As filed
with the Securities and Exchange Commission on October 10,
2008
Registration
No. 333-
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
____________________________
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
CHINA
VALVES TECHNOLOGY, INC.
(Exact
name of registrant as specified in its charter)
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Nevada
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3390
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86-0891913
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(State
or other jurisdiction of incorporation or organization)
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(Primary
Standard Industrial Classification Code Number)
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(I.R.S.
Employer
Identification
No.)
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No. 93 West Xinsong Road,
Kaifeng City, Henan Province, PRC
475002
Telephone: (86) 378-2925211
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
____________________________
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Copies
to:
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Louis
A. Bevilacqua, Esq.
Thomas
M. Shoesmith, Esq.
Joseph
R. Tiano, Jr., Esq.
Thelen
LLP
701
8th
Street, N.W.,
Washington,
D.C. 20001
(202)
508 4000
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(Names,
addresses and telephone numbers of agents for service)
____________________________
Approximate date of commencement of
proposed sale to public: As soon as practicable after this Registration
Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer
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¨
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Accelerated
filer
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¨
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Non-accelerated
filer
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¨
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Smaller
reporting company
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x
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(Do
not check if a smaller reporting company)
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CALCULATION
OF REGISTRATION FEE
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Title
of each class of securities to be
registered
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Amount
to
be
registered(1)
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Proposed
maximum offering
price
per share
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Proposed
maximum aggregate
offering
price
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Amount
of
registration
fee
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Common
stock, $0.001 par value per share
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16,778,523(4)
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$8.00(2)
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$134,228,184.00(2)
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$5,275.17
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Common
stock, $0.001 par value per
share
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1,274,497(5)
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$8.00(3)
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$10,195,976.00(3)
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$400.70
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Total
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18,053,020
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$144,424,160.00
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$5,675.87
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(1) In
accordance with Rule 416(a), the Registrant is also registering hereunder
an indeterminate number of shares that may be issued and resold resulting
from stock splits, stock dividends or similar transactions.
(2) Estimated
pursuant to Rule 457(c) of the Securities Act of 1933 solely for the
purpose of computing the amount of the registration fee based on the
average of the high and low prices reported on the OTC Bulletin Board on
October 7, 2008.
(3) Calculated
in accordance with Rule 457(g) based upon the average of the bid and asked
prices of the registrant’s common stock as reported on the
Over-the-Counter Bulletin Board on October 7, 2008.
(4) Represents
shares of the Registrant’s common stock being registered for resale that
have been issued to the selling stockholders named in this registration
statement.
(5) Represents
shares of common stock issuable upon exercise of three-year warrants to
purchase shares of common stock held by the selling stockholders named in
this registration statement.
The
registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to such Section 8(a), may
determine.
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PROSPECTUS
Subject
to completion, dated October 10 , 2008
 CHINA
VALVES TECHNOLOGY, INC.
18,053,020
Shares of Common Stock
This
prospectus relates to 18,053,020 shares of common
stock of China Valves Technology, Inc. that may be sold from time to time
by the selling stockholders named in this prospectus, which
includes:
· 16,778,523
shares of common stock; and
· 1,274,497
shares of common stock issuable upon the exercise of warrants held by some
of the selling stockholders.
We
will not receive any of the proceeds from the sale of shares of our common
stock by the selling stockholders but we will receive funds from the
exercise of the warrants held by the selling stockholders if and when
those warrants are exercised for cash. We will use any proceeds from the
exercise of such warrants for general corporate and working capital
purposes.
Our
common stock is quoted on the OTC Bulletin Board maintained by the
Financial Industry Regulatory Authority, or FINRA, under the symbol
“CVVT.OB.” The closing bid price for our common stock on
October 7, 2008 was $8 per share, as reported on the OTC Bulletin
Board.
Any
participating broker-dealers and any selling stockholders who are
affiliates of broker-dealers may be “underwriters” within the meaning of
the Securities Act of 1933, as amended, or the Securities Act, and any
commissions or discounts given to any such broker-dealer or affiliate of a
broker-dealer may be regarded as underwriting commissions or discounts
under the Securities Act. The selling stockholders have
informed us that they do not have any agreement or understanding, directly
or indirectly, with any person to distribute their common
stock.
Investing
in our common stock involves a high degree of risk. See “Risk
Factors” beginning on page 7 to read about factors you should consider
before buying shares of our common stock.
Neither
the Securities and Exchange Commission nor any state securities commission
has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
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You should only rely on the
information contained in this prospectus. We have not, and the
selling stockholders have not, authorized any other person to provide you with
different information. This prospectus is not an offer to sell, nor
is it seeking an offer to buy, these securities in any state where the offer or
sale is not permitted.
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The
items in the following summary are described in more detail later in this
prospectus. This summary provides an overview of selected
information and does not contain all of the information you should
consider. Therefore, you should also read the more detailed
information set out in this prospectus, including the financial
statements, the notes thereto and matters set forth under “Risk
Factors.”
In this prospectus, unless
indicated otherwise, references to
·
the "Company," China Valves," "we," "us" and "our" are
references to the combined business of China Valves Technology, Inc. and
its subsidiaries, China Fluid Equipment
Holdings Limited, Henan Tonghai Fluid Equipment Co.,
Ltd.;
· “China Valve Samoa” are references to “China Valve Holdings Limited” incorporated in Samoa;
· “China Valve Hong Kong” are references to “China Valve Holdings
Limited” incorporated
in Hong
Kong;
· “China Fluid Equipment” are references to “China Fluid Equipment Holdings
Limited” incorporated
in Hong
Kong;
· “Henan Tonghai Fluid” are references to Henan Tonghai
Fluid Equipment Co., Ltd.;
· “Henan Tonghai Valve” are references to Henan Tonghai
Valve Technology Co., Ltd.;
· “Zhengdie Valve” are references to Zhengzhou City
Zhengdie Valve Co., Ltd.;
· “High Pressure Valve” are references to Henan Kaifeng
High Pressure Valve Co., Ltd.;
· “China” and “PRC” are references to the
People’s Republic of China;
· “RMB” are references to Renminbi, the
legal currency of China;
· “HKD” are references to the Hong Kong
Dollar;
· “$” are references to the legal currency
of the United
States.
The Company
China Valves Technology, Inc.,
formerly known as Intercontinental Resources, Inc., or Intercontinental,
develops, manufactures and sells high-quality metal valves for the
electricity, petroleum, chemical, water, gas,
nuclear power and metal industries in the People’s Republic of China, or the PRC.
Our operations are headquartered
in Kaifeng, Henan Province, PRC. Our two
Chinese operating subsidiaries are Zhengdie Valve and High Pressure
Valve.
Our
broad product range and well known brands have led to long-standing
relationships with several key distributors in our industry. Our diverse
end markets, extensive distributor and end-user relationships, acquisition
strategy and leading market position have contributed to strong operating
margins and sales growth. Our sales revenue and net income
were $37,036,282 and $7,142,592, respectively, during the fiscal year
ended December 31,
2007, and $25,530,183
and $4,679,379, respectively, during the same period in
2006.
Our Industry
China is currently experiencing growth
in urbanization and heavy industrialization. The Company
believes that increased demand for energy and water treatment in urban
centers will increase demand for valve products. According to the China Valve
Industry Association’s research, sales of valve
products in the Chinese domestic market in 2007 reached $6.97 billion, an
increase of 30% from the previous year, and the Chinese market is expected
to increase at an annual rate of more than 30% for the next 5
years.
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According to the China Valve
Industry Association’s research, the valve market is
divided into five primary segments: (i) power; (ii) petrochemical; (iii)
oil; (iv) water supply; and (v) metallurgy, which account for approximately 21％, 12％, 24.5％, 14％ and 8％ of market share,
respectively. All other valve products account for the
remaining 20.5%.
The power industry in China has experienced rapid growth
aided particularly by economic reforms by the Chinese government and the
opening of the
Chinese market to the outside world. In 2006, total installed capacity
achieved 600 million KW and generated electricity volume of 284 million
KWh, both of which were the highest in the world. Currently in
China, there are sixteen thermal
power projects under construction or
scheduled to commence operation in the near future. We expect
to have an extensive market share in the supercritical pressure unit
market. Another sector of the power industry, nuclear power, is also
experiencing rapid growth. Based on the
target power generation increases set forth in the eleventh five-year plan
of the Chinese government (2006-2010), or the Eleventh Five-Year Plan, the
2006 report issued by the China Valve Industry Association, or the 2006
Report, estimated the demand for valves in the
nuclear power industry will reach RMB 3 billion by 2010, with an average
annual amount of RMB 0.6 billion from 2006 to 2010.
The Eleventh Five-Year Plan also
focuses on the development of the petrochemical and oil
industries. The Chinese
government plans to develop 80-100 mil-mt/year projects, including both
build-out and transformation of existing 40-45 mil-mt/year
equipment/facilities and construction of new large-scale ethane
equipment/facilities. In addition, the government expects that prior to 2010,
the newly established large-scale gas pipeline would reach a capacity of
above 20,000 KM and crude high-pressure oil pipelines of 5,000 KM will be
built during the Eleventh Five-Year Plan period. These large-scale
projects have expanded the market for
special valves and high-temperature valves for ethane fission gas as well
as the market for high-temperature, high-pressure and grind-resist valves
used in large-scale gas projects.
The 2006 Report estimated that the
total demand for
valves in China will reach $12 billion by 2010.
We will continue to work to utilize all the tangible and intangible
resources to expand and strengthen our products and increase our market
share.
Our Competitive
Strengths
· Broad range
of products and leading brands. We believe
that we have the most comprehensive range of valve products in our
industry and enjoy leading market positions based on the estimated market
share of our key products, broad brand recognition and a strong reputation
for quality and service within the markets we serve.
· Low-cost
and high quality manufacturing
capabilities. We have daily production
capacity for 23 tons of high quality valves and 15 tons of high pressure
and high temperature valves. We believe our historical capital investment
in manufacturing technologies helps us reduce the costs of producing our
products. We focus on
manufacturing and selling high quality valves at competitive
prices. We
believe we have price advantage over most of our
competitors.
· Highly
experienced and incentivized research and development team. We have a R&D
department composed of 114 engineers with many years of
experience. We are committed in
developing new products, we generally launch a new model every two months.
· Highly
experienced, proven management team. We are led by an experienced
management team with a long and successful track record, enabling us to
recognize and capitalize upon attractive opportunities in our key markets.
Our 15 most
senior members of the management team have an average of over 18 years of
experience in the valve industry
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and
have substantial experience in acquisition and integration of businesses,
cost management rationalization and efficient manufacturing processes. The
management team is led by Siping Fang, the Chairman, President and Chief
Executive Officer, who has over 20 years of
experience in the valve industry.
Our Growth
Strategy
Our primary objectives are to increase
profitability, cash flow and revenue while developing and enhancing
our position as the
leading fluid
equipment and pump
manufacturer in
China. Our strategy for
achieving these objectives includes the following key
elements:
Pursue
Strategic Acquisitions. China’s valve market is very
fragmented. We anticipate that the fragmented nature of the Chinese
valve market will continue to provide opportunities for growth through
strategic acquisitions. Our acquisition strategy will continue to focus on
entities with (1) fluid products that provide opportunities for us
to expand and (2)
products that can be marketed through our existing direct sales teams and
distribution channels
or provide us with new distribution channels for our existing products,
thereby increasing marketing and distribution
efficiency.
Further
Penetrate Existing
Market Segments. We intend to seek to further
penetrate existing market segments to drive sustainable growth by (1)
strengthening our existing customer relationships and (2) attracting new
customers. We will continue to provide quality products, fulfill logistical requirements and
volume demands efficiently and consistently, and provide comprehensive
product support from design to after-market customer
service.
Enter
New Market Segments. To drive organic growth from our
existing businesses, we intend to continue to leverage our
customer relationships to develop or acquire new products and product
extensions to enter into new market segments such as nuclear power, oil
and chemical markets.
High
End Product Focus. We
will continue to focus on high end valve products, such as
high-parameter and special usage valves. Because of our
technology and R&D strength, we will continue to focus on high end
valve products and pursue higher margins than the industry
average. Additionally, we intend to cooperate with the electricity power design
colleges and solicit support from industry
associations.
Increase
in International Sales. We plan to increase our focus on
sales into international markets. In the short term, we plan to
focus on neighboring developing countries and in the long term,
we expect to focus on the United States and Europe.
Our Challenges
Our ability to successfully
operate our business and achieve our goals and strategies is subject to
numerous challenges and risks as discussed more fully in the section titled
“Risk
Factors,” including
for example:
· Downturns in the power,
petrochemical, oil and water supply industries that we
serve;
· Adverse macro-economic, political,
regulatory, legal and foreign exchange risks associated with
international
expansion;
· Domestic and foreign
competition;
· Any loss of the key distributors
(currently,
30% of our sales
comes from our key distributors), customers or key members of our
senior management; and
· Disruption of supply
chains.
You should read and
consider the
information set forth in “Risk Factors” and all other information set
forth in this prospectus before investing in our common
stock.
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Corporate
Information
We are a Nevada holding company for several
direct and indirect subsidiaries in China. Our principal operations in China are conducted through High
Pressure Valve and Zhengdie Valve, which are held by our direct
wholly-owned subsidiary Henan Tonghai Fluid, a PRC company and China Fluid
Equipment, a Hong
Kong
corporation. China Fluid Equipment and Henan Tonghai Fluid has no active
business operations other than their ownership of High Pressure Valve
and Zhengdie Valve.
The following chart reflects our
organizational structure as of the date of this Prospectus.
 The address of our principal
executive office in China is No. 93 West Xinsong
Road, Kaifeng City, Henan Province, People’s Republic of China, 475002. Our telephone number is
(86) 378-2925211, and our fax number is
(86) 378-2924630. We maintain a website
at www.cvalve.net that contains information about
us, but that information is not part of this
prospectus.
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The
Offering
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Common
stock offered by selling stockholders
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18,053,020 shares,
including 1,274,497 shares of common stock that are issuable upon the
exercise of warrants held by some of the selling
stockholders. This number represents 28.9% of our current
outstanding common stock
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Common
stock outstanding before the offering
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62,385,103
shares.
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Common
stock outstanding after the offering
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63,659,600
shares.
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Proceeds
to us
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We
will not receive any proceeds from the sale of common stock covered by
this prospectus. To the extent that the selling stockholders exercise, for
cash, all of the warrants covering the 1,274,497 shares of common stock
registered for resale under this prospectus, we would receive $2,820,000
in the aggregate from such exercises. We intend to use such proceeds for
general corporate and working capital purposes.
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Risk
Factors
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You
should read “Risk Factors” for a discussion of factors that you should
consider carefully before deciding whether to purchase shares of our
common stock.
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Summary
Consolidated Financial Information
The
following summary consolidated financial data for the years ended December
31, 2007 and 2006 are derived from the audited consolidated financial
statements of China Valves
and its subsidiaries. The summary
consolidated financial data for the periods ended June 30, 2008 and 2007
are derived from our unaudited consolidated financial statements included
in this prospectus. This information should be read in
conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial
statements and related notes appearing elsewhere in this
prospectus. Our
historical results are not necessarily indicative of our results for any
future periods.
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Six Months Ended June
30,
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Year Ended December
31,
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2008
(Unaudited)
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2007
(Unaudited)
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2007
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2006
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Revenue
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24,766,156
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19,671,307
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37,036,282
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25,530,183
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Operating
expenses
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5,231,768
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3,202,173
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6,349,041
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4,463,167
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Operating
profit
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4,716,252
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4,466,730
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8,637,200
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6,544,814
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Income
taxes
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1,281,274
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668,058
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1,337,743
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1,158,161
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Net income
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3,430,368
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3,749,597
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7,142,592
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4,679,379
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Earnings (loss) per share (basic
and diluted)
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0.09
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0.09
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0.18
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0.12
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As
of June 30,
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As
of December 31,
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2008
(unaudited)
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2007
(unaudited)
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2007
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2006
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Balance sheet
data:
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Working
capital
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12,816.069
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4,427,677
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9,262,252
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3,158,856
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Current
assets
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41,679,463
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34,528,569
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35,758,807
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33,746,688
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Total
assets
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74,278,570
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60,923,778
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64,766,790
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57,499,030
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Current
liabilities
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28,863,394
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30,100,892
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26,496,555
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30,587,832
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Stockholders’
equity
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44,247,976
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30,822,886
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37,173,435
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26,911,198
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Total
liabilities and shareholders’ equity
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74,278,570
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60,923,778
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64,766,790
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57,499,030
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An investment in our common
stock involves a high
degree of risk. You should carefully consider the risks described below,
together with all of the other information included in this Prospectus, before
making an investment decision. If any of the following risks actually occurs,
our business, financial condition or results of
operations could suffer. In that case, the trading price of our common stock
could decline, and you may lose all or part of your
investment.
RISKS RELATED TO OUR
BUSINESS
Our
business would be adversely affected by a downturn in government spending
related to infrastructure upgrades, repairs and replacements, or in the reduced
demand in power, petrochemical, oil or water supply industries.
Our
business is primarily dependent upon spending on new infrastructure projects, as
well as infrastructure upgrades, repairs and replacement, in the power,
petrochemical, oil and water supply industries. We are also subject
to general economic conditions, the need for large-scale projects, interest
rates and government incentives provided for public work projects. As a result,
our sales could be impacted adversely by declines in the number of projects
planned by government agencies, government spending cuts, general budgetary
constraints, difficulty in obtaining necessary permits or the inability of
government entities to issue debt. It is not unusual for projects in power,
petrochemical, oil or water supply industries to be delayed and rescheduled for
a number of reasons, including changes in project priorities and difficulties in
complying with environmental and other government regulations. We cannot assure
you that economic growth experienced by China will continue or that if it does,
that state and local governments will address deferred infrastructure needs. Any
significant decline in the project spending in the key industries or
governmental spending on infrastructure could have a material adverse effect on
our financial condition and results of operations.
Our industry is very competitive in
China.
The domestic market for valve products is competitive.
We compete with
approximately 168 medium-sized, local Chinese valve
manufacturers, although we are aware of only two that have similar manufacturing capacities as our
company. The number of
these companies varies from time to time. While we may have greater
resources than our smaller competitors, it is possible that these competitors
have better access in certain local markets to customers and prospects and lower
production and raw material costs. Some of our valve products compete on the basis of price and
are sold in fragmented markets with low barriers to entry, allowing less
expensive domestic producers to gain market share and reduce our
margins.
Foreign
competition is intense and could have a material adverse effect on our financial
condition and results of operations.
In
addition to domestic competition, we face intense foreign competition. The
intensity of foreign competition is affected significantly by fluctuations in
the value of the U.S. dollar against Chinese currency and by the level of import
duties imposed by the Chinese government on certain products. Our major international competitors
are Velan Inc.,
KSB Group and Tyco Flow Inc. Many of our competitors have more resources and greater brand
recognition than we enjoy.
While our resources may not be as great as our larger competitors, we
believe our product quality and direct sales offices and distribution network are superior
in China. If our competitors are able to
gain greater market share or improve their sales efforts, our sales may
decrease, we may be forced to lower our prices, or our marketing costs may
increase, all of which could negatively impact our financial
results.
Any decline in the availability, or
increase in the cost of raw materials could materially affect our
earnings.
Our valve manufacturing operations
depend heavily on the availability of various raw materials and energy
resources. The mix of raw materials used in the production of valves is
mainly composed of casting steel blank parts, forging steel blank parts and
steel, which represent 60% of all raw materials used in the production of
valves. The fuel costs in our manufacturing operations, particularly heavy
oil and electricity, account for over 2% of total manufacturing costs.
The availability of
raw materials and energy resources may decline and their prices may fluctuate
greatly. We have long-term relationships with several suppliers; however,
we do not have long term supply contracts and if our suppliers are unable
or unwilling to provide us
with raw materials on terms favorable to us, we may be unable to produce certain
products. This could result in a decrease in profit and damage to our
reputation in our industry. In the event our raw material and energy costs
increase, we may not be able to pass these
higher costs on to our customers in full or at all. Any increase in the
prices for raw materials or energy resources could materially increase our costs
and therefore lower our earnings.
We
depend on a group of major distributors for a significant portion of our sales;
any loss of these distributors could reduce our sales and continuing
consolidation of distributors could cause price pressure.
In fiscal
year 2007, 70% of our sales revenue was generated from our direct sales teams
throughout China and 30% was generated from our distributors. Sales through
distributors was highly concentrated in a few distributors, with 64.51% of
distributor sales coming from our ten largest distributors, and 29.2% from the
three largest distributors: Dalian Yukai High Pressure Valves Co., Ltd.,
Xinxiang Plastic Equipment Manufacturing Plan and Qinghuangdao City Fengchi
Mechanical Installation Company. Our business relationships with most of our
major distributor branches may be terminated at the option of either party upon
30 days’ notice.
While our
relationships with our ten largest distributors have been long-lasting,
distributors in our industry have experienced significant consolidation in
recent years, and we cannot assure you that our distributors will not be
acquired by other distributors who buy products from our competitors. Our
ability to retain these customers in the face of other competitors generally
depends on a variety of factors, including the quality and price of our products
and our ability to market these products effectively. We cannot assure you that,
as consolidation among distributors continues, distributors will not be able to
force us to lower our prices, which would have an adverse impact on our
financial condition or results of operations.
Any disruption in the supply chain of
raw materials and our products could adversely impact our ability to produce and
deliver products.
As a manufacturing company, we face
serious challenges in supply chain management for raw materials and delivery of our
products. Supply chain fragmentation and local protectionism within
China further complicates supply chain
disruption risks. Local administrative bodies and physical infrastructure built
to protect local interests pose transportation challenges for raw
material transportation as well as product delivery. In addition,
profitability and volume could be negatively impacted by limitations inherent
within the supply chain, including competitive, governmental, legal,
natural disasters, and other events that
could impact both supply and price. Any of these occurrences could cause
significant disruptions to our supply chain, manufacturing capability and
distribution system that could adversely impact our ability to produce
and deliver products.
We do not maintain a reserve fund for
warranty or defective products claims. Our costs could substantially increase if
we experience a significant number of warranty claims.
We typically warrant all of our products
and provide replacement or
credit to our customers who are not satisfied with our products for a period of
one year from the date of shipment. We have not established reserve funds
for potential customer claims because, historically, we have not experienced
significant customer complaints about our products and
none of our customers have requested damages for any loss incurred due to
product quality problems.
We believe that our customer support
teams, our quality assurance and manufacturing monitoring procedures will
continue to keep claims at a level that does
not support a need for a reserve. However, if we were to experience a
significant increase in warranty claims, our financial results could be
adversely affected.
Our rapid expansion could significantly
strain our resources,
management and operational infrastructure which could impair our ability to meet
increased demand for our products and hurt our business
results.
To accommodate our anticipated growth,
we will need to expend capital resources and dedicate personnel to implement and upgrade our
accounting, operational and internal management systems and enhance our record
keeping and contract tracking system. Such measures will require us to dedicate
additional financial resources and personnel to optimize our operational infrastructure and to recruit
more personnel to train and manage our growing employee base. If we cannot
successfully implement these measures efficiently and cost-effectively, we will
be unable to satisfy the demand for our products, which will impair our revenue growth and hurt our
overall financial performance.
We must manage growth in operations to
maximize our potential growth and achieve our expected revenues and any failure
to manage growth will cause a disruption of our operations resulting in the failure to generate
revenue.
In order to maximize potential growth in
our current and potential markets, we believe that we must expand the scope of
our valve manufacturing and production facilities and capabilities and continue
to develop new and improved
valves. This expansion will place a significant strain on our management and our
operational, accounting, and information systems. We expect that
we will need to continue to improve our financial controls, operating
procedures and management information systems. We will
also need to effectively train, motivate and manage our
employees. Our failure to manage our growth could disrupt our
operations and ultimately prevent us from generating the revenues we
expect.
We cannot assure you that our
internal growth strategy
will be successful, which may result in a negative impact on our growth,
financial condition, results of operations and cash flow.
One of our strategies is to grow
internally through increasing the development of new products and improve the quality of existing
products. However, many obstacles to this expansion exist, including,
but not limited to, increased competition from similar businesses, international
trade and tariff barriers, unexpected costs, costs associated with
marketing efforts abroad and maintaining
attractive foreign exchange ratios. We cannot, therefore, assure you
that we will be able to successfully overcome such obstacles and establish our
services in any additional markets. Our inability to implement this
internal growth strategy successfully may
have a negative impact on our growth, future financial condition, results of
operations or cash flows.
We cannot assure you that our
acquisition growth strategy will be successful, resulting in our failure to meet
growth and revenue
expectations.
In addition to our internal growth
strategy, we have also explored the possibility of growing through strategic
acquisitions. We intend to pursue opportunities to acquire businesses
in the PRC that are complementary or related in product lines and business
structure to us. We may not be able to locate suitable acquisition
candidates at prices that we consider appropriate or to finance acquisitions on
terms that are satisfactory to us. If we do identify an appropriate
acquisition candidate, we may not be able to
negotiate successfully the terms of an acquisition, or, if the acquisition
occurs, integrate the acquired business into our existing
business. Acquisitions of businesses or other material operations may
require debt financing or additional equity
financing, resulting in leverage or dilution of
ownership. Integration of acquired business operations could disrupt
our business by diverting management away from day-to-day operations. The
difficulties of integration may be increased by the necessity of
coordinating geographically dispersed organizations, integrating personnel with
disparate business backgrounds and combining different corporate
cultures.
We also may not be able to maintain key
employees or customers of an acquired business or realize cost
efficiencies or synergies or other benefits we anticipated when selecting our
acquisition candidates. In addition, we may need to record
write-downs from future impairments of intangible assets, which could reduce
our future reported earnings. At
times, acquisition candidates may have liabilities or adverse operating issues
that we fail to discover through due diligence prior to the
acquisition. In addition to the above, acquisitions in the PRC,
including state owned businesses, will be required to comply
with the laws of the PRC, to the extent applicable. There can be no assurance
that any given proposed acquisition will be able to comply with PRC
requirements, rules and/or regulations, or that we will successfully
obtain governmental approvals that are
necessary to consummate such acquisitions, to the extent required. If
our acquisition strategy is unsuccessful, we will not grow our operations and
revenues at the rate that we anticipate.
We may have difficulty defending our intellectual property rights
from infringement, resulting in lawsuits requiring us to devote financial and
management resources that would have a negative impact on our operating
results.
We regard our service marks, trademarks,
trade secrets, patents and
similar intellectual property as critical to our success. We rely on
trademark, patent and trade secret law, as well as confidentiality and license
agreements with certain of our employees, customers and others to protect our
proprietary rights. We have received patent protection
for certain of our products in the PRC. No assurance can be given
that our patents, trademarks and licenses will not be challenged, invalidated,
infringed or circumvented, or that our intellectual property rights
will provide competitive advantages to
us. There can be no assurance that we will be able to obtain a
license from a third-party for technology that we may need to conduct our
business or that such technology can be licensed at a reasonable
cost.
Presently, we provide our valves mainly in the
PRC. To date, no trademark or patent filings have been made other
than in the PRC. To the extent that we market our services in other
countries, we may have to take additional action to protect our intellectual
property. The measures we take to
protect our proprietary rights may be inadequate and we cannot give you any
assurance that our competitors will not independently develop formulations,
processes and services that are substantially equivalent or superior to
our own or copy our
products.
We depend on our key management
personnel and the loss of their services could adversely affect our
business.
We place substantial reliance upon the
efforts and abilities of our executive officers. The loss of the
services of any of our
executive officers could have a material adverse effect on our business,
operations, revenues or prospects. We do not maintain key man life
insurance on the lives of these individuals.
We may never pay any dividends to
shareholders.
We have never paid any dividends and have not
declared any dividends to date. Our board of directors does not
intend to distribute dividends in the near future. The declaration,
payment and amount of any future dividends will be made at the discretion of the
board of directors and will depend upon,
among other things, the results of our operations, cash flows and financial
condition, operating and capital requirements and other factors the board of
directors considers relevant. There is no assurance that future
dividends will be paid, and, if dividends
are paid, there is no assurance with respect to the amount of any such
dividend.
We may incur significant costs to ensure
compliance with United
States corporate governance
and accounting requirements.
We may incur significant costs associated with our
public company reporting requirements, costs associated with newly applicable
corporate governance requirements, including requirements under the
Sarbanes-Oxley Act of 2002 and other rules implemented by the
Securities and Exchange Commission, or the
Commission. We expect all of these applicable rules and regulations to
significantly increase our legal and financial compliance costs and to make some
activities more time consuming and costly. We also expect that
these applicable rules and regulations may
make it more difficult and more expensive for us to obtain director and officer
liability insurance and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar coverage. As
a result, it may be more difficult for us to attract and retain qualified
individuals to serve on our board of directors or as executive
officers. We are currently evaluating and
monitoring developments with respect to these newly applicable rules, and we cannot
predict or estimate the amount of additional costs we may incur or the timing of
such costs.
We may not be able to meet the
accelerated filing and internal control reporting requirements imposed by the
Securities and Exchange
Commission, resulting in a possible decline in the price of our common
stock and our inability to obtain future financing.
As directed by Section 404 of the
Sarbanes-Oxley Act, the Commission adopted rules requiring each public company
to include a report of
management on the company’s internal controls over financial
reporting in its annual reports. In addition, the independent
registered public accounting firm auditing a company’s financial statements must also attest
to and report on management’s assessment of the effectiveness of the
company’s internal controls over financial
reporting as well as the operating effectiveness of the company’s internal controls.
While we expect to expend significant
resources in developing the necessary documentation and testing procedures required
by Section 404 of the Sarbanes-Oxley Act, there is a risk that we may not be
able to comply timely with all of the requirements imposed by this
rule. In the event that we are unable to receive a positive
attestation from our independent registered public
accounting firm with respect to our internal controls, investors and others may
lose confidence in the reliability of our financial statements and our stock
price and ability to obtain equity or debt financing as needed could suffer.
In addition, in the event that our
independent registered public accounting firm is unable to rely on our internal
controls in connection with its audit of our financial statements, and in the
further event that it is unable to devise alternative procedures in order to satisfy
itself as to the material accuracy of our financial statements and related
disclosures, it is possible that we would be unable to file our Annual Report on
Form 10-K with the Securities and Exchange Commission, which could also adversely affect the market
price of our common stock and our ability to secure additional financing as
needed.
We may have difficulty raising necessary
capital to fund operations as a result of market price volatility for our shares
of common
stock.
In recent years, the securities markets
in the United
States have experienced a
high level of price and volume volatility, and the market price of securities of
many companies has experienced wide fluctuations that have not necessarily been
related to the operations,
performances, underlying asset values or prospects of such
companies. For these reasons, our shares of common stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If our business
development plans are successful, we may require additional financing to
continue to develop and exploit existing and new products and services related
to our industries and to expand into new markets. The exploitation of
our services may, therefore, be dependent upon our
ability to obtain financing through debt and equity or other
means.
Our
management is unfamiliar with the United States securities law, they may have to
expend time and resources becoming familiar with such laws which could lead to
various regulatory issues.
We became
a public company in December 2007 through the reverse acquisition with China
Valves Samoa. Our management is not familiar with the United States securities
laws. They have to spend time and resources becoming familiar with such laws.
This could be expensive and time-consuming and could lead to various regulatory
issues which may adversely affect our operations.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Adverse
changes in political and economic policies of the PRC government could impede
the overall economic growth of China, which could reduce the demand for our
products and damage our business.
We
conduct substantially all of our operations and generate most of our revenue in
China. Accordingly, our business, financial condition, results
of operations and prospects are affected significantly by economic, political
and legal developments in China. The PRC economy differs from the
economies of most developed countries in many respects, including:
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a
higher level of government
involvement;
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a
early stage of development of the market-oriented sector of the
economy;
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a
rapid growth rate;
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a
higher level of control over foreign exchange;
and
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the
allocation of resources.
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As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us.
Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the
allocation of resources, controlling the payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.
Any
adverse change in economic conditions or government policies in China could have
a material adverse effect on the overall economic growth in China, which in turn
could lead to a reduction in demand for our services and consequently have a
material adverse effect on our business and prospects.
Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
We
conduct substantially all of our business through our operating subsidiary in
the PRC. Our operating subsidiaries are generally subject to laws and
regulations applicable to foreign investments in China and, in particular, laws
applicable to foreign-invested enterprises. The PRC legal system is based on
written statutes, and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, a series of new PRC laws and regulations
have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In
addition, all of our executive officers and all of our directors are residents
of China and not of the United States, and substantially all the assets of these
persons are located outside the United States.
As a
result, it could be difficult for investors to affect service of process in the
United States or to enforce a judgment obtained in the United States against our
Chinese operations and subsidiaries.
If
we are found to have failed to comply with applicable laws, we may incur
additional expenditures or be subject to significant fines and
penalties.
Our
operations are subject to PRC laws and regulations applicable to us. However,
many PRC laws and regulations are uncertain in their scope, and the
implementation of such laws and regulations in different localities could have
significant differences. In certain instances, local implementation rules and/or
the actual implementation are not necessarily consistent with the regulations at
the national level. Although we strive to comply with all the applicable PRC
laws and regulations, we cannot assure you that the relevant PRC government
authorities will not later determine that we have not been in compliance with
certain laws or regulations.
