Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1 Filing Table of Contents
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Approximate
date of commencement of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,”“accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated
filer
¨ (Do
not check if a smaller reporting company)
Smaller reporting company
x
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to such Section 8(a), may determine.
CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
Proposed Maximum
Aggregate Offering Price
Amount of
Registration Fee
Common
Shares
$
27,600,000
(1)
Placement Agent Warrant(2)
$
100
Common Shares Underlying Placement Agent
Warrant(2)
$
3,312,000
(2)
Total
$
30,912,100
$
3,589
(3)
(1)
The
registration fee for securities to be offered by the Registrant is based
on an estimate of the Proposed Maximum Aggregate Offering Price of the
securities, and such estimate is solely for the purpose of calculating the
registration fee pursuant to Rule 457(o).
(2)
In
connection with the Registrant’s sale of the common shares registered
hereby, the Registrant will sell to the placement agents a warrant to
purchase up to 517,500 common shares (the “Placement Agent Warrant”),
such amount representing 10% of the aggregate number of common shares sold
by the Registrant pursuant to this registration statement. The price to be
paid by the placement agents for the Placement Agent Warrant is $100. The
exercise price of the Placement Agent Warrant will be 120% of
the per-share price of the common shares offered hereby. The resale of the
common shares underlying the Placement Agent Warrant is registered
hereunder.
(3)
Paid
herewith.
The information in this prospectus is
not complete and may be changed. We may not sell these securities until
the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not
permitted.
This is
the initial public offering of Haiwang Resources & Technology Ltd., a
British Virgin Islands company. We are offering a minimum of 4,500,000 and a
maximum of 5,175,000 of our common shares. None of our officers, directors or
affiliates may purchase shares in this offering.
We expect
that the offering price will be between $[ ] and
$[ ] per common share. No public market currently
exists for our common shares. We intend to apply to have our common shares
listed on the NASDAQ Global Select Market or the NASDAQ Global Market under the
symbol “NACL.” No assurance can be given that our application will be approved,
and, even if such application is approved, we cannot guarantee that our common
shares will continue to be listed on such exchange. If our application is not
approved, we will not complete this offering.
Investing
in these common shares involves risks. See “Risk Factors” beginning on page 11
of this prospectus.
Total
Per Share
Minimum
Offering
Maximum
Offering
Assumed
public offering price
$
$
$
Assumed
Placement discount(1)
$
$
$
Assumed
Proceeds, before expenses, to us(2)
$
$
$
(1)
The
placement discount will be 6.0% of the public offering price, or
$[ ] per share. The discount
does not reflect additional compensation to the Placement Agents in the
form of a non-accountable expense allowance of 2% or
$[ ] per share. See
“Placement.”
(2)
The
total expenses of this offering, excluding the placement discount and
expenses, are approximately
$650,000.
Chardan
Capital Markets, LLC and Financial West Group (the “Placement Agents”) must sell
4,500,000 common shares if any are sold. The Placement Agents are required to
use only their best efforts to sell the securities offered. Until we sell at
least 4,500,000 shares, all investor funds will be held in an escrow account at
SunTrust Bank, Richmond, Virginia. If we complete this offering, net proceeds
will be delivered to our company on the closing date. We will not be able to use
such proceeds in China, however, until we complete certain remittance procedures
in China, which may take as long as six months in the ordinary course. If we
complete this offering, then on the closing date, we will issue common shares to
investors in the offering and a warrant (the “Placement Agent Warrant”) to our
Placement Agents to purchase up to 10% of the aggregate number of common shares
sold in this offering.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
Chardan
Capital Markets, LLC
Financial
West Group
Prospectus
dated
,
2011
TABLE
OF CONTENTS
Prospectus
Summary
1
Risk
Factors
11
Forward-Looking
Statements
32
Use
of Proceeds
33
Dividend
Policy
34
Exchange
Rate Information
34
Capitalization
36
Dilution
37
Selected
Consolidated Financial Data
38
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
This
summary highlights information that we present more fully in the rest of this
prospectus. This summary does not contain all of the information you should
consider before buying common shares in this offering. This summary contains
forward-looking statements that involve risks and uncertainties, such as
statements about our plans, objectives, expectations, assumptions or future
events. In some cases, you can identify forward-looking statements by
terminology such as “anticipate,”“estimate,”“plan,”“project,”“continuing,”“ongoing,”“expect,”“we believe,”“we intend,”“may,”“should,”“will,”“could,” and similar expressions denoting uncertainty or an action that may,
will or is expected to occur in the future. These statements involve estimates,
assumptions, known and unknown risks, uncertainties and other factors that could
cause actual results to differ materially from any future results, performances
or achievements expressed or implied by the forward-looking statements. You
should read the entire prospectus carefully, including the “Risk Factors”
section and the financial statements and the notes to those
statements.
Prospectus
Conventions
Except
where the context otherwise requires and for purposes of this prospectus
only:
·
the
terms “we,”“us,”“our company,” and “our” refer to Haiwang Resources
& Technology Ltd. (“Haiwang” when referring solely to our British
Virgin Islands listing company); our wholly-owned subsidiary, Haiwang
(Hong Kong) Resources & Technology Limited, a Hong Kong limited
liability company (“Haiwang HK”); Haiwang HK’s wholly-owned subsidiary,
Beijing Binhai Yintai Technology Co., Ltd., a Chinese limited liability
company (“WFOE”); and our affiliated entity, Shandong Haiwang Chemical
Stock Co., Ltd., a Chinese limited liability company (“Shandong Haiwang”),
which WFOE controls by virtue of contractual
arrangements.
·
“shares”
and “common shares” refer to our common shares, $0.001 par value per
share;
·
“tons”
and “metric tons” refer to metric
tons;
·
“China”
and “PRC” refer to the People’s Republic of China, and for the purpose of
this prospectus only, excludes Taiwan, Hong Kong and Macau;
and
·
all
references to “RMB,”“Renminbi” and “¥” are to the legal currency of China
and all references to “USD,”“U.S. dollars,”“dollars,” and “$” are to the
legal currency of the United
States.
This
prospectus contains translations of certain RMB amounts into U.S. dollar amounts
at a specified rate solely for the convenience of the reader unless otherwise
noted, all translations made in this prospectus are based upon a rate of RMB
6.6118 to US$1.00, which was the exchange rate on December 31,2010.
Unless
otherwise stated, we have translated balance sheet amounts with the exception of
equity at December 31, 2010 at ¥6.6118 to $1.00, June 30, 2010 at ¥6.7889 to
$1.00 and June 30, 2009 at ¥6.8259 to $1.00. We have stated equity accounts at
their historical rate. The average translation rates applied to income statement
accounts for the six months ended December 31, 2010 and the six months ended
December 31, 2009 were ¥6.7241 and ¥6.8386, and for the year ended June 30, 2010
and the year ended June 30, 2009 were ¥6.8180 and ¥6.8259, respectively. We make
no representation that the RMB or U.S. dollar amounts referred to in this
prospectus could have been or could be converted into U.S. dollars or RMB, as
the case may be, at any particular rate or at all. On February 1, 2011, the
interbank rate was ¥6.6135 to $1.00. See “Risk Factors – Fluctuation of the
Renminbi could materially affect our financial condition and results of
operations” for discussions of the effects of fluctuating exchange rates on the
value of our common shares. Any discrepancies in any table between the amounts
identified as total amounts and the sum of the amounts listed therein are due to
rounding.
For the
sake of clarity, this prospectus follows the English naming convention of first
name followed by last name, regardless of whether an individual’s name is
Chinese or English. For example, the name of our chairman and chief executive
officer will be presented as “Chunbin Yang”, even though, in Chinese, his name
would be presented as “Yang Chunbin.”
Unless
otherwise indicated, all information in this prospectus assumes:
·
no
person will exercise any outstanding
options;
·
the
sale of 4,500,000 common shares, the minimum number of shares offered in
this offering; and
·
an
assumed initial public offering price of $[ ]
per share, the midpoint of the range set forth on the cover page of this
prospectus.
We have
relied on statistics provided by a variety of publicly-available sources
regarding China’s expectations of growth, China’s demand for crude salt, bromine
and brominated specialty chemical products, and China’s chemical industry.
Except as otherwise stated herein, theses sources mainly include the Chinese
Salt Association’s annual report, the Weifang City Crude Salt Association annual
report, and Chinese chemical websites China ChemNet http://china.chemnet.com and
China Chemical Information Net http://www.cheminfo.gov.cn. We did not, directly
or indirectly, sponsor or participate in the publication of such
materials.
Our
Company
Our
company is in the business of producing and selling bromine and crude
salt. We extract these materials from concentrated underground brine
water reserves. The government has granted our company the rights to
tap and extract brine water resources from reserves underneath approximately 24
square kilometers of land in Weifang City, Shandong Province, and we are
applying for the mineral rights to approximately 10 square kilometers of land on
which we plan to construct a salt farm in Dongying City, Shandong Province,
China. We also use our self-developed processing technology to manufacture and
sell brominated specialty chemicals, including decabromodiphenyl ether and
decabromodiphenyl ethane, which are used as flame retardants
in a variety of applications such as automobiles, electronic appliances and
equipment, furniture and construction materials; and also including hydrobromic
acid, which is used to produce other bromine compounds and itself is widely used
in the medical, dyeing and perfume industries. Our business
operations are conducted in two segments: (a) bromine and crude salt and (b)
specialty chemical products. We conduct all of our operations in China and sell
substantially all of our products to customers in China. We are
located near China’s chemical and pharmaceutical manufacturing base and its
rapidly growing market.
We
entered the bromine and crude salt production business in 2003
when Shandong Haiwang built its first plant. In this
operating segment, we mainly manufacture bromine and crude salt for customers in
China’s chemical and pharmaceutical industries. Bromine is a basic raw material
widely used in a variety of applications such as flame retardants, medicines,
agricultural pesticides, dyes, oil exploration and fine chemistry engineering.
Crude salt also has a wide variety of industrial purposes as a basic chemical
raw material. China is the world’s largest producer and the world’s largest
consumer of crude salt. We are the largest privately-owned crude salt producer
producing crude salt from seawater in China.
The PRC
laws require the licensing of bromine producers to produce bromine. Currently,
approximately 75 bromine producers have been licensed in Shandong Province. In
response to this policy, we have implemented a strategy of acquiring small
bromine and crude salt producers. Since 2003 we have acquired the operating
assets and related mining permits of 5 small bromine producers in Weifang City
and one additional bromine factory in Dongying City, Shandong Province. As a
result we now operate 7 bromine factories with 18 bromine production lines with
a production capacity of 18,000 metric tons per year. We are one of the largest
bromine producers in China in terms of production capacity and output. Our
bromine factories are spread across 3 salt farms, which are used for producing
crude salt from bromine production waste water, and which have a total annual
production capacity of 1.02 million tons of crude salt. We also lease one
property of 10 square kilometers to construct a salt farm in Dongying City,
Shandong Province. We are currently planning to construct salt pans on this salt
field. We expect to complete construction and reach 100% of our crude salt
capacity in mid-2011. Once we reach capacity, we expect this salt farm to yield
an additional 350,000 tons per year, for a total of 1.37 million tons. We also
lease space on our salt pans to smaller crude salt producers.
1
Our
brominated specialty chemicals include decabromodiphenyl ether,
decabromodiphenyl ethane and hydrobromic acid. Our decabromodiphenyl ether and
decabromodiphenyl ethane can serve as flame retardants due to their excellent
thermal stability and low toxicity, and thus have been widely accepted by the
market and are undergoing a rapid growth stage in China. These same
characteristics also allow them to be widely used in a variety of other areas
including polymer composite materials, plastic, fiber and building materials.
The brominated flame retardant is the most widely used flame retardant in China
due to its excellent capability and lower price. Approximately 50% of all flame
retardants used in China are brominated flame retardants. We anticipate that the
Chinese government will in the future tighten the implementation of rules it has
enacted in the compulsory application of flame retardants on construction
materials to lessen damages from fire disasters. Our hydrobromic acid is used to
produce other bromine compounds, and itself is widely used in a variety of
industries such as medicine, dyeing and perfume. We are among the top three
decabromodiphenyl ether and decabromodiphenyl ethane producers in China in terms
of production capacity.
We use
our self-developed processing technology to manufacture and sell brominated
specialty chemicals. We also invest in bromine production facilities
and assemble high-caliber bromine reservoirs, agitated reactors, buffer tankers
and pipes into a reaction system to optimize output while maintaining production
safety with our self-developed processing technologies.
We
currently derive the majority of our revenues from our bromine and crude salt
operating segment. However our brominated specialty chemical products segment
has been providing an increasing contribution to our total revenue, and we plan
to increase our focus on this segment in the future.
In recent
years, we have experienced rapid organic growth. Our net revenue grew from
$49.86 million in fiscal 2009 to $64.8 million in fiscal 2010, representing a
growth rate of 30%. Our net income grew from $4.73 million to $6.76 million
during the same period, a growth rate of 42.9%. Our net revenue grew to $56.7
million in the six months ended December 31, 2010 from $32.87 million in the
same period in 2009, representing a growth rate of 73%. Our net income grew to
$14.23 million in the six months ended December 31, 2010 from $2.8 million in
the same period in 2009, representing a growth rate of 401%.
Corporate
Information
Our
principal executive office is located at Haiwang Street, Yangzi Ave., Coastal
Economic Development Zone, Weifang City, Shandong Province, China 261108. Our
telephone number is (+86) 536 7578 888. Our fax number is (+86) 536 7578 888. We
do not maintain a corporate website at this time; however, the website for
Shandong Haiwang is www.sdhwchem.com. Shandong Haiwang’s website is not
incorporated in this prospectus.
Industry
and Market Background
PRC
Economic Growth
Demand
for our products is driven in line with macroeconomic industrial growth both
globally and in the PRC. As our bromine, crude salt and brominated
specialty chemical products are used in a wide variety of industries from
chemicals and medicine to oil drilling, general economic growth underlies our
success, especially in China. PRC macroeconomic growth has been strong and
positive in recent years. According to the World Bank, China’s gross
domestic product (“GDP”) grew at a rate of 9.1% in 2009, reaching $4.98
trillion. The International Monetary Fund (“IMF”) currently projects
that China’s GDP will grow at 10.5% for 2010 and 9.6% for 2011.
Crude
Salt
In China
crude salt primarily comes from three sources: seawater, salt mines and lakes.
Crude salt extracted from sea water accounted for 48.84% of China’s total salt
output, salt mines accounted for 40.33%, and lakes accounted for 10.31% in 2009
according to the 2009 Chinese Salt Association Annual Book. We produce our crude
salt by pumping the waste water remaining from the bromine production process
into our salt pans. The waste water is then left to evaporate, leaving us with
crude salt. The primary industrial application of crude salt is in the
industrial caustic soda and soda ash process,
which accounts for approximately 79% of China’s total crude salt output. Caustic
soda is used in many industries, mostly as a strong chemical base in the
manufacture of chemicals, medicine, pulp and paper, aluminum production,
textiles, drinking water, soaps and detergents and as a drain cleaner. Soda ash
is mainly used in the glass industry, and is also widely used in construction
materials, medicines, textiles, metallurgy, and as a water softener.
Approximately 13% is used for producing edible salt, and the remaining 8% is
used in other assorted applications such as melting snow.
2
In the
past decade, the demand for crude salt has mainly been driven by the fast
growing downstream caustic soda and soda ash industry. China’s total production
of crude salt reached 63.35 million tons in 2007, making China the world’s
largest producer and consumer of crude salt. China has remained the largest
producer of crude salt, with total output of 72.8 million tons in 2009. A demand
analysis of the downstream caustic soda and soda ash industries, conducted by
the China Salt Industry Association, showed that China is the largest producer
of soda ash in the world and compound annual growth rate (“CAGR”) for
soda ash output has been 11.86% over the past five years. Caustic soda
output has had a CAGR of 20.5% over the past five years. Due to transportation
and cost factors, caustic soda and soda ash producers purchase crude salt from
suppliers in close proximity to them. According to 2010 statistics from the
Weifang City Crude Salt Association, Shandong Province accounts for 22.5% of the
capacity of caustic soda and soda ash in China, and the production capacity for
both reached 12.2 million tons in 2009. Capacity at this level requires 19
million tons of crude salt annually, which exceeds the current market supply.
This imbalance leaves significant room for growth in the crude salt industry.
China is still in the middle stages of industrialization and due to strong
economic growth in China, the soda ash and caustic soda production capacity is
expected to continue to grow. Soda ash production capacity is expected to grow
by an additional 10 million tons by 2012, and production capacity for caustic
soda is expected to grow by 8.6 million tons by 2011, leading to annual crude
salt demand of approximately 29 million tons. We believe that the growth rate
for caustic soda and soda ash will exceed the GDP growth rate in the coming five
years.
Bromine
The
world’s production capability for bromine was approximately 439 thousand tons in
2009, excluding the United States, an increase from 413 thousand tons in 2008,
according to the U.S. Geological Survey. We expect the new
application of using bromine to reduce the discharge of mercury will increase
demand for bromine by 150 thousand tons by 2015, which translates into 15% to
20% of current world output, and a market of $400 to $500 million.
The
growth rate for bromine production in China has significantly outpaced the rest
of the world in recent years. In 2009, China produced approximately 126 thousand
tons of bromine. As the main raw material for bromine compounds, China’s bromine
output has also increased at a rapid rate, with a CAGR of over 25% from 2005 to
2007, making it the third largest bromine producing country in the world.
Bromine produced in China primarily comes from refining brine water, and there
are approximately 75 bromine producers in Weifang City, Shandong Province, which
produce approximately 85% of all the bromine produced in China. China’s bromine
producers are mainly concentrated in the area surrounding the Laizhou Bay,
particularly in the coastal area of Northern Weifang City, Shandong Province.
The bromine we produce is used to manufacture a wide variety of bromine
compounds used in the chemical and medical industries. Bromine is commonly used
to produce brominated flame retardants, fumigants, water purification compounds,
dyes, medicines and disinfectants.
Worldwide,
the largest end-markets for bromine include brominated flame retardants, which
are used as a plastic additive that decreases plastic’s flammable
characteristics by chemically eliminating combustion components such as oxygen,
heat and fuel from plastic. Drilling fluids represent the second major end-use
segment of bromine used in oil field chemicals. In 2009, the largest end-markets
for bromine in China included brominated flame retardants, which accounted for
approximately 49%; organic intermediates, which accounted for approximately 19%;
and oilfield chemicals, which accounted for approximately 15% of the bromine
consumed in China.