Our
failure to comply with the applicable laws and regulations in China could
subject us to administrative penalties and injunctive relief, as well as civil
remedies, including fines, injunctions and recalls of our products. It is
possible that changes to such laws or more rigorous enforcement of such laws or
with respect to our current or past practices could have a material adverse
effect on our business, operating results and financial condition. Further,
additional environmental, health or safety issues relating to matters that are
not currently known to management may result in unanticipated liabilities and
expenditures.
The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.
The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes
in its laws and regulations, including those relating to taxation, import and
export tariffs, environmental regulations, land use rights, property and other
matters. We believe that our operations in China are in material
compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the
jurisdictions in which we operate may impose new, stricter regulations or
interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations. Accordingly, government actions in
the future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof and could
require us to divest ourselves of any interest we then hold in Chinese
properties or joint ventures.
Restrictions
on currency exchange may limit our ability to receive and use our sales revenue
effectively.
All our
sales revenue and expenses are denominated in RMB. Under PRC law, the RMB is
currently convertible under the “current account,” which includes dividends and
trade and service-related foreign exchange transactions, but not under the
“capital account,” which includes foreign direct investment and loans.
Currently, our PRC operating subsidiary may purchase foreign currencies for
settlement of current account transactions, including payments of dividends to
us, without the approval of the State Administration of Foreign Exchange, or
SAFE, by complying with certain procedural requirements. However, the relevant
PRC government authorities may limit or eliminate our ability to purchase
foreign currencies in the future. Since a significant amount of our future
revenue will be denominated in RMB, any existing and future restrictions on
currency exchange may limit our ability to utilize revenue generated in RMB to
fund our business activities outside China that are denominated in foreign
currencies.
Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including SAFE.
In particular, if our PRC operating subsidiaries borrow foreign currency through
loans from us or other foreign lenders, these loans must be registered with
SAFE, and if we finance the subsidiaries by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities, including the Ministry of Commerce, or MOFCOM, or their
respective local counterparts. These limitations could affect their ability to
obtain foreign exchange through debt or equity financing.
Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.
The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Because substantially all of our earnings
and cash assets are denominated in RMB and the net proceeds from this offering
will be denominated in U.S. dollars, fluctuations in the exchange rate between
the U.S. dollar and the RMB will affect the relative purchasing power of these
proceeds, our balance sheet and our earnings per share in U.S. dollars following
this offering. In addition, appreciation or depreciation in the value of the RMB
relative to the U.S. dollar would affect our financial results reported in U.S.
dollar terms without giving effect to any underlying change in our business or
results of operations. Fluctuations in the exchange rate will also affect the
relative value of any dividend we issue after this offering that will be
exchanged into U.S. dollars as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the
People’s Bank of China regularly intervenes in the foreign exchange market to
prevent significant short-term fluctuations in the exchange rate, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar in the
medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen
intervention in the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
Currently,
some of our raw materials and major equipment are imported. In the
event that the U.S. dollars appreciate against RMB, our costs will
increase. If we cannot pass the resulting cost increases on to our
customers, our profitability and operating results will suffer. In
addition, since our sales to international customers are growing rapidly, we are
increasingly subject to the risk of foreign currency depreciation.
Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.
Substantially
all of our revenues are earned by our PRC subsidiaries. However, PRC regulations
restrict the ability of our PRC subsidiaries to make dividends and other
payments to their offshore parent company. PRC legal restrictions permit
payments of dividend by our PRC subsidiaries only out of their accumulated
after-tax profits, if any, determined in accordance with PRC accounting
standards and regulations. Each of our PRC subsidiaries is also required under
PRC laws and regulations to allocate at least 10% of our annual after-tax
profits determined in accordance with PRC GAAP to a statutory general reserve
fund until the amounts in said fund reaches 50% of our registered capital.
Allocations to these statutory reserve funds can only be used for specific
purposes and are not transferable to us in the form of loans, advances or cash
dividends.
Any
limitations on the ability of our PRC subsidiaries to transfer funds to us could
materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends and
otherwise fund and conduct our business.
Under
the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC stockholders.
China
passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing
rules, both of which became effective on January 1, 2008. Under the New EIT Law,
an enterprise established outside of China with “de facto management bodies”
within China is considered a “resident enterprise,” meaning that it can be
treated in a manner similar to a Chinese enterprise for enterprise income tax
purposes. The implementing rules of the New EIT Law define de facto management
as “substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the enterprise. Because
the New EIT Law and its implementing rules are new, no official interpretation
or application of this new “resident enterprise” classification is available.
Therefore, it is unclear how tax authorities will determine tax residency based
on the facts of each case.
If the
PRC tax authorities determine that China Valves is a “resident enterprise” for
PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we may be subject to the enterprise income tax at a rate of
25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as interest
on offering proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the New EIT Law
and its implementing rules dividends paid to us from our PRC subsidiaries would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax purposes. Finally,
it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC stockholders and
with respect to gains derived by our non-PRC stockholders from transferring our
shares. We are actively monitoring the possibility of “resident enterprise”
treatment for the 2008 tax year and are evaluating appropriate organizational
changes to avoid this treatment, to the extent possible.
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
If
the China Securities Regulatory Commission, or CSRC, or another PRC regulatory
agency determines that CSRC approval is required in connection with the reverse
acquisition, the reverse acquisition may be cancelled, or we may become subject
to penalties.
On August
8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the
Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors, or the M&A Rule, which became effective on September 8, 2006. The
M&A Rule, among other things, requires that an offshore company controlled
by PRC companies or individuals that have acquired a PRC domestic company for
the purpose of listing the PRC domestic company’s equity interest on an overseas
stock exchange must obtain the approval of the CSRC prior to the listing and
trading of such offshore company’s securities on an overseas stock exchange. On
September 21, 2006, the CSRC, pursuant to the M&A Rule, published on its
official web site procedures specifying documents and materials required to be
submitted to it by offshore companies seeking CSRC approval of their overseas
listings.
If the
CSRC or another PRC governmental agency subsequently determines that we must
obtain CSRC approval prior to the completion of the reverse acquisition, we may
face regulatory actions or other sanctions from the CSRC or other PRC regulatory
agencies. These regulatory agencies may impose fines and penalties on our
operations in China and limit our operating privileges in China, or take other
actions that could have a material adverse effect on our business, financial
condition, results of operations, reputation and prospects, as well as the
trading price of our shares.
The
M&A Rule establishes more complex procedures for some acquisitions of
Chinese companies by foreign investors, which could make it more difficult for
us to pursue growth through acquisitions in China.
The
M&A Rule establishes additional procedures and requirements that could make
some acquisitions of Chinese companies by foreign investors more time-consuming
and complex, including requirements in some instances that the PRC Ministry of
Commerce be notified in advance of any change-of-control transaction and in some
situations, require approval of the PRC Ministry of Commerce when a foreign
investor takes control of a Chinese domestic enterprise. In the future, we may
grow our business in part by acquiring complementary businesses, although we do
not have any plans to do so at this time. The M&A Rule also requires PRC
Ministry of Commerce anti-trust review of any change-of-control transactions
involving certain types of foreign acquirers. Complying with the requirements of
the M&A Rule to complete such transactions could be time-consuming, and any
required approval processes, including obtaining approval from the PRC Ministry
of Commerce, may delay or inhibit our ability to complete such transactions,
which could affect our ability to expand our business or maintain our market
share.
You
may have difficulty enforcing judgments against us.
We are a
Nevada holding company and most of our assets are located outside of the United
States. All of our current operations are conducted in the PRC. In addition, all
of our directors and officers are nationals and residents of countries other
than the United States. A substantial portion of the assets of these persons is
located outside the United States. As a result, it may be difficult for you to
effect service of process within the United States upon these persons. It may
also be difficult for you to enforce in U.S. courts judgments on the civil
liability provisions of the U.S. federal securities laws against us and our
officers and directors, most of whom are not residents in the United States and
the substantial majority of whose assets are located outside of the United
States. In addition, there is uncertainty as to whether the courts of the PRC
would recognize or enforce judgments of U.S. courts. Courts in China may
recognize and enforce foreign judgments in accordance with the requirements of
the PRC Civil Procedures Law based on treaties between China and the country
where the judgment is made or on reciprocity between jurisdictions. China does
not have any treaties or other arrangements that provide for the reciprocal
recognition and enforcement of foreign judgments with the United States. In
addition, according to the PRC Civil Procedures Law, courts in the PRC will not
enforce a foreign judgment against us or our directors and officers if they
decide that the judgment violates basic principles of PRC law or national
sovereignty, security or the public interest. So it is uncertain whether a PRC
court would enforce a judgment rendered by a court in the United
States.
RISKS RELATED TO THE MARKET FOR OUR
STOCK
Our common stock is quoted on the OTC
Bulletin Board, which may have an unfavorable impact on our stock price and
liquidity.
Our common stock is quoted on the OTC
Bulletin Board. The OTC Bulletin Board is
a significantly more limited market than the New York Stock Exchange or Nasdaq
system. The quotation of our shares on the OTC Bulletin Board may
result in a less liquid market available for existing and potential
stockholders to trade shares of our common stock,
could depress the trading price of our common stock and could have a long-term
adverse impact on our ability to raise capital in the
future.
We may be subject to penny stock
regulations and restrictions and you may have difficulty selling shares of our
common stock.
The Commission has adopted regulations
which generally define so-called “penny stocks” to be an equity security that has a
market price less than $5.00 per share or an exercise price of less than $5.00
per share, subject to
certain exemptions. If our common stock becomes a
“penny stock”, we may become subject to Rule 15g-9
under the Exchange Act, or the “Penny Stock
Rule”. This rule
imposes additional sales practice requirements on broker-dealers that
sell such securities to persons other than
established customers and “accredited investors” (generally, individuals with a net
worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000
together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser’s written consent to the transaction
prior to sale. As a result, this rule may affect the ability of
broker-dealers to sell our securities and may affect the
ability of purchasers to sell any of our securities in the secondary
market.
For any transaction involving a penny
stock, unless exempt, the rules require delivery, prior to any transaction in a
penny stock, of a disclosure schedule prepared by the Commission
relating to the penny stock market. Disclosure is also required to be
made about sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the
securities. Finally, monthly statements are required to
be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny
stock.
There can be no assurance that our
common stock will qualify for exemption from the Penny Stock Rule. In
any event, even if our common stock were exempt from the Penny Stock Rule, we
would remain subject to Section 15(b)(6) of the Exchange Act, which gives the
Commission the authority to restrict any person from participating in
a distribution of penny stock, if the
Commission finds that such a restriction would be in the public
interest.
Future sales or perceived sales of our
common stock could depress our stock price.
A substantial number of shares of our
common stock held by our
current stockholders are freely tradable. If the holders of these
freely tradable shares were to attempt to sell a substantial amount of their
holdings at once, the market price of our common stock could
decline. Moreover, the perceived risk of this potential dilution could cause
stockholders to attempt to sell their shares and investors to short the stock, a
practice in which an investor sells shares that he or she does not own at
prevailing market prices, hoping to purchase shares later at a lower
price to cover the sale. As
each of these events would cause the number of shares of our common stock being
offered for sale to increase, our common stock’s market price would likely further
decline. All of these events could combine to make it very
difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.
We do not intend to pay dividends on
shares of our common stock for the foreseeable future.
We have never declared or paid any cash
dividends on shares of our
common stock. We intend to retain any future earnings to fund the operation and
expansion of our business and, therefore, we do not anticipate paying cash
dividends on shares of our common stock in the foreseeable
future.
This prospectus contains forward-looking
statements. The forward-looking statements are contained principally in the
sections entitled “Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and
“Business.” These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any
future results, performances or achievements
expressed or implied by the forward-looking
statements.
These risks and uncertainties include,
but are not limited to, the factors described in the section captioned
“Risk Factors” above.
In some cases, you can identify forward-looking statements by
terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to
identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. These forward-looking
statements include, among other things, statements relating
to:
|
·
|
our
views on the growth of the valve
industry;
|
|
·
|
ability
to overcome competition in the Chinese valve manufacturing
market;
|
|
·
|
the
impact that a downturn or negative changes in the industries in which out
products are sold could have on our business and
profitability;
|
|
·
|
any
decrease in the availability, or increase in the cost, of raw materials
and energy;
|
|
·
|
our
ability to simultaneously fund the implementation of our business plan and
invest in new projects;
|
|
·
|
economic,
political, regulatory, legal and foreign exchange risks associated with
international expansion;
|
|
·
|
loss
of key members of our senior management;
and
|
|
·
|
unexpected
change to China’s political or economic situation and legal
environment.
|
Also, forward-looking statements
represent our estimates and assumptions only as of the date of this prospectus.
You should read this prospectus and the documents that we reference in this
prospectus, or that we filed as exhibits to the registration statement of which
this prospectus is a part, completely and with the understanding that our actual
future results may be materially different from what we
expect.
Except as required by law, we assume no
obligation to update any forward-looking statements publicly, or to update
the reasons actual results could differ materially from those anticipated in any
forward-looking statements, even if new information becomes available in the
future.
We will
not receive any of the proceeds from the sale of shares of our common stock by
the selling stockholders but we will receive funds from the exercise of the
warrants held by the selling stockholders if and when those warrants are
exercised for cash. We will use any proceeds from the exercise of such warrants
for general corporate and working capital purposes. We will have complete
discretion over how we may use the proceeds, if any, from any exercise of the
warrants.
The
selling stockholders will determine at what price they may sell the offered
shares, and such sales may be made at prevailing market prices or at privately
negotiated prices.
Our net
tangible book value as of December 31, 2007 was approximately $0.43 per share of common stock.
Net tangible book value is determined by dividing our tangible book value (total
assets less intangible assets including know-how and less total liabilities) by
the number of outstanding shares of our common stock. Since this offering is
being made solely by the selling stockholders and none of the proceeds will be
paid to us, our net tangible book value will be unaffected by this offering.
However,
we have 1,274,497 warrants outstanding, among which 1,174,497 warrants can be
exercised at $2.1456 per share and 100,000 warrants can be exercised at $3.00
per share. These warrants may have a dilutive effect depending on our tangible
book value at the time of their exercise.
Market
Information
Our common stock, having $0.001 par value per
share, is traded on the Over-The-Counter Bulletin Board under the symbol
“CVVT.OB.”
On October 7, 2008, the closing bid quotation for our
common stock as reported on the OTCBB was $8. The bid price reflects
inter-dealer quotations,
does not include retail markups, markdowns or commissions and does not
necessarily reflect actual transactions.
The following table sets forth, for the
periods indicated, the high and low bid prices of our common
stock. These prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
|
Closing Bid Prices
(1)(2)
|
||||||||
|
High
|
Low
|
|||||||
|
Year Ended December 31,
2008
|
||||||||
|
1st Quarter
|
$
|
10
|
$
|
5
|
||||
|
2nd Quarter
|
$
|
10
|
$
|
2.1
|
||||
|
3rd Quarter
|
$
|
5
|
$
|
3.5
|
||||
|
4th Quarter (through October 8, 2008)
|
$
|
N/A
|
$
|
N/A
|
||||
|
Closing Bid Prices
(1)(2)
|
||||||||
|
High
|
Low
|
|||||||
|
Year Ended December 31,
2007
|
||||||||
|
1st Quarter
|
$
|
N/A
|
$
|
N/A
|
||||
|
2nd Quarter
|
$
|
N/A
|
$
|
N/A
|
||||
|
3rd Quarter
|
$
|
4.5
|
$
|
1.12
|
||||
|
4th Quarter
|
$
|
11
|
$
|
1.50
|
||||
|
Closing Bid Prices
(1)(2)
|
||||||||
|
High
|
Low
|
|||||||
|
Year Ended December 31,
2006
|
||||||||
|
1st Quarter
|
$
|
N/A
|
$
|
N/A
|
||||
|
2nd Quarter
|
N/A
|
N/A
|
||||||
|
3rd Quarter
|
N/A
|
N/A
|
||||||
|
4th Quarter
|
N/A
|
N/A
|
||||||
(1) The above tables set forth the range
of high and low closing bid prices per share of our common stock as reported by
finance.yahoo.com for the periods indicated.
(2) The stock price was only available
since September 19, 2007.
Holders
On
October 7, 2008, there were
approximately 137
stockholders of record of our common stock. The number of
record holders does not include persons who held our common stock in nominee or
“street name” accounts through brokers.
Dividend
Policy
We have
never declared dividends or paid cash dividends. Our board of directors will
make any future decisions regarding dividends. We currently intend to retain and
use any future earnings for the development and expansion of our business and do
not anticipate paying any cash dividends in the near future. Our board of
directors has complete discretion on whether to pay dividends, subject to the
approval of our shareholders. Even if our board of directors decides to pay
dividends, the form, frequency and amount will depend upon our future operations
and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that the board of directors may deem
relevant.
Securities
Authorized for Issuance Under Equity Compensation Plans
We
presently do not have any equity based or other long-term incentive programs. In
the future, we may adopt and establish an equity-based or other long-term
incentive plan if it is in the best interest of the Company and our stockholders
to do so.
Overview
The following discussion is an overview
of the important factors that management focuses on in evaluating our business,
financial condition and
operating performance and should be read in conjunction with the financial
statements included in this prospectus. This discussion contains
forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those anticipated in
these forward looking statements as a result of any number of factors, including
those set forth under the section entitled “Risk Factors” and elsewhere in this
prospectus.
Our Business
Through our subsidiaries and certain commercial and contractual
relationships and arrangements with other Chinese companies, we operate
companies in China that develop, manufacture and
distribute valves for a variety of different industries. We are
located in Henan Province but do business throughout China, Southeast Asia, Middle-East as
well as Europe. China Valve engages in the development, manufacture and
sales of high quality metal valves for the electricity, petroleum, chemical,
water, gas and metal industries.
Our
production facility in Kaifeng has an area of more than 61.8
acres. We are the leader in valve sales for the thermal power
and water supply industries, according to the Board Chairman of China Valve
Industry Association. We produce over 700 models of valves and service
numerous industries, including the thermal power, water supply, municipal
construction, sewage disposal, oil and chemical,
metallurgy, heat power, and nuclear power industries.
Revenue
Our revenue increased $11.5 million, or 45%,
to $37.0 million in 2007
from $25.6 million in 2006. This increase was primarily driven by a 25% increase
in the average selling price of products sold and a 75% increase in the volume
of products sold. The increase in average selling price in 2007 was primarily
due to the increase in raw material prices,
particularly steel metal price, and the increased sales volume was attributable
to (1) increase in demand of our products fueled by rapid industrialization and
manufacturing development in China, (2) our successful marketing efforts, (3) retaining our existing
customers and adding additional large customers, and (4) our expansion into the
nuclear power station valve market segment.
Principal Factors Affecting Our
Financial Performance
We believe that the following
factors affect our
financial performance:
· Growth of
China’s Urbanization and
Industrialization
According to the China Valve Industry
Association’s research result, the annual growth
rate of the valve industry in China is expected to be 30% for the next 5
years. This growth is
fueled by rapid industrialization and manufacturing industries developing in
China. If this growth continues,
we believe that the growth rate of the valve industry will grow at a similar
rate and that we will be able to sustain its growth and continue to be a leader in the
valve industry in China.
· PRC
Regulations
China has looked favorably on the valve
production industry and has loosened regulations to promote manufacturing growth
in China, which ultimately benefits China Valves
and similarly situated companies.
For example, in June, 2007,
the State Department of
China issued a new policy entitled “Policy to Expedite the Development of
China’s Equipment Manufacturing
Industry.” In
this policy, the Chinese government stated it will promote the development of
China’s equipment manufacturing
industry, which includes the valve industry,
through, among other things, tax incentives, import/export support and capital
support. The State Council also issued policy to promote constructing more large-scale power plants. As long as China continues to promote economic growth and allow
manufacturing companies to grow and expand their operations, we expect our
operations will be positively effected by PRC regulations.
Taxation
United States
We are subject to the United States tax at a tax rate of 34%. No
provision for the
US federal income taxes has been made as
we had no taxable income in the United States for the second quarter of 2008 or the
fiscal years 2007 and 2006.
Hong Kong
China Fluid Equipment was incorporated
in Hong Kong and is not subject to income taxes under the current laws of
Hong Kong.
PRC
A company
registered in China is subject to national and local income taxes within China
at the applicable tax rate on the taxable income as reported in its PRC
statutory financial statements in accordance with relevant income tax laws.
Under the Provisional Taxation Regulation of the People’s Republic of China
effective before January 1, 2008, income tax was generally payable by
enterprises at a rate of 33% of their taxable income.
In 2007,
China passed the New EIT Law and its implementing rules, both of which became
effective on January 1, 2008. The New EIT Law significantly curtails tax
incentives granted to foreign-invested enterprises under the previous law. The
New EIT Law, however, (i) reduces the statutory rate of enterprise income tax
from 33% to 25%, (ii) permits companies to continue to enjoy their existing tax
incentives, adjusted by certain transitional phase-out rules, and (iii)
introduces new tax incentives, subject to various qualification
criteria.
Substantially
all of our income may be derived from dividends we receive from our PRC
operating subsidiaries described above. The New EIT Law and its implementing
rules generally provide that a 10% withholding tax applies to China-sourced
income derived by non-resident enterprises for PRC enterprise income tax
purposes. We expect that such 10% withholding tax will apply to dividends paid
to us by our PRC subsidiaries but this treatment will depend on our status as a
non-resident enterprise. For detailed discussion of PRC tax issues related to
resident enterprise status, see “Risk Factors — Risks Associated with Doing
Business in China — Under the New EIT Law, we may be classified as a ‘resident
enterprise’ of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC stockholders.”
Our Chinese subsidiaries are currently
taxed at a rate of 25% of assessable profit.
Results of
Operations
The following tables set forth key
components of our results of operations for the periods indicated,
in dollars and as a percentage of revenue.
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
Six Months Ended June
30,
|
Year Ended December
31,
|
|||||||
|
2008
(unaudited)
|
2007
(unaudited)
|
2007
|
2006
|
|||||
|
(in
thousands)
|
(in
thousands)
|
|||||||
|
Sales
revenue
|
24,766
|
19,671
|
37,036
|
25,530
|
||||
|
Cost of
sales
|
14,818
|
12,002
|
22,050
|
14,522
|
||||
|
Gross
profit
|
9,948
|
7,669
|
14,986
|
11,007
|
||||
|
Expenses
|
||||||||
|
General & administrative
expenses
|
3,270
|
1,753
|
3,246
|
2,181
|
||||
|
Research and development
costs
|
99
|
15
|
105
|
33
|
||||
|
Selling
expenses
|
1,863
|
1,434
|
2,999
|
2,249
|
||||
|
Total operating
expenses
|
5,232
|
3,202
|
6,349
|
4,463
|
||||
|
Other
income
|
(287)
|
(313)
|
394
|
14
|
||||
|
Other
expense
|
--
|
--
|
22
|
183
|
||||
|
Financial
cost
|
528
|
538
|
||||||
|
Income before income
taxes
|
4,711
|
4,417
|
8,480
|
5,838
|
||||
|
Income
taxes
|
1,281
|
668
|
1,338
|
1,158
|
||||
|
Net income
|
3,430
|
3,750
|
7,143
|
4,679
|
||||
|
As a Percentage of
Sales
Revenue
|
||||||||
|
Sales
revenue
|
100%
|
100%
|
100
|
%
|
100
|
%
|
||
|
Cost of
sales
|
60%
|
61%
|
60
|
%
|
57
|
%
|
||
|
Gross
profit
|
40%
|
39%
|
40
|
%
|
43
|
%
|
||
|
Expenses
|
||||||||
|
General & Administrative
expenses
|
13%
|
9%
|
9
|
%
|
9
|
%
|
||
|
Research and development
costs
|
0.3%
|
0.7%
|
0.30
|
%
|
0.10
|
%
|
||
|
Selling
expenses
|
8%
|
7%
|
8
|
%
|
9
|
%
|
||
|
Total operating
expenses
|
21%
|
16%
|
17
|
%
|
17
|
%
|
||
|
Income before income
taxes
|
19%
|
22%
|
23
|
%
|
23
|
%
|
||
|
Income
taxes
|
5%
|
3%
|
4
|
%
|
5
|
%
|
||
|
Net income
|
14%
|
19%
|
19
|
%
|
18
|
%
|
||
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Sales Revenue
Our sales revenue for the six months
ended June 30,
2008 was $24.8 million,
which is approximately $5.1 million, or 26%, more than that of the same period ended
June 30, 2007, when we had revenue of $19.7
million. The increase in sales revenue was primarily attributed to
the expansion of our customer base and sales of more expensive higher end
products. The increase in sales revenue was a result of price
increases for our products, which generated approximately 45% of the increase in revenues, and
increased quantities of products sold, which generated approximately
55% of the increase in
revenues. The price increase of our products was in line with the price
increase of raw materials. The degree of increase in
revenue for the six months ended June 30 2008 was below our expectation mainly due to
the earthquake that occurred in Sichuan Province in the middle of May,
2008. As a result, the Company could not deliver any products to one of its
largest customers, the Oriental Turbine Factory in Sichuan, and other customers
in the earthquake-affected areas. The sales revenue decrease due to the
earthquake was about $1,746,442.
Cost of Goods Sold
Cost of goods sold, which consist of raw
materials, direct labor and manufacturing overhead expenses, was $14.8 million
for the six month period ended June 30, 2008, an increase of $2.8 million, or 23%,
as compared to $12.0 million for the six month period ended June 30, 2007. Our costs of goods sold
increased primarily as a result of the increase in sales, however, we did
achieve some economies of scale and therefore our costs of good sold did not
increase as much as our revenues. Cost of sales as a percentage of total revenues
were 60% and 61% for the six month periods ended on June 30, 2008 and 2007, respectively, a decrease of
approximately 1%. This was primarily a result of economies of
production scale and more efficient cost control.
Selling Expenses
Selling expenses, which consist
primarily of sales commission, advertising and promotion expenses, freight
charges and related compensation, were $1.9 million for the six month
period ended June 30,
2008, as compared to $1.4
million for the same period
ended June 30,
2007, an increase of $0.5
million, or approximately 30%. The increase was in line with the
increase in sales.
Operating and Administrative
Expenses
Our general and administrative expenses,
which consist primarily of rental expenses, related salaries, business
development, depreciation and traveling expenses, legal and professional
expenses, were $3.3 million for the six month
period ended June 30,
2008, as compared to $1.8
million for the same period ended June 30, 2007, an increase of $1.5 million, or
approximately 87%. The increase was primarily attributable to our
adoption of early retirement program, traveling expenses including overseas road-show
expenses for financing and consulting and audit expenses which
were approximately $0.7
million, $0.2 million, and $0.2 million respectively.
Environmental Laws Compliance
Costs
We incurred no costs for environmental
compliance for the six month period ended June 30, 2008 and 2007.
Income From
Operations
Income from operations was $4.7 million for the six month
periods ended June 30,
2008, as compared to $4.4
million for the same period ended June 30, 2007, an increase of $0.3 million or
approximately 6%. The increase was primarily attributable
to increase in sales and gross margin.
Other
Income (Expenses)
Total other income was $0.289 million
for the six month period ended June 30, 2008, as compared to $0.31 million for the
same period ended June 30,
2007. The
financial expenses for the six month period ended on June 30, 2008 and 2007 were $0.29 million and $0.36
million, respectively.
Income Taxes
We incurred income taxes of $1.3 million
for the six month period ended on June 30, 2008. This is an increase of $0.6
million or 92% from the taxes we incurred in the same 2007 period, which were $0.7
million. We incurred more taxes in the six months ended June 30, 2008 mostly because of the higher assessable
income in the six month period ended on June 30, 2008 compared to 2007. In addition, our
subsidiary, High Pressure Valve no longer enjoys tax exemption as
it did in 2007. The tax exemption was granted due to Kaifeng City tax incentive for privatized companies.
It is currently subject to regular tax rate of 25%.
Net Income
We earned net income of $3.4 million for
the six month period ended
June 30, 2008. This is a decrease of $0.3
million or approximately 9% from the same period ended June 30, 2007 which had a net income of $3.7
million. This decrease was primarily attributable to the
increase in operating and administrative expenses as well as increase in income
taxes after the tax exemption for High Pressure Valve expired on December 31,
2007.
Fiscal Year Ended December 31, 2007 Compared to Fiscal Year Ended
December 31,
2006
Sales Revenue. Sales revenue increased $11.5
million, or 45%, to $37.0
million in 2007 from $25.6 million in 2006. This increase was primarily driven
by a 25% increase in the average selling price of products sold and a 75%
increase in the volume of products sold. The increase in average selling
price in 2007 was primarily due to the
increase in raw material prices, particularly the steel metal price, and the
increased sales volume was attributable to (1) increase in demand of our
products fueled by rapid industrialization and manufacturing
development in China, (2) our successful marketing
efforts, (3) retaining our existing customers and adding additional large
customers and (4) our expansion into the nuclear power station valve market
segment.
Cost of Sales. Our cost of sales increased $7.5
million to $22.0 million in
2007 from $14.5 million in 2006. The cost of sales, as a percentage of sales
revenue, increased from 57% in 2006 to 60% in 2007. As sales revenue
increases, cost of goods sold also increase due to increased purchases of raw
materials in order to meet the demand for our
products. The slight increase in cost of sales as a percentage of sales revenue
is attributable to the increase in costs of materials and labor used in
production that we did not pass on to our customers.
Gross Profit. Our gross profit increased $4.0 million
to $15.0 million in 2007 from $11.0 million in 2006. Gross profit as a
percentage of net sales revenue decreased from 43.12% to 40.46%. This was
primarily driven by higher raw material costs that affected the selling price. As discussed above, this
increase is attributable to the increase in costs of materials and labor used in
production that we did not pass on to our customers.
General
and Administrative Expenses. Our administrative expenses increased
$1.1 million, or 45%, to
$3.2 million in 2007 from $2.2 million in 2006. As a percentage of sales
revenue, administrative expenses remained consistent, at approximately 9% from
2006 to 2007.
Research
and Development Costs. Our research and development costs
consist of amounts spent on
developing new products and enhancing our existing products. Our research and
development costs increased $71,242, or 214%, to $104,502 in 2007 from $33,260
in 2006. The increase was primarily attributable to (1) update of
certain product lines, (2) the increase in
our research and development expenses for certain valve products (3) the
increase in our research and development expense for our nuclear power station
valve products, (4) our increased investment in high end valve products, and (5) our increased spending on
developing new products.
Selling Expenses. Our selling expenses increased to $3.0
million in 2007 from $2.2 million in 2006. As a percentage of sales revenue, our
selling expenses have stayed fairly consistent, decreasing by only 1% from 2006 to 2007.
The increase in selling expenses is directly related to the increase in sales
revenue. Our addition of five new direct sales offices in
Beijing, Shanghai, Tianjin, Chongqing and Chengdu in 2007 also contributed to
the increase in our selling expense. To keep up with the Company's business
expansion, these new direct sales teams mainly focus on the petrochemical, oil,
metallurgical power and nuclear power industries as well
as large-scale projects.
Total
Operating
Expenses. Our total expenses increased $1.9
million to $6.3 million in 2007 from $4.5 million in 2006. As a percentage of
sales revenue, our total expenses remained unchanged in 2007 from
2006.
Income Before Income Taxes. Income from operations before income taxes increased $2.6 million,
or 45%, to $8.5 million in 2007 from $5.8 million in 2006. Income
from operations before income taxes as a percentage of revenue remained
unchanged in 2007 from 2006.
Net Income. Net income increased $2.5
million, or 53%, to $7.1
million in 2007 from $4.7 million in 2006 due to an overall increase in
revenue.
Allowance for Doubtful
Debts
Our trade receivables net of allowance
for doubtful accounts were $17.3 million as of December 31, 2007, an increase of $7.7 million, or 80%, from $9.6 million as of
December 31,
2006. Our allowance for
doubtful accounts totaled $274,167 as of December 31, 2007. We had no allowance for doubtful debts
as of December 31,
2006.
The increase of our trade receivables
was mainly due to overall
increase in sales revenue. Generally we consider a trade receivable
as a doubtful account only if it remains uncollected for more than one year from
due date. Our allowance for doubtful debts accounts for an
insignificant portion of the receivable balance in spite of the increasing
trade receivable balance throughout the reporting periods because almost all the
outstanding debts were aged less than one year. Many of our customers have long
business relationships with us and good settlement histories. In the absence of significant
bad debt experience, we consider the existing provisioning policy as
adequate.
Liquidity and Capital
Resources
As of June 30, 2008, we had cash and cash equivalents of
$4.6 million. The following table sets forth a summary of our cash flows for the
periods indicated:
|
Six Months
Ended
June 30,
|
Year Ended
December
31,
|
||||||||||
|
2008
(Unaudited)
|
2007
(Unaudited)
|
2007
|
2006
|
||||||||
|
(in
thousands)
|
(in
thousands)
|
||||||||||
|
Net cash (used in) / provided by
operating
activities
|
47
|
4,175
|
5,098
|
(3,310)
|
|||||||
|
Net cash (used in) investing
activities
|
(1,729)
|
(1,264)
|
(2,090)
|
(2,184)
|
|||||||
|
Net cash (used in) / provided by
financing activities
|
3,263
|
(7,842)
|
(5,882)
|
9,280
|
|||||||
|
Effect of exchange rate changes on
cash and cash equivalents
|
239
|
84
|
57
|
331
|
|||||||
|
Net increase/(decrease) in cash
and cash equivalent
|
1,820
|
(4,847)
|
(2,817)
|
4,117
|
|||||||
|
Cash and cash equivalents at the
beginning of period
|
2,814
|
5,591
|
5,591
|
1,474
|
|||||||
|
Cash and cash equivalents at the
end of period
|
4,634
|
744
|
2,774
|
5,591
|
|||||||
Cash has historically been generated
from operations as well as short-term loans from various sources, which has
provided sufficient liquidity to support our working capital
requirements, planned capital expenditures, completion of current and future
reorganization and acquisition-related programs, and debt
obligations.
Operating
Activities
Net cash provided by operating
activities was $47,000 in
the six months ended June
30, 2008, compared to net
cash provided by operating activities of $4.2 million in the same period in
fiscal year 2007. The change of $4.1 million in operating activities was
primarily attributable to the following factors:
|
●
|
In
the first half of 2007, our bank acceptance bills to suppliers increased,
which resulted in a great amount of cash in the Company’s bank account. In
the same period of 2008, we had less bank acceptance bills to suppliers
and we purchased a larger amount of raw materials, leaving less cash in
the Company’s bank account.
|
|
·
|
The
Company paid year-end bonus and sales incentive payments to the employees
in the beginning of the year 2008.
|
|
·
|
The Company paid $1.3 million
income taxes
in the beginning of
2008.
|
Investing
Activities
Net cash used in investing activities
increased from $1.3 million in the six months ended June 30, 2007, to $1.7 million in the same period in
fiscal year 2008. The net cash used in investing activities during
the period ended June
30, 2008, was primarily used for the
construction of the new plant in Kaifeng and purchase of additional
equipment.
Financing
Activities
Net cash provided by financing
activities was $3.3 million in the six months ended June 30, 2008, compared to net cash used in
finance activities of $7.8
million in the same period in fiscal year 2007. This was primarily attributable
to short term borrowing proceeds from related party and third parties. In
addition, Mr. Siping Fang contributed additional $1.3 million to the
Company during the six months ended
June 30, 2008.
As of June 30, 2008, there was no principal outstanding
under our credit facilities and lines of credit.
Capital
Expenditures
The capital expenditures in the six
months ended June 30,
2008 and 2007 and the
fiscal years ended
December 31,
2007 and 2006 are set forth
below. Our capital expenditures were used primarily for plant construction and
purchases of equipment to expand our production capacity. The table below sets
forth the breakdown of our capital expenditures by use for the periods
indicated.
|
Years Ended December
31,
|
Six Months Ended June
30,
|
|||||||||||||||
|
2007
|
2006
|
2008
|
2007
|
|||||||||||||
|
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
|
Construction
costs
|
$ | 171 | $ | 355 | $ | 375 | $ | 115 | ||||||||
|
Purchase of
equipment
|
$ | 949 | $ | 634 | $ | 564 | $ | 428 | ||||||||
|
Total capital
expenditure
|
$ | 1,120 | $ | 989 | $ | 939 | $ | 543 | ||||||||
We
estimate that our total capital expenditures in fiscal year 2008 will reach
approximately $10 million, most of which will be used to construct a new plant
in Kaifeng to increase our production capacity. The expenditures will also be
used for equipment purchases, such as those for ultra-supercritical thermal
power projects.
Other than the contractual obligations
and commercial commitments set forth above, we did not have any other long-term debt
obligations, operating lease obligations, capital commitments, purchase
obligations or other long-term liabilities as of June 30, 2008.
Critical Accounting
Policies
Our consolidated financial information
has been prepared in
accordance with U.S. GAAP, which requires us to make judgments, estimates and
assumptions that affect (1) the reported amounts of our assets and liabilities,
(2) the disclosure of our contingent assets and liabilities at the end of each
fiscal period and (3) the reported amounts of
revenues and expenses during each fiscal period. We continually evaluate these
estimates based on our own historical experience, knowledge and assessment of
current business and other conditions, our expectations regarding the future based on available
information and reasonable assumptions, which together form our basis for making
judgments about matters that are not readily apparent from other sources. Since
the use of estimates is an integral component of the financial reporting process, our actual results
could differ from those estimates. Some of our accounting policies require a
higher degree of judgment than others in their application.
When reviewing our financial statements,
the following should also be considered: (1) our selection of critical
accounting policies, (2) the judgment and other uncertainties affecting the
application of those policies, and (3) the sensitivity of reported results to
changes in conditions and assumptions. We believe the following
accounting policies involve the most
significant judgment and estimates used in the preparation of our financial
statements.
Revenue Recognition
The Company’s revenue recognition policies are in
compliance with Staff Accounting Bulletin (“SAB”) 104. Sales revenue is recognized when all of the
following have occurred: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services have been rendered, (iii) the price is fixed
or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally
satisfied at the time of shipment when risk of loss and title passes to the
customer.
The Company recognizes revenue when the
goods are delivered and title has passed. Sales revenue represents the invoiced
value of goods, net of a
value-added tax (VAT). All of the Company’s products that are sold in the PRC are
subject to a Chinese value-added tax at a rate of 17% of the gross sales price
or at a rate approved by the Chinese local government. This VAT may be offset
by the VAT paid by the Company on raw
materials and other materials included in the cost of producing their
finished product.
Foreign
Currency Translation and Other Comprehensive Income
The
reporting currency of the Company is the US dollar. The functional currency of
its Chinese operating entities Henan Kaifeng Pressure Valve Co., Ltd. and
Zhengzhou City Zhengdie Valve Co., Ltd is Renminbi (RMB).
For the
subsidiaries whose functional currencies are other than the US dollar, all
assets and liabilities accounts were translated at the exchange rate on the
balance sheet date; stockholder's equity is translated at the historical rates
and items in the income and cash flow statements amounts are translated at the
average rate for the year. Because cash flows are calculated based using the
average translation rate, amounts related to assets and liabilities reported on
the statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet. Translation adjustments resulting
from this process are included in accumulated other comprehensive income in the
statement of shareholders’ equity. The resulting translation gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred.
Accumulated
other comprehensive income in the consolidated statement of shareholders’ equity
amounted to $3,173,745 and $1,304,099 as of December 31, 2007 and 2006,
respectively. The balance sheet amounts with the exception of equity at December
31, 2007 and 2006 were translated at 7.29 RMB and 7.80 RMB to $1.00 USD,
respectively. The average translation rates applied to income and cash flow
statement amounts for the year ended December 31, 2007 and 2006 were 7.59 RMB
and 7.96 RMB to $1.00, respectively.
Income
Taxes
The
Company adopted Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (SFAS 109) that requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between income tax basis and financial reporting basis of assets and
liabilities. Provision for income taxes consist of taxes currently due plus
deferred taxes. Since the Company had no operations within the United States
there is no provision for US income taxes and there are no deferred tax amounts
as of June 30, 2007 and 2006.
The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet date. Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
Deferred
tax is calculated at the tax rates that are expected to apply to the period when
the asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it related to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in
equity. Deferred tax assets and liabilities are offset when they relate to
income taxes levied by the same taxation authority and the Company intends to
settle its current tax assets and liabilities on a net basis.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption had no
affect on the Company’s financial statements.
Warranties
We
typically warrant all of our products. It is the Company’s policy to replace
parts if they become defective within one year after deployment at no additional
charge. Historically, failure of product parts due to materials or
workmanship is rare. Therefore, at June 30, 2008 and December 31, 2007, the
Company made no provision for warranty claims for our products. Management
continuously evaluates the potential warranty obligation. Management will record
the expenses related to the warranty obligation when the estimated amount become
material at the time revenue is recorded.
Concentrations
Risks
The
Company's operations are carried out in the PRC. Accordingly, the Company's
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's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
Cash
includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People’s Republic of China and Hong Kong. Total cash
(including restricted cash balances) in these banks on December 31, 2007 and
2006 amounted to $2,814,118 and $5,591,211, respectively, of which no deposits
are covered by insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any risks on its cash in bank
accounts.
Five
major suppliers, which represented approximately 38% and 30% of the Company’s
total purchases for the years ended December 31, 2007 and 2006, respectively.
Five suppliers accounted for 5% and 15% of total accounts receivable as of
December 31, 2007 and 2006 respectively.
Accounts
Receivable And Allowance For Doubtful Accounts
The
Company’s business operations are conducted in the PRC. During the normal course
of business, the Company extends unsecured credit to its customers by selling on
various credit terms. Management reviews its accounts receivable on a quarterly
basis to determine if the allowance for doubtful accounts is adequate. An
estimate for doubtful accounts is recorded when collection of the full amount is
no longer probable. The Company’s existing reserve is consistent with its
historical experience and considered adequate by the management.
Fair
Value of Financial Instruments
The
Company adopted SFAS No. 157, “Fair Value Measurements” on January 1, 2008. SFAS
No. 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosure requirements for
fair value measures. The carrying amounts reported in the balance sheets for
receivables and payables qualify as financial instruments and are a reasonable
estimate of fair value because of the short period of time between the
origination of such instruments and their expected realization and their current
market rate of interest. The three levels are defined as
follows:
Level
1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
Level
2 inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for substantially
the full term of the financial instruments.
Level
3 inputs to the valuation methodology are unobservable and
significant to the fair value.
The
Company invested in China Perfect Machinery Industry Co., Ltd. in 1996 and
Kaifang Commercial Bank in 1997. Long term investments amounted to $760,346 and
$714,485 as of June 30, 2008 and December 31, 2007,
respectively. There is no quoted or observable market price for the
joint venture interest or other similar joint ventures; therefore, the Company
used level 3 inputs for its valuation methodology. The determination of the fair
value was based on the capital investment that the Company
contributed.
The
Company did not identify any other assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS
No.157.
Changes in Accounting
Standards
In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities—including an amendment of FASB Statement
No. 115 (“FAS
159”). FAS 159 permits
companies to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. The objective of FAS 159 is to provide opportunities to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without
having to apply hedge accounting provisions. FAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for
similar types of assets and liabilities. The
Company adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect the
option to measure the fair value of eligible financial assets and
liabilities.
In June 2007, the FASB issued FASB Staff
Position No. EITF 07-3,
“Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
advance payments for goods or services that used or rendered for research and development
activities should be expensed when the advance payment is made or when the
research and development activity has been performed. The Company
adopted FSP EITF 07-3 and expensed the research and development as
incurred.
In December 2007, the FASB issued SFAS
No. 160 “Noncontrolling
Interests in Consolidated Financial Statements-an amendment of ARB No.
51”. SFAS 160 establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective for the fiscal year beginning after December 15, 2008. The management is in the process of
evaluating the impact SFAS 160 will have on the Company’s financial statements upon
adoption.
In December 2007, Statement of Financial
Accounting Standards No. 141(R), Business Combinations, was issued. SFAS No.
141R replaces SFAS No. 141, Business Combinations. SFAS 141R retains the
fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the
purchase method) be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS 141R requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions.
This replaces SFAS 141’s cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets acquired and
liabilities assumed based on their estimated fair values. SFAS 141R also
requires the acquirer in a business combination achieved in stages (sometimes
referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of their fair
values (or other amounts determined in accordance with SFAS 141R). SFAS
141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that
date. The Company is currently evaluating the impact that adopting SFAS No. 141R
will have on its financial statements.
In March 2008, the FASB issued SFAS
No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133”, (“SFAS 161”) which requires additional disclosures
about the objectives of the derivative instruments and hedging activities,
the method of accounting for such instruments under SFAS 133 and its related
interpretations, and a tabular disclosure of the effects of such instruments and
related hedged items on our financial position, financial performance, and cash flows. SFAS 161
is effective for us beginning January 1, 2009. The Company is currently evaluating
the impact that adopting SFAS 161 will have on its financial
statements.
In April 2008, the FASB issued 142-3
“Determination of the
useful life of Intangible
Assets”, which amends the
factors a company should consider when developing renewal assumptions used to
determine the useful life of an intangible asset under SFAS142. This Issue is
effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. SFAS 142 requires companies to consider whether renewal can be
completed without substantial cost or material modification of the existing
terms and conditions associated with the asset. FSP 142-3
replaces the previous useful life criteria with a new requirement—that an entity consider its own
historical experience in renewing similar arrangements. If historical experience
does not exist, then the Company would consider market participant assumptions
regarding renewal including 1) highest and best use of the asset by a market
participant, and 2) adjustments for other entity-specific factors included in
SFAS 142. The Company is currently evaluating the impact that adopting SFAS No.142-3 will have on its
financial statements.
In May 2008, the FASB issued SFAS No.
162, “The Hierarchy of
Generally Accepted Accounting Principles.” This Statement identifies the sources
of accounting principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). The Company is currently evaluating the impact that adopting SFAS
No. 141R will have on its financial statements.
In May 2008, the FASB issued SFAS No.
163, “Accounting for
Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No.
60.” The scope of this
Statement is limited to
financial guarantee insurance (and reinsurance) contracts, as described in this
Statement, issued by enterprises included within the scope of Statement 60.
Accordingly, this Statement does not apply to financial guarantee contracts
issued by enterprises excluded from the scope
of Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This Statement also does not apply
to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments
and Hedging Activities.”
This Statement will not have and impact on the
Company’s financial
statements.
In June 2008, the FASB issued Emerging
Issues Task Force Issue 07-5 “Determining whether an Instrument (or
Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). This Issue is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Paragraph 11(a) of Statement of Financial Accounting Standard No
133 “Accounting for
Derivatives and Hedging Activities” (“SFAS 133”) specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to
the Company’s own stock and (b) classified
in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. EITF
No.07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for
the SFAS 133 paragraph 11(a) scope exception. This standard triggers
liability accounting on all options and warrants exercisable at strike prices
denominated in any currency other than the functional currency of the operating
entity in China (Renminbi). We issued a warrant
to purchase 100,000 shares of our Common Stock to CCG Investors Relation
Partners LLC on December 12, 2007. On August 26, 2008, we issued to
Brean Murray, Carret & Co., LLC and Rosewood Securities, LLC warrants to
purchase an aggregate of 1,174,497 shares of the Common Stock. All of the shares
underlying the warrants are being registered by this prospectus and are
denominated in U.S. dollars. Accordingly, the Company will be required to
account for these warrants as derivative instrument liabilities and mark to
market their value each period.
In June 2008, FASB issued EITF Issue No.
08-4, “Transition Guidance
for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4 is to
provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios”, that result from
EITF No. 00-27 “Application
of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity”. This Issue is effective for
financial statements issued for fiscal years ending after December 15, 2008. Early application is
permitted. This Statement will not have and impact on the
Company’s financial
statements.
Off-Balance Sheet
Arrangement
We do not have any off-balance sheet
arrangements.
Seasonality
Our operating results and operating cash
flows historically have not been subject to seasonal variations. This pattern may change, however, as
a result of new market opportunities or new product
introductions.
We are a Nevada holding company for several direct and
indirect subsidiaries in China. Our principal operations in
China are conducted through High Pressure
Valve and Zhengdie Valve which are held by our direct wholly-owned subsidiary
Henan Tonghai Fluid, a PRC company and China Fluid Equipment, a Hong Kong corporation. Henan Tonghai Fluid
and China Fluid Equipment have no active business operations other
than their ownership of High Pressure Valve and
Zhengdie Valve.
The following chart reflects our
organizational structure as of the date of this prospectus.
Our
Corporate History
We were
originally incorporated on August 1, 1997 in the State of Nevada under the name
Intercontinental Resources, Inc. Our name has been changed several
times over the years and our current name is China Valves Technology,
Inc. We had no active operations during the period from 2001 until
December 18, 2007, at which time we entered into a Stock Purchase Agreement
and Share Exchange Agreement, or the Exchange Agreement, with China Valve Samoa,
a company incorporated under the laws of Samoa on June 6, 2007, and with China Valve Samoa’s sole shareholder Mr. Siping Fang. Pursuant to the Exchange Agreement, we acquired
all of the outstanding capital stock of China Valve Samoa from the sole
shareholder for an aggregate of 40,000,000 shares, or 99.8% of
our common stock and a cash payment by China
Valve Samoa of $490,000. Pursuant to the Exchange Agreement, on
December 18,
2007, we filed with the
Secretary of State for the state of Nevada a Certificate of Amendment to our
Certificate of Incorporation changing our name to “China Valves Technology,
Inc.” to better reflect our
business plan.
In our
Form 10-K for the fiscal year ended December 31, 2007 filed with the Commission
on March 31, 2008, or the Form 10-K, the acquisition of China Valves Samoa was
treated as a reverse acquisition and recapitalization of the Company (the legal
acquirer), whereby China Valve Samoa (the legal acquiree) was deemed to be the
accounting acquirer and the Company was the accounting
acquiree.
Accordingly,
the historical financial statements for periods prior to December 16, 2007 are
those of China Valve Samoa, including the Operating Subsidiaries (as defined
below), except that the equity section and earnings per share were retroactively
restated to reflect the reverse acquisition. The audited consolidated
financial statements of China Valve Samoa as of December 31, 2005 and 2006, and
the unaudited condensed consolidated financial statements of China Valve Samoa
as of September 30, 2007 and for the nine months ended September 30, 2007, were
previously filed as exhibits on Form 8-K. The audited consolidated
financial statements of the Company as of December 31, 2007 were included in the
Form 10-K and the unaudited condensed consolidated financial statements of the
Company as of March 31, 2008 and June 30, 2008 and for the three and six month
periods ended March 31, 2008 and June 30, 2008 were included in the Company’s
Form 10-Q for those periods, filed with the Commission on May 15, 2008 and
August 14, 2008, respectively.
Prior to
entry into the Exchange Agreement, China Valve Samoa undertook a group
reorganization plan to comply with the regulations of the China State
Administration of Foreign Exchange. China Valve Samoa’s wholly owned subsidiary
China Valve Holdings Limited, was incorporated under the laws of the Hong Kong
Special Administrative Region on June 11, 2007, or China Valve Hong
Kong. China Valve Hong Kong established Henan Tonghai Valve, a
wholly-owned subsidiary in the People’s Republic of China, on September 5,
2007. Neither China Valve Samoa nor China Valve Hong Kong had any active
business operations other than their ownership of Henan Tonghai
Valve. Henan Tonghai Valve acquired 100% of the equity of High
Pressure Valve and Zhengdie Valve, together, referred to as the Operating
Subsidiaries, from Mr. Siping Fang, the Chief Executive Officer of the Company
and the other individual owners of those companies. The acquisition of the
Operating Subsidiaries by Henan Tonghai Valve from Mr. Siping Fang was
considered to be a transaction between entities under common
control.
Pursuant
to the group reorganization plan, on April 1 and 3, 2008, the Company
transferred 100% of the equity of the Operating Subsidiaries back to Sipang Fang
and the other original owners, with the intention that Sipang Fang would
transfer the Operating Subsidiaries to a new entity controlled by Mr. Bin Li,
and that Mr. Li would then sell such entity to the Company, thereby allowing the
Company to reacquire legal ownership of the Operating
Subsidiaries.
On April
10, 2008, Mr. Fang, the Company’s Chief Executive Officer and President, sold
24,300,000 shares of the Company’s common stock beneficially owned by him and
which he had received in the merger transaction described above, to Mr. Li for
$10,000. In connection with his acquisition of the shares, Mr. Li
issued to Mr. Fang a $10,000 note. The note, which does not bear
interest, is due sixty days after a written demand for payment is made by Mr.
Fang to Mr. Li, provided that such demand is made on or after October 15, 2008.
The sale represents a change of control of the Company and the shares acquired
by Mr. Li represent approximately 60.75% of the issued and outstanding capital
stock of the Company calculated on a fully-diluted basis. Prior to the
acquisition, Mr. Li was not affiliated with the Company. However
following the acquisition, Mr. Li was deemed an affiliate of the Company as a
result of his stock ownership interest in the Company. In connection therewith,
Mr. Fang and Mr. Li entered into an Earn-In Agreement, or the Earn-In
Agreement, pursuant to which Mr. Fang obtained the right and option to
re-acquire the shares of the Company from Mr. Li, subject to the satisfaction of
four conditions as set forth in the Earn-In Agreement. These conditions would be
able to be satisfied only if the Company is able to reacquire and operate the
Operating Subsidiaries. The
sale of Siping Fang’s common stock and the Earn-In Agreement
were disclosed in a Current Report on Form 8-K filed with the
Commission on April 16, 2008.
Pursuant to the group reorganization
plan, Mr. Li established China Fluid Equipment on April 18, 2008, to
serve as the 100% owner of a new PRC subsidiary, Henan Tonghai Fluid. On June
30, 2008, Henan Tonghai Fluid acquired the Operating Subsidiaries from Mr. Fang
and the other original owners. The acquisitions were consummated under the
laws of the PRC. The former Hong Kong holding company, China Valve
Hong Kong and its subsidiary Henan Tonghai Valve, which no longer held any
assets, were dissolved. On July 31, 2008, the Company and Mr. Li completed the
reorganization plan when Mr. Li transferred all of the capital stock of China
Fluid Equipment to the Company pursuant to an Instrument of Transfer for a
nominal consideration of HKD$10,000 (approximately $1,281). As a result of these
transactions, the Operating Subsidiaries are again the Company’s indirect
wholly-owned subsidiaries.
During
this reorganization, the Operating Subsidiaries continued to be under the
operating and management control of the Company. Because of this operating
and management control and because the Company continued to bear the residual
risks and rewards related to the Operating Subsidiaries, the Company continued
to consolidate the Operating Subsidiaries during the
reorganization. The acquisition by the Company on July 31, 2008 of
the new holding company for the Operating Subsidiaries, which represented the
return to legal ownership of the Operating Subsidiaries by the Company,
represented a transaction between related parties under common control and did
not establish a new basis in the assets and liabilities of the Operating
Subsidiaries. The Earn-In Agreement will enable Mr. Fang to regain ownership of
the Company’s shares originally transferred by him to Mr. Li as part of the
reorganization arrangements and, accordingly, the Company does not consider his
re-acquisition of those shares to represent compensation cost to the
Company.
Overview
China Valves Technology, Inc., formerly
known as Intercontinental
Resources, Inc., through its direct and indirect subsidiaries, focuses primarily
on the development, manufacture and sale of high-quality metal values for the
electricity, petroleum, chemical, water, gas and metal industries in
China.
Our operations are headquartered in
Kaifeng, Henan Province, PRC. Our two
Chinese operating subsidiaries are Zhengdie Valve and High Pressure
Valve.
Our sales revenue and net income were
$37,036,282 and $7,142,592, respectively, during the fiscal year ended
December 31, 2007, and $25,530,183 and $ 4,679,379,
respectively, during the same period in 2006.
Our Industry
China is currently experiencing growth in
urbanization and heavy industrialization. The Company believes that
increased demand for energy and water treatment in urban centers will
increase demand for valve products. According to the China Valve Industry
Association’s research, sales of valve products in
the Chinese domestic market in 2007 reached $6.97 billion, an increase of 30%
from the previous year, and the Chinese market is
expected to increase at an annual rate of more than 30% for the next 5
years.
According to the China Valve Industry
Association’s research, the valve market is divided
into five primary segments: (i) power; (ii) petrochemical; (iii) oil; (iv) water supply; and
(v) metallurgy, which account for approximately 21％, 12％, 24.5％, 14％ and 8％ of market share,
respectively. All other valve products account for the remaining
18.5%.
1. Power
industry
Thermal power
The power industry has experienced rapid
growth since the founding of the PRC, aided particularly by economic reforms by the
Chinese government and the opening of the Chinese market to the outside world.
In 2006, total installed capacity achieved 600 million KW and generated
electricity volume of 284 million KWh, both of which were the highest in the world. Although
overall installed capacity is relatively sufficient, the structure of such units
has been inefficient.
Small thermal power generating units
account for approximately 70% of total capacity, however, the above-300 KW units
account for less than 30% of the total.
Compared to technology used in developed countries, technology used in the PRC
is falling far behind. Equipment is outdated and the majority of
thermal power units are sub-critical pressure and super-critical pressure
units. These units have high coal
consumption, low efficiency and high pollution, which lead to environmental and
energy-saving problems. Based on the current development of the
Chinese domestic power market, in 2010 China power generating installed
capacity should reach approximately 950 million
KW and thermal power installed capacity should reach approximately 550-600
million KW. Thermal power installed capacity has been increasing by over 30
million KW annually.
The focus of thermal power industry
development is primarily on
adjusting and optimizing thermal power units. High-temperature, high-pressure
and high-parameter thermal power generating units have high-thermal efficiency,
good economic results and light pollution, which is good for environmental
protection and energy
saving. 600 MW thermal power generating units have had the lowest
demand in China. There has been a trend toward 1000 MW
supercritical pressure units and these units are expected to become more
prevalent in the future. Currently in China, there are sixteen projects that are
under construction or are scheduled to commence operation in the near
future. These include facilities at Zhejing Ninghai, Waigaoqiao,
Wuhu, Pingdingshan and Shanxi Zhangze, with
a total capacity of 34 million KW of 34 units. High Pressure Valve is the
sole company that would have the capacity to manufacture valves used for
ultra-critical thermal power generating units. We expect to have an
extensive market share in the supercritical pressure unit
market.
Nuclear power
There are about 500 nuclear power
generating units in the world, 11 of which have been built in China with total installed capacity of 8.7
million KW. Presently, six nuclear power generating units having a
capacity of over a million KW are planned to be built at the Sanmen nuclear
power station and four nuclear power generating units are planned at the Tianwan
nuclear power station. Based on the Chinese State Energy Plan, by 2020
approximately 20 nuclear power generating units are proposed to be established in Lingdong in Shenzhen,
Yangjiang, Taishan, Peiling, Chongqing and Dalian, with an aggregate capacity of
40 million KW, or 4-5% total installed capacity. Demand for valves
used in the nuclear power industry is higher than demand in the
thermal power industry for power stations
having similar capacity. A nuclear power station with two sets of one
million KW nuclear power generating units typically requires approximately
30,000 units of valves. Based on an increase of 2.5 million KW of nuclear
power generating units per year, we
estimate that the average annual demand for valves used in the nuclear power
industry will reach 38,000 units. Based on the target power
generation increases set forth in the Eleventh Five-Year Plan of the Chinese
government, the 2006 Report estimated that the
demand for valves in the nuclear power industry will reach RMB 3 billion by
2010, with an average annual amount of RMB 0.6 billion from 2006 to
2010. In addition, the 2006 Report estimated that the market for
repairs of valves is approximately RMB 150
million per year.
2. Petrochemical and oil
industries
During the period of the Eleventh
Five-Year Plan, the focus of the large-scale ethane and fertilizer industry is
on developing 80-100 mil-mt/year projects, including build-out and transformation of
existing 40-45 mil-mt/year equipment/facilities and building new large-scale
ethane equipment/facilities. During this period, the large-scale ethane
equipment of 40-45 mil-mt/year in Daqing, Jilin and Maoming will be transformed into equipment of 80
mil-mt/year. Additionally, large-scale ethane equipment projects of 80
mil-mt/year in Tianjin and 100 mil-mt/year in Zhenhai are
expected to be implemented. It is anticipated that several sets of
new large-scale 80 mil-mt/year ethane equipment projects will be
built by joint investment and joint venture. The 2006 Report stated
that the market for large-scale ethane key equipments, such as special valves
and high-temperature valves for ethane fission gas, which are currently still imported into the PRC, will
increase within the PRC.
It is anticipated that prior to 2010,
the newly established large-scale gas pipeline would reach a capacity of above
20,000 km and the demand for large caliber high-pressure gas pipeline
ball valves will be approximately 20,000
units. The segment of the Sino-Russian oil pipeline that is located in
China requires 300 units of electromotion DN
caliber pipeline valves. During the eleventh five-year plan period,
crude high-pressure oil pipelines of 5,000 km are planned to be built,
which will require approximately 3,000 units of high-pressure DN caliber
pipeline valves. Additionally, the PRC is expected to develop the LNG station,
which should generate large demand for various types of low-temperature valves. The majority of
high-standard special valves involved in large-scale gas projects are from
imports. It is necessary for us to strengthen research and development of
high-temperature, high-pressure and grind-resist valves in order to meet
demands for development of the coal-liquefied
industry.
3. Water supply
industry
American Watts Water Technologies Group,
a leading manufacturer of equipment for water treatment internationally,
anticipates that the total demand for valves in China to be used in the water supply industry will be
RMB 10 billion. The 2006 Report stated that the budgeted amount for
valves for the 70 km segment of the north-south water transfer project in
Beijing from suburban Beijing to downtown Beijing alone is more than RMB ten million. In addition, the
scalable hydroelectric power supply project is not only an immediate project but
also a long-term task. Major projects such as gas transportation between western
and eastern regions of the PRC, the transformation of the old industry base, construction of downtown
pipe network in major cities, residential building, and wastewater treatment and
water conservancy should also generate tremendous demand for
valves.
According to the 2006 Report, the total
demand for valves will reach $12 billion by 2010. The Chinese
government is expected to put an emphasis on construction of basic
infrastructure for water, electricity, gas and heat in order to ensure
continuous economic development and meet the requirement of improving
people’s living standard. This construction
should generate huge demand for valves. China’s valve market is expected to keep
developing. We expect to keep working on how to utilize all the tangible and
intangible resources to expand and strengthen our products and increase market share.
Our Competitive
Strengths
|
·
|
Broad range
of products and leading brands. We believe
that we have the most comprehensive range of valve products in our
industry and enjoy leading market positions based on the estimated market
share of our key products, broad brand recognition and a strong reputation
for quality and service within the markets we
serve.
|
|
·
|
Low-cost
and high quality manufacturing
capabilities. We have daily production
capacity for 23 tons of high quality
valves and 15 tons of high
pressure and high temperature valves. We believe our historical
capital investment in manufacturing technologies helps us reduce the costs
of producing our products. We focus on manufacturing and
selling high quality valves at competitive prices. We believe we have
price advantage over most of our
competitors.
|
|
·
|
Highly
experienced and incentivized research and development team. We have a R&D
department composed of 114 engineers with many years of
experience. We are committed in
developing new
products, we have in recent months generally launched a new model every two months.
|
|
·
|
Highly
experienced, proven management team. We are led by an
experienced management team with a long and
successful track record, enabling us to recognize and capitalize upon
attractive opportunities in our key markets. Our 15 most senior members
of the management team have an average of over 18 years of experience in
the valve industry and have substantial experience in acquisition and
integration of businesses, cost management rationalization and efficient
manufacturing processes. The management team is led by Siping Fang, the
Chairman, President and Chief Executive Officer, who has over 20 years of
experience in the valve industry.
|
Our Growth Strategy
Our primary objectives are to increase
profitability, cash flow and revenue while developing and enhancing our position
as the leading fluid
equipment and pump
manufacturer in
China. Our strategy for achieving
these objectives includes the following key elements:
Pursue
Strategic Acquisitions. China’s valve market is very
fragmented. We anticipate that the fragmented nature of the Chinese
valve market will continue to provide opportunities for growth through strategic
acquisitions. Our acquisition strategy will continue to focus on entities with
fluid products that provide opportunities for us to
expand and products that can be marketed through our existing direct sales teams and distribution channels or provide us with
new distribution channels for our existing products, thereby increasing marketing and
distribution efficiency.
Further
Penetrate Existing Market Segments. We intend to seek to further penetrate
existing market segments to drive sustainable growth by strengthening our
existing customer relationships and attracting new customers. We will
continue to provide quality products, fulfill logistical requirements and volume
demands efficiently and consistently, and provide comprehensive product support
from design to after-market customer service.
Enter
New
Market Segments. To drive organic growth from our
existing businesses, we intend to continue to leverage our customer
relationships to develop or acquire new products and product extensions to enter
into new market segments such as nuclear power, oil and chemical markets.
High
End Product Focus. We will
keep focusing on high end, more sophisticated valve products, including
high-parameter and special usage valves. Because of our technology
and R&D strength, we will continue focusing on high end valve products and pursing higher margins than
the industry average. Additionally, we intend to cooperate with the
electricity power design colleges and solicit support from industry
associations.
Increase
in International Sales. We plan to increase our focus
on sales into international
markets. In the short term, we plan to focus on neighboring
developing countries and in the long term, we expect to focus on the
United States and Europe.
Our Products
We produce valves for many different
industries. The main product lines consist
of:
|
·
|
High pressure and high temperature
valves for power station
units;
|
|
·
|
Valves for long distance petroleum
pipelines;
|
|
·
|
Special valves for chemical
lines;
|
|
·
|
Large valves for water supply pipe
networks;
|
|
·
|
Valves for sewage;
and
|
|
·
|
Valves for long distance gas
pipelines.
|
We produce over 700 models of valves and
more than 10,000 standards of valves in categories such as low, medium and
high-pressure valves. The valves are produced with varying diameters
from 3mm to 1300mm and with pressure caps that range from 150lbs to
4500lbs. In addition, different valve products can be used in
temperatures ranging from -196 degrees Celsius to 610 degrees
Celsius.
The major materials that are used in the
production of these valves include carbon steel, stainless steel, low temperature steel and
heat resistant steel extra.