Brominated
Specialty Chemicals
Our
specialty chemical products are brominated compounds. Our brominated specialty
chemicals include decabromodiphenyl ether, decabromodiphenyl ethane and
hydrobromic acid. Primarily, our decabromodiphenyl ether and decabromodiphenyl
ethane are used as flame retardants. In China, brominated flame retardants are
mainly produced in Shandong Province. Bromine’s excellent thermal stability and
low toxicity make our specialty chemicals an ideal flame retardant. Brominated
flame retardants are added as a plastic additive that decreases plastic’s
flammable characteristics by eliminating combustion components such as oxygen,
heat and fuel chemically from plastic, which are widely used in cars, electronic
appliances, construction materials and furniture to prevent damages from fire.
Since 2002 the explosive growth of the electronics and automobile industries has
propelled the flame retardant industry to accelerate at CAGR of approximately
20%.
3
Our
hydrobromic acid is a byproduct that is produced during the production process
for our other brominated specialty chemicals. It can be further processed into
other compounds such as sodium bromide. It can also be used in medicine to
produce sedatives and anesthetics or as a catalyst in the oil field
industry.
Our
Geographic Region
Our
facilities are located in Weifang City, Shandong Province on approximately 24
square kilometers of brine field and 10 square kilometers of brine field in
Dongying City. Our working region extends from latitude N 37°01’ to N 37°08’ and
from longitude E 119°05’ to E 119°12’, in the northern region of the Coastal
Economic Development Zone, Weifang City. We have two working fields. One extends
from the Bailang River to the west of the Yu River and the other from the Dan
River to the west of the BeiHai Road. We have six bromine plants scattered on
three salt farms and five brominated specialty chemicals workshops in the
working region, and the area is 9.18 square miles (5,875 acres). In
addition we have a bromine plant in Dongying City, Shandong Province. We also
lease land there covering 10 square kilometers where we plan to construct our
fourth salt farm.
Our
Opportunity and Competitive Strengths
We
believe our long-term experience in producing bromine, crude salt and brominated
specialty chemicals in Shandong Province has positioned us as a leader in the
industry. Our business is growing at a rapid pace as demand for our products in
China increases. We currently operate on a 24 square kilometer brine field in
Weifang City and we have leased 10 square kilometers of land to construct a salt
pan in Dongying where we will jointly produce crude salt and bromine from
underground concentrated seawater resources (brine water). We currently have
crude salt production capacity of approximately 1.02 million tons and bromine
production capacity of approximately 18,000 tons, and we expect our crude salt
production capacity to increase to 1.37 million tons by the time our new salt
farm in Dongying City, Shandong Province reaches capacity. As our bromine
production capacity increases, so too will our production capacity for
brominated specialty chemicals.
We
believe the following strengths differentiate us from our competitors in our
market in China:
·
We
are one of the largest crude salt, bromine and brominated specialty
chemical companies in China, and one of only a few companies in China with
annual production capacities of over 1 million metric tons of crude salt,
over 10,000 metric tons of bromine and over 2,000 metric tons
of brominated flame
retardant;
·
We
are endowed with natural brine water resources at our working area in
Weifang City, Shandong Province, an area which accounts for 85% of China’s
annual bromine output and one third of China’s crude salt output processed
from seawater;
·
We
have invested in technology designed to significantly improve the purity
of bromine; and we have obtained one exclusive patent license and filed
five patent applications, which are pending approval, for safe and
scalable production technology to produce high-quality brominated
specialty chemical products;
·
We
believe we have a limited ability to influence China’s bromine prices due
to our scalable production and superior storage capacity which can impact
the market supply of bromine and limit price
volatility;
·
We
benefit from economies of scale as a result of operating multiple
similarly-sized bromine plants;
·
The
scale of our bromine production allows us to strategically expand
production of brominated specialty chemicals and command a premium because
of our vertical integration;
·
Our
joint production of crude salt and bromine is highly encouraged by the
local government, and the government is eliminating small unlicensed
players who do not produce both;
·
We
have attained several awards in recognition of our leading position in the
industry, our excellent credit record with banks and customers, our
efforts to deliver quality products, and our investment in technological
research and development;
·
We
have attained a reputation for quality among our long-term customers which
are mainly large and in some cases publicly traded companies in the
chemistry, pharmaceutical and specialty chemical industries;
and
·
We
are easily accessible to our customers due to our physical location, which
lowers logistics costs for us and our
customers.
4
Our
Strategies
We plan
to increase our position as one of China’s largest crude salt and bromine
companies, and a leading company in the brominated specialty chemicals industry.
We intend to achieve this goal by implementing the following
strategies:
·
Acquisitions
of small local bromine plants to enlarge our brine water reserve
inventory;
·
Construction
of new brominated specialty chemical plants to meet rapidly growing demand
in the bromine compounds market;
·
Expansion
of our geographical footprint to other resource rich
areas;
·
Expansion
and diversification of our salt resource inventory by acquiring proven
salt mines in Shandong Province;
·
Leverage
our research achievements to develop a new series of brominated
specialty chemicals used as environmentally-friendly brominated
agricultural pesticide, medicine intermediates and dye
intermediates;
·
Strengthen
our brand image in order to position our company to penetrate and grow
strategic client accounts; and
·
Utilize
the knowledge we have gained through recent research and development
efforts to extract bromine directly from seawater, an unlimited
resource.
Our
Challenges and Risks
We
believe our primary challenges are:
·
we
face uncertainties associated with the development, introduction and
marketing of new products;
·
we
must actively recruit, train and retain skilled technical and sales
personnel;
·
we
face competition from existing competitors and new market
entrants;
·
we
must protect our trade secrets and other valuable intellectual property
regarding our processing
technology;
·
we
are subject to fluctuations in the prices of our products in the
market;
·
we
may be unable to capitalize on opportunities to acquire new facilities or
pursue new business opportunities;
and
·
we
rely principally on dividends paid by our PRC operating subsidiary, WFOE,
and our PRC affiliate, Shandong Haiwang, to fund cash and financing
requirements, and there are PRC laws restricting the ability of these
entities from paying dividends or making other distributions to
us.
In
addition, we face risks and uncertainties that may materially affect our
business, financial condition, results of operations and prospects. Thus, you
should consider the risks discussed in “Risk Factors” and elsewhere in this
prospectus before investing in our common shares.
Our
Corporate Structure
Overview
We are a
holding company incorporated in the British Virgin Islands that owns all of the
outstanding capital stock of Haiwang HK, our wholly owned subsidiary in Hong
Kong. Haiwang HK, in turn, owns all of the outstanding capital stock of WFOE,
our operating subsidiary based in Beijing, China. WFOE has entered into control
agreements with all of the owners of Shandong Haiwang, which agreements allow
WFOE to control Shandong Haiwang. Through our ownership of Haiwang HK, Haiwang
HK’s ownership of WFOE and WFOE’s control agreements with Shandong Haiwang, we
control Shandong Haiwang. Additionally, Shandong Haiwang has two wholly-owned
subsidiaries, Shandong Kehai Chemical Co., Ltd (“Shandong Kehai”) and Dongying
City Haihui Industrial and Trade Co. Ltd. (“Dongying Haihui”).
5
Corporate
History – Shandong Haiwang
Shandong
Haiwang was organized by our chairman and CEO, Mr. Chunbin Yang, as a
limited liability company on January 27, 2003 with a registered capital of RMB
4.23 million (approximately $511,830), when Mr. Yang began to operate our first
bromine plant. In 2006, Shandong Haiwang increased its registered capital to RMB
12.98 million (approximately $1,605,000) and reorganized into a joint stock
limited company. In 2009, Shandong Haiwang increased its registered capital to
RMB 60 million (approximately $8,467,000). From 2004 to 2008, Shandong Haiwang
acquired the operating assets and mineral rights of five additional bromine
plants in purchases from separate sellers. In November 2009, Shandong Haiwang
acquired Dongying Haihui Industrial and Trade Co., Ltd, a bromine company in
Dongying City, Shandong Province. At present, Shandong Haiwang operates three
salt farms with an annual capacity of 1.02 million metric tons of crude salt and
seven bromine plants with an annual capacity of 18,000 metric tons. Shandong
Haiwang also leases land of 10 square kilometers in Dongying City, Shandong
Province, where it plans to construct a salt farm. We expect to complete
construction and reach 100% capacity in mid-2011. Once we reach capacity, we
expect this salt farm to yield an additional 350,000 tons per year.
In
addition, Shandong Haiwang currently has annual production capacity of 2,500
metric tons of decabromodiphenyl ether, 4,000 metric tons decabromodiphenyl
ethane and 12,350 metric tons hydrobromic acid.
Corporate
History – WFOE, Haiwang HK and Haiwang
Haiwang
was incorporated in the British Virgin Islands on October 18, 2010 as a limited
liability company. Haiwang’s wholly owned subsidiary, Haiwang HK, was
incorporated in Hong Kong on October 26, 2010 as a limited liability company.
Other than the equity interest in Haiwang HK, Haiwang does not own any assets or
conduct any operations.
Mr.
Chunbin Yang, Mr. Tongjiang Sun and Mr. Xiusheng Cui are key members of
management of both Haiwang and Shandong Haiwang and have controlled more than
50% of the voting ownership interests in both entities since their respective
inception dates. Haiwang and Shandong Haiwang have been considered under common
management since October 18, 2010 (the inception date of Haiwang) and therefore
our financial statements include both companies presented on a combined basis
from October 18, 2010 to December 31, 2010. The financial statements are solely
those of the consolidated statements of Shandong Haiwang and its subsidiaries
for the fiscal years ended June 30, 2010 and June 30, 2009, for the interim
period ended December 31, 2009 and for the period from July 1, 2010 through
October 17, 2010. On January 17, 2011, Mr. Chunbin Yang, Mr.
Tongjiang Sun and Mr. Xiusheng Cui signed a cooperation agreement and agreed
that they would continue to vote in concert on corporate matters with respect to
Haiwang and Shandong Haiwang.
WFOE was
incorporated on January 25, 2011 as a wholly-foreign-owned enterprise under
Chinese law, 100% owned by Haiwang HK. Chinese laws and regulations currently do
not prohibit or restrict foreign ownership in crude salt, bromine and brominated
specialty chemicals businesses. However, Chinese laws and regulations do prevent
direct foreign investment in certain industries and the Chinese government could
enact future restrictions on foreign ownership in crude salt, bromine and
brominated specialty chemicals businesses. In connection with the formation of
Haiwang, Haiwang HK and WFOE, we caused WFOE to enter into certain control
agreements with Shandong Haiwang and its shareholders, pursuant to which we, by
virtue of our ownership of Haiwang HK and Haiwang HK’s ownership of WFOE,
control Shandong Haiwang.
Control
Agreements
We
conduct our business in China through our subsidiary, WFOE. WFOE, in turn,
conducts it business through Shandong Haiwang, which we consolidate as a
variable interest entity (“VIE”). WFOE and Shandong Haiwang operate in
connection with a series of control agreements, rather than through an equity
ownership relationship.
6
Chinese
laws and regulations currently do not prohibit or restrict foreign ownership in
crude salt, bromine and brominated specialty chemicals businesses. However,
Chinese laws and regulations do prevent direct foreign investment in certain
industries. On February 1, 2011, to protect our company’s shareholders from
possible future foreign ownership restrictions and to protect against
uncertainties associated with Chinese restrictions on mergers and acquisitions
with certain companies organized outside the PRC, Shandong Haiwang and all of
the shareholders of Shandong Haiwang entered into an Exclusive Technical and
Consulting Service Agreement, Exclusive Equity Interest Pledge Agreement,
Exclusive Equity Interest Purchase Agreement, Operating Agreement and Proxy
Agreement (collectively, the “Control Agreements”) with WFOE in return for
ownership interests in Haiwang. Through the formation of Haiwang as a holding
company, Shandong Haiwang’s shareholders, including Chunbin Yang, our Chairman
and Chief Executive Officer, Tongjiang Sun, our Chief Marketing Officer,
Xiusheng Cui, our chief Operating Officer and Shangxue Liu, our Chief Technology
Officer, now own 98.8% of the common shares of Haiwang. See –
“Principal Shareholders.” The remaining 1.2% of Haiwang’s common shares belong
to other investors. Haiwang, in turn owns 100% of the equity of Haiwang HK,
which owns 100% of the equity of WFOE.
WFOE,
Shandong Haiwang and each of the shareholders of Shandong Haiwang entered into
the Control Agreements on February 1, 2011. Through the Control Agreements, we
can substantially influence Shandong Haiwang’s daily operations and financial
affairs, appoint its senior executives and approve all matters requiring
shareholder approval. As a result of these Control Agreements, which enable us
to control Shandong Haiwang and cause WFOE to absorb 100% of the expected losses
and gains of Shandong Haiwang, we are considered the primary beneficiary of
Shandong Haiwang. Accordingly, we consolidate Shandong Haiwang’s operating
results, assets and liabilities in our financial statements. For a description
of these contractual arrangements, see “Our Corporate Structure—Contractual
Arrangements with Shandong Haiwang and Shandong Haiwang’s
Shareholders.”
7
Our
current corporate structure is as follows:
Equity
interest
Contractual
arrangements including Exclusive Technical and Consulting Service
Agreement, Proxy Agreement, Operating Agreement and Exclusive Equity
Interest Purchase Agreement. For a description of these
agreements, see “Corporate Structure— Contractual Arrangements with
Shandong Haiwang and Shandong Haiwang’s Shareholders.”
Contractual
arrangements including Exclusive Equity Interest Purchase Agreement,
Equity Interest Pledge Agreement, Operating Agreement and Proxy Agreement.
For a description of these agreements, see “Corporate Structure—
Contractual Arrangements with Shandong Haiwang and Shandong Haiwang’s
Shareholders.”
8
The
Offering
Shares
Offered:
Minimum:
4,500,000 common shares
Maximum: 5,175,000 common
shares
Shares
Outstanding Prior to Completion of Offering:
21,180,000
common shares (assuming the pro rata issuance of 21,130,000 shares to our
existing shareholders prior to completion of this
offering)
Shares
to be Outstanding after Offering:
Minimum:
25,680,000 common shares
Maximum: 26,355,000 common
shares
Assumed
Offering Price per Share:
$[ ]
Gross
Proceeds:
Minimum:
$24,000,000
Maximum: $27,600,000
Proposed NASDAQ Global Select
Market Symbol:
“NACL”
(CUSIP No. G4233R 104). We have selected this symbol, which represents the
chemical formula for salt.
Investing
in these securities involves a high degree of risk. As an investor, you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
of this prospectus before deciding to invest in our common
shares.
Closing
of Offering:
We
expect to deliver the shares registered hereunder against payment on
_____________, 2011.
Principal Purposes for Use of Net Proceeds of
Offering:
• Construction
of brominated compound production facility
• Constructing
and/or acquiring small bromine plants
• Acquisitions
of salt mines
• Working
capital
• Sarbanes-Oxley
compliance-related professional
fees
Placement
We have
engaged the Placement Agents to conduct this offering on a “best efforts,
minimum/maximum” basis. The offering is being made without a firm commitment by
the Placement Agents, who have no obligation or commitment to purchase any of
our shares. They are
required to use only their best efforts to complete the offering; however, they
must place atleast 4,500,000 shares if any are to be sold. None of our
officers, directors or affiliates may purchase shares in this
offering.
Unless
sooner withdrawn or canceled by either us or the Placement Agents, the offering
will continue until the earlier of (i) a date mutually acceptable to us and the
Placement Agents after which the minimum of 4,500,000 shares is sold, or (ii)
[ ] (the “Offering
Termination Date”). The Placement Agents have agreed in accordance with the
provisions of SEC Rule 15c2-4 to cause all funds received by the Placement
Agents for the sale of the common shares to be promptly deposited in an escrow
account maintained by SunTrust Bank (the “Escrow Agent”) as escrow agent for the
investors in the offering. The Escrow Agent will exercise signature control on
the escrow account and will act based on joint instructions from our company and
the Placement Agents. On the closing date for the offering, net proceeds in the
escrow account maintained by the Escrow Agent will be delivered to our company.
We will not be able to use such proceeds in China, however, until we complete
certain remittance procedures in China. If we do not complete this offering
before the Offering Termination Date, all amounts will be promptly returned by
noon of the next business day. See “Placement.”
9
Placement
Agent’s Warrant
We have
agreed to sell to the Placement Agents, on the closing date of this offering, at
a price of $100, the Placement Agent Warrant to purchase such number of our
shares as equal to 10% of the offered shares sold to investors. The
Placement Agent Warrant shall be exercisable at any time, in whole or in part,
commencing on the date of this prospectus and expiring three years from that
date, at a price per share equal to 120% of the public offering price of our
shares (or at such higher price allowed by FINRA). The Placement
Agent Warrant will contain standard provisions regarding stock splits and
certain other corporate actions consistent with FINRA rules, and will also
include a provision for cashless exercise. See “Placement.”
Summary
Financial Information
In the
table below, we provide you with summary financial data of our company. This
information is derived from our consolidated financial statements included
elsewhere in this prospectus. Historical results are not necessarily indicative
of the results that may be expected for any future period. When you read this
historical selected financial data, it is important that you read it along with
the historical statements and notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this
prospectus.
(1) The
number of pro forma common shares assumes the pro rata issuance of 21,130,000
shares to our existing shareholders, who currently hold 50,000 shares, prior to
completion of this offering.
10
Risk
Factors
Investment
in our securities 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. The risks
and uncertainties described below represent our known material risks to our
business. If any of the following risks actually occurs, our business,
financial condition or results of operations could suffer. In that case,
you may lose all or part of your investment. You should not invest in this
offering unless you can afford to lose your entire investment.
Risks
Related to Our Industry
We
may become subject to numerous risks and hazards associated with our chemical
processing business.
Bromine
is highly corrosive and must be handled carefully in order to avoid leakage and
damage to containers, transportation equipment and other facilities. The
risks associated with bromine include environmental hazards and industrial
accidents, including personal injury. Such risks could result in damage to or
destruction of properties or production facilities, personal injury or death,
environmental damage, monetary losses and legal liability.
Although
we may establish stringent rules relating to the storage, handling and use of
dangerous materials, there is no assurance that accidents will not
occur. Should we be held liable for any such accident, we may be
subject to penalties and possible legal proceedings may be brought against
our employees.
The
resource industry in the PRC is subject to drawbacks that the resource industry
does not have within the United States.
In China, insurance coverage is a
relatively new concept compared to in the United States and for certain
aspects of a business operation, insurance coverage is restricted or
expensive. Workers compensation for employees in the PRC may be
unavailable or, if available, insufficient to adequately cover such employees.
We could be subject to liability injuries suffered by our employees while on the
job.
Additionally, the environmental laws
and regulations in the PRC set various standards regulating certain aspects of
health and environmental quality, including, in some cases, the obligation to
rehabilitate current and former facilities and locations where operations are or
were conducted. Violation of these standards could result in a
temporary or permanent restriction by the PRC of our operations. We cannot
assure you that we will be able to adequately address any of these or other
limitations.
Our
brominated specialty chemical, decabromodiphenyl ether, might be subject to
restriction on usage.
Decabromodiphenyl ether, which is used
as a flame retardant, produces a harmful toxin once it is burned. There has
been debate on limiting its usage, mainly in Europe. However, due to its
paramount position in the flame retardant industry and the inability to find an
equally capable substitute, no country has legally banned its
usage.
We believe that any possible future
limitation on its usage in China would come later than in more developed
countries. Additionally, we have proactively increased our production capacity
for decabromodiphenyl ethane, which does not produce any harmful byproducts, to
mitigate the impact that could come from potential future restrictions on
decabromodiphenyl ether. Nevertheless, should the Chinese government introduce
restrictions on the use of decabromodiphenyl ether in the future, our financial
condition and results of operations could be negatively impacted.
New
product supply can create structural market imbalances, which could negatively
affect our operating results and financial performance.
Bromine
and crude salt are commodities, and the market for bromine and crude salt is
highly competitive and affected by global supply and demand. With recent
favorable prices, producers have been, and will likely continue to be, engaged
in expansion and development projects to increase production. Many of these
projects to increase bromine and crude salt production are speculative. However,
if bromine and crude salt production is increased beyond market demand, the
price at which we sell our products and our sales volume would likely fall,
which would materially adversely affect our operating results and financial
condition.
11
Bromine
reserve estimates in the underground brine water of Shandong Province depend on
many assumptions that may be inaccurate, which could materially adversely affect
the quantities and value of our reserves.
Our
reserve estimates may vary substantially from the actual amounts of bromine we
may be able to economically recover from the underground brine water permeating
into the Shandong Province brine fields from the Laizhou Bay. There are numerous
uncertainties inherent in estimating quantities of reserves, including many
factors beyond our control. Estimates of bromine reserves necessarily
depend upon a number of variables and assumptions, any one of which, if
incorrect, may result in an estimate that varies considerably from actual
results. These factors and assumptions relate to:
·
future
extraction technology improvements;
·
the
effects of regulation by governmental agencies;
and
·
geologic
conditions, which may not be fully identified by available exploration
data and may differ from our experiences in the area we currently
operate.
Our
earnings and, therefore, our profitability may be affected by price
volatility.
We
anticipate that the majority of our future revenues will be derived from the
sale of crude salt, bromine and the brominated specialty chemical products we
derive from bromine and, as a result, our earnings are directly related to the
prices of these products. There are many factors influencing the price of these
products including expectations for inflation; global and regional demand and
production; political and economic conditions; and production costs. These
factors are beyond our control and are impossible for us to predict. While we
may be able to counter unfavorable price movements due to our large production
scale and revenue base, our financial condition and operating results may be
adversely affected if prices were to shift downward in the future.
Our
operations depend on our having received and maintained the required permits and
approvals from governmental authorities.
We hold
numerous governmental and other permits and approvals authorizing
operations at each of our facilities. A decision by a governmental agency to
deny or delay issuing a new or renewed permits or approvals, or to revoke or
substantially modify an existing permit or approval, could prevent or limit our
ability to continue operations at the affected facility and have a material
adverse effect on our business, financial condition and operating results.
Expansion of our existing operations would also require securing the necessary
permits and approvals, which we may not receive in a timely manner, if at all.
In addition, we may be required to invest significant future funds to the
construction of more environmentally friendly facilities. Increases in our costs
as a result of efforts to comply with present and future environmental
protection regulations may adversely affect our financial condition and
operating results.
If
we do not pass the review and approval for renewing our licenses for our bromine
and crude salt production, our bromine and crude salt business may
suffer.
We are
required to hold a production license for industrial products, a work safety
license and a salt production license in order to operate our bromine and crude
salt production business in the PRC. Our production license for industrial
products, our work safety license and our salt production license are subject to
inspections every five years, three years and two years, respectively. Our salt
production license, work safety license and production license for industrial
products will currently expire on December 31, 2011, August 16, 2013 and January12, 2015, respectively, but can be renewed upon passing inspection. If we do not
successfully pass the inspection by relevant government authorities, our bromine
and crude salt production operations may be suspended until we are able to
comply with the license requirements which could have a material adverse effect
on our business, financial condition and results of operations.
12
Our
business operations and related activities may be subject to PRC government
regulations concerning environmental protection.
We may
have to make a significant financial commitment for the construction of
environmental protection facilities and the establishment of a sound
environmental protection management and monitoring system. Compliance with
existing and future environmental protection regulations may increase our
operating costs and may adversely affect our operating results.
We
face competition from other bromine, crude salt and brominated specialty
chemical companies, which places downward pressure on the prices and margins of
our products.
We
operate in a highly competitive marketplace, competing against a number of
bromine, crude salt and brominated specialty chemical producers throughout
Shandong Province. Competition is based on several key criteria, including
product performance and quality, product price, product availability and
security of supply, responsiveness of product development in cooperation with
customers and customer service. While we believe we are larger and have greater
operating and financial strength than most of our competitors, some of our
competitors may be able to maintain greater operating and financial flexibility
than we do. As a result, these competitors may be better able to withstand
changes in conditions within our industry, changes in the prices of raw
materials and energy and in general economic conditions. Our ability to maintain
or increase our profitability is, and will continue to be, dependent upon our
ability to offset decreases in the prices and margins of our products by
improving production efficiency and volume, shifting to higher margin brominated
specialty chemical products and improving existing products through innovation
and research and development. If we are unable to do so or to otherwise maintain
our competitive position, we could lose market share to our
competitors.
Risks
Related to Our Business
The
unsuccessful integration of a business or business segment we acquire could have
a material adverse effect on our results.
As part of our business strategy, we
expect to acquire assets and businesses relating to or complementary to our
operations. These acquisitions will involve risks commonly encountered in
acquisitions. These risks include exposure to unknown liabilities of the
acquired companies, additional acquisition costs, unanticipated expenses,
potential disputes, diversion of management attention from existing businesses,
and difficulty with integrating personnel and financial and other systems. Our
quarterly and annual operating results could fluctuate due to the costs and
expenses of acquiring and integrating new businesses.
Since 2004, Shandong Haiwang has
acquired five plants in Weifang and one in Dongying City. Altogether, these six
additional plants contribute an additional 16,000 tons of bromine capacity to
the 2,000 tons from our original plant. Our growth strategy includes the
continued expansion of Shandong Haiwang’s operations and may include
acquisitions of additional bromine plants and salt fields as well as the
possible construction of new plants. Such acquisition strategy will likely
require additional equity or debt financing, resulting in additional leverage or
dilution of ownership. We cannot assure you that any future acquisition will be
consummated, or that if consummated, that we will be able to integrate such
acquisition successfully. We also could experience financial or other setbacks
if any of our growth strategies incur problems of which we are not presently
aware.
We expect
to allocate a portion of the net proceeds from this offering to such
acquisitions, but we have not yet located any potential targets, and we may be
unable to do so. Further, even if we find a target we believe to be suitable, we
may be unable to negotiate acquisition terms that are satisfactory to us. In the
event we are unable to complete acquisitions, we have reserved the right to
reallocate such funds to our working capital. If this happens, we would have
broad discretion over the ultimate use of such funds, and we could use such
funds in ways with which investors might disagree.
13
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We have a
limited operating history. While Shandong Haiwang has operated since 2003,
Haiwang HK and Haiwang were established in 2010 and WFOE was established in
2011. Accordingly, you should consider our future prospects in light of the
risks and uncertainties experienced by early stage companies in evolving markets
such as the growing markets for bromine, crude salt and brominated specialty
chemical products in the PRC. Some of these risks and uncertainties relate to
our ability to:
·
offer
additional products to attract and retain a larger customer
base;
·
attract
additional customers and increased spending per
customer;
·
increase
awareness of our brand and continue to develop customer
loyalty;
·
respond
to competitive market conditions;
·
respond
to changes in our regulatory
environment;
·
manage
risks associated with intellectual property
rights;
·
maintain
effective control of our costs and
expenses;
·
raise
sufficient capital to sustain and expand our
business;
·
attract,
retain and motivate qualified personnel;
and
·
upgrade
our technology to support additional research and development of
brominated specialty chemicals.
If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
do not have land use rights for certain parcels of land on which we plan to
construct a salt farm and may not be able to obtain the property certificates to
the buildings which we will construct on the land.
We do not
have land use rights for certain parcels of land which we lease in Dongying
City, totaling approximately 10 square kilometers pursuant to a lease which
expires in 2025. We may not be able to obtain the property certificates to the
buildings which we will construct on the land because we do not have the land
use rights for the underlying land. The property certificates confirm legal
ownership of the buildings. However, under PRC laws, the mineral rights for an
underground mine and the land use rights for the land where the mine is located
are granted separately. Our application for the mineral rights would not be
affected by our lack of valid land use rights for the land. Because we do not
have land use rights for the leased land, we might be required by the government
to demolish our buildings and restore the land back to its original state. If
this occurs, it may disrupt our local business operation and may adversely
affect our financial condition and results of operations. We are currently
negotiating with the applicable local government authorities and the lessor, and
are trying to obtain the land use rights for such land. If we obtain the land
use rights we would be entitled to apply for the property certificates for the
buildings we construct on the land in accordance with PRC laws.
We
may require additional financing in the future, and our operations could be
curtailed if we are unable to obtain required additional financing when
needed.
We may
need to obtain additional debt or equity financing to fund future capital
expenditures. While we do not anticipate seeking additional financing in the
immediate future, any additional equity may result in dilution to the holders of
our outstanding shares of capital stock. Additional debt financing may include
conditions that would restrict our freedom to operate our business, such as
conditions that:
·
limit
our ability to pay dividends or require us to seek consent for the payment
of dividends;
·
increase
our vulnerability to general adverse economic and industry
conditions;
·
require
us to dedicate a portion of our cash flow from operations to payments on
our debt, thereby reducing the availability of our cash flow to fund
capital expenditures, working capital and other general corporate
purposes; and
·
limit
our flexibility in planning for, or reacting to, changes in our business
and our industry.
We cannot
guarantee that we will be able to obtain any additional financing on terms that
are acceptable to us, or at all.
14
Potential
disruptions in the capital and credit markets may adversely affect our business,
including the availability and cost of short-term funds for liquidity
requirements, which could adversely affect our results of operations, cash flows
and financial condition.
In the
last two years, the global economy has experienced a contraction, which has
affected the availability of business and consumer credit. We may need to rely
on the credit markets, particularly for short-term borrowings from banks in the
PRC, as well as the capital markets, to meet our financial commitments and
short-term liquidity needs if internal funds are not available from our
operations. Disruptions in the credit and capital markets, as have been
experienced since mid-2008, could adversely affect our ability to draw on such
short-term bank facilities. Our access to funds under such credit facilities is
dependent on the ability of the banks that are parties to those facilities to
meet their funding commitments, which may be dependent on governmental economic
policies in the PRC. Those banks may not be able to meet their funding
commitments to us if they experience shortages of capital and liquidity or if
they experience excessive volumes of borrowing requests from us and other
borrowers within a short period of time.
Long-term
disruptions in the credit and capital markets, similar to those that have been
experienced since mid-2008, could result from uncertainty, changing or increased
regulation, reduced alternatives or failures of financial institutions and could
adversely affect our access to liquidity needed for our business. Any disruption
could require us to take measures to conserve cash until the markets stabilize
or until alternative credit arrangements or other funding for our business needs
can be arranged. Such measures could include deferring capital expenditures, and
reducing or eliminating discretionary uses of cash.
Continued
market disruptions could cause broader economic downturns, which may lead to
lower demand for bromine, crude salt and our brominated specialty chemical
products and increased likelihood that our customers will be unable to pay for
our products. Further, bankruptcies or similar events by customers may cause us
to incur bad debt expense at levels higher than historically experienced. These
events would adversely impact our results of operations, cash flows and
financial position.
Our
operating results may fluctuate from period to period.
Our
operating results have fluctuated from period to period and are likely to
continue to fluctuate as a result of a wide range of factors, including seasonal
variations in bromine supply and bromine consumption. For example, our
production and sales of bromine are generally lower in the winter months due to
the local government’s order to limit production during the winter months, in an
effort to protect the brine water reserves. Interim reports may not be
indicative of our performance for the year or our future performance, and
period-to-period comparisons may not be meaningful due to a number of reasons
beyond our control.
If
WFOE is required to make a payment under its agreement to bear the losses of
Shandong Haiwang, our liquidity may be adversely affected, which could harm our
financial condition and results of operations.
On
February 1, 2011, WFOE entered into an Operating Agreement with Shandong
Haiwang. Pursuant to the Operating Agreement, WFOE agreed to bear the losses of
Shandong Haiwang. If Shandong Haiwang suffers losses and WFOE is required to
absorb all or a portion of such losses, WFOE will be required to seek
reimbursement from Shandong Haiwang. In such event, it is unlikely that Shandong
Haiwang will be able to make such reimbursement and WFOE may be unable to recoup
the loss WFOE absorbed at such time, if ever. Further, under the Operating
Agreement, WFOE may absorb the losses at a time when WFOE does not have
sufficient cash to make such payment and at a time when we or WFOE may be unable
to borrow such funds on terms that are acceptable, if at all. As a result, any
losses absorbed under the Operating Agreement may have an adverse effect on our
liquidity, financial condition and results of operations.
15
Our
bank accounts are not insured or protected against loss.
Shandong
Haiwang and we maintain our cash with various banks located in the PRC. Our cash
accounts are not insured or otherwise protected. Should any bank holding our
cash deposits become insolvent, or if we are otherwise unable to withdraw funds,
we would lose the cash on deposit with that particular bank.
We
are substantially dependent upon our senior management and key research and
development personnel.
We are
highly dependent on our senior management to manage our business and operations
and our key research and development personnel for the development of new
bromine-related technologies and the enhancement of our existing products and
technologies. In particular, we rely substantially on our chairman and CEO, Mr.
Chunbin Yang to manage our operations.
We also
depend on our key research personnel for the development of new technology and
products. We do not maintain key man life insurance on any of our senior
management or key personnel. The loss of any one of them would have a material
adverse effect on our business and operations. Competition for senior management
and our other key personnel is intense and the pool of suitable candidates is
limited. We may be unable to locate a suitable replacement for any senior
management or key personnel that we lose. In addition, if any member of our
senior management or key personnel joins a competitor or forms a competing
company, they may compete with us for customers, business partners and other key
professionals and staff members of our company. Although each of our senior
management and key personnel has signed a confidentiality and non-competition
agreement in connection with his employment with us, we cannot assure you that
we will be able to successfully enforce these provisions in the event of a
dispute between us and any member of our senior management or key
personnel.
We
compete for qualified personnel with other chemical companies and research
institutions. Intense competition for these personnel could cause our
compensation costs to increase, which could have a material adverse effect on
our results of operations. Our future success and ability to grow our business
will depend in part on the continued service of these individuals and our
ability to identify, hire and retain additional qualified personnel. If we are
unable to attract and retain qualified employees, we may be unable to meet our
business and financial goals.
Our
management is comprised almost entirely of individuals residing in the PRC with
very limited English skills.
Our management is comprised almost
entirely of individuals born and raised in the PRC. As a result of
differences in culture, educational background and business experiences, our
management may analyze, evaluate and present business opportunities and results
of operations differently from the way they are analyzed, evaluated and
presented by management teams of public companies in Europe and the United
States. In addition, our management has very limited skills in
English. Consequently, it is possible that our management team will
emphasize or fail to emphasize aspects of our business that might customarily be
emphasized in a different manner by comparable public companies from different
geographical and political areas.
We
may not be able to adequately protect and maintain our intellectual property,
trade secrets, and brand names.
We rely
on a combination of trademark, trade secret, nondisclosure agreements and patent
laws to protect our trade secrets and other valuable intellectual property and
in particular, our processing methods for brominated specialty chemicals. We
currently have one exclusive patent license and have five additional patent
applications pending. These applications were filed with the State Committee of
Intellectual Property in October 2008. The approval process typically takes
three years and as such we expect to receive approval in October 2011. The risk
of infringement of our proprietary technology in China is high. While we do have
one exclusive patent license and have five others pending, any inability to
protect our rights to our intellectual property may adversely affect our ability
to prevent competitors from using our products and developments, which could in
turn materially adversely affect our business.
16
Our
senior management lacks experience managing a public company and complying with
laws applicable to operating as a U.S. public company domiciled in the British
Virgin Islands.
Prior to
the completion of this offering, Shandong Haiwang has operated as a private
company located in China. In connection with this offering, the senior
management of Shandong Haiwang formed Haiwang in the British Virgin Islands,
Haiwang HK in Hong Kong and caused WFOE to become Haiwang HK’s subsidiary in the
PRC. They also caused Shandong Haiwang and WFOE to enter into certain agreements
that gave Haiwang effective control over the operations of Shandong Haiwang by
virtue of its ownership of Haiwang HK and Haiwang HK’s ownership of WFOE. In the
process of taking these steps to prepare our company for this initial public
offering; Shandong Haiwang’s senior management became the senior management of
Haiwang. None of Haiwang’s senior management has experience managing a public
company or managing a British Virgin Islands company.
As a
result of this offering, our company will become subject to laws, regulations
and obligations that do not currently apply to it, and our senior management
currently has no experience in complying with such laws, regulations and
obligations. For example, Haiwang will need to comply with the British Virgin
Islands laws applicable to companies that are domiciled in that country. By
contrast, such senior management is currently experienced in operating the
business of Shandong Haiwang in compliance with Chinese law. Similarly, by
virtue of this offering, Haiwang will be required to file quarterly and annual
reports and to comply with U.S. securities and other laws, which may not have
applied to Haiwang prior to the offering. These obligations can be burdensome
and complicated, and failure to comply with such obligations could have a
material adverse effect on Haiwang. In addition, we expect that the process of
learning about such new obligations as a public company in the United States
will require senior management to devote time and resources to such efforts that
might otherwise be spent on the operation of our business.