We also produce the following types of
valves:
|
·
|
Gate
valves;
|
|
·
|
Globe
valves;
|
|
·
|
Check
valves;
|
|
·
|
Throttle
valves;
|
|
·
|
Butterfly
valves;
|
|
·
|
Ball
valves;
|
|
·
|
Safety
valves;
|
|
·
|
Water pressure test
valves;
|
|
·
|
Vacuum valves;
and
|
|
·
|
Extraction check valves
extra.
|
Our Manufacturing
Process
Our manufacturing process consists of
the following steps:
|
·
|
purchasing and depositing of raw
materials,
|
|
·
|
processing,
|
|
·
|
production of inventory of
semi-finished products (or transporting to the next step
directly),
|
|
·
|
completing the part processing and
assembling products,
|
|
·
|
product inspection and testing,
and
|
|
·
|
production of inventory of
finished products.
|
Our modern CAD center can assist in the
design of all products. The Company closely monitors and tests quality of raw
materials, including casting steel blank parts, forging steel blank parts and
steel. The Company uses a high-speed direct reading spectrograph (32
channels) for the analysis of the chemical components of raw
materials. We have cobalt
60γflaw
detectors, high-power magnetic particle flaw detectors and ultrasonic flaw
detectors, non-destructive equipment that helps to ensure the internal quality
of forging blank parts. We have a metal material test room for physical and
chemical analysis and mechanics testing of raw
materials. In order to ensure production structural capability, we utilize
high-precision equipment, including high-precision CNC lathes and advanced welding equipment
to satisfy requirements of products design. We have modern product-processing workshops
mainly with CNC lathes and approximately 20 units of
large-scale high-precision equipment, including 4 m CNC vertical lathes, CNC horizontal lathes and CNC boring and milling machines. In
addition, we have pressure equipment to conduct pressure testing for
finished products in accordance with relative standards.
We have set up a comprehensive and
reliable quality management system with strict and material manufacturing
procedures and standard inspection. In addition, our company acquired an API quality certificate in January of 1994,
a Norway DNV ISO9001 in May of 1996, a European Union CE in 2004 and a
China special equipment manufacturing
certificate in 2005.
Warranties
We typically warrant all of our products
and provide replacement or
credit to our customers who are not satisfied with our products for a period of
one year from the date of shipment. When we receive an indication
that a product did not perform as expected, our quality control specialists and
laboratory personnel test the product to
determine if our process was correct for the specifications submitted by the
customer and if the manufacturing process was completed as
planned.
If we failed to produce the product
according to the customer’s specifications or if the manufacturing process was
flawed, we provide immediate credit to the customer. If we produced
the product to the customer’s specifications and if the
manufacturing process was not flawed, we send a team to the customer’s facilities to see if we can assist the customer in
correcting its process. Typically a team consists of at least one
engineer, at least one experienced production person and the
customer’s sales representative. If
the product was manufactured to the proper specifications, our team works with the customer in
developing corrective action to solve its problem.
We have not established reserve funds
for potential customer claims because, historically, we have not experienced
significant customer complaints about our products and none of our customers have requested
damages for any loss incurred due to product quality problems. We
believe that our customer support teams, our quality assurance and manufacturing
monitoring procedures will continue to keep claims at a level that does not support a need for a
reserve. We review customer returns on a monthly basis and may
establish a reserve fund as we expand our business by volume and products. If we
were to experience a significant increase in warranty claims, our financial
results could be adversely affected. See
“Risk Factors - Risks
Related to Our Business - We do not maintain a reserve fund for warranty or
defective products claims. Our costs could substantially increase if we
experience a significant number of warranty claims.”
Suppliers of Our Raw
Material
Our raw materials are primarily
varieties of steel and casting blank parts and driven devices. The price for
such material fluctuates depending upon market conditions. However, since we
have long-term suppliers and clients, the influence of material price
fluctuation is not currently material to the Company.
We have established long-term
relationships with key suppliers. However, we do not have long term supply
contracts and we do not exclusively rely on our key suppliers. We have adopted a dual supplier
system for raw materials. Therefore, if our primary suppliers cannot supply us
with our raw material for any reason, we are able to acquire raw material from
another supplier. All of our suppliers must meet our quality
standards and delivery requirements
consistently in order to remain on our approved supplier list. If deliveries are
delayed repeatedly, we terminate the partnership with such
supplier.
The flexible sourcing arrangements are
designed to ensure the stable supply of raw material and promote
healthy competition among our suppliers. We believe our supplier
arrangements would encourage our suppliers to provide advanced technology and
high quality products.
Top 10 Suppliers in
2007
The
following table lists our top ten suppliers in 2007:
|
Rank
|
Company
Name
|
Unit
（ton）
|
Purchasing
amount
in 2007 (in
RMB)
|
Location
|
Material
|
|
1
|
Kaifeng High Pressure Valve
Castings Ltd
|
1596.87
|
2,543,564.31
|
Kaifeng, Henan
|
Casting
|
|
2
|
Sichuan Jiangyou City Xinchuan
Special Steel, Inc.
|
143.66
|
662,471.31
|
Jiangyou,
Sichuan
|
Steel
|
|
3
|
Luoyang Menjin Yonghui Castings
Plant
|
472.00
|
424,201.23
|
Luoyang
|
Electricity
Installation
|
|
4
|
Yuzhou Huolong Ding Country Light
Industry Welfare
Castings
Plant
|
376.00
|
337,517.61
|
Yuzhou,
Henan
|
Casting
Copper
|
|
5
|
Shanghai Demorui Drive,
Inc.
|
88.00
|
291,254.01
|
Shanghai
|
Electricity
Installation
|
|
6
|
Linzhou Minwei Refined Castings
Plant
|
269.00
|
241,158.16
|
Linzhou
|
Valve
Accessory
|
|
7
|
Huixian Huahe Metal Magnesium
Plant
|
262.00
|
234,507.80
|
Huixian
|
Electricity
Installation
|
|
8
|
Linzhou Jinhe Power Service
Ltd
|
250.00
|
223,853.03
|
Linzhou
|
Welding
Rod
|
|
9
|
Zhengzhou Fuheng Material
Ltd
|
356.00
|
211,229.60
|
Zhengzhou
|
Welding
Rod
|
|
10
|
Huixian Feida Heavy Synthetical
Mechinary Ltd
|
225.00
|
201,457.19
|
Huixian
|
Electricity
Installation
|
Our Major Customers
Our major customers are large-scale
equipment enterprises in the electricity, chemical, oil and water supply
industries in China. Most of our customers are
state-owned entities with good reputations. Our customers include Shanghai
Turbine Corporation, Dongfang Turbine Corporation, Shanghai Waigaoqiao Disan
Generating Power Inc. and Sichuan Electric Power Construction
Corporation. The number of our clients exceeds 400. We
focus on maintaining long-term relationships with our
customers. We have enjoyed recurring orders from most of our
customers for periods of 5 to 30 years. Our typical contract has a
one-year term and is usually renewable. As we continue to build sales in the
domestic market, we also plan to grow by
developing sales overseas.
The following table shows the revenues
generated and percentage of total revenues received from our ten largest
customers during 2007 fiscal year.
|
Rank
|
Clients
Name
|
Unit
(set)
|
Sales in 2007
(in RMB)
|
Percentage of Total
Revenue(2007)
|
|
1
|
Shanghai Tap Water
Inc.
|
1298
|
2,565,217.39
|
7.44%
|
|
2
|
Kunshan Tap Water Group
Ltd
|
579
|
1,144,265.48
|
3.32%
|
|
3
|
Shanghai Waigaoqiao Disan
Generating Power Inc.
|
322
|
852,374.36
|
2.47%
|
|
4
|
Wuhan Steel Processing
Ltd
|
423
|
836,909.88
|
2.43%
|
|
5
|
Sino Tianchen Chemical Project
Co.
|
949
|
777,821.92
|
2.26%
|
|
6
|
East Hope Sanmen Xia Aluminum
Industry Ltd
|
1038
|
683,831.36
|
1.98%
|
|
7
|
Shanghai Turbine
Co.
|
33
|
655,377.63
|
1.90%
|
|
8
|
Sichuan Electric Power
Construction Co.
|
461
|
628,646.72
|
1.82%
|
|
9
|
Materials Supplier for Daqing
Oilfield
|
347
|
602,750.94
|
1.75%
|
|
10
|
Nanjing Huashui Water Disposal
Equipment Ltd
|
281
|
555,248.48
|
1.61%
|
Sales, Marketing and
Distribution
We market our products through regional
agents. In addition, High Pressure Valve has 37 sales agents across China and we adopt the management method of
project authorization to avoid the conflict in bidding. We provide periodic
training to our sales staff. Because we have direct communication
with clients and participate in trade exhibitions, our sales staff has produced successful
results. As a major supplier of valve products in China, we believe we have established a good
reputation in our industry.
Our Research and Development
Efforts
Our business is dependent on constantly
improving the technology
associated with developing and manufacturing valves. Therefore, we
have committed ourselves to research and development of new valves and
developing state of the art valves that improve and advance the valve
industry. In fiscal year 2006, total investment in research
and development was in $33,260, while in 2007 the amount went up to
$104,502. We intend to increase the amount of
resources we allocate to
research and development as the Company begins to further
expand.
The company has 114 technicians and researchers dedicated to
actively researching and developing new valves and participating in the valve
production and improvement. We operate a research and development
laboratory with Lanzhou Science and Engineering University (the only university in China that offers a major in valve
development and manufacturing). We have also partnered with Hefei
General Mechanical Study Department Valves Study institute to work to improve
the development, manufacture and quality of valves produced in China.
Competition
We are a leading valve producer in China
and is involved in the development, manufacture and sale of valves in many
different industries, including the thermal power industry, sewage disposal, oil
and chemical industry, metallurgy, hot power industry and nuclear power
industry. There are approximately total 4,000 valve manufacturers in
China, of which 168 are medium-sized valve manufacturers, we are aware of only two that have similar manufacturing capacities as our
company. Compared to
our competitors, we believe we have the most comprehensive product lines, high
quality, high technology, more diversified products, higher production capacity
and greater resources.
The following is a list of our major
competitors in the valve industry:
|
·
|
Hong Cheng Machinery Co., Ltd
– a manufacturer of medium pressure
big diameter butterfly valves for the water supply industry;
and
|
|
·
|
Sufa Technology Industry, Co., Ltd
– a manufacturer of valves for
nuclear power industry.
|
There are, however, certain factors
that we believe set us
apart from all of our competitors. Compared to these manufactures, we
offer a broader range of products at competitive price. We also have strong
research and development team and great resources to develop new products and
make us more competitive.
|
·
|
We are the first manufacturer of
main stream gate valves for 300MW and main water supply gate valves for
600MW power stations in China and our subsidiary High Pressure Valve has
strong brand recognition as one of the first players in the valves
market;
|
|
·
|
We are the sole designer and
manufacturer in China of valves that are used for ultra
supercritical units of 1000MW power
stations;
|
|
·
|
We are the first manufacturer of
high pressure large diameter oil pipeline valves in China;
|
|
·
|
We are the first domestic manufacturer of 2500
pound high pressure gate valves for hydrogenation in chemical lines, which
substitutes for imported
products;
|
|
·
|
We are the first domestic
manufacturer of high pressure large diameter gate valves for the coal
chemical industry;
|
We are the sole manufacturer in
China that produces all of the following:
blowtorch valves, water pressure testing valves, steam controlling valves for
high parameter power stations and bypass valves for high pressure
heaters.
Intellectual
Property
We own the following two
trademarks:
Our two subsidiaries High Press Valve
and Zhengdie Valve own a total of 11 patents for water supply and drainage
pipes, supply and disposal pipes for water and gas, sewage disposal used for
water and gas supply and
drainage pipes, etc. The expiration dates for these patents range from 2010 to
2014. We have filed applications for one additional patent in October 2007 and
two in March 2008.
We cannot give any assurance that the
protection afforded our intellectual property will be adequate. It may be
possible for third parties to obtain and use, without our consent, intellectual
property that we own or are licensed to use. Unauthorized use of our
intellectual property by third parties, and the expenses incurred in protecting our intellectual property
rights, may adversely affect our business.
Regulation
Because our operating subsidiaries High
Pressure Valve and Zhengdie Valve are located in the PRC, we are regulated by
the national and local laws of the PRC.
There is no private ownership of land in
China and all land ownership is held by the
government of the PRC, its agencies and collectives. Land use rights
can be obtained from the government for a period up to 70 years and are
typically renewable. Land use rights can be transferred upon
approval by the land administrative authorities of the PRC (State Land
Administration Bureau) upon payment of the required land transfer
fee. We do not own the building and land we operate
on. High Pressure Valve owns three manufacturing companies and the
equipment of Kaifeng High Pressure Valve Steel Casting Limited Liabilities
Company, or the Casting Company. The land use rights and the buildings of High
Pressure Valve belong to the Casting Company. See “OUR BUSINESS – Our Facilities” for more details.
In addition, we are also subject to the
PRC’s foreign currency
regulations. The PRC government has control over Renminbi reserves
through, among other things, direct regulation of the conversion or Renminbi
into other foreign
currencies. Although foreign currencies that are
required for “current
account” transactions can
be bought freely at authorized Chinese banks, the proper procedural requirements
prescribed by Chinese law must be met. At the same time, Chinese
companies are also required to sell their
foreign exchange earnings to authorized Chinese banks and the purchase of
foreign currencies for capital account transactions still requires prior
approval of the Chinese government.
We do not face any significant
government regulation in
connection with the production of our products. We do not require any special
government permits to produce our products other than those permits that are
required of all corporations in China.
Our Employees
As of September 30, 2008, we had approximately 1002 full-time
employees. The number of employees in each department is detailed in
the following chart:
|
Department
|
Number
of Employees
|
|
Marketing
|
105
|
|
Management
|
64
|
|
Finance and
Accounting
|
36
|
|
Research &
Development
|
114
|
|
Human Resources
|
8
|
|
Production
workers
|
521
|
|
Engineering and Technical
Support
|
154
|
|
Total
|
1002
|
Insurance
We maintain property insurance for our
automobiles. We do not maintain business interruption, product liability
insurance or key-man life insurance. We believe our insurance coverage is
customary and standard of companies of comparable size in comparable industries
in China. However, we cannot ensure that
our existing insurance policies are sufficient to insulate us from all
loses and liabilities that we may incur.
Litigation
Before
the reverse acquisition on December 18, 2007, Intercontinental was sued by
Merrill Lynch Canada, Inc., in British Columbia, Canada, in July 2000. In
connection with the reverse acquisition, Intercontinental agreed to place a
portion of the purchase price, i.e., $20,000, into escrow pending resolution of
this suit. A judgment was entered on May 12, 2003 in the Supreme
Court of the State of New York, County of New York, in favor of the plaintiff
and against Intercontinental, for the sum of $40,786.72. The plaintiff accepted
in full satisfaction of the judgment in the sum of $20,000 paid from the escrow
in June, 2008.
Directors and Executive
Officers
The following table sets forth the
names, ages, and positions of our new executive officers and directors
as of October 7,
2008.
|
NAME
|
AGE
|
POSITION
|
|
Siping Fang
|
55
|
President, Chief Executive
Officer, Chairman and Secretary
|
|
Zengbiao Yu
|
47
|
Director
|
|
Jing Chen
|
42
|
Chief Financial
Officer
|
|
Huifeng
Chen
|
36
|
Director and Treasurer
|
|
Renrui Tang
|
35
|
Director
|
|
Zhiyuan Jia
|
37
|
Chief Technology
Officer
|
|
Binjie Fang
|
35
|
Chief Operating Officer and
Director
|
Siping
Fang, Chairman, Chief
Executive Officer, Chairman and Secretary
Mr. Fang has over 20 years’ of experience in the valve
industry. In
2001, Mr. Fang established Zhengdie Valve and was appointed as President and CEO
of that company. In 2003, Mr. Fang acquired state-owned enterprise High Pressure
Valve and was appointed as President and CEO of the company. Mr. Fang has been
responsible for making strategic decisions
on major corporate issues and overlooking the comprehensive operations and
market expansion of both companies. In 2007, Mr. Fang became our CEO after the
reverse acquisition of China Valve Samoa.
Zengbiao Yu, Director
Mr. Yu has been working as a professor
and a Ph.D. tutor for Tsinghua University since 1999. Mr. Yu is currently a
member of PRC Accounting Study Committee and PRC Cost Research Committee, the
special editor of Accounting Study, a publication of PRC Accounting Study Committee, and independent
director of China Heavy Auto Company and Shanghai Yongle Company Limited. In
addition, he is an editor of "Educational Case Journal" published by
IMA of U.S.A. Mr. Yu has a Ph.D. in modern
management accounting from a business school established jointly
by University of Illinois and Xiamen University. He was awarded "certificates of high
attainment" from the University of Illinois in 1991 as an "outstanding accountant"
from Ministry of Finance in 1995.
Jing Chen, Chief Financial
Officer
Since December 2007, Ms. Chen has been
the Chief Financial Officer of Origin Agritech Inc., a United States NASDAQ
listed company. Prior to that, Ms. Chen was Senior Director of
Finance of iKang Healthcare Inc. from December 2006 to November 2007. From August
2001 to November 2006, Ms. Chen was the Director of Finance of Elong Inc., a
United States NASDAQ listed company. Ms. Chen holds a Doctor of
Business Administration from Victoria University, Switzerland and a MBA from
City University, the United States. Ms. Chen also has CPA Australia
Membership.
Renrui Tang,
Director
Between 1994 and 2004, Mr. Tang worked
for Zhengdie Valve as the manger for financial department. He had been in charge
of the firm’s financing activities and various issues in accounting
fields. From 2004 to April 2008, Mr. Tang was the financial director
of High Pressure Valve. His major duties included managing accounting
and financing activities, supervising financial analysis, capital
allocation, internal control and
auditing.
Huifeng Chen, Director and
Treasurer
From 2002 to 2003, Ms. Chen was the
Financial Manager of Zhengzhou Zhongyuan Construction Development Company. From
2004 to the present, Ms. Chen has been the Financial Director of Zhengdie Valve.
She has been in charge of
various fields in accounting and finance. Her major responsibilities include
supervising the preparation of financial statements, capital budgeting, internal
control and auditing.
Binjie Fang, Chief Operating Officer and
Director
Between September 1995 and January 2005,
Mr. Fang was the head of the operations and human resource departments of
Zhengdie Valve. His major responsibilities included managing daily
operations and human resource related issues. From January 2005 to
the present, Mr. Fang has
been the general manager of Zhengdie Valve. His major
responsibilities include supervising company operations in various aspects and
managing marketing and business development activities.
Board Composition and
Committees
The Board of Directors is currently composed of
five members: Siping Fang, Binjie Fang, Renrui Tang, Huifeng Chen and Zengbiao
Yu.
We currently do not have standing audit,
nominating or compensation committees. Our sole director handles the functions
that would otherwise be
handled by each of the committees. We intend, however, to establish an audit
committee, a nominating committee and a compensation committee of the board of
directors as soon as practicable. We envision that the audit committee will be
primarily responsible for reviewing the services
performed by our independent auditors, evaluating our accounting policies and
our system of internal controls. The nominating committee would be primarily
responsible for nominating directors and setting policies and procedures for the nomination of
directors. The nominating committee would also be responsible for overseeing the
creation and implementation of our corporate governance policies and procedures.
The compensation committee will be primarily responsible for reviewing and approving our
compensation and benefit policies, including compensation of executive
officers.
Family Relationships
Mr. Binjie Fang is the son of Mr. Siping
Fang. Ms. Huifeng Chen is the sister-in-law of Mr. Siping Fang. Other than
otherwise disclosed, there
are no other family relationships between any of our directors or executive
officers and any other directors or executive officers.
Involvement in Certain Legal
Proceedings
To the best of our knowledge, none of
our directors or executive
officers has been convicted in a criminal proceeding, excluding traffic
violations or similar misdemeanors, or has been a party to any judicial or
administrative proceeding during the past five years that resulted in a
judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state securities
laws, or a finding of any violation of federal or state securities laws, except
for matters that were dismissed without sanction or settlement. Except as set forth in our discussion
below in “Transactions with
Related Persons, Promoters and Certain Control Persons; Corporate
Governance,” none of our
directors, director nominees or executive officers has been involved in any
transactions with us or any of our directors, executive
officers, affiliates or associates which are required to be disclosed pursuant
to the rules and regulations of the Commission.
Summary Compensation Table – 2006 and 2007
The following table sets forth information concerning all
compensation awarded to, earned by or paid to the following persons for services
rendered in all capacities during 2007 and 2006: Matthew Markin, our former
Chairman and Chief Executive Officer; and Siping Fang, who became our President and Chief Executive
Officer when we completed the reverse acquisition on December 16, 2007. No other executive officers
received total compensation in excess of $100,000 in either fiscal
year.
|
Name and Principal
Position
|
Year
|
Salary
|
Total
($)
|
|
Matthew Markin, former Chairman
and CEO (1)
|
2006
|
0
|
0
|
|
2007
|
0
|
0
|
|
|
Fang Siping, President, CEO and
Director (2)
|
2006
|
0
|
0
|
|
2007
|
$100,000
|
$100,000
|
(1) Mr. Markin did not receive any
compensation for his services in 2006 because the company was not operating at the
time he served as the Chief Executive Officer and Chief Financial Officer. On
December 16,
2007, Mr. Markin resigned
from his positions in connection with the reverse merger between
Intercontinental Resources, Inc. and China Valves.
(2) On December 16, 2007, we acquired China Valves in a reverse
acquisition transaction that was structured as a share exchange and in
connection with that transaction, Mr. Fang became our Chief Executive Officer,
President and Secretary.
Prior to the effective date of the reverse acquisition, Mr. Fang served Henan
Tonghai Valve as Chief Executive Officer and Chairman. The compensation shown in
this table includes the amount Mr. Fang received from Henan Tonghai Valve prior
to the consummation of our reverse acquisition of China
Valves on December 16,
2007 in addition to the
compensation Mr. Fang received for his services for the remainder of
2007.
Employment Contracts
On and
effective October 7, 2008, Mr. Jianxing Li resigned as Chief Financial Officer
and the Company appointed Ms. Veronica Jing Chen as Chief Financial Officer of
the Company. On September 19, 2008, the Company and Ms. Chen entered into an
employment agreement pursuant to which Ms. Chen receives an annual salary of
$84,000 and is to be granted an option for 100,000 shares of our Common Stock
upon approval of the Board of Directors. The Employment Agreement contains
covenants prohibiting Ms. Chen from competing with the Company during the
initial term of two years and for two years after the initial term. The
Employment Agreement also prohibits Ms. Chen from disclosing any confidential
information of the Company. Ms. Chen is an
employee-at-will.
We have not granted any equity-based
awards to any of our named executive officers, nor do we provide retirement
benefits (other than a state compensation scheme in which all of our employees
in China participate) or severance or change of
control benefits to our named executive officers.
Payment of Post-Termination
Compensation
The Company does not have
change-in-control agreements with any of its executive officers, and the Company
is not obligated to pay severance or other enhanced benefits to executive
officers upon termination of their employment.
Director
Compensation
Zengbiao Yu was appointed director
effective as of January 30,
2008. We entered
into an independent director indemnification agreement with Zengbiao Yu,
pursuant to which he is entitled to $17,000, as annual compensation for the
services to be provided as an independent director, and as
chairperson of various board committees, as applicable. Under the
terms of the indemnification agreement, we agreed to indemnify the independent
director against expenses, judgments, fines, penalties or other amounts
actually and reasonably incurred by the
independent director in connection with any proceeding if the independent
director acted in good faith and in our best interests. It is our
practice to reimburse our directors for reasonable travel expenses related to
attendance at board of directors and
committee meetings.
Mr. Tang is entitled to $40,000 as
annual compensation for the services provided as a director. Mr. Fang and Ms.
Chen were paid in their capacity as executive officers of the Company and they
do not receive any
additional compensation for their service as directors.
Transactions
with Related Persons
The following includes a summary of
transactions since the beginning of the 2007 fiscal year, or any currently proposed
transaction, in which we were or are to be a participant and the amount involved
exceeded or exceeds $120,000, and in which any related person had or will have a
direct or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms
obtained or consideration that we paid or received, as applicable, in connection
with the transactions described below were comparable to terms available or the
amounts that would be paid or received, as applicable, in
arm's-length transactions.
The Company received advances from Mr.
Siping Fang, the Company’s Chief Executive Officer, for cash flow
purposes. As of June
30, 2008 and December 31, 2007 the outstanding amount due to Mr.
Fang was
$2,687,473 and $2,848,032, respectively. The advances are unsecured,
interest-free and have no fixed terms of repayment, but are expected to be
repaid in cash.
The Company borrowed money
from certain employees for cash flow purposes. The loans bear an interest at 10% per annum with no
fixed repayment terms. Loans from employees amounted to $715,861 and
$671,188 as of June 30,
2008 and December 31, 2007, respectively. The following tables set forth the
names of the employees and the amounts they lent to the Company for the periods ended
June 30, 2008 and December 31, 2007.
|
As of December 31,
2007
|
|
|
Name
|
Amount (in
RMB)
|
|
Shuangyuan
Wang
|
500,000.00
|
|
Shumin
Zhao
|
35,000.00
|
|
Jingyu
Fang
|
91,144.00
|
|
Xiuying
Wei
|
1,768,940.00
|
|
Lijun
Zhang
|
130,000.00
|
|
Fengqin
Du
|
400,000.00
|
|
Peizhuang
Zhang
|
46,759.00
|
|
Bo
Zhang
|
215,000.00
|
|
Jinguo
Fang
|
13,000.00
|
|
Xiaocai
Wang
|
36,092.00
|
|
Chunchang
Yang
|
11,400.00
|
|
Yulan
Li
|
32,859.00
|
|
Baoying
Feng
|
152,611.64
|
|
Hong
Zhang
|
100,000.00
|
|
Jinqi
Zhang
|
300,000.00
|
|
Junfeng
Zhu
|
200,000.00
|
|
Kuijin
Qi
|
100,000.00
|
|
Shusen
Li
|
100,000.00
|
|
Huancheng
Lu
|
100,000.00
|
|
Jingzhi
Wang
|
100,000.00
|
|
Yuanfu
Xu
|
100,000.00
|
|
Dawei
Chang
|
20,000.00
|
|
Fuming
Chen
|
5,000.00
|
|
Huaming
Wang
|
30,000.00
|
|
Jianshe
Chen
|
50,000.00
|
|
Minsheng
Zhang
|
80,917.20
|
|
Junfeng
Zhu
|
100,000.00
|
|
Liqing
Bin
|
50,000.00
|
|
Total
|
4,868,722.84
|
|
As
of June 30, 2008
|
|
|
Name
|
Amount
(in RMB)
|
|
Shumin
Zhao
|
100,000
|
|
Bo
Zhang
|
327,851
|
|
Xiuying
Wei
|
1,754,780
|
|
Chunchang
Yang
|
11,400
|
|
Jianjun
Jing
|
1,100,000
|
|
Shuangyuan
Wang
|
527,160.26
|
|
Quanzhong
Zhang
|
13,930.00
|
|
Jianbin
Xu
|
35,945.00
|
|
Limei
Han
|
13,790.00
|
|
Kuijun
Qi
|
50,000.00
|
|
Huaming
Wang
|
30,000.00
|
|
Jianshe
Chen
|
50,000.00
|
|
Renrui
Tang
|
217,576.78
|
|
Jisheng
Peng
|
10,000.00
|
|
Yue
Zhou
|
10,000.00
|
|
Hongyao
Wang
|
50,000.00
|
|
Liying
Xue
|
500,000.00
|
|
Weimin
Wu
|
14,350.00
|
|
Yuanfu
Xu
|
89,730.00
|
|
Total
|
4,906,512.78
|
During the first half of 2008, the
Company borrowed money from our director Huifeng Chen and from Mr. Siping
Fang’s daughter, Zhihong Fang, in the amount
of $456,607 and $275,828, respectively, for cash flow purposes. The loans
are unsecured, interest free and have no fixed terms of repayment, but are
expected to be repaid in cash upon request.
Promoters and Certain Control
Persons
We did not have any promoters at any
time during the past five
fiscal years.
Director Independence
Our Board is currently composed of five
members, one of which, Zengbiao Yu, is “independent” as that term is defined by Rule
4200(a)(15)of the Marketplace Rules of The Nasdaq Stock Market,
Inc.
Prior to our reverse acquisition of
China Valves, our independent registered public accounting firm was Chisholm,
Bierwolf & Nilson, LLC (“Chisholm”). On December 16, 2007, concurrent with the reverse
acquisition discussed above, our board of directors approved the dismissal of Chisholm
as our independent auditor, effective upon the completion of the audit of
financial statements of the period through September 30, 2007 and the issuance of its report thereon.
Concurrent with the decision to dismiss Chisholm as our independent auditor, our
board of directors elected to appoint Madsen & Associates CPAs, Inc. as our
independent auditor.
The dismissal of Chisholm became
effective when Chisholm completed its audit of such financial statements and
released its report with
respect thereto on September 30, 2007.
Chisholm’s reports on China Valves’s financial statements as of and for the
fiscal years ended December
31, 2006 and 2005, did not
contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles, except that its report for the fiscal
year ended December 31,
2006 contained a going
concern qualification as to the Holding Company’s ability to
continue.
In connection with the audits of the fiscal years ended
December 31,
2006 and 2005, and during
the subsequent interim period through September 30, 2007, there were (1) no disagreements with
Chisholm on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Chisholm, would have
caused Chisholm. to make reference to the subject matter of the disagreements in
connection with its reports, and (2) no events of the type listed in paragraphs (A) through (D)
of Item 304(a)(1)(v) of Regulation S-K.
During the fiscal years ended
December 31,
2006 and 2005 and through
September 30,
2007, neither us nor anyone
acting on our behalf consulted Madsen & Associates CPAs, Inc. with respect to (i) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements,
and neither a written report was provided to us or oral advice was provided that Madsen &
Associates CPAs, Inc. concluded was an important factor considered by us in
reaching a decision as to the accounting, auditing or financial reporting issue;
or (ii) any matter that was the subject of a disagreement or reportable events set forth in Item
304(a)(1)(iv) and (v), respectively, of Regulation S-K.
On February 19, 2008, Madsen was dismissed as independent
auditor for the Company. On February 19, 2008, the Company engaged Moore Stephens
Wurth Frazer and Torbet, LLP (“Moore Stephens”) as its principal independent
auditor. This decision to engage Moore Stephens was ratified by the
majority approval of the Board of Directors of the Company.
Management of the Company has not had
any disagreements with Madsen and Chisholm related to any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. For the two most recent fiscal years and any
subsequent interim period through Madsen’s termination on February 19, 2008, there has been no disagreement between the
Company and Madsen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Madsen would have
caused it to make a reference to the
subject matter of the disagreement in connection with its
reports.
This
prospectus relates to the resale by the selling stockholders named below from
time to time of up to a total of 18,053,020 shares of our common stock that were
issued to the selling stockholders pursuant to transactions exempt from
registration under the Securities Act. All of the common stock
offered by this prospectus is being offered by the selling stockholders for
their own accounts. The selling stockholders are divided into three
categories: (i) investors from the private placement transaction; (ii) Brean
Murray, Carret & Co., LLC and Rosewood Securities LLC, or the Placement
Agents, who received warrants in connection with its placement agent services;
and (iii) CCG Investor Relations Partners LLC, or CCG, who received warranties
on December 12, 2007.
Private Placement
Transaction
On August
26, 2008, we sold 16,778,523 shares of our common stock to 23 investors at
$1.788 per share for a total of $30 million pursuant to a securities purchase
agreement dated August 26, 2008. The issuance of our shares to these
investors was made in reliance on the exemption provided by Section 4(2) of the
Securities Act for the offer and sale of securities not involving a public
offering and Regulation D promulgated thereunder. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate the investment, and who represented to us that the shares were being
acquired for investment.
Warrants Issued to the
Placement Agents
On August
26, 2008, as part of the compensation for the Placement Agents’ service, we
issued to Brean Murray, Carret & Co., LLC and Rosewood Securities, LLC, as
our placement agents for the private placement transaction described above, the
Placement Agents warrants for the purchase of an aggregate of 1,174,497 shares
of our common stock. The warrants have an exercise price of $2.1456
per share and have a term of three years. The warrants were issued in
reliance on the Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
Warrants Issued to CCG
Investor Relations
On
December 12, 2007, we issued to CCG 100,000 shares of our common stock for an
exercise price of $3 per share and have a term of three years. The shares were
issued in reliance on the Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
The
following table sets forth certain information regarding the selling
stockholders and the shares offered by them in this
prospectus. Beneficial ownership is determined in accordance with the
rules of the SEC. In computing the number of shares beneficially
owned by a selling stockholder and the percentage of ownership of that selling
stockholder, shares of common stock underlying shares of convertible preferred
stock, options or warrants held by that selling stockholder that are convertible
or exercisable, as the case may be, within 60 days of October 7, 2008 are
included. Those shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other selling
stockholder. Each selling stockholder’s percentage of ownership in
the following table is based upon 62,385,103 shares of common stock outstanding
as of October 7, 2008.