Additionally,
our management is comprised almost entirely of individuals born and raised in
the PRC. As a result of differences in culture, educational
background and business experiences, our management may analyze, evaluate and
present business opportunities and results of operations differently from the
way they are analyzed, evaluated and presented by management teams of public
companies in Europe and the United States. In addition, our
management has very limited skills in English. Consequently, it is
possible that our management team will emphasize or fail to emphasize aspects of
our business that might customarily be emphasized in a different manner by
comparable public companies from different geographical and political
areas.
Our
inability to successfully manage the growth of our business may have a material
adverse effect on our business, results or operations and financial
condition.
We expect
to experience growth in the number of employees and the scope of our operations
as a result of internal growth and acquisitions. Such activities could result in
increased responsibilities for management. Our future success will be highly
dependent upon our ability to successfully manage the expansion of operations.
Our ability to manage and support our growth effectively will be substantially
dependent on our ability to implement adequate improvements to financial,
inventory, management controls, reporting, order entry systems and other
procedures, and hire sufficient numbers of financial, accounting,
administrative, and management personnel.
Our
future success depends on our ability to address potential market opportunities
and to manage expenses to match our ability to finance operations. The need to
control our expenses will place a significant strain on our management and
operational resources. If we are unable to control our expenses effectively, our
business, results of operations and financial condition may be adversely
affected.
17
As
part of our growth strategy, we have acquired various companies with operations
in the PRC. If any of our acquisitions are reviewed by PRC regulatory agencies
or found not to comply with applicable laws or regulations, we might be required
to make filings or submissions to PRC regulators or amend the terms of such
acquisitions to meet PRC regulatory requirements.
We are
rapidly expanding our operations in the PRC and Shandong Haiwang has completed
several domestic acquisitions since 2003. While we believe that each of these
acquisitions has complied with all PRC laws and regulations applicable to such
transactions, the regulatory environment that governs merger and acquisition
transactions in the PRC has continued to evolve in recent years and remains
subject to interpretation by the agencies that have responsibility for reviewing
or approving such transactions. In particular, on August 8, 2006, six PRC
regulatory agencies, including the Ministry of Commerce (“MOFCOM”), the State
Assets Supervision and Administration Commission, the State Administration of
Taxation, the State Administration for Industry and Commerce, China Securities
Regulatory Commission (“CSRC”) and the State Administration of Foreign Exchange
(“SAFE”), jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors (the “New M&A Rule”). The New M&A Rule
became effective on September 8, 2006 and it has a broad scope
applicable to certain merger and acquisition transactions involving companies
organized outside of the PRC. If any of the acquisitions Shandong Haiwang
completed were reviewed by a PRC regulator, it is possible that we may be
required to demonstrate how the transaction under review complied with
applicable PRC laws, including the New M&A Rule. This could require us to
expend company resources that would otherwise be used to manage our company.
Further, if such regulators determine that any of our transactions did not
comply with applicable regulations, we may be required to renegotiate or revise
the terms of the acquisition with the counterparties to the affected
transaction. If such a scenario were to occur, we cannot be sure that our
efforts to meet the regulator’s requirements would be successful, or that such
efforts would not have an adverse effect on our operations.
Risks
Related to Operating in the PRC
We
are dependent on the state of the PRC’s economy as all of our business is
conducted in the PRC.
Currently,
all of our business operations are conducted in the PRC, and substantially all
of our customers are also located in the PRC. Accordingly, any material slowdown
in the PRC economy may cause our customers to reduce expenditures or delay the
building of new facilities or projects. This may in turn lead to a decline in
the demand for our products. That would have a material adverse effect on our
business, financial condition and results of operations.
A
general economic downturn, a recession or a sudden disruption in business
conditions in the PRC may affect the demand from our downstream customers in the
chemistry and pharmaceutical industry, which could adversely affect our
business.
The
demand from our customers is generally affected by a number of factors,
including general economic conditions, general Chinese industrialization, the
level of unemployment, inflation, interest rates, and energy costs, all of which
are beyond our control. The demand from chemical and pharmaceutical industries
is cyclical, shrinking during recessionary periods, and rebounding when the
economy recovers, which may impact sales of our products. In addition, sudden
disruptions in business conditions as a result of a terrorist attacks,
retaliation and the threat of further attacks or retaliation, war, adverse
weather conditions and climate changes or other natural disasters, pandemic
situations or large scale power outages can have a short or, sometimes,
long-term impact on consumer spending. A downturn in the economy in the PRC,
including any recession or a sudden disruption of business conditions in those
economies, could adversely affect our business, financial condition or results
of operation.
Since
our operations and assets are located in the PRC, shareholders may find it
difficult to enforce a U.S. judgment against the assets of our company, our
directors and executive officers.
Our
operations and assets are located in the PRC. In addition, most of our executive
officers and directors are non-residents of the U.S., and substantially all the
assets of such persons are located outside the U.S. As a result, it could be
difficult for investors to effect service of process in the U.S., or to enforce
a judgment obtained in the U.S. against us or any of these persons. See
“Enforceability of Civil Liabilities.”
We
must remit the offering proceeds to China before they may be used to benefit our
business in China, and this process may take a number of months.
The
proceeds of this offering must be sent back to the PRC, and the process for
sending such proceeds back to the PRC may take up to six months in the ordinary
course after the closing of this offering. We may be unable to use these
proceeds to grow our business until we receive such proceeds in the PRC. In
order to remit the offering proceeds to China, we will take the following
actions:
18
·
First,
we will open a special foreign exchange account for capital account
transactions. To open this account, we must submit to SAFE certain
application forms, identity documents, transaction documents, form of
foreign exchange registration of overseas investments of the domestic
residents, and a foreign exchange registration certificate of the invested
company.
·
Second,
we will remit the offering proceeds into this special foreign exchange
account.
·
Third,
we will apply for settlement of the foreign exchange. In order to do so,
we must submit to SAFE certain application forms, identity documents,
payment order to a designated person, and a tax
certificate.
The
timing of the process is difficult to estimate because the efficiencies of
different SAFE branches can vary materially. Ordinarily the process takes
several months but is required to be accomplished within six months of
application by law. Any delays in remitting the offering proceeds to China may
result in a delay of a possible acquisition or the expansion of our business and
could prevent our ability to increase our net revenue.
Although
we do not import goods into or export goods out of the PRC, fluctuation of the
Renminbi (RMB) may indirectly affect our financial condition by affecting the
volume of cross-border money flow.
Although
we use the United States dollar for financial reporting purposes, all of the
transactions effected by WFOE and Shandong Haiwang are denominated in the PRC’s
currency, the RMB. The value of the RMB fluctuates and is subject to changes in
the PRC’s political and economic conditions. We do not currently engage in
hedging activities to protect against foreign currency risks. Even if we chose
to engage in such hedging activates, we may not be able to do so effectively.
Future movements in the exchange rate of the RMB could adversely affect our
financial condition as we may suffer financial losses when transferring money
raised outside of China into the country or paying vendors for services
performed outside of China.
If
any dividend is declared in the future and paid in a foreign currency, you may
be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you
will actually ultimately receive.
If you
are a United States holder, you will be taxed on the U.S. dollar value of your
dividends, if any, at the time you receive them, even if you actually receive a
smaller amount of U.S. dollars when the payment is in fact converted into U.S.
dollars. Specifically, if a dividend is declared and paid in a foreign currency,
the amount of the dividend distribution that you must include in your income as
a U.S. holder will be the U.S. dollar value of the payments made in the foreign
currency, determined at the spot rate of the foreign currency to the U.S. dollar
on the date the dividend distribution is includible in your income, regardless
of whether the payment is in fact converted into U.S. dollars. Thus, if the
value of the foreign currency decreases before you actually convert the currency
into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the
U.S. dollar amount that you will actually ultimately receive.
We may be
classified as a passive foreign investment company (“PFIC”), which could result
in adverse U.S. federal income tax consequences to U.S.
investors.
In
general, we will be treated as a PFIC for any taxable year in which either (1)
at least 75% of our gross income (looking through certain 25% or more-owned
corporate subsidiaries) is passive income or (2) at least 50% of the average
value of our assets (looking through certain 25% or more-owned corporate
subsidiaries) is attributable to assets that produce, or are held for the
production of, passive income. Passive income generally includes, without
limitation, dividends, interest, rents, royalties, and gains from the
disposition of passive assets. If we are determined to be a PFIC for any taxable
year (or portion thereof) that is included in the holding period of a U.S.
Holder (as defined in the section of this prospectus captioned “Taxation—United
States Federal Income Taxation—General”) of our common shares, the U.S. Holder
may be subject to increased U.S. federal income tax liability and may be subject
to additional reporting requirements. Based on the expected composition (and
estimated values) of the assets and the nature of the income of us and our
subsidiaries and our current plans of operation, we do not expect to be treated
as a PFIC for our current taxable year or in the near future. Our actual PFIC status for
our current taxable year or any subsequent taxable year, however, will not be
determinable until after the end of such taxable year. Accordingly, there can be
no assurance in respect to our status as a PFIC for our current taxable year or
any future taxable year. U.S. Holders of our common shares are urged to consult
their own tax advisors regarding the possible application of the PFIC rules. See
the discussion in the section entitled ‘‘Taxation—United States Federal Income
Taxation—U.S. Holders—Passive Foreign Investment Company
Rules.”
19
Adverse
changes in economic and political policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to economic,
political and legal developments in China. China’s economy differs from the
economies of most developed countries in many respects, including with respect
to the amount of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources.
While the
PRC economy has grown more rapidly in the past 30 years than the world
economy as a whole, growth has been uneven across different regions and among
various economic sectors of China. The PRC government has implemented various
measures to encourage economic development and guide the allocation of
resources. Some of these measures benefit the overall PRC economy, but may also
have a negative effect on us. For example, our financial condition and results
of operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. Since early
2004, the PRC government has implemented certain measures to control the pace of
economic growth. Such measures may cause a decrease in the level of economic
activity in China, which in turn could adversely affect our results of
operations and financial condition.
Introduction
of new laws or changes to existing laws by the PRC government may adversely
affect our business.
The PRC
legal system is a codified legal system made up of written laws, regulations,
circulars, administrative directives and internal guidelines. Unlike common law
jurisdictions like the U.S., decided cases (which may be taken as reference) do
not form part of the legal structure of the PRC and thus have no binding effect.
Furthermore, in line with its transformation from a centrally planned economy to
a more free market-oriented economy, the PRC government is still in the process
of developing a comprehensive set of laws and regulations. As the legal system
in the PRC is still evolving, laws and regulations or the interpretation of the
same may be subject to further changes.
We
may be subject to foreign exchange controls in the PRC.
Our PRC
subsidiary and affiliates are subject to PRC rules and regulations on currency
conversion. In the PRC, SAFE regulates conversion between the RMB and foreign
currencies. Currently, foreign investment enterprises (“FIEs”) are required to
apply to SAFE for “Foreign Exchange Registration Certificate for FIEs”. WFOE is
a FIE. With such registration certifications (which need to be renewed
annually), FIEs are allowed to open foreign currency accounts including the
“recurrent account” and the “capital account”. Currently, conversion within the
scope of the “recurrent account” can be effected without requiring the approval
of SAFE. However, conversion of currency in the “capital account” (e.g. for
capital items such as direct investments, loans, securities, etc.) still
requires the approval of SAFE.
In
particular, if WFOE borrows foreign currency through loans from Haiwang or other
foreign lenders, these loans must be registered with SAFE. If WFOE is financed
by means of additional capital contributions, these capital contributions must
be approved by certain Chinese government authorities, including MOFCOM, SAFE,
or the local counterparts of SAFE and MOFCOM. These restrictions could limit our
use of funds raised in this offering.
We
do not have business interruption or litigation insurance.
The
insurance industry in China is still at an early state of development. In
particular PRC insurance companies offer limited business products. As a
result, we do not have any business interruption or liability insurance coverage
for our operations in China. Any business interruption or litigation may
result in our business incurring substantial costs and the diversion of
resources.
20
WFOE’s
contractual arrangements with Shandong Haiwang may result in adverse tax
consequences to us.
We could
face material and adverse tax consequences if the PRC tax authorities determine
that WFOE’s contractual arrangements with Shandong Haiwang were not made on an
arm’s length basis and adjust our income and expenses for PRC tax purposes in
the form of a transfer pricing adjustment. A transfer pricing adjustment
could result in a reduction, for PRC tax purposes, of adjustments recorded by
Shandong Haiwang, which could adversely affect us by increasing Shandong
Haiwang’s tax liability without reducing WFOE’s tax liability, which could
further result in late payment fees and other penalties to Shandong Haiwang for
underpaid taxes.
WFOE’s
contractual arrangements with Shandong Haiwang may not be as effective in
providing control over Shandong Haiwang as direct ownership.
We
conduct substantially all of our operations, and generate substantially all of
our revenues, through contractual arrangements with Shandong Haiwang that
provide us, through our ownership of WFOE, with effective control over Shandong
Haiwang. We depend on Shandong Haiwang to hold and maintain contracts with
our customers. Shandong Haiwang also owns substantially all of our
intellectual property, facilities and other assets relating to the operation of
our business, and employs the personnel for substantially all of our
business. Neither our company nor WFOE has any ownership interest in
Shandong Haiwang. Although we have been advised by Beijing Kang Da Law
Firm, our PRC legal counsel, that each contract under WFOE’s contractual
arrangements with Shandong Haiwang is valid, binding and enforceable under
current PRC laws and regulations, these contractual arrangements may not be as
effective in providing us with control over Shandong Haiwang as direct ownership
of Shandong Haiwang would be. In addition, Shandong Haiwang may breach the
contractual arrangements. For example, Shandong Haiwang may decide not to
make contractual payments to WFOE, and consequently to our company, in
accordance with the existing contractual arrangements. In the event of any
such breach, we would have to rely on legal remedies under PRC law. These
remedies may not always be effective, particularly in light of uncertainties in
the PRC legal system.
PRC
laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation
of such PRC laws and regulations, we could be subject to sanctions. In
addition, changes in such PRC laws and regulations may materially and adversely
affect our business.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of WFOE’s contractual
arrangements with Shandong Haiwang. Haiwang and WFOE are considered foreign
persons or foreign invested enterprises under PRC law. As a result, Haiwang
and WFOE are subject to PRC law limitations on foreign ownership of Chinese
companies. These laws and regulations are relatively new and may be subject
to change, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance by
foreign investors. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively.
The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our
businesses. We cannot assure you that our current ownership and operating
structure would not be found in violation of any current or future PRC laws or
regulations. As a result, we may be subject to sanctions, including fines,
and could be required to restructure our operations or cease to provide certain
services. In addition, any litigation in China may be protracted and result
in substantial costs and diversion of resources and management attention. Any of
these or similar actions could disrupt our business operations or restrict us
from conducting a substantial portion of our business operations, which could
materially and adversely affect our business, financial condition and results of
operations.
21
The
shareholders of Shandong Haiwang have potential conflicts of interest with us,
which may adversely affect our business.
Neither
we nor WFOE owns any portion of the equity interests of Shandong Haiwang.
Instead, we rely on WFOE’s contractual obligations to enforce our interest in
receiving payments from Shandong Haiwang. Conflicts of interests may arise
between Shandong Haiwang’s shareholders and our company if, for example, their
interests in receiving dividends from Shandong Haiwang were to conflict with our
interest requiring these companies to make contractually-obligated payments to
WFOE. As a result, we have required Shandong Haiwang and each of its
shareholders to execute irrevocable powers of attorney to appoint the individual
designated by us to be his attorney-in-fact to vote on their behalf on all
matters requiring shareholder approval by Shandong Haiwang and to require
Shandong Haiwang’s compliance with the terms of its contractual
obligations. We cannot assure you, however, that when conflicts of interest
arise, these companies’ shareholders will act completely in our interests or
that conflicts of interest will be resolved in our favor. In addition,
these shareholders could violate their agreements with us by diverting business
opportunities from us to others. If we cannot resolve any conflicts of
interest between us and Shandong Haiwang’s shareholders, we would have to rely
on legal proceedings, which could result in the disruption of our
business.
Recent
PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident shareholders to personal
liability and limit our ability to inject capital into our PRC subsidiary, limit
our subsidiary’s ability to increase its registered capital, distribute profits
to us, or otherwise adversely affect us.
On
October 21, 2005, the SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fund-raising and Reverse Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies, or Notice 75, which became effective as of November 1,2005. According to Notice 75, prior registration with the local SAFE
branch is required for PRC residents to establish or to control an offshore
company for the purposes of financing that offshore company with assets or
equity interests in an onshore enterprise located in the PRC. An amendment
to registration or filing with the local SAFE branch by such PRC resident is
also required for the injection of equity interests or assets of an onshore
enterprise in the offshore company or overseas funds raised by such offshore
company, or any other material change involving a change in the capital of the
offshore company. Moreover, Notice 75 applies retroactively. As a
result, PRC residents who have established or acquired control of offshore
companies that have made onshore investments in the PRC in the past were
required to complete the relevant registration procedures with the local SAFE
branch by March 31, 2006.
We have
requested our shareholders who are PRC residents to make the necessary
applications, filings and amendments as required under Notice 75 and other
related rules. We attempt to comply, and attempt to ensure that our
shareholders who are subject to these rules comply, with the relevant
requirements. However, we cannot provide any assurances that all of our
shareholders who are PRC residents will comply with our request to make or
obtain any applicable registrations or comply with other requirements required
by Notice 75 or other related rules. The failure or inability of our
PRC resident shareholders to make any required registrations or comply with
other requirements may subject such shareholders to fines and legal sanctions
and may also limit our ability to contribute additional capital into or provide
loans to (including using the proceeds from this offering) WFOE or Shandong
Haiwang, limit their ability to pay dividends or otherwise distribute profits to
us, or otherwise adversely affect us.
We
rely on dividends paid by WFOE for our cash needs.
We rely
primarily on dividends paid by WFOE for our cash needs, including the funds
necessary to pay dividends and other cash distributions, if any, to our
shareholders, to service any debt we may incur and to pay our operating
expenses. The payment of dividends by entities organized in China is subject to
limitations. Regulations in the PRC currently permit payment of dividends only
out of accumulated profits as determined in accordance with accounting standards
and regulations in China. Under British Virgin Islands law, we may only pay
dividends from surplus (the excess, if any, at the time of the determination of
the total assets of our company over the sum of our liabilities, as shown in our
books of account, plus our capital), and we must be solvent before and after the
dividend payment in the sense that we will be able to satisfy our liabilities as
they become due in the ordinary course of business; and the realizable value of
assets of our company will not be less than the sum of our total liabilities,
other than deferred taxes as shown on our books of account, and our capital. If
we determine to pay dividends on any of our common shares in the future, as a
holding company, we will be dependent on receipt of funds from WFOE. See
“Dividend Policy.”
22
Pursuant
to the new PRC enterprise income tax law effective on January 1, 2008,
dividends payable by a foreign investment entity to its foreign investors are
subject to a withholding tax of up to 20%. At present, the Chinese tax authority
has not issued any guidance on the application of the EIT Law and its
implementing rules on non-Chinese enterprises or group enterprise controlled
entities whose structures are like ours. In practice, the tax authorities
typically impose the withholding tax rate of 10%, as prescribed in the
implementation regulations; however, there can be no guarantee that this
practice will continue as more guidance is provided by relevant government
authorities. As a result, we are unable to predict whether payments from WFOE to
Haiwang will be subject to withholding tax because it is unclear whether Haiwang
will be deemed to be a resident enterprise for Chinese tax purposes. If so,
Haiwang will be subject to an enterprise income tax rate of 25% on all of its
income, including interest income on the proceeds from this offering on a
worldwide basis. However, if Haiwang is deemed to be a non-resident enterprise,
then it will be subject to a withholding tax at the rate of 10% on any dividends
paid by its Chinese subsidiaries to Haiwang.
The
payment of dividends by entities organized in China is subject to limitations,
procedures and formalities. Regulations in the PRC currently permit payment of
dividends only out of accumulated profits as determined in accordance with
accounting standards and regulations in China. Shandong Haiwang is also required
to set aside at least 10% of its after-tax profit based on PRC accounting
standards each year to its surplus reserves fund until the accumulative amount
of such reserves reaches 50% of its registered capital.
The
transfer to this surplus reserves fund must be made before distribution of any
dividend to shareholders. 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. For the years ended June 30, 2010 and 2009, respectively,
Shandong Haiwang made appropriations to its surplus reserve fund in accordance
with PRC law.
WFOE
is also required to allocate a portion of its after-tax profits, as determined
by its board of directors, to the general reserve, and the staff welfare and
bonus funds, which may not be distributed to equity owners.
Pursuant
to the “Wholly Foreign-Owned Enterprise Law of the P.R. China (2000 Revision)”
and “Detailed Implementing Rules for the Law of the People’s Republic of China
on Wholly Foreign-Owned Enterprises (Revised at 2001)”, WFOE is required to
allocate a portion of its after-tax profits in accordance with its Articles of
Association, to the general reserve, and the staff welfare and bonus funds. Not
less than 10% of an enterprise’s after tax-profits should be allocated to the
general reserve. When the general reserve account balance is equal to or greater
than 50% of WFOE’s registered capital, no further allocation to the general
reserve account is required. The general reserve is used to offset future
extraordinary losses. The subsidiaries may, upon a resolution passed by the
shareholders, convert the general reserve into capital. According to the
Articles of Association of WFOE, the amount contributed to the staff welfare and
bonus funds is determined by WFOE’s board of directors. The staff welfare and
bonus fund is used for the collective welfare of the staff of the subsidiaries.
These reserves represent appropriations of retained earnings determined
according to PRC law.
As of the
date of this prospectus, the amounts of these reserves have not yet been
determined, and we have not committed to establishing such amounts at this time.
Under current PRC laws, WFOE is required to set aside reserve amounts, but has
not yet done so. WFOE has not done so because PRC authorities grant companies
flexibility in making a determination. Chinese law requires such a determination
to be made in accordance with the companies’ organizational documents and WFOE’s
organizational documents do not require the determination to be made within a
particular timeframe. Although we have not yet been required by PRC authorities
to make such determinations or set aside such reserves, PRC authorities may
require WFOE to rectify its noncompliance and we may be fined if we fail to do
so after warning within the time period set in the warning.
Additionally,
PRC law requires that the after-tax profits of foreign invested companies be
distributed after a portion of after-tax profits is allocated to the general
reserve and the staff welfare and bonus funds reserve. Therefore, if for any
reason, the dividends from WFOE cannot be repatriated to us or not in time, then
it may detrimentally affect our cash flow and even cause us to become
insolvent.
23
Governmental
control of currency conversion may affect the value of your
investment.
The PRC
government imposes controls on the convertibility of the Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of China, which
may take as long as six months in the ordinary course. We receive the
majority of our revenues in Renminbi. Under our current corporate
structure, our income is derived from payments from WFOE. Shortages in the
availability of foreign currency may restrict the ability of WFOE to remit
sufficient foreign currency to pay dividends or other payments to us, or
otherwise satisfy their foreign currency denominated obligations. Under
existing PRC foreign exchange regulations, payments of current account items,
including profit distributions, interest payments and expenditures from
trade-related transactions, can be made in foreign currencies without prior
approval from the PRC SAFE by complying with certain procedural
requirements. However, approval from appropriate government authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies. The PRC government may also at its
discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay dividends in foreign currencies to our
shareholders.
Fluctuation
of the Renminbi could materially affect our financial condition and results of
operations.
The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in political and economic
conditions. On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the Renminbi to the U.S. dollar. Under the new
policy, the Renminbi is permitted to fluctuate within a narrow and managed band
against a basket of certain foreign currencies. This change in policy has
resulted in an appreciation of the Renminbi against the U.S. dollar. While the
international reaction to the Renminbi revaluation has generally been positive,
there remains international pressure on the PRC government to adopt an even more
flexible currency policy, which could result in a further and more rapid
appreciation of the Renminbi against the U.S. dollar. Any material revaluation
of the Renminbi may materially and adversely affect our cash flows, revenues,
earnings and financial position, and the value of, and any dividends payable on,
our common shares in U.S. dollars. For example, an appreciation of the Renminbi
against the U.S. dollar would make any new Renminbi denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into Renminbi for such purposes. See “Exchange Rate
Information.”
Recent
changes in the PRC’s labor law restricts our ability to reduce our workforce in
the PRC in the event of an economic downturn and may increase our production
costs.
In June
2007, the National People’s Congress of the PRC enacted new labor law
legislation called the Labor Contract Law, which became effective on
January 1, 2008. To clarify certain details in connection with the
implementation of the Labor Contract Law, the PRC State Council promulgated the
Implementing Rules for the Labor Contract Law on September 18, 2008, which
came into effect immediately. The new legislation formalized workers’ rights
concerning overtime hours, pensions, layoffs, employment contracts and the role
of trade unions. Considered one of the strictest labor laws in the world, among
other things, this new law provides for specific standards and procedures for
the termination of an employment contract and places the burden of proof on the
employer. In addition, the law requires the payment of statutory severance pay
upon the termination of an employment contract in most cases, including in the
case of the expiration of a fixed-term employment contract. Further, the law
requires an employer to conclude an “employment contract without a fixed-term”
with any employee who either has worked for the same employer for 10 consecutive
years or more or has had two consecutive fixed-term contracts with the same
employer. An “employment contract without a fixed term” can no longer be
terminated on the ground of the expiration of the contract, although it can
still be terminated pursuant to the standards and procedures set forth under the
new law. Because of the lack of precedents for the enforcement of such a law,
the standards and procedures set forth under the law in relation to the
termination of an employment contract have raised concerns among foreign
investment enterprises in the PRC that such “employment contract without a fixed
term” might in fact become a “lifetime, permanent employment contract.” Finally,
under the new law, downsizing of either more than 20 people or more than 10% of
the workforce may occur only under specified circumstances, such as a
restructuring undertaken pursuant to the PRC’s Enterprise Bankruptcy Law, or
where a company suffers serious difficulties in production and/or business
operations, or where there has been a material change in the objective economic
circumstances relied upon by the parties at the time of the conclusion of the
employment contract, thereby making the performance of such employment contract
not possible. To date, there has been very little guidance and precedents as to
how such specified circumstances for downsizing will be interpreted and enforced
by the relevant PRC authorities. All of our employees working for us exclusively
within the PRC are covered by the new law and thus, our ability to adjust the
size of our operations when necessary in periods of recession or less severe
economic downturns may be curtailed. Accordingly, if we face future periods of
decline in business activity generally or adverse economic periods specific to
our business, this new law can be expected to exacerbate the adverse effect of
the economic environment on our results of operations and financial
condition.
24
If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with the SAFE. We may also face regulatory uncertainties
that could restrict our ability to adopt an equity compensation plan for our
directors and employees and other parties under PRC law.
On April6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company (“Circular 78”). It is not clear
whether Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. For any plans that are so
covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the plan. In
addition, Circular 78 also requires PRC citizens to register with SAFE and make
the necessary applications and filings if they participated in an overseas
listed company’s covered equity compensation plan prior to April 6, 2007. We
intend to adopt an equity compensation plan in the future and make option grants
to our officers and directors, most of whom are PRC citizens. Circular 78 may
require our officers and directors who receive option grants and who are PRC
citizens to register with SAFE. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time consuming.
If it is determined that any of our equity compensation plans are subject to
Circular 78, failure to comply with such provisions may subject us and
participants of any equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent us from being able to grant equity compensation to
our PRC employees. In that case, our ability to compensate our employees and
directors through equity compensation would be hindered and our business
operations may be adversely affected.
25
If
relations between the United States and China worsen, our share price may
decrease and we may have difficulty accessing U.S. capital markets.
At
various times during recent years, the United States and China have had
disagreements over political and economic issues. Controversies may arise in the
future between these two countries. Any political or trade controversies between
the United States and China could adversely affect the market price of our
common shares and our ability to access U.S. capital markets.
The
Chinese government could change its policies toward private enterprise or even
nationalize or expropriate private enterprises, which could result in the total
loss of our investment in that country.
Our
business is subject to political and economic uncertainties and may be adversely
affected by political, economic and social developments in China. Over the
past several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. The Chinese government may not continue to pursue these
policies or may alter them to our detriment from time to time with little, if
any, prior notice.
Changes
in policies, laws and regulations or in their interpretation or the imposition
of confiscatory taxation, restrictions on currency conversion, restrictions or
prohibitions on dividend payments to shareholders, devaluations of currency or
the nationalization or other expropriation of private enterprises could have a
material adverse effect on our business. Nationalization or expropriation
could even result in the total loss of our investment in China and in the total
loss of your investment in us.
Because
our operations are located in China, information about our operations are not
readily available from independent third-party sources.
Because
Shandong Haiwang and WFOE are based in China, our shareholders may have greater
difficulty in obtaining information about them on a timely basis than would
shareholders of a U.S.-based company. Their operations will continue to be
conducted in China and shareholders may have difficulty in obtaining information
about them from sources other than the companies themselves. Information
available from newspapers, trade journals, or local, regional or national
regulatory agencies such as issuance of construction permits and contract awards
for development projects will not be readily available to shareholders and,
where available, will likely be available only in Chinese. Shareholders will be
dependent upon management for reports of their progress, development, activities
and expenditure of proceeds.
Our
failure to obtain prior approval of CSRC of the listing and trading of our
common shares on a foreign stock exchange could delay this offering or could
have a material adverse effect upon our business, operating results, reputation
and trading price of our common shares.
The New
M&A Rule became effective on September 8, 2006. This regulation
contains provisions that purport to require that an offshore special purpose
vehicle (“SPV”) formed for listing purposes and controlled directly or
indirectly by PRC companies or individuals shall obtain the approval of the CSRC
prior to the listing and trading of such SPV’s securities on an overseas stock
exchange. On September 21, 2006, the CSRC published procedures specifying
documents and materials required to be submitted to it by SPVs seeking CSRC
approval of overseas listings.
26
However,
the application of the New M&A Rule remains unclear with no consensus
currently existing among leading PRC law firms regarding the scope and
applicability of the CSRC approval requirement. Our PRC counsel, Kang Da Law
Firm, has advised us that, based upon their understanding of current PRC laws
and regulations:
·
We
currently control our Chinese affiliate, Shandong Haiwang, by virtue of
WFOE’s VIE agreements with Shandong Haiwang, but not through equity
interest or asset acquisition which are stipulated in the New M&A
Rule; and
·
In
spite of the lack of clarity on this issue, the CSRC has not issued any
definitive rule or interpretation regarding whether offerings like the one
contemplated by this prospectus are subject to the New M&A
Rule.
The CSRC
has not issued any such definitive rule or interpretation, and we have not
chosen to voluntarily request approval under the New M&A Rule. If the CSRC
requires that we obtain its approval prior to the completion of this offering,
the offering will be delayed until we obtain CSRC approval, which may take
several months. There is also the possibility that we may not be able to obtain
such approval. If prior CSRC approval was required, we may face regulatory
actions or other sanctions from the CSRC or other PRC regulatory authorities.
These authorities may impose fines and penalties upon our operations in the PRC,
limit our operating privileges in the PRC, delay or restrict the repatriation of
the proceeds from this offering into the PRC, or take other actions that could
have a material adverse effect upon our business, financial condition, results
of operations, reputation and prospects, as well as the trading price of our
common shares. The CSRC or other PRC regulatory agencies may also take actions
requiring us, or making it advisable for us, to terminate this offering prior to
closing.
Risks
Associated with this Offering
There
may not be an active, liquid trading market for our common shares.
Prior to
this offering, there has been no public market for our common shares. An
active trading market for our common shares may not develop or be sustained
following this offering. You may not be able to sell your shares at the
market price, if at all, if trading in our shares is not active. The
initial public offering price was determined by negotiations between us and the
Placement Agents based upon a number of factors. The initial public
offering price may not be indicative of prices that will prevail in the trading
market.
Investors
risk loss of use of funds allocated for purchases, with no right of return,
during the offering period.
We cannot
assure you that all or any shares will be sold in this offering. Our
Placement Agents are offering our shares on a “best efforts, minimum/maximum
basis.” We have no firm commitment from anyone to purchase all or any of the
shares offered. If offers to purchase atleast 4,500,000 shares are not
received on or before the Offering Termination Date, escrow provisions require
that all funds received be promptly refunded. If refunded, investors will
receive no interest on their funds. During the offering period, investors
will not have any use or right to return of the funds. None of our
officers, directors or affiliates may purchase shares in this
offering.
The
market price for our common shares may be volatile, which could result in
substantial losses to investors.
The
market price for our common shares is likely to be volatile and subject to wide
fluctuations in response to factors including the following:
·
actual
or anticipated fluctuations in our quarterly operating
results;
·
changes
in the Chinese economy;
·
announcements
by our competitors of acquisitions, strategic partnerships, joint ventures
or capital commitments;
27
·
additions
or departures of key personnel; or
·
potential
litigation.
In
addition, the securities markets have from time to time experienced price and
volume fluctuations that are not related to the operating performance of
particular companies. As a result, to the extent shareholders sell our
shares in negative market fluctuation, they may not receive a price per share
that is based solely upon our business performance. We cannot guarantee
that shareholders will not lose some of their entire investment in our common
shares.
We
may not pay dividends.
We have
not previously paid any cash dividends, and we do not anticipate paying any
dividends on our common shares. Although we have achieved net profitability
since 2003, we cannot assure you that our operations will continue to result in
sufficient revenues to enable us to operate at profitable levels or to generate
positive cash flows. Furthermore, there is no assurance our Board of
Directors will declare dividends even if we are profitable. Our dividend
policy is subject to the discretion of our Board of Directors and will depend
on, among other things, our earnings, financial condition, capital requirements
and other factors. If we determine to pay dividends on any of our common
shares in the future, we will be dependent, in large part, on receipt of funds
from Shandong Haiwang. See “Dividend Policy.”
There
is no guarantee that our shares will be listed on the NASDAQ Global Select
Market or the NASDAQ Global Market.
We intend to apply to have our common
shares listed on the NASDAQ Global Select or the NASDAQ Global Market under the
symbol “NACL.” After the consummation of this offering, we believe that we will
satisfy the listing requirements and expect that our common shares will be
listed on the NASDAQ Global Select Market or the NASDAQ Global Market. Such
listing, however, is not guaranteed, nor can we guarantee that our common shares
will continue to be listed on such exchange even if our application for listing
is approved. If the application is not approved, we will not complete this
offering. Even if such listing is approved, there can be no assurance any broker
will be interested in trading our stock. Therefore, it may be difficult to sell
our common shares if you desire or need to sell them. Our Placement Agents,
Financial West Group and Chardan Capital Markets LLC are not obligated to make a
market in our securities, and even after making a market, can discontinue market
making at any time without notice. Neither we nor our Placement Agents can
provide any assurance that an active and liquid trading market in our securities
will develop or, if developed, that the market will continue.
We
will incur increased costs as a result of being a public company.
As a
public company, we will incur legal, accounting and other expenses that we did
not incur as a private company. For example, we must now engage U.S. securities
law counsel and U.S. GAAP auditors that we did not require prior to this
offering, and we will have annual payments for listing on a stock exchange if we
are so listed. In addition, the Sarbanes-Oxley Act, as well as new rules
subsequently implemented by the SEC and NASDAQ, have required changes in
corporate governance practices of public companies. We expect these new
rules and regulations to increase our legal, accounting and financial compliance
costs and to make certain corporate activities more time-consuming and
costly. In addition, we will incur additional costs associated with our
public company reporting requirements. While it is impossible to determine the
amounts of such expenses in advance, we expect that we will incur expenses of
between $500,000 and $1 million per year that we did not experience prior to
commencement of this offering.
Our
classified board structure may prevent a change in our control.
Our board
of directors is divided into three classes of directors. The current terms
of the directors expire in 2011, 2012 and 2013. Directors of each class are
chosen for three-year terms upon the expiration of their current terms, and each
year one class of directors is elected by the shareholders. The staggered
terms of our directors may reduce the possibility of a tender offer or an
attempt at a change in control, even though a tender offer or change in control
might be in the best interest of our shareholders. See “Management – Board
of Directors and Board Committees.”
28
Shares
eligible for future sale may adversely affect the market price of our common
shares, as the future sale of a substantial amount of outstanding common shares
in the public marketplace could reduce the price of our common
shares.