Except as
specifically set forth in the footnotes to the table, none of the selling
stockholders has held a position as our officer or director, nor has any selling
stockholder had any material relationship of any kind with us or any of our
affiliates. All information with respect to share ownership has been
furnished by the selling stockholders. The shares being offered are
being registered to permit public secondary trading of the shares and each
selling stockholder may offer all or part of the shares owned for resale from
time to time. In addition, none of the selling stockholders has any
family relationships with our officers, directors or controlling
stockholders. Furthermore, except Brean Murray, Carret & Co.,
LLC, Rosewood Securities, LLC and Hassan Nemazee, no selling stockholder is a
registered broker-dealer or an affiliate of a registered
broker-dealer.
For
additional information, refer to our disclosure under the headings “Security
Ownership of Certain Beneficial Owners and Management.”
The term
“selling stockholders” also includes any transferees, pledges, donees, or other
successors in interest to the selling stockholders named in the table
below. To our knowledge, subject to applicable community property
laws, each person named in the table has sole voting and investment power with
respect to the shares of common stock set forth opposite such person’s
name. We will file a supplement to this prospectus (or a
post-effective amendment hereto, if necessary) to name successors to any named
selling stockholders who are able to use this prospectus to resell the
securities registered hereby.
|
Name
and Address
|
Shares
Beneficially Owned before the Offering
|
Shares
of Common Stock Included in Prospectus
|
Beneficial
Ownership After the Offering (1)
|
Percentage
of Common Stock Owned After Offering(1)
|
|
Leland
C. Ackerley
5306
Hollister
Houston,
TX 77040
Attn:
Pattie Everitt
|
489,374
|
489,374
|
0
|
*
|
|
Alder
Capital Partners I, L.P. (2)
12750
High Bluff Drive, Ste 120
San
Diego, CA 92130
Attn:
Michael C. Licosati
|
158,387
|
158,387
|
0
|
*
|
|
Alder
Offshore Master Fund, L.P. (3)
12750
High Bluff Drive, Ste 120
San
Diego, CA 92130
Attn:
Michael C. Licosati
|
65,327
|
65,327
|
0
|
*
|
|
Atlas
Allocation Fund, L.P. (4)
c/o
Atlas Capital
100
Crescent Ct., Suite 800
Dallas,
TX 75201
Attn:
Caryn Peeples
|
782,998
|
782,998
|
0
|
*
|
|
Beekman
514, Ltd. (5)
5306
Hollister
Houston,
TX 77040
Attn:
Pattie Everitt
|
489,374
|
489,374
|
0
|
*
|
|
Centaur
Value Fund (6)
c/o
Centaur Capital Partners
1460
Main St., Suite 234
Southlake,
TX 76092
Attn:
Zeke Ashton
|
134,228
|
134,228
|
0
|
*
|
|
Halter
Global Opportunity Fund, L.P. (7)
5914
W. Courtyard Drive, #190
Austin,
TX 78730
Attn:
Mark Hood
|
111,857
|
111,857
|
0
|
*
|
|
Name
and Address
|
Shares
Beneficially Owned before the Offering
|
Shares
of Common Stock Included in Prospectus
|
Beneficial
Ownership After the Offering (1)
|
Percentage
of Common Stock Owned After Offering(1)
|
|
MDS
Investment Partners (8)
570
Lexington Ave.
New
York, NY 10022
Attn:
William McCluskey
|
39,150
|
39,150
|
0
|
*
|
|
MMH
Group, LLC (9)
7582
Windermere Court
Lake
Worth, FL 33467
Attn:
Matthew Hayden
|
35,235
|
35,235
|
0
|
*
|
|
Hassan
Nemazee (10)
40
W. 57th Street, 20th Floor
New
York, NY 10019
|
139,821
|
139,821
|
0
|
*
|
|
Newberg
Road Partners, L.P. (11)
5306
Hollister
Houston,
TX 77040
Attn:
Luanne Prince
|
978,747
|
978,747
|
0
|
*
|
|
Patara
Capital, LP (12)
c/o
Patara Capital Management
5050
Quorum Dr., Ste. 312
Dallas,
TX 75254
Attn:
Oz Targun
|
153,803
|
153,803
|
0
|
*
|
|
Pinnacle
China Fund, L.P. (13)
4965
Preston Park Blvd.
Suite
240
Plano,
TX 75093-5170
Attn:
Barry M. Kitt
|
4,500,000
|
4,500,000
|
0
|
*
|
|
Precept
Capital Master Fund, G.P. (14)
200
Crescent Court, Suite 1450
Dallas,
TX 75201
Attn:
Nick Roossien
|
374,720
|
374,720
|
0
|
*
|
|
Sandor
Capital Master Fund, L.P. (15)
2828
Routh Street, Suite 500
Dallas,
TX 75201
Attn:
John S. Lemak
|
111,857
|
111,857
|
0
|
*
|
|
Southwell
Partners, L.P. (16)
1901
North Akard Street
Dallas,
TX 75201
Attn:
Wilson S. Jaeggli
|
1,006,711
|
1,006,711
|
0
|
*
|
|
Straus-GEPT
Partners, L.P. (17)
c/o
Straus Asset Management
329
Park Avenue
10th
Floor
New
York, NY 10022
Attn:
Andrew Marks
|
251,678
|
251,678
|
0
|
*
|
|
Straus
Partners L.P. (18)
c/o
Straus Asset Management
329
Park Avenue
10th
Floor
New
York, NY 10022
Attn:
Andrew Marks
|
307,606
|
307,606
|
0
|
*
|
|
Name
and Address
|
Shares
Beneficially Owned before the Offering
|
Shares
of Common Stock Included in Prospectus
|
Beneficial
Ownership After the Offering (1)
|
Percentage
of Common Stock Owned After Offering(1)
|
|
The
Pinnacle Fund, L.P. (19)
4965
Preston Park Blvd.
Suite
240
Plano,
TX 75093-5170
Attn:
Barry M. Kitt
|
4,500,000
|
4,500,000
|
*
|
|
|
United
Centaur Master Fund (20)
c/o
Centaur Capital Partners
1460
Main St., Suite 234
Southlake,
TX 76092
Attn:
Zeke Ashton
|
134,228
|
134,228
|
*
|
|
|
Vision
Opportunity China LP (21)
c/o
Vision Capital Advisors
20
W. 55th Street, 5th Floor
New
York, NY 10019
Attn:
Adam D. Benowitz
|
671,141
|
671,141
|
*
|
|
|
Westpark
Capital, L.P. (22)
4965
Preston Park Blvd.
Suite
220
Plano,
TX 75093
Attn:
Patrick J. Brosnahan
|
1,006,711
|
1,006,711
|
*
|
|
|
Whitebox
Intermarket Partners, LP (23)
c/o
Whitebox Advisors, LLC
3033
Excelsior Blvd., Suite 300
Minneapolis,
MN 55416
Attn:
Barlo Reller
|
335,570
|
335,570
|
*
|
|
|
CCG
Investors Relation Partners LLC (24)
1325
Avenue of the Americas
Suite
2800
New
York, NY 10019
|
100,000
|
100,000
|
*
|
|
|
Brean
Murray, Carret & Co., LLC (25)
570
Lexington Avenue
New
York, NY 10022-6822
|
704,698
|
704,698
|
*
|
|
|
Rosewood
Securities, LLC (26)
360
Main Street, P.O. Box 393
Washington,
VA 22747
|
469,799
|
469,799
|
*
|
|
|
Total
|
18,053,020
|
18,053,020
|
0
|
*
|
* Less
than 1%
(1) Based
upon 62,385,103 shares of common stock issued and outstanding as of October 7,
2008. Assumes all of the common stock offered pursuant to this prospectus is
sold.
(2)
Michael C. Licosati is the managing partner of Alder Capital Partners I. L.P.
and has voting power and investment power of securities held by Alder Capital
Partners I. L.P.
(3)
Michael C. Licosati is the managing partner of Alder Offshore Master Fund, L.P.
and has voting power and investment power of securities held by Alder Offshore
Master Fund, L.P.
(4)
Robert H. Alpert is the president of Atlas Allocation Fund, L.P. and the general
partner of RHA, Inc. and has voting power and investment power of securities
held by Atlas Allocation Fund, L.P.
(5)
Leland C. Ackerley is the manager of LCA Interests LLC and the sole general
partner of Beekman 514, Ltd. and has sole voting power and investment power of
securities held by Beekman 514, Ltd.
(6)
Malcolm Zeke Ashton is the managing partner and investment manager of Centaur
Value Fund and has voting power and investment power of securities held by
Centaur Value Fund.
(7) Mark
Hood is the fund manager of Halter Global Opportunity Fund, L.P. and has voting
power and investment power of securities held by Halter Global Opportunity Fund,
L.P.
(8)
William McCluskey is the partner of MDS Investment Partners and has voting power
and investment power of securities held by MDS Investment Partners.
(9)
Matthew Hayden is the sole member of MMH Group, LLC and has sole voting power
and investment power of securities held by MMH Group, LLC.
(10)
Hassan Nemazee is an affiliate of a broker-dealer and certifies that he
purchased the resale securities in the ordinary course of business and at the
time of the purchase of the securities, he had no agreements or understandings,
directly or indirectly, with any person to distribute the
securities.
(11)Luanne
Prince is the manager of RGA Ventures, LLC and the sole general partner of
Newberg Road Partners, L.P. and has sole voting power and investment power of
securities held by Newberg Road Partners, L.P.
(12)
Ozarslan Targun is the principal of Patara Capital, L.P. and has voting power
and investment power of securities held by Patara Capital, L.P.
(13)
Pinnacle China Advisers, L.P. (“China Advisers”) is the general partner of
Pinnacle China Fund, L.P. (“Pinnacle China”). Pinnacle China Management, LLC
(“China Management”) is the general partner of China Advisers. Kitt China
Management, LLC (“China Manager”) is the manager of China Management. Mr. Barry
Kitt is the manager of China Manager. Mr. Kitt has dispositive and voting power
over the shares and may be deemed to be the beneficial owner of the shares of
common stock beneficially owned by Pinnacle China. Mr. Kitt disclaims beneficial
ownership of the shares to the extent of his direct or indirect pecuniary
interest.
(14) D.
Blair Baker is the managing member of Precept Capital Master Fund, G.P. and has
voting power and investment power of securities held by Precept Capital Master
Fund, G.P.
(15) John
S. Lemak is the manager of Sandor Capital Master Fund, L.P. and has voting power
and investment power of securities held by Sandor Capital Master Fund,
L.P.
(16)
Wilson S. Jaeggli is the managing director of Southwell Partners, L.P. and has
voting power and investment power of securities held by Southwell Partners,
L.P.
(17)
Melville Straus is the managing partner of Straus-GEPT Partners, L.P. and has
voting power and investment power of securities held by Straus-GEPT Partners,
L.P.
(18)
Melville Straus is the managing principal of Straus Partners L.P. and has voting
power and investment power of securities held by Straus Partners
L.P.
(19)
Pinnacle Advisers, L.P. (“Advisers”) is the general partner of The Pinnacle
Fund, L.P. (“Pinnacle”). Pinnacle Fund Management, LLC (“Management”)
is the general partner of Advisers. Mr. Barry Kitt is the sole member
of Management. Mr. Kitt has dispositive and voting power over the
shares and may be deemed to be the beneficial owner of the shares of common
stock beneficially owned by Pinnacle. Mr. Kitt disclaims beneficial ownership of
the shares to the extent of his direct or indirect pecuniary
interest.
(20)
Malcolm Zeke Ashton is the managing partner and investment manager of United
Centaur Master Fund and has voting power and investment power of securities held
by United Centaur Master Fund.
(21) Adam
D. Benowitz is the portfolio manager of Vision Opportunity China LP and has
voting power and investment power of securities held by Vision Opportunity China
LP.
(22)
Patrick J. Brosnahan is the general partner of Westpark Capital, L.P. and has
voting power and investment power of securities held by Westpark Capital,
L.P.
(23)
Andrew J. Redleaf is the managing member of Whitebox Intermarket Partners, LP
and has voting power and investment power of securities held by Whitebox
Intermarket Partners, LP.
(24)
William F. Coffin is the managing partner of CCG Investors Relation Partners LLC
and has voting power and investment power of securities held by CCG Investors
Relation Partners LLC.
(25)
William J. McCluskey is the president and CEO of Brean Murray, Carret & Co.,
LLC and has voting power and investment power of securities held by Brean
Murray, Carret & Co., LLC. Brean Murray, Carret & Co., LLC is a
broker-dealer.
(26)
Joseph Meuse is the managing member of Rosewood Securities, LLC and has voting
power and investment power of securities held by Rosewood Securities, LLC.
Rosewood Securities, LLC is an affiliate of a broker-dealer and certifies that
it purchased the resale securities in the ordinary course of business and at the
time of the purchase of the securities, it had no agreements or understandings,
directly or indirectly, with any person to distribute the
securities.
We will
not receive any of the proceeds from the sale of any shares by the selling
stockholders but we will receive funds from the exercise of the warrants held by
the selling stockholders if and when those warrants are exercised for
cash. We have agreed to bear expenses incurred by the selling
stockholders that relate to the registration of the shares being offered and
sold by the selling stockholders, including the Commission registration fee and
legal, accounting, printing and other expenses of this offering.
The following table sets forth certain
information regarding our common stock beneficially owned on October 7, 2008, for (i) each shareholder known to be
the beneficial owner of 5% or more of our outstanding common stock, (ii) each of
our officers and directors,
and (iii) all executive officers and directors as a
group.
Unless otherwise specified, the address
of each of the persons set forth below is in care of China Valves Technology,
Inc., No. 93 West Xinsong
Road, Kaifeng, Henan Province, China 475002.
|
Name
& Address of
Beneficial Owner
|
Office, if Any
|
Title of Class
|
Amount
& Nature of Beneficial
Ownership(1)
|
Percent
of Class(2)
|
|
Officers
and Directors
|
||||
|
Siping
Fang
|
Chief
Executive Officer, President and Chairman
|
Common
Stock $0.001 par value
|
0
|
*
|
|
Veronica
Jing Chen
|
Chief
Financial Officer
|
Common
Stock $0.001 par value
|
0
|
*
|
|
Binjie
Fang
|
Chief
Operating Officer and Director
|
Common
Stock $0.001 par value
|
0
|
*
|
|
Zhiyuan
Jia
|
Chief
Technology Officer
|
Common
Stock $0.001 par value
|
0
|
*
|
|
Renrui
Tang
|
Director
|
Common
Stock $0.001 par value
|
0
|
*
|
|
Huifeng
Chen
|
Director
|
Common
Stock $0.001 par value
|
0
|
*
|
|
Zengbiao
Yu
|
Director
|
Common
Stock $0.001 par value
|
0
|
*
|
|
All
officers and directors as a group (7 persons named above)
|
Common
Stock $0.001 par value
|
0
|
0%
|
|
|
5%
Securities Holder
|
||||
|
Bin
Li
1165
Rugglestone Way, Duluth, GA 30097
|
Common
Stock $0.001 par value
|
25,166,064
|
40.34%
|
|
|
Bin
Fang
|
Common
Stock $0.001 par value
|
5,500,000
|
8.82%
|
|
|
Name
& Address of
Beneficial Owner
|
Office, if Any
|
Title of Class
|
Amount
& Nature of Beneficial
Ownership(1)
|
Percent
of Class(2)
|
|
The
Pinnacle Fund, L.P.
4965
Preston Park Blvd.
Suite
240
Plano,
Texas 75093
|
Common
Stock $0.001 par value
|
4,500,000(3)
|
7.21%
|
|
|
Pinnacle
China Fund, L.P.
4965
Preston Park Blvd.
Suite
240
Plano,
Texas 75093
|
Common
Stock $0.001 par value
|
4,500,000(4)
|
7.21%
|
|
|
Barry
M. Kitt
c/o
Pinnacle Fund, L.P.
4965
Preston Park Blvd.
Suite
240, Plano, Texas 75093
|
Common
Stock $0.001 par value
|
9,000,000(3)
(4)
|
14.42%
|
* Less
than 1%.
1Beneficial
ownership is determined in accordance with the rules of the Commission and includes voting or
investment power with respect to the ordinary shares.
2A total
of 62,385,103 shares of our common stock as of October 7, 2008 are considered to be
outstanding pursuant to the Commission Rule
13d-3(d)(1). For each beneficial owner above, any options exercisable
within 60 days have been included in the denominator.
3 Pinnacle
Advisers, L.P. (“Advisers”) is the general partner of The Pinnacle Fund, L.P.
(“Pinnacle”). Pinnacle Fund Management, LLC (“Management”) is the
general partner of Advisers. Mr. Barry Kitt is the sole member of
Management. Mr. Kitt has dispositive and voting power over the shares
and may be deemed to be the beneficial owner of the shares of common stock
beneficially owned by Pinnacle. Mr. Kitt disclaims beneficial ownership of the
shares to the extent of his direct or indirect pecuniary interest.
4 Pinnacle
China Advisers, L.P. (“China Advisers”) is the general partner of Pinnacle China
Fund, L.P. (“Pinnacle China”). Pinnacle China Management, LLC (“China
Management”) is the general partner of China Advisers. Kitt China Management,
LLC (“China Manager”) is the manager of China Management. Mr. Barry Kitt is the
manager of China Manager. Mr. Kitt has dispositive and voting power over the
shares and may be deemed to be the beneficial owner of the shares of common
stock beneficially owned by Pinnacle China. Mr. Kitt disclaims beneficial
ownership of the shares to the extent of his direct or indirect pecuniary
interest.
Changes in Control
On April
10, 2008, Siping Fang sold 24,300,000 shares of the Company’s common stock
beneficially owned by him to Bin Li, for an aggregate purchase price of $10,000,
pursuant to a Common Stock Purchase Agreement. In connection with the Common
Stock Purchase Agreement, Siping Fang and Bin Li entered into the Earn-In
Agreement pursuant to which Siping Fang obtained the right and option to
re-acquire the shares of the Company from Bin Li, subject to the satisfaction of
four conditions as set forth in the Earn-In Agreement. These conditions may be
satisfied only if the Company is able to reacquire and operate the Operating
Subsidiaries. The sale represented a change of control of the Company and the
shares acquired by Bin Li represented approximately 60.75% of the then issued
and outstanding common stock of the Company. The sale of Siping Fang’s common
stock and the Earn-In Agreement were disclosed in an 8-K filed on April 16,
2008.
Common Stock
Our authorized capital stock consists of
300,000,000 shares of common stock, par value $0.001 per share. We plan to amend our
articles of incorporation to effect a 1-for-2 reverse split of our outstanding common
stock. As a result of the reverse split, the number of
shares of our outstanding common stock will be reduced from 62,385,103 shares to
31,192,552 shares. The holders of
outstanding shares of common stock are entitled to receive dividends out of
assets legally available at times and in amounts as our board of directors may
determine. Each stockholder is entitled to one vote for each share of
common stock held on all
matters submitted to a vote of the stockholders. Cumulative voting is
not provided for in our articles of incorporation, or any amendments thereto,
which means that the majority of the shares voted can elect all of the directors
then standing for election. The
common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon the occurrence of a liquidation,
dissolution or winding-up, the holders of shares of common stock are entitled to
share ratably in all assets remaining after payment
of liabilities and satisfaction of preferential rights of any outstanding
preferred stock. There are no sinking fund provisions applicable to
the common stock. The outstanding shares of common stock are, and the
shares of common stock to be issued upon
conversion of the Warrants will be, fully paid and
non-assessable.
Preferred Stock
The Company is not authorized to issue
any preferred stock.
Warrants
On
December 12, 2007, CCG Investors Relation Partners LLC, our investors relation
consultant, received warrants to purchase 100,000 shares of our common
stock. The warrants have a term of three years, are exercisable at $3
per share, subject to the usual adjustments for certain corporate
events. In connection with our private placement which closed on
August 26, 2008, Brean Murray, Carret & Co., LLC and Rosewood Securities,
LLC, our placement agents, received, as partial compensation, warrants to
purchase 704,698 and 469,799 shares of our common stock,
respectively. The warrants have a term of three years and are
immediately exercisable at $2.1456 per share, subject to the usual adjustments
for certain corporate events. The shares underlying the
warrants are being included in this registration statement, but none of the
warrants have been exercised.
Transfer Agent and
Registrar
Pacwest Transfer, LLC is currently the
transfer agent and registrar for our Common Stock. Its address is
2510 Pines Road
North, Spokane Valley, Washington 99206. Its phone number is
(509) 926-2330.
As of
October 7, 2008, we had outstanding 62,385,103 shares of common
stock.
Shares
Covered by this Prospectus
All of
the 18,053,020 shares being registered in this offering may be sold without
restriction under the Securities Act, so long as the registration statement of
which this prospectus is a part is, and remains, effective.
Rule 144
The Commission has recently adopted
amendments to Rule 144 which became effective on February 15, 2008 and applies
to securities acquired both before and after that date. Under these
amendments, a person who has beneficially owned restricted shares of our common
stock or warrants for at least six months is entitled to sell their securities
provided that (1) such person is not deemed to have been one of our affiliates
at the time of, or at any time during the three months preceding, a sale, (2) we
are subject to the Exchange Act reporting requirements for at least 90 days
before the sale and (3) if the sale occurs prior to satisfaction of a one-year
holding period, we provide current information at the time of sale.
Persons
who have beneficially owned restricted shares of our common stock or warrants
for at least six months but are our affiliates at the time of, or at any time
during the three months preceding, a sale, are subject to additional
restrictions, by which such person would be entitled to sell within any
three-month period only a number of securities that does not exceed the greater
of:
• 1%
of the total number of securities of the same class then outstanding, which will
equal approximately 623,851 shares immediately after this offering ;
or
• the
average weekly trading volume of such securities during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to such
sale.
provided, in each case, that
we are subject to the Exchange Act periodic reporting requirements for at least
three months before the sale.
However,
since we anticipate that our shares will be quoted on the OTC Bulletin Board,
which is not an “automated quotation system,” our stockholders will not be able
to rely on the market-based volume limitation described in the second bullet
above. If, in the future, our securities are listed on an exchange or
quoted on NASDAQ, then our stockholders would be able to rely on the
market-based volume limitation. Unless and until our stock is so
listed or quoted, our stockholders can only rely on the percentage based volume
limitation described in the first bullet above.
Such
sales by affiliates must also comply with the manner of sale, current public
information and notice provisions of Rule 144. The selling
stockholders will not be governed by the foregoing restrictions when selling
their shares pursuant to this prospectus.
Restrictions
on the Use of Rule 144 by Shell Companies or Former Shell Companies
Historically,
the Commission staff has
taken the position that Rule 144 is not available for the resale of
securities initially issued by companies that are, or previously were, blank
check companies, like us. The Commission has codified and expanded this position
in the amendments discussed above by prohibiting the use of Rule 144 for resale
of securities issued by any shell companies (other than business combination
related shell companies) or any issuer that has been at any time previously a
shell company. The Commission has provided an important exception to
this prohibition, however, if the following conditions are
met:
• the
issuer of the securities that was
formerly a shell company has ceased to be a shell
company;
• the
issuer of the securities is
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act;
• the
issuer of the securities has filed
all Exchange Act reports and material required to be filed, as
applicable, during the
preceding 12 months (or such shorter period that the issuer was required to file
such reports and materials), other than current reports on Form 8-K;
and
• the
least one year has elapsed from
the time that the issuer filed current comprehensive disclosure with the Commission
reflecting its status as an entity that is not a shell
company.
As a result, it is likely that pursuant
to Rule 144, our stockholders, who were stockholders
of ours prior to the reverse acquisition of China Valves, will be able to sell the their shares
of our common stock from and after December 16, 2008 (the one year anniversary of our
reverse acquisition of China Valves) without registration.
The
Selling Stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of Common Stock on any stock exchange, market or trading facility on
which the shares are traded or quoted or in private
transactions. These sales may be at fixed or negotiated
prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits Investors;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
to
cover short sales made after the date that this Registration Statement is
declared effective by the
Commission;
|
|
·
|
broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or
discounts from the Selling Stockholders (or, if any broker-dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions
and discounts to exceed what is customary in the types of transactions
involved.
The
Selling Stockholders may from time to time pledge or grant a security interest
in some or all of the Shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of Common Stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
Upon the
Company being notified in writing by a Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of Common
Stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such Selling Stockholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such the shares of Common Stock were sold, (iv)the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus, and (vi) other facts material to the transaction. In
addition, upon the Company being notified in writing by a Selling Stockholder
that a donee or pledgee intends to sell more than 500 shares of Common Stock, a
supplement to this prospectus will be filed if then required in accordance with
applicable securities law.
The
Selling Stockholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Discounts,
concessions, commissions and similar selling expenses, if any, that can be
attributed to the sale of Securities will be paid by the Selling Stockholder
and/or the purchasers. Each Selling Stockholder has represented and
warranted to the Company that it acquired the securities subject to this
Registration Statement in the ordinary course of such Selling Stockholder’s
business and, at the time of its purchase of such securities such Selling
Stockholder had no agreements or understandings, directly or indirectly, with
any person to distribute any such securities.
The
Company has advised each Selling Stockholder that it is the view of the
Commission that it may not use shares registered on this Registration Statement
to cover short sales of Common Stock made prior to the date on which this
Registration Statement shall have been declared effective by the
Commission. If a Selling Stockholder uses this prospectus for any
sale of the Common Stock, it will be subject to the prospectus delivery
requirements of the Securities Act. The Selling Stockholders will be
responsible to comply with the applicable provisions of the Securities Act and
Exchange Act, and the rules and regulations thereunder promulgated, including,
without limitation, Regulation M, as applicable to such Selling Stockholders in
connection with resales of their respective shares under this Registration
Statement.
The
Company is required to pay all fees and expenses incident to the registration of
the shares, but the Company will not receive any proceeds from the sale of the
Common Stock. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
The
validity of the securities offered hereby has been passed upon for us by Thelen
LLP, Washington, D.C.
The
audited financial statements included in this prospectus and in the registration
statement have been audited by Moore Stephens Wurth Frazer and Torbet, LLP, an
independent registered public accounting firm, to the extent and for the periods
set forth in their report appearing elsewhere herein and in the registration
statement, and are included in reliance on such report, given the authority of
said firm as an expert in auditing and accounting.
No expert
or counsel named in this prospectus as having prepared or certified any part of
this prospectus or having given an opinion upon the validity of the securities
being registered or upon other legal matters in connection with the registration
or offering of the common stock was employed on a contingency basis, or had, or
is to receive, in connection with the offering, a substantial interest, direct
or indirect, in the Registrant or any of its parents or
subsidiaries. Nor was any such person connected with the Registrant
or any of its parents or subsidiaries as a promoter, managing or principal
underwriter, voting trustee, director, officer or employee.
We have
filed with the Commission,
a registration statement on Form S-1 under the Securities Act with respect to
the common stock offered in this offering. This prospectus does not contain all
of the information set forth in the registration statement. For further
information with respect to us and the common stock offered in this offering, we
refer you to the registration statement and to the attached exhibits. With
respect to each such document filed as an exhibit to the registration statement,
we refer you to the exhibit for a more complete description of the matters
involved.
You may
inspect our registration statement and the attached exhibits and schedules
without charge at the public reference facilities maintained by the Commission at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain copies of all or any part of our
registration statement from the Commission upon payment of
prescribed fees. You may obtain information on the operation of the public
reference room by calling the Commission at
1-800-SEC-0330.
Our SEC
filings, including the registration statement and the exhibits filed with the
registration statement, are also available from the SEC's website at
www.sec.gov, which contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission.
CHINA
VALVES TECHNOLOGY, INC.
Index
to Consolidated Financial Statements
|
Page
|
|
|
China Valves Technology, Inc.
Consolidated Financial Statements For the three and six
months ended June 30, 2008 (unaudited)
|
|
|
Consolidated
Balance Sheets
|
F-1
|
|
Consolidated Statements
of Income and Other Comprehensive Income
|
F-2
|
| Consolidated Statements of Shareholders' Equity | F-3 |
|
Consolidated
Statements of Cash Flows
|
F-4
|
|
Notes to Consolidated Financial
Statements
|
F-5
- F-20
|
|
China Valves Technology, Inc.
Consolidated Financial Statements for the years ended December 31, 2007 and 2006
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-21
- F-22
|
|
Consolidated
Balance Sheets
|
F-23
|
|
Consolidated
Statements of Income and Other Comprehensive Income
|
F-24
|
|
Consolidated
Statements of Cash Flows
|
F-25
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-26
|
|
Notes to Consolidated Financial
Statements
|
F-27
- F-41
|
|
CHINA
VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
AS
OF JUNE 30, 2008 AND DECEMBER 31, 2007
|
||||||||
|
ASSETS
|
||||||||
|
June
30,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
(Unaudited)
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 4,492,072 | $ | 2,773,262 | ||||
|
Restricted
cash
|
142,071 | 40,856 | ||||||
|
Notes
receivable
|
24,803 | - | ||||||
|
Accounts
receivable, net of allowance for doubtful accounts of
$856,225
|
||||||||
|
and
$274,167 as of June 30, 2008 and December 31, 2007,
respectively
|
21,208,272 | 16,789,383 | ||||||
|
Other
receivables
|
5,585,673 | 4,638,477 | ||||||
|
Inventories
|
8,130,685 | 10,539,087 | ||||||
|
Advances
on inventory purchases
|
1,711,497 | 458,699 | ||||||
|
Prepaid
expenses
|
384,390 | 519,043 | ||||||
|
Total
current assets
|
41,679,463 | 35,758,807 | ||||||
|
PLANT
AND EQUIPMENT, net
|
8,275,773 | 7,523,788 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
Accounts
receivable - retainage, long-term
|
1,317,092 | 559,368 | ||||||
|
Advances
on equipment purchases
|
1,115,479 | 324,858 | ||||||
|
Goodwill
- purchased
|
20,698,274 | 19,449,851 | ||||||
|
Intangibles,
net of accumulated amortization
|
432,143 | 435,633 | ||||||
|
Other
investments, at lower of cost or market
|
760,346 | 714,485 | ||||||
|
Total
other assets
|
24,323,334 | 21,484,195 | ||||||
|
Total
assets
|
$ | 74,278,570 | $ | 64,766,790 | ||||
|
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable - trade
|
$ | 7,009,288 | $ | 6,452,519 | ||||
|
Short-term
loans
|
8,101,990 | 6,479,291 | ||||||
|
Short-term
loans - related parties
|
1,448,296 | 671,188 | ||||||
|
Other
payables
|
5,697,867 | 4,435,982 | ||||||
|
Other
payable - related partites
|
2,687,473 | 2,848,032 | ||||||
|
Accrued
liabilities
|
1,676,128 | 1,734,679 | ||||||
|
Customer
deposits
|
1,643,763 | 2,810,352 | ||||||
|
Taxes
payable
|
598,589 | 1,064,512 | ||||||
|
Total
current liabilities
|
28,863,394 | 26,496,555 | ||||||
|
Long-term
liabilities:
|
||||||||
|
Long-term
debt
|
1,167,200 | 1,096,800 | ||||||
|
Total
long-term liabilities
|
1,167,200 | 1,096,800 | ||||||
|
SHAREHOLDERS'
EQUITY:
|
||||||||
|
Common
Stock, $0.001 par value; 300,000,000 shares authorized
|
||||||||
|
40,106,500 and
40,000 000 shares issued and outstanding as of June 30,
2008
|
||||||||
|
and
December 31, 2007, respectively
|
40,107 | 40,107 | ||||||
|
Additional
paid-in-capital
|
17,682,124 | 16,365,029 | ||||||
|
Statutory
reserves
|
2,105,172 | 1,749,601 | ||||||
|
Retained
earnings
|
18,919,750 | 15,844,953 | ||||||
|
Accumulated
other comprehensive income
|
5,500,823 | 3,173,745 | ||||||
|
Total
shareholders' equity
|
44,247,976 | 37,173,435 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 74,278,570 | 64,766,790 | |||||
The accompanying notes are an integral part of
these financial statements.
|
CHINA
VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
|
||||||||||||||||
|
FOR
THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND
2007
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
SALES
|
$ | 11,783,209 | $ | 12,500,455 | $ | 24,766,156 | $ | 19,671,307 | ||||||||
|
COST
OF GOODS SOLD
|
6,938,709 | 7,261,839 | 14,818,136 | 12,002,404 | ||||||||||||
|
GROSS
PROFIT
|
4,844,500 | 5,238,616 | 9,948,020 | 7,668,903 | ||||||||||||
|
EXPENSES:
|
||||||||||||||||
|
Selling
expense
|
856,034 | 850,747 | 1,863,360 | 1,433,997 | ||||||||||||
|
General
and administrative
|
1,689,614 | 809,530 | 3,269,702 | 1,753,169 | ||||||||||||
|
Research
and development
|
46,163 | 7,009 | 98,706 | 15,007 | ||||||||||||
|
Total
Operating Expenses
|
2,591,811 | 1,667,286 | 5,231,768 | 3,202,173 | ||||||||||||
|
INCOME
FROM OPERATIONS
|
2,252,689 | 3,571,330 | 4,716,252 | 4,466,730 | ||||||||||||
|
OTHER
EXPENSE (INCOME) :
|
||||||||||||||||
|
Other
income, net
|
(195,436 | ) | (275,300 | ) | (286,984 | ) | (313,274 | ) | ||||||||
|
Interest
expense,net
|
157,766 | 210,438 | 291,594 | 362,349 | ||||||||||||
|
Total
other expense (income), net
|
(37,670 | ) | (64,862 | ) | 4,610 | 49,075 | ||||||||||
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
2,290,359 | 3,636,192 | 4,711,642 | 4,417,655 | ||||||||||||
|
INCOME
TAX EXPENSE
|
620,321 | 517,191 | 1,281,274 | 668,058 | ||||||||||||
|
NET
INCOME
|
1,670,038 | 3,119,001 | 3,430,368 | 3,749,597 | ||||||||||||
|
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
|
Foreign
currency translation gain
|
739,516 | 409,584 | 2,327,078 | 448,313 | ||||||||||||
|
COMPREHENSIVE
INCOME
|
$ | 2,409,554 | $ | 3,528,585 | $ | 5,757,446 | $ | 4,197,910 | ||||||||
|
WEIGHTED
AVERAGE NUMBER OF SHARES (BASIC AND DILUTED)
|
40,003,550 | 40,000,000 | 40,003,550 | 40,000,000 | ||||||||||||
|
EARNINGS
PER COMMON SHARE (BASIC AND DIULTED)
|
$ | 0.04 | $ | 0.08 | $ | 0.09 | $ | 0.09 | ||||||||
The accompanying notes are an integral part of
these financial statements.
|
CHINA
VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
|
Common
Stock
|
Additional
|
Retained
Earnings
|
Accumulated
other
|
|||||||||||||||||||||||||
|
Number
|
Par
|
Paid-in
|
Statutory
|
comprehensive
|
||||||||||||||||||||||||
|
of
shares
|
Value
|
capital
|
reserves
|
Unrestricted
|
income
|
Total
|
||||||||||||||||||||||
|
BALANCE,
January 1, 2007
|
40,000,000 | $ | 40,000 | $ | 15,115,137 | $ | 1,032,933 | $ | 9,419,029 | $ | 1,304,099 | $ | 26,911,198 | |||||||||||||||
|
Net
income
|
3,749,597 | 3,749,597 | ||||||||||||||||||||||||||
|
Adjustment
to statutory reserve
|
358,566 | (358,566 | ) | - | ||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
448,313 | 448,313 | ||||||||||||||||||||||||||
|
BALANCE,
June 30, 2007, unaudited
|
40,000,000 | $ | 40,000 | $ | 15,115,137 | $ | 1,391,499 | $ | 12,810,060 | $ | 1,752,412 | $ | 31,109,108 | |||||||||||||||
|
Shares
issued for reorganization on
|
||||||||||||||||||||||||||||
|
December
18, 2007
|
106,500 | 107 | (107 | ) | - | |||||||||||||||||||||||
|
Capital
contribution from shareholder
|
1,249,999 | 1,249,999 | ||||||||||||||||||||||||||
|
Net
income
|
3,392,995 | 3,392,995 | ||||||||||||||||||||||||||
|
Adjustment
to statutory reserve
|
358,102 | (358,102 | ) | - | ||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
1,421,333 | 1,421,333 | ||||||||||||||||||||||||||
|
BALANCE,
December 31, 2007
|
40,106,500 | $ | 40,107 | $ | 16,365,029 | $ | 1,749,601 | $ | 15,844,953 | $ | 3,173,745 | $ | 37,173,435 | |||||||||||||||
|
Net
income
|
3,430,368 | 3,430,368 | ||||||||||||||||||||||||||
|
Adjustment
to statutory reserve
|
355,571 | (355,571 | ) | - | ||||||||||||||||||||||||
|
Additional
capital contribution from shareholder
|
1,317,095 | 1,317,095 | ||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
2,327,078 | 2,327,078 | ||||||||||||||||||||||||||
|
BALANCE,
June 30, 2008, unaudited
|
40,106,500 | $ | 40,107 | $ | 17,682,124 | $ | 2,105,172 | $ | 18,919,750 | $ | 5,500,823 | $ | 44,247,976 | |||||||||||||||
The accompanying notes are an integral part of
these financial statements.
|
CHINA
VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
FOR
THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
|
||||||||
|
(Unaudited)
|
||||||||
|
2008
|
2007
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income
|
$ | 3,430,368 | $ | 3,749,597 | ||||
|
Adjustments
to reconcile net income to cash
|
||||||||
|
provided
by (used in) operating activities:
|
||||||||
|
Depreciation
|
440,655 | 252,068 | ||||||
|
Amortization
of intangible assets
|
30,577 | 9,739 | ||||||
|
Bad
debt allowance
|
548,753 | 151,323 | ||||||
|
Loss
on disposal of fixed assets
|
16,888 | 1,369 | ||||||
|
Change
in operating assets and liabilities:
|
||||||||
|
Notes
receivable
|
(24,113 | ) | (27,538 | ) | ||||
|
Accounts
receivable - trade
|
(4,498,743 | ) | (6,293,759 | ) | ||||
|
Other
receivables
|
(631,394 | ) | (1,499,971 | ) | ||||
|
Inventories
|
2,999,028 | 2,205,065 | ||||||
|
Advance
on inventory purchases
|
(1,189,313 | ) | (567,409 | ) | ||||
|
Prepaid
expenses
|
163,295 | - | ||||||
|
Accounts
payable - trade
|
138,636 | 910,280 | ||||||
|
Other
payables and accrued liabilities
|
784,795 | 2,015,975 | ||||||
|
Other
payables - related party
|
(333,810 | ) | 1,423,961 | |||||
|
Customer
deposits
|
(1,309,494 | ) | 1,225,933 | |||||
|
Taxes
payable
|
(519,385 | ) | 618,866 | |||||
|
Net
cash provided by operating activities
|
46,743 | 4,175,499 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Intangible
assets
|
(61,154 | ) | - | |||||
|
Advance
on equipment purchases
|
(748,349 | ) | (721,824 | ) | ||||
|
Purchases
of plant and equipment
|
(563,678 | ) | (427,873 | ) | ||||
|
Construction
in progress
|
(375,293 | ) | (114,535 | ) | ||||
|
Proceeds
from sale of equipment
|
19,857 | - | ||||||
|
Net
cash used in investing activities
|
(1,728,617 | ) | (1,264,232 | ) | ||||
|
CASH
FLOWS FINANCING ACTIVITIES:
|
||||||||
|
Restricted
cash due to export convenant
|
95,849 | 316,183 | ||||||
|
Proceeds
from short-term debt
|
5,811,400 | 2,169,211 | ||||||
|
Proceeds
from short-term loans-related party
|
713,601 | 58,517 | ||||||
|
Repayments
of short-term debt
|
(4,638,168 | ) | (6,154,743 | ) | ||||
|
Repayment
of notes payable
|
- | (4,230,854 | ) | |||||
|
Proceeds
from shareholder
|
1,280,444 | - | ||||||
|
Net
cash provided by (used in) financing activities
|
3,263,126 | (7,841,686 | ) | |||||
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
238,773 | 83,564 | ||||||
|
INCREASE
(DECREASE) IN CASH
|
1,820,025 | (4,846,855 | ) | |||||
|
CASH,
beginning of period
|
2,814,118 | 5,591,211 | ||||||
|
CASH,
end of period
|
$ | 4,634,143 | 744,356 | |||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid for interest
|
$ | 276,737 | $ | 387,951 | ||||
|
Cash
paid for income taxes
|
$ | 1,480,817 | $ | 705,895 | ||||
The accompanying notes are an integral part of
these financial statements.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
Note 1 –
Organization
China
Valves Technology, Inc, formerly known as Intercontinental Resources, Inc., (the
“Company”) was incorporated in the State of Nevada in August 1997, under the
name Meximed Industries, Inc. In January 1999, the Company changed its name to
Digital Video Display Technology Corporation and in July 2001 to Iconet, Inc. In
the middle of 2003 the Company again changed its name to Anglotajik Minerals,
Inc. The Company was considered to be in the exploration stage as its operations
principally involved research and exploration, market analysis, and other
business planning activities, and no revenue was generated from its business
activities. The Company suspended its proposed activities in mineral exploration
in the Republic of Tajikistan, and changed its name to Intercontinental
Resources, Inc in May of 2006. From that time until December 2007,
the Company had no significant operations.
On
December 16, 2007, the Company entered into a Stock Purchase Agreement and Share
Exchange (the “Exchange Agreement”) with China Valve Holding Limited (“China
Valve Samoa”), a company incorporated under the laws of Samoa, and the equity
owner of China Valve Hong Kong. The closing of the transaction took
place on December 16, 2007 (the “Closing Date”) and resulted in the merger
between the Company and China Valve Samoa (the “Merger”). Pursuant to
the terms of the Exchange Agreement, the Company acquired all of the outstanding
capital stock and ownership interests of China Valve Samoa (the “Interests”)
from the China Valve Samoa shareholder for 40,000,000 shares, or 99.8% of the
Company’s common stock. In addition, China Valve Samoa agreed to pay
cash of $490,000 (the “Purchase Price”). Because the acquisition is treated as a
reverse acquisition, the financial statements of the Company have been
retroactively adjusted to reflect the acquisition from the beginning of the
reported period. The merger transaction has been accounted for as a reverse
acquisition and recapitalization of the Company whereby China Valve Samoa is
deemed to be the accounting acquirer (legal acquiree) and the Company to be the
accounting acquiree (legal acquirer). The historical financial statements for
periods prior to December 16, 2007 are those of China Valve Samoa except that
the equity section and earnings per share have been retroactively restated to
reflect the reverse acquisition.
Pursuant
to the Exchange Agreement, on December 18, 2007 the Company filed with the
Secretary of State for the state of Nevada a Certificate of Amendment to our
Certificate of Incorporation changing its name to “China Valves Technology, Inc”
to better reflect its business. The Company through its subsidiaries
in the People’s Republic of China (PRC) focuses primarily on the development,
manufacture and sale of high-quality metal valves for electricity, petroleum,
chemical, and water, gas and metal industries.
China
Valve Samoa was incorporated on June 6, 2007 in Samoa. China Valve Samoa’s
principle activity is investment in its subsidiaries.
Prior to
entry into the Exchange Agreement, China Valve Samoa undertook a group
reorganization plan to comply with the regulations of the China State
Administration of Foreign Exchange. China Valve Samoa became the holding company
of the group in September 2007 by acquiring a 100% interest in China Valve
Holdings Limited (incorporated in Hong Kong) ("CVHL") on September 28, 2007.
CVHL established Henan Tonghai Valve Science Technology Co., Ltd. ("TVST"), a
wholly-own subsidiary in the People's Republic of China, on September 5, 2007.
TVST acquired 100% of the equity of Henan Kaifeng High Pressure Valve Co., Ltd.
(“High Pressure
Valve”) and Zhengzhou City Zhengdie Valve Co., Ltd. (“Zhengdie Valve,”)
(together, the “Operating
Subsidiaries”) from Mr. Siping Fang, the Chief Executive Officer and
President of the Company and the other individual owners of those companies. The
acquisition of the Operating Subsidiaries by Henan Tonghai Valve from Mr. Siping
Fang was considered to be a transaction between entities under common
control.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
Pursuant
to a restructuring plan intended to ensure compliance with regulatory
requirements of the PRC, on April 1 and 3, 2008, the Company transferred 100% of
the equity of the Operating Subsidiaries back to Sipang Fang and the other
original owners, with the intention that Sipang Fang would transfer the
Operating Subsidiaries to a new entity controlled by Mr. Bin Li, and that Mr. Li
would then sell such entity to the Company, thereby allowing the Company to
reacquire legal ownership of the Operating Subsidiaries.
On April
10, 2008, Mr. Fang, the Company’s Chief Executive Officer and President, sold
24,300,000 shares of the Company’s common stock beneficially owned by him and
which he had received in the merger transaction described above, to Mr Li for
$10,000. In connection with his acquisition of the Shares, Mr. Li
issued to Mr. Fang a $10,000 note. The note, which does not bear
interest, is due sixty days after a written demand for payment is made by Mr.
Fang to Mr. Li, provided that such demand is made on or after October 15, 2008.
The sale represents a change of control of the Company and the Shares acquired
by Mr. Li represent approximately 60.75% of the issued and outstanding capital
stock of the Company calculated on a fully-diluted basis. Prior to the
acquisition, Mr. Li was not affiliated with the Company. However
following the acquisition, Mr. Li will be deemed an affiliate of the Company as
a result of his stock ownership interest in the Company. In connection
therewith, Mr. Fang and Mr. Li entered into an Earn-In Agreement (the
“Earn-In Agreement”) pursuant to which Mr. Fang obtained the right and option to
re-acquire the shares of the Company from Mr. Li, subject to the satisfaction of
four conditions as set forth in the Earn-In Agreement. These conditions would be
able to be satisfied only if the Company is able to reacquire and operate the
Operating Subsidiaries. Mr Li established China Fluid Equipment on April
18, 2008, to serve as the 100% owner of a new PRC subsidiary, Henan Tonghai
Fluid Equipment Co., Ltd. (“Henan Tonghai”). On June 30, 2008, Henan Tonghai
acquired the Operating Subsidiaries from Mr. Fang and the other original
owners. The acquisitions were consummated under the laws of the PRC.
The former Hong Kong holding company, CVHL and its subsidiary TVST, which
no longer held any assets, were dissolved. On July 31, 2008, the Company and Mr.
Li completed the reorganization plan when Mr. Li transferred all of the capital
stock of China Fluid Equipment to the Company pursuant to an Instrument of
Transfer for a nominal consideration of HKD$10,000 (approximately $1,281). As a
result of these transactions, the Operating Subsidiaries are again the Company’s
indirect wholly-owned subsidiaries.
During
this re-organization, the Operating Subsidiaries continued to be under the
operating and management control of the Company. Because of this operating
and management control and because the Company continued to bear the residual
risks and rewards related to the Operating Subsidiaries, the Company continued
to consolidate the Operating Subsidiaries during the
re-organization. The acquisition by the Company on July 31, 2008 of
the new holding company for the Operating Subsidiaries, which represented the
return to legal ownership of the Operating Subsidiaries by the Company,
represented a transaction between related parties under common control and did
not establish a new basis in the assets and liabilities of the Operating
Subsidiaries. The Earn-In Agreement will enable Mr. Fang to regain ownership of
the Company’s shares originally transferred by him to Mr. Li as part of the
re-organization arrangements and, accordingly, the Company does not consider his
re-acquisition of those shares to represent compensation cost to the
Company.
Note 2 –
Summary of significant accounting policies
THE
REPORTING ENTITIES
The
accompanying consolidated financial statements include the following
entities:
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
|
Name
of entity
|
Place
of
incorporation
|
Capital
|
Ownership
|
Principle
business
|
|
|
Local
currency
|
USD
|
||||
|
Henan
Kai Feng High Pressure Valve Co., Ltd.
|
PRC
|
RMB
60,000,000
|
$7,260,000
|
100%
Indirectly
|
Manufacture
|
|
Zhengzhou
City ZhengDie Valve., Ltd.
|
PRC
|
RMB
50,000,000
|
$6,454,174
|
100%
Indirectly
|
Manufacture
|
|
Henan
Tonghai Fluid Equipment Co., Ltd.
|
PRC
|
RMB
10,000,000
|
$1,459,000
|
100%
Indirectly
|
Holding
Company
|
|
China
Fluid Equipment Holdings Limited
|
Hong
Kong
|
HKD
10,000
|
$1,282
|
100%
Directly
|
Holding
Company
|
BASIS OF
PRESENTATION
The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US
GAAP"). In the opinion of management, the accompanying balance
sheets, and statements of income, stockholders’ equity and cash flows include
all adjustments, consisting only of normal recurring items. All
material inter-company transactions and balances have been eliminated in
consolidation.
Management
has included all normal recurring adjustments considered necessary to give a
fair presentation of operating results for the periods presented. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
information included in the 2007 annual report filed on Form 10-K.
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with US GAAP
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE
RECOGNITION
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin 104. Sales revenue is recognized when all of the following have
occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the price is fixed or
determinable, and (iv) the ability to collect is reasonably assured. These
criteria are generally satisfied at the time of shipment when risk of loss and
title passes to the customer.
The
Company recognizes revenue when the goods are delivered and title has passed.
Sales revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company’s products that are sold in the PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. This VAT may be offset by the VAT paid
by the Company on raw materials and other materials included in the cost of
producing their finished product.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
SHIPPING
AND HANDLING
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs which totaled $50,411 and $75,135 for the three
months ended June 30, 2008, and 2007, respectively. Shipping and handling costs
amounted to $78,855 and $132,567 for the six months ended June 30, 2008, and
2007, respectively.
ADVERTISING
Advertising
costs are expensed as incurred and totaled $1,780 and $4,528 for the three
months ended June 30, 2008, and 2007, respectively and $15,535 and $16,361 for
the six months ended June 30, 2008 and 2007, respectively.
FOREIGN
CURRENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME
The
reporting currency of the Company is the US dollar. The functional currency of
the Company and its Operating Subsidiaries Henan Kai Feng Pressure Valve Co.,
Ltd. and Zhengzhou City Zhengdie Valve Co., Ltd is the Chinese Renminbi
(RMB).
For those
entities whose functional currency is other than the US dollar, all assets and
liabilities are translated into U.S. dollars at the exchange rate on the balance
sheet date; stockholder's equity is translated at historical rates and items in
the statements of income and of cash flows are translated at the average rate
for the period. Because cash flows are translated based on the average
translation rate, amounts related to assets and liabilities reported on the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet. Translation adjustments resulting
from this process are included in accumulated other comprehensive income in the
statement of shareholders’ equity. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as
incurred.
Accumulated
other comprehensive income in the consolidated statement of shareholders’ equity
amounted to $5,500,823 and $3,173,745 as of June 30, 2008 and December 31, 2007,
respectively. The balance sheet amounts with the exception of equity at June 30,
2008 and December 31, 2007 were translated at 6.85 RMB and 7.29 RMB to $1.00
USD, respectively. The average translation rates applied to the statements of
income and of cash flows for the six months ended June 30, 2008 and 2007 were
7.05 RMB and 7.73 RMB to $1.00, respectively, and for the three months ended
June 30, 2008 and 2007, the average translation rates were 6.97 RMB and 7.69 RMB
to $1.00, respectively. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
PLANT AND
EQUIPMENT
Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
calculated using the straight-line method over the estimated life of the asset,
ranging from five to ten years.
Construction
in progress represents direct costs of construction as well as acquisition
and design fees incurred. Capitalization of these costs ceases and the
construction in progress is transferred to plant and equipment when
substantially all the activities necessary to prepare the assets for their
intended use are completed. No depreciation is provided until construction is
completed and the asset is ready for its intended use.
INTANGIBLE
ASSETS
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
Intangible
assets consist of goodwill, patents and software. The Company records
goodwill when the purchase price of net assets acquired exceeds their fair
value. In accordance with SFAS 142, “Goodwill and Other Intangible
Assets,” goodwill has an infinite life and therefore costs are not
amortized but reviewed for impairment. Patents and software are
subject to amortization. Patents, which have a legal life of 10 years in the
PRC, are being amortized over 5 years as management has determined that five
years is the estimated useful life of the patents currently owned by the
Company. Software is amortized over 10 years, its estimated useful
life.
LONG-LIVED
ASSETS
The
Company periodically reviews the carrying amount of its long-lived assets for
impairment. An asset is considered impaired when estimated future cash flows are
less than the carrying amount of the asset. In the event the carrying amount of
such asset is considered not recoverable, the asset is adjusted to its fair
value. Fair value is generally determined based on discounted future cash flow.
As of
June 30, 2008, the Company determined no impairment charges were
necessary.
INVENTORY
The
Company values its inventory at the lower of cost or market, determined on a
weighted average method, or net realizable value. The Company reviews its
inventories periodically to determine if any reserves are necessary for
potential obsolescence. As of June 30, 2008 and December 31, 2007 the
Company determined no reserves were necessary.
RESEARCH
AND DEVELOPMENT COSTS
Research
and development costs are expensed as incurred. The costs of material and
equipment that are acquired or constructed for research and development
activities and which have alternative future uses, either in research and
development, marketing, or sales, are classified as property and equipment and
depreciated over their estimated useful lives.
RETIREMENT
BENEFIT COSTS
Amounts
payable for the PRC state managed retirement benefit programs are expensed in
the financial statements following the accrual basis of accounting.
INCOME
TAXES
The
Company applies Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (SFAS 109), which requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between the income tax basis and financial reporting basis of assets
and liabilities. Provision for income taxes consist of taxes currently due plus
deferred taxes. Because the Company has no operations within the United States,
there is no provision for US income taxes and there are no deferred tax amounts
as of June 30,, 2008.
The
charge for taxation is based on the results for the year as adjusted for items
that are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet date. Deferred
taxes are accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle,
deferred tax liabilities are recognized for all taxable temporary differences,
and deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
Deferred
taxes are calculated at the tax rates that are expected to apply to the period
when the asset is realized or the liability is settled. Deferred
taxes are charged or credited in the income statement, except when they relate
to items credited or charged directly to equity, in which case the deferred
taxes are also recordrd in equity. Deferred tax assets and liabilities are
offset when they relate to income taxes levied by the same taxation authority
and the Company intends to settle its current tax assets and liabilities on a
net basis.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption of FIN 48
had no affect on the Company’s financial statements.
.CASH AND
CASH EQUIVALENTS
Cash and
cash equivalents comprise cash in banks and on hand, demand deposits with
banks and other financial institutions, and short-term, highly liquid
investments which are readily convertible into known amounts of cash and which
are subject to an insignificant risk of changes in value, having been within
three months of maturity at acquisition.
RESTRICTED
CASH
The
Company is required to have restricted cash in the bank as security for its
exported products. The restriction is released after the customers have
received and inspected the products. Restricted cash amounted to
$142,071 and $40,856 as of June 30, 2008 and December 31, 2007,
respectively.
CONCENTRATIONS
AND RISKS
The
Company's operations are carried out in the PRC. Accordingly, the Company's
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's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. The Company's results may be
adversely affected by changes in governmental policies with respect to laws
and regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
Cash
includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People’s Republic of China and Hong Kong. Total cash
(including restricted cash balances) in these banks on June 30, 2008 and
December 31, 2007 amounted to $4,634,143 and $2,814,118, respectively, of
which no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant risks
on its cash in bank accounts.
Five
major suppliers represented approximately 44% and 51% of the Company’s total
purchases for the three months ended June 30, 2008 and 2007, respectively. For
the six months ended June 30, 2008 and 2007, five major
suppliers represented approximately 37% and 47%, respectively of the
Company’s total purchases.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company adopted SFAS No. 157, “Fair Value Measurements” on January 1, 2008. SFAS
No. 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosure requirements for
fair value measures. The carrying amounts reported in the balance sheets for
receivables and payables qualify as financial instruments and are a reasonable
estimate of fair value because of the short period of time between the
origination of such instruments and their expected realization and their current
market rate of interest. The three levels are defined as
follows:
Level
1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
Level
2 inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for substantially
the full term of the financial instruments.
Level
3 inputs to the valuation methodology are unobservable and
significant to the fair value.
The
Company invested in China Perfect Machinery Industry Co., Ltd. in 1996 and
Kaifang Commercial Bank in 1997. Long term investments amounted to
$760,346 and $714,485 as of June 30, 2008 and December 31, 2007,
respectively. There is no quoted or observable market price for the
joint venture interest or other similar joint ventures; therefore, the Company
used level 3 inputs for its valuation methodology. The determination of the fair
value was based on the capital investment that the Company
contributed.
The
Company did not identify any other assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with
SFAS No.157.
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The
Company’s business operations are conducted in the PRC by selling on various
credit terms. Management reviews its accounts receivable on a quarterly basis to
determine if the allowance for doubtful accounts is adequate. An estimate for
doubtful accounts is recorded when collection of the full amount is no longer
probable. The Company’s existing reserve is consistent with its historical
experience and considered adequate by management.
EARNINGS
PER SHARE
The
Company reports earnings per share in accordance with the provisions of SFAS No.
128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution (using the treasury
stock method) that could occur if securities or other contracts to issue common
stock were exercised and converted into common stock.
All per
share data including earnings per share has been retroactively restated to
reflect the merger on December 16, 2007 as if it had occurred at the beginning
of 2006. For the three months ended June 30, 2008 and 2007, basic and diluted
earnings per share amounted to $0.04 and $0.08, respectively. For the six months
ended June 30, 2008 and 2007, basic and diluted earnings per share amount to
$0.09 and $0.09, respectively
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
LONG TERM
INVESTMENT
The
Company invested in China Perfect Machinery Industry Co., Ltd. in 1996 and
Kaifeng Commercial Bank in 1997. The Company does not have the ability to
exercise control over of the investee companies and the investments have been
recorded under the cost method. Long term investment amounted to $760,346 and
$714,485 as of June 30, 2008 and December 31, 2007, respectively. Management
believes there is no impairment as of June 30, 2008.
CUSTOMER
DEPOSIT
Customer
deposits represent amounts advanced by customers on product orders. The product
normally is shipped within six months after receipt of the advance payment and
the related sale is recognized in accordance with the Company’s revenue
recognition policy. As of June 30, 2008 and December 31, 2007, customer deposits
amounted to $1,643,763 and $2,810,352, respectively.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. The objective of FAS 159 is to provide
opportunities to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply hedge
accounting provisions. FAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
The Company adopted SFAS No. 159 on January 1, 2008. The Company chose not to
elect the option to measure the fair value of eligible financial assets and
liabilities.
In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed. The Company adopted FSP EITF 07-3 and expensed the
research and development as incurred.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
has not determined the effect that the application of SFAS 160 will have on its
consolidated financial statements.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
In
December 2007, Statement of Financial Accounting Standards No. 141(R), Business
Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business
Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that
the acquisition method of accounting (which SFAS 141 called the purchase method)
be used for all business combinations and for an acquirer to be identified for
each business combination. SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values. SFAS 141R
also requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the noncontrolling interest in the acquiree,
at the full amounts of their fair values (or other amounts determined in
accordance with SFAS 141R). SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An entity
may not apply it before that date. The Company is currently evaluating the
impact that adopting SFAS No. 141R will have on its financial
statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133”, (“SFAS 161”) which
requires additional disclosures about the objectives of the derivative
instruments and hedging activities, the method of accounting for such
instruments under SFAS 133 and its related interpretations, and a tabular
disclosure of the effects of such instruments and related hedged items on our
financial position, financial performance, and cash flows. SFAS 161 is effective
for us beginning January 1, 2009. The Company is currently evaluating the
impact that adopting SFAS 161 will have on its financial
statements.
In April
2008, the FASB issued 142-3 “Determination of the useful life of Intangible
Assets”, which amends the factors a company should consider when developing
renewal assumptions used to determine the useful life of an intangible asset
under SFAS142. This Issue is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. SFAS 142 requires companies to consider whether renewal can be
completed without substantial cost or material modification of the existing
terms and conditions associated with the asset. FSP 142-3 replaces the previous
useful life criteria with a new requirement—that an entity consider its own
historical experience in renewing similar arrangements. If historical experience
does not exist, then the Company would consider market participant assumptions
regarding renewal including 1) highest and best use of the asset by a market
participant, and 2) adjustments for other entity-specific factors included in
SFAS 142. The Company is currently evaluating the impact that adopting SFAS
No.142-3 will have on its financial statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). The Company is currently evaluating the
impact that adopting SFAS No. 141R will have on its financial
statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
this Statement is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this Statement does not apply to
financial guarantee contracts issued by enterprises excluded from the scope of
Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables).
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
This
Statement also does not apply to financial guarantee insurance contracts that
are derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have and impact on the Company’s financial statements.
In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
The Company is currently evaluating the impact that adopting EITF No. 07-5 will
have on its financial statements.
In June
2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
is to provide transition guidance for conforming changes made to EITF No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
150, “Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity”. This Issue is effective for financial statements issued
for fiscal years ending after December 15, 2008. Early application is
permitted. This Statement will not have and impact on the Company’s
financial statements.
RECLASSIFICATIONS
Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.
Note 3 -
Plant and equipment
Plant
and equipment consist of the following:
|
June
30, 2008
|
December
31, 2007
|
|||||||
|
(unaudited)
|
||||||||
|
Machinery
|
$ | 11,070,845 | $ | 10,018,027 | ||||
|
Motor
vehicles
|
1,655,285 | 1,519,634 | ||||||
|
Office
equipment and others
|
3,300,012 | 2,790,370 | ||||||
|
Construction
in progress
|
176,363 | 239,059 | ||||||
| 16,202,505 | 14,567,090 | |||||||
|
Less:
Accumulated depreciation
|
(7,926,732 | ) | (7,043,302 | ) | ||||
| $ | 8,275,773 | $ | 7,523,788 | |||||
Depreciation
expense was $246,263 and $119,725 for the three months ended June 30,
2008 and 2007, respectively. For the six months ended June 30, 2008 and 2007,
depreciation expense was $ 440,655 and $252,068, respectively.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
Note
4 – Goodwill and intangible assets
In 2004,
the Company acquired two separate companies engaged in the production of
valves. As a result of these acquisitions the Company recorded goodwill in
the amount of $20,698,274. This goodwill represents the fair value of the assets
acquired in these acquisitions over the cost of the assets
acquired.
Intangible
assets consist of the following:
|
June
30, 2008
|
December
31, 2007
|
|||||||
|
(unaudited)
|
||||||||
|
Patents
|
$ | 103,193 | $ | 96,969 | ||||
|
Software
|
422,641 | 397,149 | ||||||
| 525,834 | 494,118 | |||||||
|
Less:
Accumulated amortization
|
(93,691 | ) | (58,485 | ) | ||||
|
Net
carrying amount
|
$ | 432,143 | $ | 435,633 | ||||
Amortization
expense was $15,512 and $5,177 for the three months ended June 30, 2008 and
2007, respectively. Amortization expense was $30,577 and $9,739 for the six
months ended June 30, 2008 and 2007, respectively.
Note 5 -
Inventories
As of
June 30, 2008 and December 31, 2007 inventories of the Company were as
follows:
|
June
30, 2008
|
December 31, 2007
|
|||||||
|
(unaudited)
|
||||||||
|
Raw
materials
|
$ | 2,372,387 | $ | 2,393,230 | ||||
|
Work-in-progress
|
1,178,707 | 666,897 | ||||||
|
Finished
goods
|
4,579,591 | 7,478,960 | ||||||
| $ | 8,130,685 | $ | 10,539,087 | |||||
The
Company reviews its inventory periodically for possibly obsolete goods and to
determine if any reserves are necessary for potential
obsolescence. As of June 30, 2008 and December 31, 2007, the Company
believed no reserves were necessary.
Note 6 –
Accounts receivable
Accounts
receivable consists of the following:
|
June
30, 2008
|
December
31, 2007
|
|||||||
|
(unaudited)
|
||||||||
|
Total
accounts receivable
|
23,381,589 | 17,622,918 | ||||||
|
Allowance
for bad debts
|
(856,225 | ) | (274,167 | ) | ||||
|
Accounts
receivable, net
|
22,525,364 | 17,348,751 | ||||||
|
Accounts
receivable - non-current retainage
|
(1,317,092 | ) | (559,368 | ) | ||||
|
Accounts
receivable – current
|
$ | 21,208,272 | $ | 16,789,383 | ||||
Retainage
represents portions held for payment by customers pending quality inspection
ranging from 12-18 months after shipment of products. At June 30,
2008 and December 31, 2007, retainage held by customers included in the
Company’s accounts receivable is as follows:
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
|
June
30, 2008
|
December
31, 2007
|
|||||||
|
(unaudited)
|
||||||||
|
Retainage
|
||||||||
|
Current
|
$ | 1,541,778 | $ | 1,264,062 | ||||
|
Non-current
(due in 2009)
|
1,317,092 | 559,368 | ||||||
|
Total
retainage
|
$ | 2,858,870 | $ | 1,823,430 | ||||
Management
reviews accounts receivable on a regular basis to determine if the allowance for
doubtful accounts is adequate. The following represents the changes in the
allowance for doubtful accounts:
|
June
30, 2008
|
December
31,2008
|
|||||||
|
(Unaudited)
|
||||||||
|
Balance,
beginning of the period
|
$ | 274,167 | $ | - | ||||
|
Additions
to the reserve
|
548,753 | 274,167 | ||||||
|
Write-off
charged against the allowance
|
- | - | ||||||
|
Recovery
of amounts previously reserved
|
- | - | ||||||
|
Foreign
currency translation adjustment
|
33,305 | - | ||||||
|
Balance,
end of the period
|
$ | 856,225 | $ | 274,167 | ||||
Note 7 –
Advances on inventory purchases
Advances
on inventory purchases are monies deposited or advanced to outside vendors or
related parties on future inventory purchases. The total outstanding amount was
$1,711,497and $458,699 as of June 30, 2008 and December 31, 2007,
respectively.