The
market price of our shares could decline as a result of sales of substantial
amounts of our shares in the public market, or the perception that these sales
could occur. In addition, these factors could make it more difficult for us
to raise funds through future offerings of our common shares. An aggregate
of 21,180,000 shares will be outstanding before the consummation of this
offering, assuming the pro-rata issuance of 21,130,000 shares to our existing
shareholders prior to completion of this offering, and assuming completion of
the minimum offering, 25,680,000 shares will be outstanding immediately after
this offering. All of the shares sold in the offering will be freely
transferable without restriction or further registration under the Securities
Act. The remaining shares will be “restricted securities” as defined in
Rule 144. These shares may be sold in the future without registration under
the Securities Act to the extent permitted by Rule 144 or other exemptions under
the Securities Act. See “Shares Eligible for Future Sale.”
You
will experience immediate and substantial dilution.
The
initial public offering price of our shares is expected to be substantially
higher than the pro forma net tangible book value per share of our common
shares. Assuming the completion of the offering, at an assumed public
offering price of $[ ] per common share,
which is the mid-point of the estimated initial offering price range set forth
on the cover of this prospectus, if you purchase shares in this offering, you
will incur immediate dilution of approximately
$[ ] or
approximately
[ ]% in the pro
forma net tangible book value per share from the price per share that you pay
for the shares. Accordingly, if you purchase shares in this offering, you will
incur immediate and substantial dilution of your investment. See
“Dilution.”
We
have not determined a specific use for a portion of the proceeds from this
offering, and we may use the proceeds in ways with which you may not
agree.
Our
management will have considerable discretion in the application of the net
proceeds received by us. In addition, in the event we are unable to locate
favorable targets for acquisitions, we have reserved the right to re-allocate
funds currently allocated to that purpose to our general working capital. If
that were to happen, then our management would have discretion over even more of
the net proceeds to be received by our company in this offering. You will not
have the opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. You must rely on the judgment of our
management regarding the application of the net proceeds of this offering. The
net proceeds may be used for corporate purposes that do not improve our efforts
to achieve profitability or increase our stock price. The net proceeds from this
offering may be placed in investments that do not produce income or that lose
value. See “Use of Proceeds.”
Our
employees, officers and/or directors, or entities controlled by them will
control a majority of our common shares, decreasing your influence on
shareholder decisions.
Assuming
the completion of the offering, our employees, officers and/or directors will,
in the aggregate, beneficially own approximately 84% of our outstanding
shares. As a result, our employees, officers and directors will possess
substantial ability to impact our management and affairs and the outcome of
matters submitted to shareholders for approval. These shareholders, acting
individually or as a group, could exert control and substantial influence over
matters such as electing directors and approving mergers or other business
combination transactions. This concentration of ownership and voting power may
also discourage, delay or prevent a change in control of our company, which
could deprive our shareholders of an opportunity to receive a premium for their
shares as part of a sale of our company and might reduce the price of our common
shares. These actions may be taken even if they are opposed by our other
shareholders, including those who purchase shares in this offering. See
“Principal Shareholders.”
29
If
securities or industry analysts do not publish research or reports or publish
unfavorable research about our business, the price and trading volume of our
common shares could decline.
The trading market for our common
shares will depend in part on the research and reports that securities or
industry analysts publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry analysts. If no
securities or industry analysts commence coverage of us the trading price for
our common shares and other securities would be negatively affected. In the
event we obtain securities or industry analyst coverage, if one or more of the
analysts who covers us downgrades our securities, the price of our securities
would likely decline. If one or more of these analysts ceases to cover us or
fails to publish regular reports on us, interest in the purchase of our
securities could decrease, which could cause the price of our common shares and
other securities and their trading volume to decline.
We
will have an ongoing relationship with our Placement Agents that may impact our
ability to obtain additional capital.
In
connection with this offering, we will, for a nominal amount, sell our Placement
Agents a warrant to purchase such number of shares as shall equal ten percent of
the shares sold in the offering. The Placement Agent Warrant is exercisable
for a period of three years from the date of issuance at a price equal to 120%
of the price of the shares sold in this offering. During the term of the
Placement Agent Warrant, the holders thereof will be given the opportunity to
profit from a rise in the market price of our common shares, with a resulting
dilution in the interest of our other shareholders. The terms on which we
could obtain additional capital during the life of this Placement Agent Warrant
may be adversely affected because the holders of this Placement Agent Warrant
might be expected to exercise it when we are able to obtain any needed
additional capital in a new offering of securities at a price greater than the
exercise price of the Placement Agent Warrant. See
“Placement.”
We
will have an ongoing relationship with our Placement Agents that may impact our
shareholders’ ability to impact decisions related to our
operations.
We have
agreed to allow our Placement Agents to have a designee present at all meetings
of our Board of Directors for a period of one year from the date of
effectiveness of this offering. Although our Placement Agents’ designee will not
be able to vote, he may nevertheless influence the outcome of matters submitted
to the Board of Directors for approval. We have agreed to reimburse the designee
for his expenses for attending our Board meetings, subject to a maximum
reimbursement of $6,000 annually, which amount is not more than the
reimbursement payable to our directors. The designee will be required to certify
that such travel expenses are not reimbursed by any other party. As of the date
of this prospectus, Mr. John McAuliffe is serving as our Placement Agents’
designee to our Board of Directors. See “Management – Board of Directors
Designee.”
As the rights of shareholders under
British Virgin Islands law differ from those under U.S. law, you may have fewer
protections as a shareholder.
Our
corporate affairs will be governed by our amended and restated memorandum and
articles of association, the British Virgin Islands Business Companies Act, 2004
(the “BVI Act”), and the common law of the British Virgin Islands. The rights of
shareholders to take legal action against our directors, actions by minority
shareholders and the fiduciary responsibilities of our directors under British
Virgin Islands law are to a large extent governed by the common law of the
British Virgin Islands and by the BVI Act. The common law of the British Virgin
Islands is derived in part from comparatively limited judicial precedent in the
British Virgin Islands as well as from English common law, which has persuasive,
but not binding, authority on a court in the British Virgin Islands. The rights
of our shareholders and the fiduciary responsibilities of our directors under
British Virgin Islands law are not as clearly established as they would be under
statutes or judicial precedents in some jurisdictions in the United States. In
particular, the British Virgin Islands has a less developed body of securities
laws as compared to the United States, and some states (such as Delaware) have
more fully developed and judicially interpreted bodies of corporate
law.
As a
result of all of the above, holders of our shares may have more difficulty in
protecting their interests through actions against our management, directors or
major shareholders than they would as shareholders of a U.S. company. For a
discussion of material differences between the provisions of the BVI Act and the
laws applicable to companies incorporated in the United States and their
shareholders, see “Description of Share Capital – Differences in Corporate
Law.”
30
British Virgin Islands companies may
not be able to initiate shareholder derivative actions, thereby depriving
shareholders of the ability to protect their interests.
British
Virgin Islands companies may not have standing to initiate a shareholder
derivative action in a federal court of the United States. The circumstances in
which any such action may be brought, and the procedures and defenses that may
be available in respect to any such action, may result in the rights of
shareholders of a British Virgin Islands company being more limited than those
of shareholders of a company organized in the United States. Accordingly,
shareholders may have fewer alternatives available to them if they believe that
corporate wrongdoing has occurred. The British Virgin Islands courts are also
unlikely to recognize or enforce against us judgments of courts in the United
States based on certain liability provisions of U.S. securities law; and to
impose liabilities against us, in original actions brought in the British Virgin
Islands, based on certain liability provisions of U.S. securities laws that are
penal in nature. There is no statutory recognition in the British Virgin Islands
of judgments obtained in the United States, although the courts of the British
Virgin Islands will generally recognize and enforce the non-penal judgment of a
foreign court of competent jurisdiction without retrial on the merits. This
means that even if shareholders were to sue us successfully, they may not be
able to recover anything to make up for the losses suffered.
The laws of the British Virgin
Islands provide little protection for minority shareholders, so minority
shareholders will have little or no recourse if the shareholders are
dissatisfied with the conduct of our affairs.
Under the
law of the British Virgin Islands, there is little statutory law for the
protection of minority shareholders other than the provisions of the BVI Act
dealing with shareholder remedies. The principal protection under statutory law
is that shareholders may bring an action to enforce the constituent documents of
the corporation, our amended and restated memorandum and articles of
association. Shareholders are entitled to have the affairs of the company
conducted in accordance with the general law and the amended and restated
articles and memorandum.
There are
common law rights for the protection of shareholders that may be invoked,
largely dependent on English company law, since the common law of the British
Virgin Islands for business companies is limited. Under the general rule
pursuant to English company law known as the rule in Foss v. Harbottle, a court
will generally refuse to interfere with the management of a company at the
insistence of a minority of its shareholders who express dissatisfaction with
the conduct of the company’s affairs by the majority or the board of directors.
However, every shareholder is entitled to have the affairs of the company
conducted properly according to law and the constituent documents of the
corporation. As such, if those who control the company have persistently
disregarded the requirements of company law or the provisions of the company’s
memorandum and articles of association, then the courts will grant relief.
Generally, the areas in which the courts will intervene are the following:
(1) an act complained of which is outside the scope of the authorized
business or is illegal or not capable of ratification by the majority;
(2) acts that constitute fraud on the minority where the wrongdoers control
the company; (3) acts that infringe on the personal rights of the
shareholders, such as the right to vote; and (4) where the company has not
complied with provisions requiring approval of a special or extraordinary
majority of shareholders, which are more limited than the rights afforded
minority shareholders under the laws of many states in the United
States.
We have
made statements in this prospectus, including under “Prospectus Summary,”“Risk
Factors,”“Management’s Discussion and Analysis of Financial Condition and
Results of Operations,”“Our Business” and elsewhere that constitute
forward-looking statements. Forward-looking statements involve risks and
uncertainties, such as statements about our plans, objectives, expectations,
assumptions or future events. In some cases, you can identify forward-looking
statements by terminology such as “anticipate,”“estimate,”“plan,”“project,”“continuing,”“ongoing,”“expect,”“we believe,”“we intend,”“may,”“should,”“will,”“could” and similar expressions denoting uncertainty or an action that
may, will or is expected to occur in the future. These statements involve
estimates, assumptions, known and unknown risks, uncertainties and other factors
that could cause actual results to differ materially from any future results,
performances or achievements expressed or implied by the forward-looking
statements.
Examples
of forward-looking statements include:
·
the
timing of the development of future
products;
·
projections
of revenue, earnings, capital structure and other financial
items;
·
statements
of our plans and objectives;
·
statements
regarding the capabilities of our business
operations;
·
statements
of expected future economic
performance;
·
statements
regarding competition in our market;
and
·
assumptions
underlying statements regarding us or our
business.
The
ultimate correctness of these forward-looking statements depends upon a number
of known and unknown risks and events. We discuss our known material risks under
the heading “Risk Factors” above. Many factors could cause our actual results to
differ materially from those expressed or implied in our forward-looking
statements. Consequently, you should not place undue reliance on these
forward-looking statements.
The
forward-looking statements speak only as of the date on which they are made,
and, except as required by law, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of unanticipated
events. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
After
deducting the estimated placement discount, non-accountable expense allowance
and offering expenses payable by us, we expect to receive net proceeds of
approximately $21,430,000 from this offering, assuming the minimum offering. The
net proceeds from this offering must be remitted to China before we will be able
to use the funds to grow our business. The procedure to remit funds may take as
long as six months after completion of this offering in the ordinary course, and
we will be unable to use the funds in China until remittance is completed. See
“Risk Factors – We must remit the offering proceeds to China before they may be
used to benefit our business in China, and this process may take a number of
months.”
We intend
to use the net proceeds of this offering as follows after we complete the
remittance process, and we have ordered the specific uses of proceeds in order
of priority.
Description of Use
Approximate Application of Net Proceeds
Percentage of Net Proceeds
Acquisition
and construction of salt mines
$
8,572,000
40
%
Construction/acquisition
of bromine plants
$
6,429,000
30
%
Construction
of bromine compounds plant
$
2,143,000
10
%
Working
capital
$
3,214,500
15
%
Sarbanes-Oxley
compliance-related professional fees
$
1,071,500
5
%
Total
$
21,430,000
100
%
In the
event we do not locate any appropriate targets for acquisitions or property on
which to construct new plants or are not able to negotiate such acquisitions or
construction agreements on terms that are acceptable to us, we reserve the right
to allocate such funds to our working capital purposes. There are no
understandings, commitments or agreements with respect to any such transaction
at this time.
Pending
use of the net proceeds, we intend to invest our net proceeds in short-term,
interest bearing, investment-grade obligations. These investments may have a
material adverse effect on the U.S. federal income tax consequences of an
investment in our common shares. It is possible that we may become a passive
foreign investment company for U.S. federal income tax purposes, which could
result in negative tax consequences to you. These consequences are described in
more detail in “Taxation.”
We have
never declared or paid any cash dividends on our common shares. We anticipate
that we will retain any earnings to support operations and to finance the growth
and development of our business. Therefore, we do not expect to pay cash
dividends in the foreseeable future. Any future determination relating to our
dividend policy will be made at the discretion of our Board of Directors and
will depend on a number of factors, including future earnings, capital
requirements, financial conditions and future prospects and other factors the
Board of Directors may deem relevant.
If we
determine to pay dividends on any of our common shares in the future, as a
holding company, we will be dependent on receipt of funds from WFOE. Payments of
dividends by WFOE to our company are subject to the requirement that foreign
invested enterprises may only buy, sell and/or remit foreign currencies at those
banks authorized to conduct foreign exchange business. Further, such remittances
would require WFOE to provide an application for remittance that includes, in
addition to the application form, a foreign registration certificate, board
resolution, capital verification report, audit report on profit and stock
bonuses, and a tax certificate. There are no such similar foreign exchange
restrictions in the British Virgin Islands.
Exchange
Rate Information
Our
business is primarily conducted in China, and the financial records of WFOE and
Shandong Haiwang are maintained in RMB, their functional currency. However, we
use the U.S. dollar as our reporting currency; therefore, periodic reports made
to shareholders will include current period amounts translated into U.S. dollars
using the then-current exchange rates, for the convenience of the readers. Our
financial statements have been translated into U.S. dollars in accordance with
Accounting Standards Codification (“ASC”) 830-10, “Foreign Currency Matters.” We
have translated our asset and liability accounts using the exchange rate in
effect at the balance sheet date. We translated our statements of operations
using the average exchange rate for the period. We reported the resulting
translation adjustments under other comprehensive income. Unless otherwise
noted, we have translated balance sheet amounts with the exception of equity at
June 30, 2010 at ¥6.7889 to $1.00 as compared to ¥6.8259 to $1.00 at June 30,2009. The average translation rates applied to income statement accounts for the
year ended June 30, 2010 and the year ended June 30, 2009 were ¥6.8180 and
¥6.8259, respectively.
We make
no representation that any RMB or U.S. dollar amounts could have been, or could
be, converted into U.S. dollars or RMB, as the case may be, at any particular
rate, or at all. The PRC government imposes control over its foreign currency
reserves in part through direct regulation of the conversion of RMB into foreign
exchange and through restrictions on foreign trade. On February 1, 2011, the
interbank rate was ¥6.6135 to $1.00. Our company does not currently engage in
currency hedging transactions.
The
following table sets forth information concerning exchange rates between the RMB
and the U.S. dollar for the periods indicated.
The
following table sets forth our capitalization as of December 31, 2010 on a pro
forma as adjusted basis giving effect to the sale of the minimum offering at an
assumed public offering price of
$[ ] per share and to
reflect the application of the proceeds after deducting the estimated 6%
placement fee, 2% non-accountable expense allowance and $650,000 in other
offering expenses.
You
should read this table in conjunction with our financial statements and related
notes appearing elsewhere in this prospectus and “Use of Proceeds” and
“Description of Capital Stock.”
On a pro forma as adjusted basis
giving effect to the pro rata issuance of 21,130,000 shares to our current
shareholders prior to the completion of this offering and the sale of the
minimum offering at an assumed public offering price of
$[ ]per share and to reflect the
application of the proceeds after deducting a 6% placement discount, 2%
non-accountable expense allowance and our estimated offering expenses of
$650,000. For purposes of this calculation, we have assumed the minimum
offering of 4,500,000
shares.
If you
invest in our common shares, your interest will be diluted to the extent of the
difference between the initial public offering price per common share and the
pro forma net tangible book value per common share after the offering. Dilution
results from the fact that the per common share offering price is substantially
in excess of the book value per common share attributable to the existing
shareholders for our presently outstanding common shares. Our net tangible book
value attributable to shareholders at December 31, 2010 was
$[ ] or approximately
$[ ] per common share. Net tangible book value per common
share as of December 31, 2010 represents the amount of total tangible assets
less goodwill, acquired intangible assets net, and total liabilities, divided by
the number of common shares outstanding.
If the
minimum offering is sold, we will have 25,680,000 common shares outstanding upon
completion of the offering. Our post offering pro forma net tangible book value,
which gives effect to receipt of the net proceeds from the offering and issuance
of additional shares in the offering, but does not take into consideration any
other changes in our net tangible book value after December 31, 2010, will be
approximately
$[ ] or
$[ ] per common
share. This would result in dilution to investors in this offering of
approximately
$[ ] per common
share or approximately
[ ] % from the
assumed offering price of $[ ] per common share.
Net tangible book value per common share would increase to the benefit of
present stockholders by
$[ ] per share
attributable to the purchase of the common shares by investors in this
offering.
The
following table sets forth the estimated net tangible book value per common
share after the offering and the dilution to persons purchasing common
shares.
Assumed
offering price per common share
$
[ ]
Net
tangible book value per common share before the offering
$
[ ]
Increase
per common share attributable to payments by new investors
$
[ ]
Pro
forma net tangible book value per common share after the
offering
$
[ ]
Dilution
per common share to new investors
$
[ ]
Post-Offering
Ownership
The following chart illustrates our pro
forma proportionate ownership, upon completion of the offering, by present
shareholders and investors in this offering, compared to the relative amounts
paid by each. The chart reflects payment by present shareholders as of the date
the consideration was received and by investors in this offering at the assumed
offering price without deduction of commissions or expenses. The chart further
assumes no changes in net tangible book value other than those resulting from
the offering.
In the
table below, we provide you with selected consolidated financial data of our
company. This information is derived from our consolidated financial statements
included elsewhere in this prospectus. Historical results are not necessarily
indicative of the results that may be expected for any future period. When you
read this historical selected financial data, it is important that you read it
along with the historical statements and notes and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere in
this prospectus.
(1) The number of pro forma common shares
assumes the pro rata issuance of 21,130,000 shares to our existing shareholders,
who currently hold 50,000 shares, prior to completion of this
offering.