Note 8 -
Loans
|
SHORT
TERM LOANS:
|
June
30,2008
|
December
31
|
||||||
|
(Unaudited)
|
2007
|
|||||||
|
Commercial
Bank of Zhengzhou City
|
||||||||
|
Due
May 2009. Monthly interest only payment at
|
||||||||
|
0.93375%
per month guaranteed by Zhengzhou
|
||||||||
|
Huazhong
Capital Construction Co., Ltd
|
$ | 393,930 | $ | 370,170 | ||||
|
Commercial
Bank of Zhengzhou,
|
||||||||
|
Due
May 2009. Monthly interest only payment at 0.93375%
|
||||||||
|
per
month, guaranteed by Zhengzhou Huazhong
|
||||||||
|
Capital
Construction Co., Ltd.
|
1,459,000 | 1,371,000 | ||||||
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
|
Unrelated
third parties, non-secured, non-interest
|
||||||||
|
bearing
with no fixed date of repayment
|
2,261,613 | 991,178 | ||||||
|
Citic
bank, Zhengzhou branch
|
||||||||
|
Due
June, 2009. Monthly interest only payment at 7.227%
|
||||||||
|
per
annum, guaranteed by Kaifeng Cast Iron Co., Ltd.
|
2,918,000 | 2,742,000 | ||||||
|
Local
Bureau of Finance, Kaifeng City.
|
||||||||
|
No
expiration date and non-interest bearing
|
544,207 | 511,383 | ||||||
|
Local
Bureau of Finance, Kaifeng City.
|
||||||||
|
No
expiration date. Monthly interest only payment at
|
||||||||
|
2.55%
per annum
|
262,620 | 246,780 | ||||||
|
Special
Payable to China National Development Committee.
|
||||||||
|
No
expiration date and non-interest bearing.
|
262,620 | 246,780 | ||||||
|
Total
short term loans
|
$ | 8,101,990 | $ | 6,479,291 | ||||
|
LONG
TERM LOANS:
|
||||||||
|
Zhengzhou
Shangjie Credit Union
|
||||||||
|
Due
July, 2009. Monthly interest only at 0.84375%
|
||||||||
|
per
month, guaranteed by Zhengzhou Huazhong
|
||||||||
|
Capital
Construction Co., Ltd.
|
$ | 1,167,200 | $ | 1,096,800 |
Total
Interest expense for the three months ended June 30, 2008 and 2007 amounted to
$139,095 and $285,581 respectively. Total interest expense for the
six months ended June 30, 2008 and 2007 amounted to $283,767 and $441,007,
respectively.
Note 9 -
Income taxes
The
Company’s subsidiaries are governed by the Income Tax Law of the People’s
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax
Laws).
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the
existing laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises
(“FIEs”). The new standard EIT rate of 25% has replaced the 33% rate currently
applicable to both DEs and FIEs.
Prior to
2008, under the Chinese Income Tax Laws, foreign investment enterprises (“FIEs”)
generally were subject to an income tax at an effective rate of 33% (30% state
income taxes plus 3% local income taxes) on income as reported in their
statutory financial statements after appropriate tax adjustments unless the
enterprise is located in specially designated regions for which more favorable
effective tax rates apply.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
Beginning
January 1, 2008, China has unified the corporate income tax rule on foreign
invested enterprises and domestic enterprises. The unified corporate income tax
rate is 25%.
The
Company’s subsidiary Henan Kai Feng Pressure Valve Co., Ltd was exempt from
income tax in 2007 due to Kaifeng city tax incentive for companies to privatize.
However, starting 2008 Henan Kai Feng Pressure Valve Co. is subject to an income
tax at an effective rate of 25%.
The
Company’s other operating subsidiary Zhengzhou City Zhengdie Valve Co., Ltd is
subject to an income tax at an effective rate of 25%.
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
June
30,
2008
(Unaudited)
|
June
30,
2007
(Unaudited)
|
June
30,
2008
(Unaudited)
|
June
30,
2007
(Unaudited)
|
|||||||||||||
|
Provision
- China income tax
|
$ | 372,193 | $ | 310,315 | $ | 768,765 | $ | 400,835 | ||||||||
|
Provision
- China local tax
|
248,128 | 206,876 | 512,509 | 267,223 | ||||||||||||
|
Total
provision for taxes
|
$ | 620,321 | $ | 517,191 | $ | 1,281,274 | $ | 668,058 | ||||||||
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended and six months ended June 30:
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
U.S.
Statutory rates
|
34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | ||||||||
|
Foreign
income not recognized in USA
|
(34.0 | ) | (34.0 | ) | (34.0 | ) | (34.0 | ) | ||||||||
|
China
income taxes
|
25.0 | 33.0 | 25.0 | 33.0 | ||||||||||||
|
China
income tax exemption
|
- | (17.0 | ) | - | (17.0 | ) | ||||||||||
|
Total
provision for income taxes
|
25.0 | % | 16.0 | % | 25.0 | % | 16.0 | % | ||||||||
The
estimated tax savings for the six months and three months ended June 30, 2007 as
a result of the Kaifeng city tax incentive described above amounted to $816,369
and $706,810, respectively. The net effect on earnings per share had the income
tax been applied would decrease basic earnings per share from $0.09 to $0.07 for
the six months ended June 30, 2007 and $0.08 to $0.06 for the 3 months ended
June 30, 2007.
VAT on
sales and VAT on purchases in China amounted to $2,084,447 and $990,525 for the
three months ended June 30, 2008 and $1,705,566 and $796,517 for the
three months ended June 30, 2007, respectively. VAT on sales and VAT on
purchases in China amounted to $4,047,985 and $1,692,359 for the
six months ended June 30, 2008 and $3,235,949 and
$1,521,627 for the six months ended June 30, 2007, respectively. Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
Taxes
payable consisted of the following:
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
|
June
30,
2008
(unaudited)
|
December
31,
2007
|
|||||||
|
VAT
|
$ | 206,509 | $ | 875,845 | ||||
|
Others
|
392,080 | 188,667 | ||||||
|
Total
taxes payable
|
$ | 598,589 | $ | 1,064,512 | ||||
Note 10 –
Statutory Reserves
The laws
and regulations of the People’s Republic of China require that before foreign
invested enterprise can legally distribute profits, it must first satisfy all
tax liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, to the
statutory reserve. The statutory reserves include the surplus reserve fund and
the common welfare fund.
STATUTORY
SURPLUS RESERVE FUND
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the three months ended June 30, 2008 and 2007, the Company
transferred $167,164 and $300,945, respectively to this reserve. For the six
months ended June 30, 2008 and 2007, the Company transferred $355,571 and
$358,566 to this reserve which represents 10% of the current year’s net income
determined in accordance with PRC accounting rules and regulations. The surplus
reserve fund is non-distributable other than during liquidation and can be used
to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Note 11 -
Operating leases
The
Company leases office space and factory space from ZhengZhou Cheng Long
Corporation and Kaifeng High-Pressure Valve Steel Casting Co., Ltd.
For the
three months ended June 30, 2008 and 2007, total lease expense, including
amounts included in cost of sales, was $ 139,201 and $78,605, respectively.
Total lease expense, including amounts included cost of sales, for the six
months ended June 30, 2008 and 2007 was $268,054 and $154,938,
respectively.
Total
future minimum lease payments at June 30, 2008, are as follows:
|
Amount
|
||||
|
Six
months ending December 31, 2008
|
$ | 283,356 | ||
|
Year
ending December 31, 2009
|
566,713 | |||
|
Year
ending December 31, 2010
|
566,713 | |||
|
Year
ending December 31, 2011
|
566,713 | |||
|
Year
ending December 31, 2012
|
566,713 | |||
|
Thereafter
|
- | |||
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(unaudited)
Note 12 -
Commitments and contingencies
After the
restructuring, the Company’s subsidiary Henan Tonghai Fluid Equipment Co.,
obtained a business license on June 11, 2008 with its registered capital of
US$1,459,000 (RMB 10,000,000) As of August 14, 2008, the registered capital has
not been contributed. The total amount of registered capital has to be received
in 24 months from China Fluid Equipment from the date of approval. As of the
date of 10Q report, the registered capital has not been
contributed.
Note
13 – Related party transactions
The Company
had the following significant related party transactions during the six months
ended June 30, 2008 and December 31, 2007:
The
Company received advances from Mr. Fang Si Ping, Chief Executive Officer and
major shareholder, for cash flow purposes. As of June 30, 2008 and December
31, 2007 the outstanding amount due to Mr. Fang was $2,687,473 and
$2,848,032, respectively. The advances are unsecured, interest-free and have no
fixed terms of repayment, but are expected to be repaid in cash.
The
Company borrowed money from certain employees for cash flow purposes. The loans
bear interest at 10% per annum with no fixed repayment terms. Loans from
employees amounted to $715,861 and $671,188 as of June 30, 2008 and
December 31, 2007, respectively.
During
the first half of 2008, the Company borrowed money from ZhengDie’s Controller,
Chen Hui Feng, and from Mr. Fang’s relative, Fang Zhi Hong, in the amount of
$732,435 for cash flow purposes. The loan is unsecured, interest free and has no
fixed terms of repayment, but is expected to be repaid in cash upon
request.
Note
14 – Legal proceedings
Before
the reverse acquisition on December 18, 2007, Intercontinental Resources Inc.
(“Intercontinental Resources”) was sued by Merrill Lynch Canada, Inc., in
British Columbia, Canada, in July 2000. Other than initial pleadings, the
plaintiff has not proceeded with the suit since it was filed. Intercontinental
Resources believes that the suit is without merit. In connection with
the reverse acquisition, Intercontinental Resources agreed to place $200,000
into escrow pending resolution of this suit. If required, the portion
of the purchase price for the reverse acquisition held in escrow will be used to
settle this lawsuit.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
of China
Valves Technology, Inc
We have
audited the accompanying consolidated balance sheet of China Valves Technology,
Inc and subsidiaries as of December 31, 2007, and the related statements of
income, stockholders’ equity and comprehensive income, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of China Valves Technology, Inc. and subsidiaries as of December 31, 2006 in the
accompanying consolidated financial statements were audited by other auditors
whose report dated December 6, 2007 expressed an unqualified opinion on those
statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Valves Technology, Inc
and subsidiaries as of December 31, 2007, and the results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Moore
Stephens Wurth Frazer and Torbet, LLP
Walnut,
California
March 31,
2008
Madsen
& Associates CPAs, Inc.
|
684
East Vine Street #3, Murray, UT 84107
|
PHONE:
(801) 268-2632 FAX: (801) 268-3978
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Directors and
Stockholders
of China Valve Holdings Limited (Incorporated in Samoa)
We have
audited the accompanying balance sheets of China Valve Holdings Limited as of
December 31, 2006 and 2005, and the related statements of income, stockholders'
equity and comprehensive income, and cash flows for each of the years ended
December 31, 2006 and 2005. China Valve Holdings Limited's management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Valve Holdings Limited as of
December 31, 2006 and 2005, and the results of its operations and its cash flows
for each of the years ended December 31, 2006 and 2005 in conformity with
accounting principles generally accepted in the United States of
America.
s/Madsen
& Associates CPA's, Inc.
Madsen
& Associates CPA's, Inc.
Salt Lake
City, Utah
December
6, 2007
|
CHINA
VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
AS
OF DECEMBER 31, 2007 AND DECEMBER 31, 2006
|
||||||||
|
A S S E T
S
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,773,262 | $ | 5,591,211 | ||||
|
Restricted
cash
|
40,856 | - | ||||||
|
Accounts
receivable, net of allowance for doubtful accounts of
$274,167
|
16,789,383 | 9,171,675 | ||||||
| and $0 as of December 31, 2007 and December 31, 2006, respectively | ||||||||
|
Other
receivables
|
4,638,477 | 3,689,926 | ||||||
|
Inventories
|
10,539,087 | 14,739,845 | ||||||
|
Advances
on inventory purchases
|
458,699 | - | ||||||
|
Prepaid
expenses
|
519,043 | 554,031 | ||||||
| Total current assets | 35,758,807 | 33,746,688 | ||||||
|
PLANT
AND EQUIPMENT, net
|
7,523,788 | 4,373,362 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
Accounts receivable - retainage, long term
|
559,368 | 469,229 | ||||||
|
Advances on equipment purchases
|
324,858 | - | ||||||
|
Goodwill
- purchased
|
19,449,851 | 18,187,242 | ||||||
|
Intangibles,
net of accumulated amortization
|
435,633 | 54,405 | ||||||
|
Other investments, at lower of cost or market
|
714,485 | 668,104 | ||||||
| Total other assets | 21,484,195 | 19,378,980 | ||||||
| Total assets | $ | 64,766,790 | $ | 57,499,030 | ||||
|
L I A B I L I T I E
S A N D S H A R E H O L D E R S' E Q U I T
Y
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable - trade
|
$ | 6,452,519 | $ | 8,843,663 | ||||
|
Short
term loans
|
6,479,291 | 10,105,186 | ||||||
|
Short
term loans - related parties
|
671,188 | 491,366 | ||||||
|
Other
payables
|
4,435,982 | 2,169,379 | ||||||
|
Other
payable - related partites
|
2,848,032 | 1,805,389 | ||||||
|
Notes
payable
|
- | 4,195,651 | ||||||
|
Accrued
liabilities
|
1,734,679 | 514,941 | ||||||
|
Customer
deposits
|
2,810,352 | 2,053,498 | ||||||
|
Taxes
payable
|
1,064,512 | 408,759 | ||||||
| Total current liabilities | 26,496,555 | 30,587,832 | ||||||
|
Long-term
liabilities:
|
||||||||
|
Long
term debt
|
1,096,800 | - | ||||||
| Total long term liabilities | 1,096,800 | - | ||||||
|
SHAREHOLDERS'
EQUITY:
|
||||||||
|
Common
Stock, $0.001 par value; 300,000,000 shares authorized
|
||||||||
| 40,106,500 shares and 40,000 000 issued and outstanding as of December 31, 2007 | ||||||||
| and December 31, 2006, respectively | 40,107 | 40,000 | ||||||
|
Additional
paid-in-capital
|
16,365,029 | 15,115,137 | ||||||
|
Statutory
reserves
|
1,749,601 | 1,032,933 | ||||||
|
Retained
earnings
|
15,844,953 | 9,419,029 | ||||||
|
Accumulated
other comprehensive income
|
3,173,745 | 1,304,099 | ||||||
| Total shareholders' equity | 37,173,435 | 26,911,198 | ||||||
| Total liabilities and shareholders' equity | $ | 64,766,790 | $ | 57,499,030 | ||||
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these statements.
|
CHINA
VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
|
||||||||
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
||||||||
|
2007
|
2006
|
|||||||
|
SALES
|
$ | 37,036,282 | $ | 25,530,183 | ||||
|
COST
OF GOODS SOLD
|
22,050,041 | 14,522,202 | ||||||
|
GROSS
PROFIT
|
14,986,241 | 11,007,981 | ||||||
|
EXPENSES:
|
||||||||
|
Selling
expense
|
2,998,585 | 2,248,613 | ||||||
|
General
and administrative
|
3,245,954 | 2,181,294 | ||||||
|
Research
and development
|
104,502 | 33,260 | ||||||
|
Total
Operating Expenses
|
6,349,041 | 4,463,167 | ||||||
|
INCOME
FROM OPERATIONS
|
8,637,200 | 6,544,814 | ||||||
|
OTHER
EXPENSE (INCOME) :
|
||||||||
|
Other
income
|
(393,686 | ) | (13,729 | ) | ||||
|
Interest
expense (Finance costs)
|
528,498 | 537,562 | ||||||
|
Other
expense
|
22,053 | 183,441 | ||||||
|
Total
Other Expense (Income)
|
156,865 | 707,274 | ||||||
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
8,480,335 | 5,837,540 | ||||||
|
INCOME
TAX EXPENSE
|
1,337,743 | 1,158,161 | ||||||
|
NET
INCOME
|
7,142,592 | 4,679,379 | ||||||
|
OTHER
COMPREHENSIVE INCOME
|
||||||||
|
Foreign
currency translation gain
|
1,869,646 | 823,057 | ||||||
|
COMPREHENSIVE
INCOME
|
$ | 9,012,238 | $ | 5,502,436 | ||||
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
40,003,550 | 40,000,000 | ||||||
|
EARNINGS
PER COMMON SHARE
|
$ | 0.18 | $ | 0.12 | ||||
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these statements.
|
CHINA
VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
||||||||||||||||||||||||||||
|
Common
Stock
|
Additional
|
Retained
Earnings
|
Accumulated
other
|
|||||||||||||||||||||||||
|
Number
|
Par
|
Paid-in
|
Statutory
|
comprehensive
|
||||||||||||||||||||||||
|
of
shares
|
Value
|
capital
|
reserves
|
Unrestricted
|
income
|
Total
|
||||||||||||||||||||||
|
BALANCE,
January 1, 2006
|
40,000,000 | $ | 40,000 | $ | 15,115,137 | $ | 508,001 | $ | 5,258,080 | $ | 481,042 | $ | 21,402,260 | |||||||||||||||
|
Net
income
|
4,679,379 | 4,679,379 | ||||||||||||||||||||||||||
|
Adjustement
to statutory reserve
|
524,932 | (524,932 | ) | - | ||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
823,057 | 823,057 | ||||||||||||||||||||||||||
|
Other
|
6,502 | 6,502 | ||||||||||||||||||||||||||
|
BALANCE,
December 31,2006
|
40,000,000 | $ | 40,000 | $ | 15,115,137 | $ | 1,032,933 | $ | 9,419,029 | $ | 1,304,099 | $ | 26,911,198 | |||||||||||||||
|
Shares
issued for reorganization on
|
||||||||||||||||||||||||||||
|
December
18, 2007
|
106,500 | 107 | (107 | ) | - | |||||||||||||||||||||||
|
Capital
contribution from shareholder
|
1,249,999 | 1,249,999 | ||||||||||||||||||||||||||
|
Net
income
|
7,142,592 | 7,142,592 | ||||||||||||||||||||||||||
|
Adjustement
to statutory reserve
|
716,668 | (716,668 | ) | - | ||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
1,869,646 | 1,869,646 | ||||||||||||||||||||||||||
|
BALANCE,
December 31, 2007
|
40,106,500 | $ | 40,107 | $ | 16,365,029 | $ | 1,749,601 | $ | 15,844,953 | $ | 3,173,745 | $ | 37,173,435 | |||||||||||||||
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these statements.
|
CHINA
VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
||||||||
|
2007
|
2006
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income
|
$ | 7,142,592 | $ | 4,679,379 | ||||
|
Adjustments
to reconcile net income to cash
|
||||||||
|
provided
by (used in) operating activities:
|
||||||||
|
Depreciation
|
551,252 | 409,441 | ||||||
|
Amortization
of intangible assets
|
18,917 | 17,763 | ||||||
|
Provision
for losses on accounts receivable
|
263,308 | - | ||||||
|
Loss
on disposal of fixed assets
|
1,363 | 10,992 | ||||||
|
Change
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable - trade, other receivables and prepaid expenses
|
(8,087,872 | ) | (4,595,754 | ) | ||||
|
Inventories
|
3,215,500 | (5,094,953 | ) | |||||
|
Accounts
payable - trade
|
(2,886,075 | ) | 809,056 | |||||
|
Other
payables and accrued liabilities
|
2,805,919 | 216,717 | ||||||
|
Other
payables - related party
|
880,977 | - | ||||||
|
Customer
deposits
|
589,965 | (408,796 | ) | |||||
|
Taxes
payable
|
602,527 | 202,153 | ||||||
|
Others
|
- | 443,745 | ||||||
|
Net
cash provided by (used in) operating activities
|
5,098,373 | (3,310,257 | ) | |||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Intangible
assets
|
(381,419 | ) | (597,842 | ) | ||||
|
Advance
on equipment purchases
|
(311,992 | ) | - | |||||
|
Purchases
of plant and equipment
|
(628,934 | ) | (1,485,832 | ) | ||||
|
Construction
in progress
|
(768,387 | ) | (94,068 | ) | ||||
|
Proceeds
from sale of equipment
|
- | 15,384 | ||||||
|
Investment
|
- | (21,888 | ) | |||||
|
Net
cash used in investing activities
|
(2,090,732 | ) | (2,184,246 | ) | ||||
|
CASH
FLOWS FINANCING ACTIVITIES:
|
||||||||
|
Restricted
cash due to export covenant
|
(39,238 | ) | - | |||||
|
Proceeds
from short term debt
|
4,747,066 | 3,339,178 | ||||||
|
Proceeds
from short term loans-related party
|
139,939 | - | ||||||
|
Repayments
of short term debt
|
(8,724,565 | ) | - | |||||
|
Proceeds
from long term debt
|
1,053,360 | 2,579,666 | ||||||
|
Repayment
of (proceeds from) notes payable
|
(4,309,215 | ) | 2,858,931 | |||||
|
Increase
in long term accounts payable
|
- | 230,760 | ||||||
|
Increase
in other long term liabilities
|
- | 271,784 | ||||||
|
Contributed
capital
|
1,249,999 | - | ||||||
|
Net
cash (used in) provided by financing activities
|
(5,882,654 | ) | 9,280,319 | |||||
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
57,064 | 330,861 | ||||||
|
(DECREASE)
INCREASE IN CASH
|
(2,817,949 | ) | 4,116,677 | |||||
|
CASH,
beginning of year
|
5,591,211 | 1,474,534 | ||||||
|
CASH,
end of year
|
$ | 2,773,262 | $ | 5,591,211 | ||||
|
SUPPLEMENTAL
DISCLOUSRES OF CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid for interest
|
$ | 665,213 | $ | 550,808 | ||||
|
Cash
paid for income taxes
|
$ | 1,005,265 | $ | 1,117,724 | ||||
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these
statements.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
Note
1 – Organization
China
Valves Technology, Inc, formerly known as Intercontinental Resources, Inc., (the
“Company”) was incorporated in the State of Nevada in August 1997, under the
name Meximed Industries, Inc. In January 1999, the Company changed its name to
Digital Video Display Technology Corporation and in July 2001 to Iconet, Inc. In
the middle of 2003 the Company again changed its name to Anglotajik Minerals,
Inc. The Company was considered to be in the exploration stage as its operations
principally involved research and exploration, market analysis, and other
business planning activities, and no revenue was generated from its business
activities. The Company suspended its proposed activities in mineral exploration
in the Republic of Tajikistan, thus the Company again changed its name to
Intercontinental Resources, Inc in May of 2006.
On December 16, 2007, the Company
entered into a Stock Purchase Agreement and Share Exchange (the “Exchange Agreement”) with China Valve Holding Limited
(“China Valve
Samoa”), a company
incorporated under the laws of Samoa and the equity owner of
China Valve
Samoa. The
closing of the transaction took place on December 16, 2007 (the “Closing Date”) and resulted in the merger between
the Company and China Valve Samoa (the “Merger”). Pursuant to the terms of
the Exchange Agreement, the Company acquired all of the outstanding capital stock
and ownership interests of China Valve Samoa (the “Interests”) from the China Valve Samoa
shareholder for 40,000,000 shares, or 99.8% of the Company’s common stock. In addition,
China Valve Samoa agreed to pay cash of $490,000 (the “Purchase Price”). Because the acquisition is treated
as a reverse acquisition, the financial statements of the Company have been
retroactively adjusted to reflect the acquisition from the beginning of the
reported period. The stock exchange transaction has been accounted as a
reverse acquisition and recapitalization of the Company whereby China Value
Samoa is deemed to be the accounting acquirer (legal acquiree) and the Company
to be the accounting acquiree (legal acquirer). The historical financial statements for periods prior to
December 16, 2007 are those of China Valve Samoa except that the equity section
and earnings per share have been retroactively restated to reflect the reverse
acquisition.
Pursuant
to the Exchange Agreement, on December 18, 2007 the Company filed with the
Secretary of State for the state of Nevada a Certificate of Amendment to our
Certificate of Incorporation changing our name to “China Valves Technology, Inc”
to better reflect our business. The Company through its subsidiaries in
the People’s Republic of China (PRC) focuses primarily on the development,
manufacture and sale of high-quality metal valves for electricity, petroleum,
chemical, and water, gas and metal industries.
China
Valve Samoa was incorporated on June 6, 2007 in Samoa. China Valve Samoa’s
principal activity is investment holding and its operations are carried out in
Samoa.
Pursuant
to a group reorganization, China Valve Samoa became the holding company of the
group in September 2007 by acquiring 100% interest in China Valve Holdings
Limited (incorporated in Hong Kong) ("CVHL") on September 28, 2007. CVHL
established Henan Tonghai Valve Science Technology Co., Ltd. ("TVST"), a
wholly-own subsidiary in the People's Republic of China, on September 5, 2007.
Later, TVST acquired a 100% interest in Henan Kai Feng High Pressure Valve Co.,
Ltd. and Zhengzhou City Zhengdie Valve Co., Ltd., both companies incorporated in
the People's Republic of China, on September 20, 2007 and October 25, 2007,
respectively.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
The
acquisitions of Henan Kai Feng Pressure Valve Co., Ltd. and Zhengzhou City
Zhengdie Valve Co., Ltd. have been treated for accounting purposes as
acquisitions under common control. Accordingly, the financial
statements have been prepared on a consolidated basis for the years being
presented.
Note
2 – Summary of significant accounting policies
THE
REPORTING ENTITIES
The
accompanying consolidated financial statements include the following
entities:
|
Name
of entity
|
Place
of incorporation
|
Capital
|
Ownership
|
Principle
business
|
|
|
Local
currency
|
USD
|
||||
|
China
Valve Holdings Limited.
|
Samoa
|
HKD
10,000
|
$1,281
|
100%
Directly
|
Investment
|
|
China
Valve Holdings Limited.
|
Hong
Kong
|
HKD
10,000
|
$1,281
|
100%
Indirectly
|
Investment
|
|
Henan
Tonghai Valve Science Technology Co., Ltd.
|
PRC
|
HKD
10,000,000
|
$1,281,000
|
100%
Indirectly
|
Product
Design and development
|
|
Henan
Kai Feng High Pressure Valve Co., Ltd.
|
PRC
|
RMB
60,000,000
|
$7,260,000
|
100%
Indirectly
|
Manufacture
|
|
Zhengzhou
City ZhengDie Valve., Ltd.
|
PRC
|
RMB
33,768,100
|
$4,085,940
|
100%
Indirectly
|
Manufacture
|
BASIS OF
PRESENTATION
The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US
GAAP"). In the opinion of management, the accompanying balance
sheets, and statements of income, stockholders’ equity and cash flows include
all adjustments, consisting only of normal recurring items. All
material inter-company transactions and balances have been eliminated in
consolidation.
USE OF
ESTIMATES
The
preparation of consolidated financial statements in conformity with US GAAP,
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
REVENUE
RECOGNITION
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized when all of the following have
occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the price is fixed or
determinable, and (iv) the ability to collect is reasonably assured. These
criteria are generally satisfied at the time of shipment when risk of loss and
title passes to the customer.
The
Company recognizes revenue when the goods are delivered and title has passed.
Sales revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company’s products that are sold in the PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. This VAT may be offset by the VAT paid
by the Company on raw materials and other materials included in the cost of
producing their finished product.
SHIPPING
AND HANDLING
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs which totaled $336,852 and $256,229 for the years
ended December 31, 2007, and 2006, respectively.
ADVERTISING
Advertisement
costs are expensed as incurred and totaled $29,413 and $54,612 for the years
ended December 31, 2007, and 2006, respectively.
FOREIGN
CURRENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME
The
reporting currency of the Company is the US dollar. The functional currency of
its Chinese operating entities Henan Kai Feng Pressure Valve Co., Ltd. and
Zhengzhou City Zhengdie Valve Co., Ltd is Renminbi (RMB).
For the
subsidiaries whose functional currencies are other than the US dollar, all
assets and liabilities accounts were translated at the exchange rate on the
balance sheet date; stockholder's equity is translated at the historical rates
and items in the income and cash flow statements amounts are translated at the
average rate for the year. Because cash flows are calculated based using the
average translation rate, amounts related to assets and liabilities reported on
the statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet. Translation adjustments resulting
from this process are included in accumulated other comprehensive income in the
statement of shareholders’ equity. The resulting translation gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred.
Accumulated
other comprehensive income in the consolidated statement of shareholders’ equity
amounted to $3,173,745 and $1,304,099 as of December 31, 2007 and 2006,
respectively. The balance sheet amounts with the exception of equity at December
31, 2007 and 2006 were translated at 7.29 RMB and 7.80 RMB to $1.00 USD,
respectively. The average translation rates applied to income and cash flow
statement amounts for the year ended December 31, 2007 and 2006 were 7.59 RMB
and 7.96 RMB to $1.00, respectively.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
PLANT AND
EQUIPMENT
Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
calculated using the straight-line method over the estimated life of the asset,
ranging from five to ten years.
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until construction is completed and the asset is
ready for its intended use.
INTANGIBLE
ASSETS
Goodwill
is tested for impairment on an annual basis as of the end of the Company's
fiscal year, or when impairment indicators arise. The Company uses a
fair-value-based approach to test for impairment. The Company evaluates the
recoverability of intangible assets periodically and takes into account events
and circumstances that warrant revised estimates of useful lives or that
indicated that impairment exists. All of the Company's intangible assets,
currently consisting of patents and software, are subject to amortization.
Patents, which have a legal life of 10 years in the PRC, are being amortized
over 5 years as management has determined that five years is the estimated
useful life of the patents currently owned by the Company. Software is amortized
over 10 years.
LONG-LIVED
ASSETS
The
Company periodically reviews the carrying amount of its long-lived assets for
impairment. An asset is considered impaired when estimated future cash flows are
less than the carrying amount of the asset. In the event the carrying amount of
such asset is considered not recoverable, the asset is adjusted to its fair
value. Fair value is generally determined based on discounted future cash
flow.
INVENTORY
The Company values its inventory at the
lower of cost or market, determined on a weighted average method, or net
realizable value. The
Company reviews its inventories periodically to determine if any
reserves are necessary for potential obsolescence. As of December 31, 2007 and 2006 the Company determined no
reserves are necessary.
RESEARCH
AND DEVELOPMENT COSTS
Research
and development costs are expensed as incurred. The costs of material and
equipment that are acquired or constructed for research and development
activities, and have alternative future uses, either in research and
development, marketing, or sales, are classified as property and equipment or
depreciated over their estimated useful lives.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
RETIREMENT
BENEFIT COSTS
Amounts
payable for the PRC state managed retirement benefit programs are expensed in
the financial statements following the accrual basis of accounting.
INCOME
TAXES
The
Company adopted Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (SFAS 109) that requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between income tax basis and financial reporting basis of assets and
liabilities. Provision for income taxes consist of taxes currently due plus
deferred taxes. Since the Company had no operations within the United States
there is no provision for US income taxes and there are no deferred tax amounts
as of June 30, 2007 and 2006.
The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet date. Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle,
deferred tax liabilities are recognized for all taxable temporary differences,
and deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
Deferred
tax is calculated at the tax rates that are expected to apply to the period when
the asset is realized or the liability is settled. Deferred tax is
charged or credited in the income statement, except when it related to items
credited or charged directly to equity, in which case the deferred tax is also
dealt with in equity. Deferred tax assets and liabilities are offset when they
relate to income taxes levied by the same taxation authority and the Company
intends to settle its current tax assets and liabilities on a net
basis.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption had no
affect on the Company’s financial statements.
RELATED
PARTIES
Parties
are considered to be related to the company if the company has the ability,
directly or indirectly, to control the party, or exercise significant influence
over the party in making financial and operating decisions, or vice versa, or
where the company and the party are subject to common control or common
significance. Related parties may be individuals (being members of key
management personnel, significant shareholders and/or their close family
members) or other entities which are under the significant influence of related
parties of the company where those parties are individuals, and post-employment
benefit plans which are for the benefits of employees of the company or of any
entity that is a related party of the company.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
CASH AND
CASH EQUIVALENTS
Cash and
cash equivalents comprise cash at bank and on hand, demand deposits with banks
and other financial institutions, and short-term, highly liquid investments
which are readily convertible into known amounts of cash and which are subject
to an insignificant risk of changes in value, having been within three months of
maturity at acquisition.
RESTRICTED
CASH
The
Company is required to have restricted cash in the bank as security for its
exported products, the restriction is released after the customers have received
and inspected the products. Restricted cash amounted to $40,856 and $0 as of
December 31, 2007 and 2006, respectively.
CONCENTRATIONS
RISKS
The
Company's operations are carried out in the PRC. Accordingly, the Company's
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's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
Cash
includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People’s Republic of China and Hong Kong. Total cash
(including restricted cash balances) in these banks on December 31, 2007 and
2006 amounted to $2,814,118 and $5,591,211, respectively, of which no
deposits are covered by insurance. The Company has not experienced any losses in
such accounts and believes it is not exposed to any risks on its cash in bank
accounts.
Five
major suppliers, which represented approximately 38% and 30% of the Company’s
total purchases for the years ended December 31, 2007 and 2006, respectively.
Five suppliers accounted for 5% and 15% of total accounts receivable as of
December 31, 2007 and 2006 respectively.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Statement
of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
Value of Financial Instruments” requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable, accrued liabilities, other payables and line of credit to approximate
their fair values because of the short period of time between the origination of
such instruments and their expected realization and their current market rate of
interest.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The
Company’s business operations are conducted in the PRC. During the
normal course of business, the Company extends unsecured credit to its customers
by selling on various credit terms. Management reviews its accounts receivable
on a quarterly basis to determine if the allowance for doubtful accounts is
adequate. An estimate for doubtful accounts is recorded when collection of the
full amount is no longer probable. The Company’s existing reserve is consistent
with its historical experience and considered adequate by the
management.
EARNINGS
PER COMMON SHARE
The
Company reports earnings per share in accordance with the provisions of SFAS No.
128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock using the treasury method.
All per
share data including earnings per share has been retroactively restated to
reflect the merger on December 16, 2007 as if it had occurred at the beginning
of 2006. For the year ended December 31, 2007 and 2006, basic and diluted
earnings per share amount to $0.18 and $0.12, respectively.
LONG TERM
INVESTMENT
The
Company invested in China Perfect Machinery Industry Co., Ltd. in 1996 and
Kaifang Commercial Bank in1997. The Company does not have the ability to
exercise control of the investee companies and the investment has been recorded
under the cost method. Long term investment amounted to $714,485 and $ 668,104
as of December 31, 2007 and 2006, respectively. Management believes there is no
impairment as of December 31, 2007.
CUSTOMER
DEPOSIT
Customer deposits represent amounts
advanced by customers on product orders. The product normally is shipped within
six months after receipt of the advance payment and the related sale is
recognized in accordance with the Company’s revenue recognition policy. As of
December 31, 2007 and December 31, 2006, customer deposits amounted to
$2,810,352 and $2,053,498,
respectively.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements” (“SFAS 157”). SFAS 157
defines fair value, establishes a framework for measuring fair value under
accounting principles generally accepted in the United States (GAAP) and expands
disclosures about fair value measurements. Fair value is defined under SFAS 157
as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 also establishes a fair value hierarchy which
requires the Company to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The Company does not
expect the adoption of SFAS 157 to have a material impact on the Company’s
financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. The objective of FAS 159 is to provide
opportunities to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply hedge
accounting provisions. FAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 will be effective in the first quarter of fiscal 2009. The Company is
evaluating the impact that this statement will have on its consolidated
financial statements.
In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed. The Company adopted FSP EITF 07-3 and expensed the
research and development as incurred.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
has not determined the effect that the application of SFAS 160 will have on its
consolidated financial statements.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
In
December 2007, Statement of Financial Accounting Standards No. 141(R), Business
Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business
Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that
the acquisition method of accounting (which SFAS 141 called the purchase method)
be used for all business combinations and for an acquirer to be identified for
each business combination. SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values. SFAS 141R
also requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the noncontrolling interest in the acquiree,
at the full amounts of their fair values (or other amounts determined in
accordance with SFAS 141R). SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An entity
may not apply it before that date. The Company is currently evaluating the
impact that adopting SFAS No. 141R will have on its financial
statements.
RECLASSIFICATIONS
Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.
Note
3 - Plant and equipment
Plant
and equipment consist of the following:
|
2007
|
2006
|
|||||||
|
Machinery
|
$ | 10,018,027 | $ | 7,505,237 | ||||
|
Motor
vehicles
|
1,519,634 | 956,412 | ||||||
|
Office
equipment and others
|
2,790,370 | 554,322 | ||||||
|
Construction
in progress
|
239,059 | 1,386,026 | ||||||
| Total | 14,567,090 | 10,401,997 | ||||||
|
Less:
Accumulated depreciation
|
(7,043,302 | ) | (6,028,635 | ) | ||||
| Total | $ | 7,523,788 | $ | 4,373,362 | ||||
Depreciation
expense was $551,252 and $409,441 for the years ended December 31, 2007 and
2006, respectively. Capitalized interest amounted to $117,446 as of December 31,
2007. No interest was capitalized in 2006.
Note
4 – Goodwill and intangible assets
In 2004,
the Company acquired two separate companies engaged in the production of
valves. As a result of these acquisitions the Company recorded goodwill in
the amount of $19,449,851. This goodwill represents the fair value of the assets
acquired in these acquisitions over the cost of the assets
acquired.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
Intangible
assets consist of the following:
|
December 31, 2007
|
December 31, 2006
|
|||||||
|
Patents
|
$ | 96,969 | $ | 90,675 | ||||
|
Software
|
397,149 | - | ||||||
| 494,118 | 90,675 | |||||||
|
Less:
Accumulated Amortization
|
(58,485 | ) | (36,270 | ) | ||||
|
Net
Carrying Amount
|
$ | 435,633 | $ | 54,405 | ||||
Aggregate
amortization expense was $18,918 and $17,763 for the years ended December 31,
2007 and 2006, respectively.
Note
5 - Inventories
As of
December 31, 2007 and 2006 inventories of the Company were as
follows:
|
December
31, 2007
|
December 31, 2006
|
|||||||
|
Raw
Materials
|
$ | 2,393,230 | $ | 2,534,837 | ||||
|
Work-in-progress
|
666,897 | 3,329,104 | ||||||
|
Finished
goods
|
7,478,960 | 8,875,904 | ||||||
| Total Inventory | $ | 10,539,087 | $ | 14,739,845 | ||||
The
Company reviews its inventory periodically for possible obsolete goods and to
determine if any reserves are necessary for potential
obsolescence. As of December 31, 2007 and 2006, the Company believes
no reserves are necessary.
Note
6 – Accounts receivable
Accounts
receivable consists of the following:
|
December
31, 2007
|
December
31, 2006
|
|||||||
|
Total
accounts receivable
|
17,622,918 | 9,640,904 | ||||||
|
Allowance
for bad debts
|
(274,167 | ) | - | |||||
|
Accounts
receivable, net
|
17,348,751 | 9,640,904 | ||||||
|
Accounts
receivable - non-current retainage
|
(559,368 | ) | (469,229 | ) | ||||
|
Accounts
receivable - current
|
$ | 16,789,383 | $ | 9,171,675 | ||||
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
At
December 31, 2007 and 2006, retainage held by customers included in the
Company’s accounts receivable as following:
|
December 31, 2007
|
December
31, 2006
|
|||||||
|
Retainage
|
||||||||
|
Current
|
$ | 1,264,062 | $ | 573,054 | ||||
|
Non-current
(due in 2008 and 2007)
|
559,368 | 469,229 | ||||||
|
Total
retainage
|
$ | 1,823,430 | $ | 1,042,283 | ||||
Retainage
represents portions held for payment by customers pending quality inspection
ranging from 12-18 months after shipment of products.
Management
reviews its accounts receivable on a regular basis to determine if the allowance
for doubtful accounts is adequate.
The
following represents the changes of allowance for doubtful
accounts:
|
2007
|
2006
|
|||||||
|
Balance,
beginning of the year
|
$ | - | $ | - | ||||
|
Additions
to the reserve
|
274,167 | |||||||
|
Recovery
of amounts previously reserved
|
- | |||||||
|
Balance,
end of the year
|
$ | 274,167 | $ | - | ||||
Note
7 – Advances on inventory purchases
Advances on inventory purchases are
monies deposited or advanced to outside vendors or related parties on future
inventory purchases. The total outstanding amount was $458,699 and $0 as of December 31,
2007 and December 31, 2006, respectively.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
Note
8 - Loans
|
Short-term
Loans:
|
||||||||
|
2007
|
2006
|
|||||||
|
Loan
from Commercial Bank of Zhengzhou City, due
|
||||||||
|
April
2008. Monthly interest only payment at
|
||||||||
|
0.79875%
per month guaranteed by Zhengzhou Huazhong
|
||||||||
|
Capital
Construction Co., Ltd
|
$ | 370,170 | $ | 346,140 | ||||
|
Loan
from Commercial Bank of Zhengzhou, due
|
||||||||
|
January
2008. Monthly interest only payment at
|
||||||||
|
0.765%
per month, guaranteed by Zhengzhou Huazhong
|
||||||||
|
Capital
Construction Co., Ltd .
|
||||||||
|
(This
loan was repaid in Jan 2008.)
|
1,371,000
|
-
|
||||||
|
Loan
from Agriculture Bank, due July 2007
|
||||||||
| Monthly interest only payment at 0.765% per month, | ||||||||
| guaranteed by Zhengzhou Huazhong Capital Construction Co., Ltd | - | 1,025,600 | ||||||
|
Loan
from Comercial Bank of Shong Du Branch, due June 2007
|
||||||||
| Monthly interest only payment from 5.1% to 6.63% per annum , | ||||||||
| guaranteed by KeifengCast Iron Co., Ltd | - | 4,358,800 | ||||||
|
Loan
from unrelated third party, non secured, non interest
bearing
|
||||||||
| with no fixed date of repayment | 991,178 | 829,916 | ||||||
|
Citic
bank, Zhengzhou branch, due June 18, 2008
|
||||||||
| Monthly interest only payment at 7.227% | ||||||||
| per annum, guaranteed by Keifang Cast Iron Co., Ltd. | 2,742,000 | - | ||||||
|
Citic
bank, Shong Du branch, due June 18, 2007
|
||||||||
| Monthly interest only payment at 6.138% | ||||||||
| per annum, guaranteed by Keifang Cast Iron Co., Ltd. | - | 2,564,000 | ||||||
|
Loan
from Local Bureau of Finance, Kaifeng City.
|
||||||||
| No expiration date, Non interest bearing | 511,383 | 478,186 | ||||||
|
Loan
from Local Bureau of Finance, Kaifeng City. No
|
||||||||
| expiration date. Monthly interest only payment at | ||||||||
| 2.55% per annum | 246,780 | 230,760 | ||||||
|
Special
Payable from China National Development Committee.
|
||||||||
| No expiration date and non interest bearing. | 246,780 | 271,784 | ||||||
| Total | $ | 6,479,291 | $ | 10,105,186 | ||||
|
Long-term
loan:
|
||||||||
| Loan from Zhengzhou Shangjie Credit Union, due | ||||||||
| July, 2009. Monthly interest only at 0.84375% | ||||||||
| per month, guaranteed by Zhengzhou Huazhong | ||||||||
| Capital Construction Co., Ltd. | $ | 1,096,800 | $ | - | ||||
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
Total
interest expense for the years ended December 31, 2007 and 2006 on the debt
listed above amounted to $595,504 and $537,050 respectively.
Note
9 - Income taxes
The
Company’s subsidiaries are governed by the Income Tax Law of the People’s
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax
Laws).
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises
(“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DEs and FIEs. The Company is currently evaluating the impact
that the new EIT will have on its financial condition.
Under the
existing Chinese Income Tax Laws, foreign investment enterprises (“FIEs”)
generally are subject to an income tax at an effective rate of 33% (30% state
income taxes plus 3% local income taxes) on income as reported in their
statutory financial statements after appropriate tax adjustments unless the
enterprise is located in specially designated regions for which more favorable
effective tax rates apply. Starting on January 1, 2008, China will unify the
corporate income tax rule on foreign invested enterprises and domestic
enterprises. The unified corporate income tax rate is 25%.
The
Company’s subsidiary Henan Kai Feng Pressure Valve Co., Ltd is exempt from
income tax due to Keifang city tax incentive for companies to
privatize.
The
Company’s other operating subsidiary Zhengzhou City Zhengdie Valve Co., Ltd is
subject to an income tax at an effective rate of 33% (30% state income taxes
plus 3% local taxes)
|
2007
|
2006
|
|||||||
|
Provision
for China Income Tax
|
$ | 1,216,130 | $ | 1,052,874 | ||||
|
Provision
for China Local Tax
|
121,613 | 105,287 | ||||||
|
Total
provision for taxes
|
$ | 1,337,743 | $ | 1,158,161 | ||||
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2007:
|
2007
|
2006
|
|||||||
|
U.S.
Statutory rates
|
34.0 | % | 34.0 | % | ||||
|
Foreign
income not recognized in USA
|
(34.0 | ) | (34.0 | ) | ||||
|
China
income taxes
|
33.0 | 33.0 | ||||||
|
China
income tax exemption
|
(17.0 | ) | (13.0 | ) | ||||
|
Total
provision for income taxes
|
16.0 | % | 20.0 | % | ||||
The
estimated tax savings from the tax exemptions for the year ended December 31,
2007, amounted to $1,460,768. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.18 to
$0.14.
The
estimated tax savings for the year ended December 31, 2006 amounted to $768,227.
The net effect on earnings per share had the income tax been applied would
decrease basic earnings per share from $0.12 to $0.10.
VAT on
sales and VAT on purchases in China amounted to $6,160,529 and $4,340,131 for
the year ended December 31, 2007 and $ 3,020,143 and $2,183,023 for the year
ended December 31, 2006, respectively. Sales and purchases are recorded net of
VAT collected and paid as the Company acts as an agent for the government. VAT
taxes are not impacted by the income tax holiday.
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
Taxes
payable at December 31, 2007 and 2006 consisted of the following:
|
2007
|
2006
|
|||||||
|
VAT
|
$ | 875,845 | $ | 125,957 | ||||
|
Others
|
188,667 | 282,802 | ||||||
|
Total
taxes payable
|
$ | 1,064,512 | $ | 408,759 | ||||
Note
10 – Reserves
The laws
and regulations of the People’s Republic of China require that before foreign
invested enterprise can legally distribute profits, it must first satisfy all
tax liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, after the
statutory reserve. The statutory reserves include the surplus reserve fund and
the common welfare fund.
Statutory surplus reserve
fund
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the years ended December 31, 2007 and 2006, the Company
transferred $714,259 and $467,938 to this reserve which represents 10% of the
current year’s net income determined in accordance with PRC accounting rules and
regulations. The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years’ losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
Note
11 - Operating leases
The
Company leases office space and factory space from ZhengZhou Cheng Long
Corporation and Kaifeng High-Pressure Valve Steel Casting Co., Ltd.
Total
lease expense for the years ended December 31, 2007 and 2006 was $305,334 and
$297,334, respectively. Total future minimum lease payments at December, 2007,
are as follows:
|
Year
ended December 31
|
Amount
|
|||
|
2008
|
$ | 308,107 | ||
|
2009
|
308,107 | |||
|
2010
|
308,107 | |||
|
2011
|
308,107 | |||
|
2012
|
308,107 | |||
|
Thereafter
|
||||
CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
Note
12 - Commitments and contingencies
As of
December 31, 2006, capital commitments to acquire plant and machinery
totaled approximately $725,000. The Company had no capital commitments as
of December 31, 2007.
Note
13 – Related party transactions
The Company
had the following significant related party transactions during the year ended
December 31, 2007:
During
the year, advances were made to the Company by Mr. Fang Si Ping, CEO and
major shareholder for cash flow purposes. As of December 31, 2007 and 2006, the
outstanding amount due to Mr. Fang Si Ping was $2,848,032 and $1,805,389,
respectively. The advance is unsecured, interest-free and has no fixed
terms of repayment.
The Company borrowed
money from certain employees for cash flow purposes. The loans bear
interest of 10% with no fixed repayment terms. Loans from employees amounted to
$671,188 and $491,366 as of December 31, 2007 and 2006,
respectively.
Note 14 – Legal proceedings
Before
the reverse acquisition on December 18, 2007, Intercontinental Resources Inc.
(“Intercontinental Resources”) was sued by Merrill Lynch Canada, Inc., in
British Columbia, Canada, in July 2000. Other than initial pleadings, the
plaintiff did not proceed with the suit since it was filed. Intercontinental
Recourses believes that the suit is without merit. In connection with
the reverse acquisition, Intercontinental Resources agreed to place $200,000
into escrow pending resolution of this suit. If required, the portion
of the purchase price for the reverse acquisition held in escrow will be used to
settle this lawsuit.
18,053,020
Shares
CHINA
VALVES TECHNOLOGY, INC.
Common
Stock
PROSPECTUS
,
2008
PART II
INFORMATION NOT REQUIRED IN THE
PROSPECTUS
Item
13. Other Expenses of Issuance and
Distribution
The following table sets forth the costs
and expenses, other than underwriting discounts and commissions, payable by us
in connection with the sale of common stock being registered. All amounts, other
than the SEC registration fee, are estimates. We will pay all these
expenses.
|
Amount to be
Paid
|
||||
|
SEC Registration
Fee
|
$ | 5,675.87 | ||
|
Printing Fees and
Expenses
|
$ | 100,000 | ||
|
Legal Fees and
Expenses
|
$ | 150,000 | ||
|
Accounting Fees and
Expenses
|
$ | 100,000 | ||
|
Blue Sky Fees and
Expenses
|
$ | 2,000 | ||
|
Transfer Agent and Registrar
Fees
|
$ | 3,000 | ||
|
Miscellaneous
|
$ | 3,000 | ||
|
Total
|
$ | 363,675.87 | ||
Item 14. Indemnification of Directors and
Officers
Section
78.138 of the Nevada Revised Statutes, or NRS, provides that a director or
officer will not be individually liable unless it is proven that (i) the
director’s or officer’s acts or omissions constituted a breach of his or her
fiduciary duties, and (ii) such breach involved intentional misconduct,
fraud or a knowing violation of the law.
Section
78.7502 of NRS permits a company to indemnify its directors and officers against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with a threatened, pending or completed
action, suit or proceeding if the officer or director (i) is not liable pursuant
to NRS 78.138 or (ii) acted in good faith and in a manner the officer or
director reasonably believed to be in or not opposed to the best interests of
the corporation and, if a criminal action or proceeding, had no reasonable cause
to believe the conduct of the officer or director was unlawful.
Section
78.751 of NRS permits a Nevada company to indemnify its officers and directors
against expenses incurred by them in defending a civil or criminal action, suit
or proceeding as they are incurred and in advance of final disposition thereof,
upon receipt of an undertaking by or on behalf of the officer or director to
repay the amount if it is ultimately determined by a court of competent
jurisdiction that such officer or director is not entitled to be indemnified by
the company. Section 78.751 of NRS further permits the company to
grant its directors and officers additional rights of indemnification under its
articles of incorporation or bylaws or otherwise.
Section
78.752 of NRS provides that a Nevada company may purchase and maintain insurance
or make other financial arrangements on behalf of any person who is or was a
director, officer, employee or agent of the company, or is or was serving at the
request of the company as a director, officer, employee or agent of another
company, partnership, joint venture, trust or other enterprise, for any
liability asserted against him and liability and expenses incurred by him in his
capacity as a director, officer, employee or agent, or arising out of his status
as such, whether or not the company has the authority to indemnify him against
such liability and expenses.
Our
Articles of Incorporation provide for the indemnification, to the fullest extent authorized by the
Nevada General Corporation Law, of our present and prior directors and
officers or any person who may have served at our request as a director or
officer of another corporation in which we own shares of capital stock or of
which we are a creditor, against expenses, liability or loss actually and
necessarily incurred by them in connection with the defense of any actions,
suits or proceedings in which they, or any of them, are made parties, or a
party, by reason of being or having been director(s) or officer(s) of us or of
such other corporation, in the absence of negligence or misconduct in the
performance of their duties. This indemnification policy could result
in substantial expenditure by us, which we may be unable to recoup.
Insofar
as indemnification by us for liabilities arising under the Securities Exchange
Act of 1934 may be permitted to our directors, officers and controlling persons
pursuant to provisions of the Articles of Incorporation and Bylaws, or
otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore,
unenforceable. In the event that a claim for indemnification by such
director, officer or controlling person of us in the successful defense of any
action, suit or proceeding is asserted by such director, officer or controlling
person in connection with the securities being offered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
Item 15. Recent Sales of Unregistered
Securities
Since
October 2005, we have issued and sold the following unregistered
securities:
On June
12, 2007, we issued Matthew Markin, the then sole officer and director of the
Comapny, 1,000,000 common shares in payment of $10,000 of indebtedness to him.
The sale of these shares was exempt from the registration provisions of the
Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof.
On August
26, 2008, we sold 16,778,523 shares of our common stock to 23 investors at
$1.788 per share for a total of $30 million pursuant to a securities purchase
agreement dated August 26, 2008. The issuance of our shares to these
investors was made in reliance on the exemption provided by Section 4(2) of the
Securities Act for the offer and sale of securities not involving a public
offering and Regulation D promulgated thereunder.
On
December 12, 2007, we issued to CCG warrants for the purchase of 100,000 shares
of our common stock as a partial consideration for its services in connection
with investor relations. The warrants were issued in reliance on the Section
4(2) of the Securities Act and Regulation D promulgated thereunder.
On August
26, 2008, we issued to Brean Murray, Carret & Co., LLC and Rosewood
Securities, LLC warrants for the purchase of an aggregate of 1,174,497 shares of
our common stock as a partial consideration for their services in connection
with the private placement transaction described above. The warrants were issued
in reliance on the Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
In
instances described above where we issued securities in reliance upon Regulation
D, we relied upon Rule 506 of Regulation D of the Securities
Act. These stockholders who received the securities in such instances
made representations that (a) the stockholder is acquiring the securities for
his, her or its own account for investment and not for the account of any other
person and not with a view to or for distribution, assignment or resale in
connection with any distribution within the meaning of the Securities Act, (b)
the stockholder agrees not to sell or otherwise transfer the purchased shares
unless they are registered under the Securities Act and any applicable state
securities laws, or an exemption or exemptions from such registration are
available, (c) the stockholder has knowledge and experience in financial and
business matters such that he, she or it is capable of evaluating the merits and
risks of an investment in us, (d) the stockholder had access to all of our
documents, records, and books pertaining to the investment and was provided the
opportunity ask questions and receive answers regarding the terms and conditions
of the offering and to obtain any additional information which we possessed or
were able to acquire without unreasonable effort and expense, and (e) the
stockholder has no need for the liquidity in its investment in us and could
afford the complete loss of such investment. Management made the
determination that the investors in instances where we relied on Regulation D
are accredited investors (as defined in Regulation D) based upon management’s
inquiry into their sophistication and net worth. In addition, there
was no general solicitation or advertising for securities issued in reliance
upon Regulation D.
In
instances described above where we indicate that we relied upon Section 4(2) of
the Securities Act in issuing securities, our reliance was based upon the
following factors: (a) the issuance of the securities was an isolated private
transaction by us which did not involve a public offering; (b) there were only a
limited number of offerees; (c) there were no subsequent or contemporaneous
public offerings of the securities by us; (d) the securities were not broken
down into smaller denominations; and (e) the negotiations for the sale of the
stock took place directly between the offeree and us.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The
following Exhibits are included as part of this Form S-1.
|
Exhibit
No.
|
Description
|
|
2.1
|
Share
Exchange Agreement, dated December 16, 2007, among the Company, the
stockholders of the Company, China Valves and the China Valves Shareholder
(incorporated herein by reference to Exhibit 2.1 to the registrant’s
current report on Form 8-K filed on December 21, 2007).
|
|
3.1
|
Articles
of Incorporation of the Company as filed with the Secretary of State of
Nevada on August 1, 1997 (incorporated herein by reference to the SB-2
Registration Statement filed on November 1, 2001)
|
|
3.2
|
Bylaws
of the registrant, as amended to date, (incorporated herein by reference
to the SB-2 Registration Statement filed on November 1,
2001).
|
|
5
|
Opinion
of Thelen LLP for the legality of the shares. *
|
|
10.1
|
Form
of Securities Purchase Agreement, dated August 26, 2008 (incorporated
herein by reference to Exhibit 10.1 to the registrant’s current report on
Form 8-K filed on August 27, 2008).
|
|
10.2
|
Form
of Registration Rights Agreement, dated August 26, 2008 (incorporated
herein by reference to Exhibit 4.1 to the registrant’s current report on
Form 8-K filed on August 27, 2008).
|
|
10.3
|
Escrow
Agreement, dated August 26, 2008, by and among the Company, Brean Murray,
Carret & Co., LLC, The Pinnacle Fund, LLC, Pinnacle China
Fund, LLC and Escrow, LLC. (incorporated herein by reference to Exhibit
10.4 to the registrant’s current report on Form 8-K filed on August 27,
2008).
|
|
10.4
|
Form
of Holdback Escrow Agreement, dated August 26, 2008 (incorporated herein
by reference to Exhibit 10.2 to the registrant’s current report on Form
8-K filed on August 27, 2008).
|
|
10.5
|
Form
of Make Good Escrow Agreement, dated August 26, 2008 (incorporated herein
by reference to Exhibit 10.3 to the registrant’s current report on Form
8-K filed on August 27, 2008).
|
|
10.6
|
Form
of Lockup Agreement, dated August 26, 2008 by and between the Company and
the stockholders listed therein (incorporated herein by reference to
Exhibit 4.2 to the registrant’s current report on Form 8-K filed on August
27, 2008).
|
|
10.7
|
Form
of Warrant (incorporated herein by reference to Exhibit 4.3 to the
registrant’s current report on Form 8-K filed on August 27,
2008).
|
|
10.8
|
English
version of Agreement for Transfer of Land Use Right and Housing Titles,
dated August 26, 2008, by and between the Company’s wholly owned
subsidiary Kaifeng High Pressure Valve Co., Ltd. and Kaifeng High Pressure
Valve Steel Casting Limited Liabilities Company (incorporated herein by
reference to Exhibit 10.5 to the registrant’s current report on Form 8-K
filed on August 27, 2008).
|
|
10.9
|
English
version of Premises Lease Agreement, dated August 26, 2008, by and between
the Company’s wholly owned subsidiary Kaifeng High Pressure Valve Co.,
Ltd. and Kaifeng High Pressure Valve Steel Casting Limited Liabilities
Company (incorporated herein by reference to Exhibit 10.6 to the
registrant’s current report on Form 8-K filed on August 27,
2008).
|
|
10.10
|
English
version of Premises Leaseback Agreement, dated August 26, 2008, by and
between the Company’s wholly owned subsidiary Kaifeng High Pressure Valve
Co., Ltd. and Kaifeng High Pressure Valve Steel Casting Limited
Liabilities Company (incorporated herein by reference to Exhibit 10.7 to
the registrant’s current report on Form 8-K filed on August 27,
2008).
|
|
10.11
|
Real
Estate Share Escrow Agreement, dated August 26, 2008, by and among the
Company, Bin Fang and Brean Murray, Carret & Co., LLC. (incorporated
herein by reference to Exhibit 10.8 to the registrant’s current report on
Form 8-K filed on August 27, 2008).
|
|
10.12
|
English
version of Manufacturing and Supply Agreement, dated August 26, 2008, by
and between the Company’s wholly owned subsidiary Kaifeng High Pressure
Valve Co., Ltd. and Kaifeng High Pressure Valve Steel Casting Limited
Liabilities Company (incorporated herein by reference to Exhibit 10.9 to
the registrant’s current report on Form 8-K filed on August 27,
2008).
|
|
10.13
|
Employment
Agreement with Veronica Jing Chen dated September 19, 2008 (incorporated
by reference to Exhibit 10.1 to the registrant’s current report on Form
8-K filed on September 23, 2008).
|
|
21
|
List
of Subsidiary *
|
|
23.1
|
Consent
of Moore Stephens Wurth Frazer and Torbet, LLP*
|
|
23.2
|
Consent
of Thelen LLP, included in exhibit 5. *
|
|
24
|
Power
of Attorney (included on the signature page of this registration
statement).*
|
*Filed herein.
ITEM
17. UNDERTAKINGS
(A) The
undersigned Registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To
include any prospectus required by Section 10(a) (3) of the Securities
Act;
(b) To
reflect in the prospectus any facts or events arising after the effective date
of this Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in this Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the
effective Registration Statement; and
(c) To
include any additional or changed material information with respect to the plan
of distribution not previously disclosed in this Registration
Statement;
(2) That,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(a) Each
prospectus filed by the registrant pursuant to 424(b)(3) shall be deemed to be
part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(b) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for
the purpose of providing the information required by section 10(a) of the
Securities Act of 1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus.
As
provided in Rule 430B, for liability purposes of the issuer and any person
that is at that date an underwriter, such date shall be deemed to be a new
effective date of the registration statement relating to the securities in the
registration statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial bona fide offering
thereof. Provided, however, that no statement
made in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
effective date, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such
effective date.
(5) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the
securities:
The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(a) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
(b) Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(c) The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(d) Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(B) The undersigned Registrant
hereby undertakes that, for purposes of determining any liability under the
Securities Act, each filing of the Registrant’s annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each
filing of an employee benefit plan’s annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in
this Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(C) Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies that
it has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Kaifeng, Henan, on
October 10, 2008.
|
By:/s/ Siping
Fang
|
|
President and CEO
|
|
By:/s/ Jing
Chen
|
|
CFO
|
POWER
OF ATTORNEY
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated. Each person whose signature appears below constitutes and
appoints Siping Fang and his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his or her substitute
or substitutes, may lawfully do or cause to be done by virtue
hereof.
|
Signature
|
Title
|
|
|
Siping
Fang
|
Chief
Executive Officer, President and Chairman (Principal Executive
Officer)
|
|
|
Jing
Chen
|
Chief
Financial Officer and director (Principal Financial and Accounting
Officer)
|
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
2.1
|
Share
Exchange Agreement, dated December 16, 2007, among the Company, the
stockholders of the Company, China Valves and the China Valves Shareholder
(incorporated herein by reference to Exhibit 2.1 to the registrant’s
current report on Form 8-K filed on December 21, 2007).
|
|
3.1
|
Articles
of Incorporation of the Company as filed with the Secretary of State of
Nevada on August 1, 1997 (incorporated herein by reference to the SB-2
Registration Statement filed on November 1, 2001)
|
|
3.2
|
Bylaws
of the registrant, as amended to date, (incorporated herein by reference
to the SB-2 Registration Statement filed on November 1,
2001).
|
|
5
|
Opinion
of Thelen LLP for the legality of the shares. *
|
|
10.1
|
Form
of Securities Purchase Agreement, dated August 26, 2008 (incorporated
herein by reference to Exhibit 10.1 to the registrant’s current report on
Form 8-K filed on August 27, 2008).
|
|
10.2
|
Form
of Registration Rights Agreement, dated August 26, 2008 (incorporated
herein by reference to Exhibit 4.1 to the registrant’s current report on
Form 8-K filed on August 27, 2008).
|
|
10.3
|
Escrow
Agreement, dated August 26, 2008, by and among the Company, Brean Murray,
Carret & Co., LLC, The Pinnacle Fund, LLC, Pinnacle China
Fund, LLC and Escrow, LLC. (incorporated herein by reference to Exhibit
10.4 to the registrant’s current report on Form 8-K filed on August 27,
2008).
|
|
10.4
|
Form
of Holdback Escrow Agreement, dated August 26, 2008 (incorporated herein
by reference to Exhibit 10.2 to the registrant’s current report on Form
8-K filed on August 27, 2008).
|
|
10.5
|
Form
of Make Good Escrow Agreement, dated August 26, 2008 (incorporated herein
by reference to Exhibit 10.3 to the registrant’s current report on Form
8-K filed on August 27, 2008).
|
|
10.6
|
Form
of Lockup Agreement, dated August 26, 2008 by and between the Company and
the stockholders listed therein (incorporated herein by reference to
Exhibit 4.2 to the registrant’s current report on Form 8-K filed on August
27, 2008).
|
|
10.7
|
Form
of Warrant (incorporated herein by reference to Exhibit 4.3 to the
registrant’s current report on Form 8-K filed on August 27,
2008).
|
|
10.8
|
English
version of Agreement for Transfer of Land Use Right and Housing Titles,
dated August 26, 2008, by and between the Company’s wholly owned
subsidiary Kaifeng High Pressure Valve Co., Ltd. and Kaifeng High Pressure
Valve Steel Casting Limited Liabilities Company (incorporated herein by
reference to Exhibit 10.5 to the registrant’s current report on Form 8-K
filed on August 27, 2008).
|
|
10.9
|
English
version of Premises Lease Agreement, dated August 26, 2008, by and between
the Company’s wholly owned subsidiary Kaifeng High Pressure Valve Co.,
Ltd. and Kaifeng High Pressure Valve Steel Casting Limited Liabilities
Company (incorporated herein by reference to Exhibit 10.6 to the
registrant’s current report on Form 8-K filed on August 27,
2008).
|
|
10.10
|
English
version of Premises Leaseback Agreement, dated August 26, 2008, by and
between the Company’s wholly owned subsidiary Kaifeng High Pressure Valve
Co., Ltd. and Kaifeng High Pressure Valve Steel Casting Limited
Liabilities Company (incorporated herein by reference to Exhibit 10.7 to
the registrant’s current report on Form 8-K filed on August 27,
2008).
|
|
10.11
|
Real
Estate Share Escrow Agreement, dated August 26, 2008, by and among the
Company, Bin Fang and Brean Murray, Carret & Co., LLC. (incorporated
herein by reference to Exhibit 10.8 to the registrant’s current report on
Form 8-K filed on August 27, 2008).
|
|
10.12
|
English
version of Manufacturing and Supply Agreement, dated August 26, 2008, by
and between the Company’s wholly owned subsidiary Kaifeng High Pressure
Valve Co., Ltd. and Kaifeng High Pressure Valve Steel Casting Limited
Liabilities Company (incorporated herein by reference to Exhibit 10.9 to
the registrant’s current report on Form 8-K filed on August 27,
2008).
|
|
10.13
|
Employment
Agreement with Veronica Jing Chen dated September 19, 2008 (incorporated
by reference to Exhibit 10.1 to the registrant’s current report on Form
8-K filed on September 23, 2008).
|
|
21
|
List
of Subsidiary *
|
|
23.1
|
Consent
of Moore Stephens Wurth Frazer and Torbet, LLP*
|
|
23.2
|
Consent
of Thelen LLP, included in exhibit 5*
|
|
24
|
Power
of Attorney (included on the signature page of this registration
statement).*
|
* Filed
herewith
II-8