38
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
You
should read the following discussion and analysis of our financial condition and
results of operations in conjunction with our audited historical consolidated
financial statements and the related notes included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results and the timing of selected events
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under “Risk
Factors” and elsewhere in this prospectus.
Overview
Our
company is in the business of producing and selling crude salt, bromine and
brominated specialty chemical products in the PRC. We control an affiliated
entity, Shandong Haiwang, pursuant to a series of control agreements between
Shandong Haiwang and our wholly owned subsidiary, WFOE. Shandong Haiwang mainly
produces and sells crude salt, bromine and brominated specialty chemicals on
approximately 24 square kilometers of land in Weifang City, Shandong Province
and 10 square kilometers of land in Dongying City, Shandong Province. This area
is ideally situated for the bromine and crude salt industry because of its
naturally occurring underground saturated brine pools. Shandong Haiwang is the
largest private producer that produces crude salt from seawater in China, as
measured by capacity. The natural brine water is first pumped from the
underground brine pools and sent to a bromine refining plant, where the bromine
is extracted. The remaining brine water is left to evaporate in brine pans,
resulting in crude salt. Crude salt is a basic raw material used for producing
chlorine, soda ash, caustic soda and hydrochloric acid, all of which play
essential roles in modern industry. Shandong Haiwang is one of the
largest producers of bromine in China, as measured by both output and production
capacity. Elemental bromine is used to manufacture a wide variety of bromine
compounds used in industry and agriculture. Bromine is commonly used to produce
brominated flame retardants, fumigants, water purification compounds, dyes,
medicines and disinfectants. Shandong Haiwang also extends its reach
downstream by using its scalable bromine to produce brominated specialty
chemicals.
Shandong
Haiwang commenced operations in January 2003 and has reached an annual operating
capacity of 1.02 million tons of crude salt, 18,000 tons of bromine from its
seven bromine plants and brominated specialty chemical production capacity of
2,500 tons of decabromodiphenyl ether, 4,000 tons of decabromodiphenyl ethane
and 12,350 tons of hydrobromic acid. In terms of capacity, we are among the top
three producers of these three products in China.
We
currently produce substantially all of our products and derive substantially all
of our revenues from processing underground brine water from Shandong Province.
While Shandong Haiwang receives a nominal amount of revenue from the sale of
bromine extracted directly from sea water, it is not a current focus of our
company. Approximately 85% of the bromine produced in China comes from the
saturated brine water resources in Shandong Province. In the last three years,
our business has grown rapidly as a result of China’s strong demand for basic
chemical raw materials and specialty chemicals.
Mr.
Chunbin Yang, Mr. Tongjiang Sun and Mr. Xiusheng Cui are key members of
management of both Haiwang and Shandong Haiwang and have controlled more than
50% of the voting ownership interests in both entities since their respective
inception dates. Haiwang and Shandong Haiwang have been considered under common
management since October 18, 2010 (the inception date of Haiwang) and therefore
the financial statements include both companies presented on a combined basis
from October 18, 2010 to December 31, 2010. The financial statements are solely
those of the consolidated statements of Shandong Haiwang and its subsidiaries
for the fiscal years ended June 30, 2010 and June 30, 2009, for the interim
period ended December 31, 2009 and for the period from July 1, 2010 through
October 17, 2010.
For the
last two fiscal years ended June 30, 2010 and 2009, our total revenues
amounted to approximately $64.79 million and $49.86 million, respectively. For
the six month periods ended December 31, 2010 and 2009, our total revenues
amounted to approximately $56.71 million and $32.87 million, respectively. Our
revenues are subject to value added tax (“VAT”). We deduct these amounts from
our gross revenues to arrive at our total revenues. Excluding the impact of
extraordinary items, our net income attributable to Haiwang for the periods
ended June 30, 2010 and 2009 was $6.76 million and $4.3 million,
respectively, and $14.23 million and $2.84 million for the six month periods
ended December 31, 2010 and 2009, respectively.
39
Principal
Factors Affecting our Results of Operations
Revenues
Our total
revenues are derived from products we provide in our two business segments: (1)
crude salt and bromine, and (2) brominated specialty chemicals. Currently, all
of the products we distribute fall within one of these two operating segments.
Demand for our products currently exceeds our supply. We anticipate demand
continuing to significantly exceed supply in the future. As a result, we expect
the prices of our products to rise and our revenues to continue to grow in turn,
as we continue to expand our production capacity to meet the ever-growing demand
for our products.
Crude Salt and Bromine – Our
Basic Chemical Raw Materials
We derive
revenues in our crude salt and bromine segment from the sale of crude
salt and bromine primarily to our customers in the chemistry, pharmaceutical and
agricultural industries. Our bromine and crude salt operating segment is our
largest operating segment and has the more extensive market penetration of our
two operating segments. We anticipate that we will continue to experience
revenue growth in our bromine and crude salt operating segment as the demand
from our customers becomes even more robust, and we further penetrate the market
through developing strategic client accounts.
We also
derive a small percentage of revenue in this operating segment in the form of
rental income from the lease of our buildings and our salt fields to third
parties. In order to benefit from increases in the price of crude salt, we
agreed with our salt field lessees to pay us a certain amount of crude salt,
instead of cash, so that we can profit from the resale of the crude salt. These
leases were entered into with the previous owners of the salt pans. As part of
the terms of our acquisitions, we allowed the smaller crude salt producers to
continue to use portions of the salt pans. The leases will expire between 2014
and 2018. We do not intend to allow the leases to be renewed upon
expiration.
Bromine Compounds –
Our Brominated Specialty Chemical Products
We derive
revenues in our brominated specialty chemical operating segment from sales of
decabromodiphenyl ether, decabromodiphenyl ethane and hydrobromic acid.
Decabromodiphenyl ether and decabromodiphenyl ethane are both used as flame
retardants, while hydrobromic acid is used to produce other bromine compounds
and is itself used to produce medicines, dyes and perfumes. Our recent
experience shows that, on a percentage basis, net revenues in this operating
segment are increasing at a more rapid rate than our total net revenues in the
near term. We anticipate revenues in this operating segment to account for an
increasing percentage of our total revenues in the future as we plan to increase
our production capacity to meet ever-increasing demand for brominated specialty
chemical products, and accordingly increase our selling price as demand
currently exceeds supply. We expect to increase our market penetration in the
brominated specialty chemical market as we develop and produce new product
lines.
Factors
Affecting Revenues
The
following factors affect the revenues we derive from our operations. For other
factors affecting our revenues, see “Risk Factors—Risks Related to Our
Business.”
Consumer demand for basic chemical
raw materials and brominated specialty chemical products. Consumer demand
for our products is closely linked to the performance of the general global
economy and is sensitive to business and production levels of chemical
producers. Declines in consumer demand due to adverse general economic
conditions or lower industrial demand can lower the revenues and profitability
of our operations. As a result, changes in consumer demand and general business
cycles can subject our revenues to volatility.
40
Competition. While the crude
salt, bromine and brominated specialty chemical industry in Shandong Province
and Weifang city features approximately 75 bromine plants and a number of salt
farms, a number of those plants and farms are significantly smaller than us and
sell much smaller quantities of crude salt and bromine than we do. Additionally,
most of these smaller bromine and crude salt producers do not have the
downstream production capability to produce brominated specialty chemical
products. We believe that recent favorable prices for basic raw materials and
chemical products are likely to result in an increased level of competition in
the market. Our scalable production, vertical integration of our production
chain, and our relatively large bromine reservoir to store lower-priced
inventory allow us to receive additional revenue from price hikes, as well as
benefit from increased economies of scale in our operations.
Price Volatility. Our
industry often experiences price volatility. This is evidenced by the drop in
prices of our products we experienced in 2009 due to the global recession,
followed by a significant rebound in 2010. While we may be able to counter
unfavorable price movements due to our large production scale, revenue base and
ability to store bromine in our reservoir, our revenue growth might be
negatively impacted if prices were to shift downward in the future.
Expansion. Our management
believes we must continue to expand our production capacity to seize additional
market share. Since 2003, Shandong Haiwang has acquired 6 bromine plants
bringing our total bromine operation to 7 bromine plants. To remain competitive
in the marketplace, our management believes we must continue with such
expansion, and if we fail to make acquisitions or expand our production
capacity, our revenue growth could slow.
Costs
and Expenses
We
primarily incur the following costs and expenses:
Costs of goods sold. In
producing bromine, crude salt and brominated specialty chemical products,
Shandong Haiwang incurs a number of costs that factor in to costs of goods sold.
It must pay a resources tax to the PRC government to utilize the Shandong
Province brine water for bromine extraction and crude salt production in the
amount of RMB 20 per ton on crude salt produced by Haiwang. Additionally, it
must purchase chlorine, brim stone, and coal, which are all essential to the
process of extracting bromine from the brine water. For purposes of producing
the brominated specialty chemicals, it also must purchase ethane and ethyl
ether. Ethane and ethyl ether are purchased in the open market and their prices
fluctuate with market supply and demand. In addition to these items, cost of
goods sold includes employee wages, water, electricity, equipment depreciation
expense, maintenance expense, sporadic equipment costs, insurance expenses, and
sewage charges.
General and administrative
expenses. General and administrative expenses consist primarily of
compensation expenses for our corporate staff and personnel supporting our
corporate staff, research and development expenses, communication costs,
gasoline, welfare expenses, education expenses, professional fees (including
consulting, audit and legal fees), travel and business hospitality expenses,
land rent, inventory gains and losses, amortization of land use rights, land use
tax, low value consumables, stamp duty expense, measure, design and monitoring
charges, contractual performance obligations and office administrative and
related expenses.
Selling expenses. Selling
expenses include freight expenses for delivery of our products and salaries and
wages for sales and marketing personnel, and related travelling expenses for
sales and marketing personnel. Delivery of our products is negotiated on a
contract by contract basis and in some instances we deliver products to our
customers and in other instances, our customers pick up their orders on
site.
Factors
Affecting Expenses
Supplies and commodity
prices. In addition to the proportionate resource tax we pay
the PRC government to utilize the brine water for bromine extraction and crude
salt production, the other main component of our expenses relates to the price
of materials and utilities required to extract bromine from brine water and to
produce crude salt and brominated specialty chemicals. To the extent the prices
of materials and utilities vary, our cost of goods will fluctuate. For this
reason, we may be affected by the prices we receive from our upstream suppliers
and external factors that could limit the supply of chlorine, brim stone or
coal.
Transition to public company.
Once we complete this offering, we expect that our administrative costs will
increase materially, as we need to comply with detailed reporting
requirements.
41
Number of customers. The more
customers Shandong Haiwang has, the greater we expect selling expenses, travel
expenses and the like will be. At present, Shandong Haiwang is able to sell
substantially all of its products within Shandong Province, Zhejiang Province
and Jiangsu Province, to a relatively small number of customers. We believe this
concentration of customers has allowed us to focus our marketing and selling
efforts in a relatively narrow area.
Transportation means and proximity
of customers. The unit transportation fee is lower if we utilize one-way
trucks to transport our goods as opposed to roundtrip trucks. Additionally, the
closer we are to our customers; the less we pay in freight, which leads to less
selling expenses. Where the contract states that the customer would bear the
freight expenses, Shandong Haiwang would bear less freight expense, and have
less selling expenses.
Number of bromine plants and salt
fields we operate. Shandong Haiwang has acquired or constructed a number
of bromine plants in the last several years. As Shandong Haiwang operates more
plants, our administrative expenses tend to increase in dollars but decrease as
a percentage of revenues.
The
following table presents certain information derived from the consolidated
statements of operations and cash flows for the six months ended December 31,2010 and December 31, 2009, respectively.
Net
revenue was $56.7 million for the six months ended December 31, 2010, an
increase of $23.8 million (or approximately 73%) compared to the same period in
2009. This increase was primarily attributable to increased revenues in
both our bromine and crude salt segment and our brominated specialty chemical
segment. Net revenue in our bromine and crude salt segment increased to $33.5
million for the six months ended December 31, 2010 compared to $24.3 million in
the same period in 2009, an increase of approximately $9.2 million or 37.9%.
This increase was primarily the result of the sharp increase in the price of
crude salt and bromine, from an average of RMB 156 per metric ton to RMB 235 per
metric ton for crude salt, and from an average of RMB 12,860 per metric ton to
RMB 21,070 per metric ton for bromine. Another significant factor underlying the
overall increase in net revenue was the growth in sales of our brominated
specialty chemical products. Net revenue attributable to our brominated
specialty chemical products increased from $8.5 million for the six months ended
December 31, 2009 to $23.1 million for the same period in 2010, an increase of
172%. The increase in revenues in our brominated specialty chemical products
segment was primarily a result of an increase in the price of brominated
specialty chemicals, from an average of RMB 18,900 per metric ton to RMB 30,245
per metric ton due to strong demand for our brominated specialty chemicals,
which are used as flame retardants. The increased production of brominated
specialty chemicals generated approximately $9.7 million of additional net
revenue for this quarter.
The cost
of net revenue reflects raw materials consumed, electricity, depreciation,
direct salaries and benefits of staff engaged in the production process, and
other manufacturing costs. The cost of net revenue and the resulting gross
profit for the six months ended December 31, 2010 and 2009 were:
The
increase in our cost of net revenue was largely the result of the substantially
higher sales volumes recorded in the six months ended December 31, 2010 as
compared to the six months ended December 31, 2009. The reduction in the
cost of net revenue as a percentage of net revenue for the six months ended
December 31, 2010 compared to the same period in 2009 was primarily because the
sharp increase in the average sales price of our products substantially exceeded
the relatively smaller increase in our production cost, production efficiencies
in consumables and electricity, our production expertise gained from operating a
number of bromine plants, and greater utilization of our production capacity for
brominated specialty chemical products. Our superior storage capacity for
bromine as compared to that of our competitors also contributes to our
profitability as we are able to store products when the price is low and sell
when the price is high.
43
The
increase in gross profit was largely the result of the sharp increase in the
sales price of our products as well as the other factors noted
above.
Selling
Expenses
Selling
expenses were $1.906 million for the six months ended December 31, 2010, a
decrease of $0.539 million (or approximately 22%) from selling expenses of
$2.445 million for the six months ended December 31, 2009. Selling expenses are
mostly comprised of freight expenses in the amount of $1.46 million and $2.07
million for the six months ended December 31, 2010 and 2009, respectively.
Freight expenses include expenses associated with delivering crude salt, bromine
and brominated specialty chemical products. The decrease was mainly due to a
change in our product mix and customer mix. Freight for crude salt is highest
due to crude salt’s physical characteristics; however, the percentage of our
total sales coming from crude salt decreased from 74% in the six months ended
December 31, 2009 to 59% in the six months ended December 31, 2010. On the other
hand new customers drove demand for bromine and brominated specialty chemical
products within Shandong Province increasing sales in the six months ended
December 2010, and corresponding freights have been much lower than freight for
crude salt. In addition we proactively increased our transportation efficiency
by selecting logistics companies that could transport their products on one-way
trips rather than round-trip, which means the back-trip would carry nothing,
causing the unit transportation fee to be relatively lower.
General
and Administrative Expenses
General
and administrative expenses were $1.532 million and $1.438 million for the six
months ended December 31, 2010 and 2009, respectively, an increase of $0.094
million or 7%. The increase in general and administrative expenses for the
six months ended December 31, 2010 was primarily due to a slight increase in
salary expense and additional land use tax paid for a newly acquired land use
right.
Income
from operations before corporate costs was $20.13 million for the six months
ended December 31, 2010 (35.5% of net revenue), an increase of $15.63 million
(approximately 348%) compared to the same period in 2009. This increase resulted
primarily from the increases in net revenue and the resulting higher income from
operations from our bromine and crude salt segment. For the six months ended
December 31, 2010, income from operations for our bromine and crude salt segment
was $13.38 million, an increase of 305% from $3.3 million for the same period in
2009. The increases in net revenue and income from operations for the bromine
and crude salt segment were primarily a result of a sharp increase in the sales
price of bromine and crude salt, and higher gross margin due to production cost
efficiencies. The increases in net revenue and income from operations of our
brominated specialty chemical products were largely due to a strong increase in
the average selling price in the current period, coupled with increased sales of
our brominated specialty chemical products
44
Other
Expense
Other
expenses were $0.74 million for the six months ended December 31, 2010, an
increase of $0.4 million from other expenses of $0.34 million in the same period
of 2009. The increase is mainly due to the increase of interest expense of $0.4
million incurred from bank loans.
Net
Income
Net
income was $14.23 million for the six months ended December 31, 2010, an
increase of $11.39 million (401%) compared to the same period in
2009. This increase was primarily attributable to the $23.84 million
increase in net revenue, and an $8.66 million increase in cost of sales. This
result can also be attributed to the slight increase in general and
administrative expenses from $1.44 million for the six months ended December 31,2009 to $1.53 million during the same period in 2010. In addition our selling
expenses decreased slightly from $2.445 million to $1.91 million, mainly due to
decreased freight expenses as previously discussed.
Liquidity
and Capital Resources
We
believe that our available funds and cash flows generated from operations will
be sufficient to meet our anticipated ongoing operating needs for the next
twelve months. However we will likely need to raise additional capital in order
to fund our ongoing strategy of acquiring smaller bromine companies. We expect
to raise those funds through the issuance of shares in this offering, or through
credit facilities obtained with lending institutions or a combination of both.
There can be no guarantee that we will be able to obtain such funding, whether
through the issuance of debt or equity, on terms satisfactory to management and
our board of directors.
As of
December 31, 2010, cash and cash equivalents were $6.39 million as compared to
$4 million at June 30, 2010. The components of this increase of $2.39 million
are reflected below.
Net
cash provided by (used in) operating activities
$
11,939
$
(3,431
)
Net
cash used in investing activities
(10,838
)
(5,126
)
Net
cash provided by financing activities
1,137
2,339
Effects
of exchange rate changes on cash
146
(14
)
Net
cash inflow (outflow)
$
2,384
$
(6,232
)
For the
six months ended December 31, 2010 we met our working capital and capital
investment requirements mainly by using cash flow from operations.
Net
Cash Provided by Operating Activities
During
the six months ended December 31, 2010, we had positive cash flow from operating
activities of $11.94 million. This was primarily attributable to the increase in
our net income of $11.39 million. Net cash provided by operating activities
during the six months ended December 31, 2010 increased by $15.37 million from
the same period in 2009, primarily due to a $11.39 million increase in net
income.
45
Net
Cash Provided (Used) by Investing Activities and Financing
Activities
Net cash
used in investing activities during the six months ended December 31, 2010
increased by $5.7 million from the same period in 2009, primarily due to a $2.6
million increase in investment in property and equipment, and a $2.7 million
increase in investment in acquiring land use rights.
Net cash
provided by financing activities during the six months ended December 31, 2010
decreased by $1.2 million from the same period in 2009, primarily due to
decreased bank loans.
Net
revenue was $64.79 million in for the fiscal year ended June 30, 2010, an
increase of $14.93 million (or approximately 30%) as compared to fiscal 2009.
This increase was primarily attributable to (1) the growth in our bromine
and crude salt segment with revenue in that segment increasing from $41.97
million for fiscal 2009 to $45.12 million for fiscal 2010, an increase of
approximately 7.5%, and (2) growth in our sales of brominated specialty chemical
products, with revenue in that segment increasing from $7.68 million in
fiscal 2009 to $19.47 million in fiscal 2010, an increase of approximately 153%.
The increase in the net sales of bromine and crude salt was primarily due to the
increase of bromine sales by approximately $6 million as a result of an increase
in the average sales price from RMB 10,700 per metric ton in fiscal 2009 to RMB
14,278 per metric ton in fiscal 2010. Sales from crude salt decreased by $2.9
million as a result of a decrease in the average sales price of crude salt from
RMB 220 per metric ton in fiscal 2009 to RMB 160 per metric ton in fiscal
2010. The increase in the sales of our brominated specialty chemical
products was due to both an increase in the average sales price from RMB 16,000
per metric ton in fiscal 2009 to RMB 20,000 per metric ton in 2010, and an
increase in sales volume from 5,379 tons in fiscal 2009 to 6,295 tons in fiscal
2010. These increases generated an additional $11.8 million in net revenue for
our brominated specialty chemical products segment in fiscal
2010.
The
proportion of our total net sales represented by bromine and crude salt in the
year ended June 30, 2010 increased as compared to the year ended June 30,2009. Although sales in both segments grew, the growth of sales of
our brominated specialty chemical products surpassed the growth rate of our
bromine and crude salt operations mainly due to the increase in the sales price
and production output. Corporate revenue represents the rental income we receive
from leasing out office space to the local government.
Cost
of Net Revenue
Cost of net revenue reflects
raw materials consumed, depreciation and amortization expenses, direct salaries
and benefits, electricity and other manufacturing costs. Our cost of net
revenue was $48.05 million in fiscal 2010, an increase of $11.5 million (or
approximately 32%) from the cost of net revenue in fiscal 2009. This
increase was in line with the increase in our net revenue and also partly
resulted from an increase in the average purchase price of our raw materials
such as chlorine and sulfur.
Gross
Profit
Year Ended June 30,
USD’000
2010
% of Net
revenue
2009
% of Net
revenue
Cost
of net revenue
$
48,045
74.15
%
$
36,526
73.26
%
Gross
Profit
$
16,747
25.85
%
$
13,333
26.74
%
Our net
revenue increased 30% in fiscal 2010 compared to fiscal 2009, which was mainly
due to the increased sales price of our bromine and brominated specialty
chemicals. The average sales price for crude salt decreased from RMB 220 per
metric ton in fiscal 2009 to RMB 160 per metric ton in fiscal 2010, reducing the
gross margin ratio for crude salt from 37% in fiscal 2009 to 29% in fiscal 2010.
However, this decrease was offset by the gross margin increase for both bromine
and brominated specialty chemical products. The average sales price of bromine
increased from RMB 10,700 per metric ton in fiscal 2009 to RMB 14,278 per metric
ton in fiscal 2010, causing the gross margin ratio for bromine to increase from
25% to 40%. The average sales price of brominated specialty chemical products
increased from RMB 16,000 per metric ton to RMB 20,000 per metric ton, causing
the gross margin ratio for brominated specialty chemical products to increase
from 12% to 28%.
47
Our
business leasing crude salt pans broke even in fiscal 2009 and fiscal 2010. As a
result, cost of net revenue as a percentage of net revenue stayed at 73-74% for
both fiscal 2010 and fiscal 2009. Gross profit as a percentage of net
revenue also stayed at 26-27% for both fiscal 2010 and fiscal
2009.
Selling
Expenses
Selling
expenses were $3.68 million in fiscal 2010, a decrease of $299,000 (or
approximately 8%) from selling expenses of $3.98 million during fiscal 2009.
Selling expenses are mostly comprised of freight expenses in the amount of $3.35
million in fiscal 2010 and $3.53 million in fiscal 2009. Freight expenses
include expenses associated with delivering crude salt, bromine and brominated
specialty chemical products. The slight decrease was mainly due to a change in
our product mix and customer mix. Freight for crude salt is higher due to crude
salt’s physical characteristics; however, the percentage of our total sales
coming from crude salt decreased from 53% in fiscal 2009 to 37% in fiscal 2010.
On the other hand new customers drove demand for bromine and brominated
specialty chemical products within Shandong Province increasing sales in fiscal
2010, and corresponding freights have been much lower than freight for crude
salt.
General
and Administrative Expenses
General
and administrative expenses were $2.63 million in fiscal 2010, an increase of
$428,000 (or approximately 19%) from general and administrative expenses of
$2.21 million during fiscal 2009. This increase in general and
administrative expenses was primarily due to the land tax and sundry expenses of
$106,000 and $241,000, respectively, for fiscal 2010.
Income
from operations was $10.43 million in fiscal 2010 (or 16.1% of net revenue), an
increase of $3.28 million (or approximately 45.87%) over income from operations
of $7.15 million in fiscal 2009. This increase resulted primarily from the
increase in revenues and relatively lower increase in expenses as shown
above. The increase is also attributable to increases in income from
operations in both our bromine and crude salt segment, and our brominated
specialty chemical products segment. In fiscal 2009, income from operations
in the bromine and crude salt segment was $8.00 million, an increase of 10.2%
from $7.26 million in fiscal 2009. In fiscal 2010, income from operations in the
brominated specialty chemical products segment was $3.47 million, a significant
increase from income from operations in this segment of 379,000 in fiscal 2009.
The increase in the income from operations for our bromine and crude salt
segment was primarily as a result of the increase in our sales price for
bromine. The increase in the income from operations for our brominated specialty
chemical products was due to both the increase in sales price and the increase
in our sales volume as a result of our greater production capacity
utilization.
Corporate
profit refers to the rents from leasing Shandong Haiwang’s building to the local
government. The corporate cost includes the depreciation expense of the
buildings and other non-allocable expenses.
48
Other
Expense
Other
expenses were $1.336 million for the 2010 fiscal year, a decrease of $15,000
from other expenses of $1.351 million for the 2009 fiscal year. This decrease
was primarily due to a decrease in interest income of $300,000, offset by a
decrease of $197,000 in interest expense. In addition, the net loss from
disposal and damage of fixed assets decreased by $496,000 compared to fiscal
2009, partly offset by one-off net gain of $391,000 from disposing of equity
investment in Shandong Haiheng Chemical Co., Ltd. in fiscal 2009.
Extraordinary
Gain
A one-off
gain in the amount of $431,000 occurred in fiscal 2009 in the nature of
compensation from the government for the requisition of a piece of
land.
Net
Income
Net
income was $6.76 million in fiscal 2010, an increase of $2.03 million (or
approximately 42.9%) as compared to fiscal 2009. This increase was primarily
attributable to the $14.93 million increase in net revenue. This result can also
be attributed to the slight increase in general and administrative expenses from
$2.21 million in fiscal 2009 to $2.63 million in fiscal 2010. In addition our
selling expenses decreased slightly from $3.98 million to $3.68 million, mainly
due to decreased freight expenses as previously discussed.
Liquidity
and Capital Resources
Cash
Flows and Working Capital
To date,
we have financed our operations primarily through cash flows from operations and
bank loans. As of June 30, 2010, we had approximately $4 million in cash and
cash equivalents. As a result of our total cash activities, net cash decreased
from $7.28 million on June 30, 2009 to $4 million on June 30, 2010, and
then increased to $6.39 million on December 31, 2010. We believe that our
currently available working capital of $10.715 million, including cash of $6.39
million, should be adequate to meet our anticipated cash needs and sustain our
current operations for at least the next 12 months.
However,
currently available working capital, especially cash, may not be sufficient to
fund our anticipated expansion. In order to meet the working capital needs for
our anticipated expansion, we may take the following actions: (i) continue
to improve our collection of accounts receivable; (ii) if necessary, raise
additional capital through the sale of equity; and (iii) enter into new, or
refinance existing, short- and/or long-term commercial loans. We cannot assure
you that financing will be available in the amounts we need or on terms
acceptable to us, if at all. The sale of additional equity securities, including
convertible debt securities, would dilute our shareholders. The incurrence of
debt would divert cash from working capital and capital expenditures to service
debt obligations and could result in operating and financial covenants that
would restrict our operations and our ability to pay dividends to our
shareholders. If we are unable to obtain additional equity or debt financing as
required, our business, operations and prospects may suffer.
Consolidated
Statement of Cash Flows
As of
June 30, 2010, cash and cash equivalents were $4.01 million as compared to $7.28
million as of June 30, 2009. The components of this decrease of $3.27
million are reflected below.
Net
cash provided by (used in) investing activities
$
(11,010
)
$
5,347
Net
cash provided by financing activities
$
10,800
$
1,479
Effects
of exchange rate changes on cash
$
26
$
12
Net
cash inflow (outflow)
$
(3,274
)
$
4,889
In fiscal
2010 we met our working capital and capital investment requirements mainly by
using operating cash flows and bank loans.
Net
Cash Provided by Operating Activities
During
the year ended June 30, 2010, we had negative cash flow from operating
activities of $3.09 million, which was primarily attributable to the increase of
accounts receivable, notes receivable and inventory in line with our sales
increase. Net cash used in operating activities in fiscal 2010 increased by
$1.14 million as compared to fiscal 2009. The increase of net cash used in
operating activities is the result of several factors, including:
·
Increase
of $3.69 million in accounts receivable. This increase was associated with
a growth in sales in fiscal 2010 compared with fiscal 2009, while our
accounts receivable terms remained the
same.
·
Increase
of $5.31 million in notes receivable. This increase was associated with a
growth in sales in fiscal 2010 compared with fiscal 2009. Our customers
settle their trade debt with notes accepted by banks. As a matter of
practice, these notes accepted by banks could be easily converted into
cash through the banks.
·
Increase
of $2.4 million in rents receivable. The increase was associated with
rental income from our leased salt fields. The rental income is accrued on
a monthly basis, but according to the lease agreements, the rent is
collected in the aggregate in
October.
·
Increase
of $3.95 million in inventory. The increase was associated with a growth
in sales in fiscal 2010 compared with fiscal 2009; however, our inventory
turnover periods remained the same.
·
Decrease
of $11.43 million in notes payables. The decrease in notes payable is
mainly due to the settlement of notes as they became
due.
Investing
Activities
Net cash
used in investing activities for the year ended June 30, 2010 was $11 million,
compared to net cash provided by investing activities of $5.35 million in the
year ended June 30, 2009. The cash used in investing activities in fiscal 2010
was mainly used for capital expenditures for the purchase of land use rights.
The cash provided by investing activities in fiscal 2009 was mainly attributable
to collection of loans to third-party companies of $9.37 million and cash
receipts from the partial disposal of our investment in Shandong Haiheng of $8.2
million, partly offset by cash expenditures for land use rights, property and
equipment of $11.4 million. We made such third party loans to utilize excess
cash to generate interest income to offset the interest expense on our bank
loans
Financing
Activities
Net cash
provided by financing activities in the year ended June 30, 2010 totaled $10.8
million, compared to net cash provided by financing activities of $1.48 million
in the year ended June 30, 2009. The cash provided by financing activities in
the year ended June 30, 2010 was mainly attributable to proceeds received from
bank loans. The cash provided by financing activities for the year ended June30, 2009 was mainly attributable to a cash injection in one subsidiary from
owners, partly offset by repayment of bank loans.
50
Contractual
Commitments
The
following table sets forth payments due by period for fixed contractual
obligations as of December 31, 2010.
Contractual obligations
Payments due by period
USD’000
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
Long-Term
bank loans
$
12,613
2,480
10,133
-
-
Long-Term
lease Obligations
$
15,986
1,168
2,336
2,336
10,146
Total
$
28,599
$
3,648
$
12,4696
2,336
10,146
Off
Balance Sheet Items
Under SEC
regulations, we are required to disclose our off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our
financial condition, such as changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. An off-balance sheet arrangement means
a transaction, agreement or contractual arrangement to which any entity that is
not consolidated with us is a party, under which we have:
any
retained or contingent interest in assets transferred to an unconsolidated
entity or similar arrangement that serves as credit, liquidity or market
risk support to that entity for such
assets,
·
any
obligation under a contract that would be accounted for as a derivative
instrument, except that it is both indexed to our stock and classified in
shareholder equity in our statement of financial position,
and
·
any
obligation arising out of a material variable interest held by us in an
unconsolidated entity that provides financing, liquidity, market risk or
credit risk support to us, or engages in leasing, hedging or research and
development services with us.
We do not
have any off-balance sheet arrangements that we are required to disclose
pursuant to these regulations. In the ordinary course of business, we enter into
operating lease commitments, purchase commitments and other contractual
obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United
States.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based upon our audited consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these audited consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. On an on-going basis, we
evaluate our estimates based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The
critical accounting policies summarized in this section are discussed in further
detail in the notes to the audited consolidated financial statements appearing
elsewhere in this prospectus. Management believes that the application of these
policies on a consistent basis enables us to provide useful and reliable
financial information about our operating results and financial
condition.
Revenue
Recognition
Revenue
is recognized when there are probable economic benefits to our company and when
the revenue can be measured reliably, on the following bases:
51
·
Sales
of goods and rental income. In accordance with ASC Topic 605-10-S99,
Revenue Recognition, our company recognizes revenue, net of any taxes,
when persuasive evidence of a customer or distributor arrangement exists
or acceptance occurs, receipt of goods by customer occurs or the service
has been rendered, the price is fixed or determinable, and collectability
is reasonably assured.
·
Interest
income, on an accrual basis using the effective interest method by
applying the rate that discounts the estimated future cash receipts
through the expected life of the loans to their net carrying
amount.
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results when ultimately realized could
differ from those estimates. Significant estimates in the quarters ended
December 31, 2010 and 2009 and the years ended June 30, 2010 and 2009
include the allowance for doubtful accounts of accounts receivable, the useful
life of plant and equipment and intangible assets.
Comprehensive
Income
We follow
ASC 205, “Presentation of
Financial Statements,” and ASC 220, “Reporting Comprehensive
Income,” to recognize the elements of comprehensive income. Comprehensive
income is comprised of net income and all changes to the statements of
shareholders’ equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. Comprehensive income for
the six months ended December 31, 2010 and fiscal 2010 and 2009 included net
income and foreign currency translation adjustments.
Impairment
of Long-lived Assets
In
accordance with ASC 360-10, “Impairment or Disposal of Long-Lived
Assets”, we periodically review our long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. We recognize an impairment loss when
the sum of expected undiscounted future cash flows is less than the carrying
amount of the asset. The amount of impairment is measured as the difference
between the estimated fair value and the book value of the underlying asset. We
did not record any impairment charges during the six months ended December 31,2010 or the fiscal years ended June 30, 2010 and 2009,
respectively.
Recent
Accounting Pronouncements
In July
2010, the FASB issued Accounting Standard Update (“ASU”) 2010-20, “Receivables
(Topic 310): Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses.” This ASU amends Topic 310 to
improve the disclosures that an entity provides about the credit quality of its
financing receivables and the related allowance for credit losses. As a result
of these amendments, an entity is required to disaggregate by portfolio segment
or class certain existing disclosures and provide certain new disclosures about
its financing receivables and related allowance for credit losses. For public
entities, the disclosures as of the end of a reporting period are effective for
interim and annual reporting periods ending on or after December 15, 2010. The
disclosures about activity that occurs during a reporting period are effective
for interim and annual reporting periods beginning on or after December 15,2010. Except for the expanded disclosure requirements, the adoption of this ASU
is not expected to have a material impact on our consolidated financial
statements.
ASU No.
2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements. This Update amends ASC 820
subtopic 10 that requires new disclosures about transfers in and out of Levels 1
and 2 and activity in Level 3 fair value measurements. This Update also amends
ASC 820 subtopic 10 to clarify certain existing disclosures. The new disclosures
and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010.
52
ASU No.
2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary. This Update amends ASC 810 subtopic 10 and related
guidance to clarify that the scope of the decrease in ownership provisions of
the Subtopic and related guidance applies to (i) a subsidiary or group of assets
that is a business or nonprofit activity; (ii) a subsidiary that is a business
or nonprofit activity that is transferred to an equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a non-controlling interest in an entity, but does not
apply to: (i) sales of in substance real estate; and (ii) conveyances of
petroleum and gas mineral rights. The amendments in this Update are effective
beginning in the period that an entity adopts FAS 160 (now included in ASC 810
subtopic 10).
In
February 2010, the FASB issued Accounting Standards Update (ASU) 2010-09 to
amend ASC 855, Subsequent Events, whose effective date is for interim or annual
reporting periods ending after June 15, 2010. As a result, ASU No. 2010-09
excludes SEC reporting entities from the requirement to disclose the date on
which subsequent events have been evaluated; In addition, it modifies the
requirement to disclose the date on which subsequent events have been evaluated
in reissued financial statements to apply only to such statements that have been
restated to correct an error or to apply U.S. GAAP retrospectively.
Quantitative
and Qualitative Disclosure about Market Risk
Interest
Rate Risk
Our risk
exposure from changes in interest rates relates primarily to the interest
expenses associated with our historical bank borrowings, as well as the interest
income generated by excess cash invested in demand and time
deposits.
We have
not historically used, and do not expect to use in the future, any derivative
financial instruments to manage our interest risk exposure. Such
interest-earning instruments and borrowings carry a degree of interest rate
risk. We have not been exposed nor do we anticipate being exposed to material
risks due to changes in interest rates.
Credit
Risk
Our
company is exposed to credit risk from its cash in bank and fixed deposits and
bills and accounts receivable. The credit risk on cash in bank and fixed
deposits is limited because the counterparties are recognized financial
institutions. Bills and accounts receivable are subjected to credit evaluations.
An allowance has been made for estimated irrecoverable amounts which have been
determined by reference to past default experience and the current economic
environment.
Foreign
Exchange Risk
The value
of the Renminbi against the U.S. dollar and other currencies is affected by,
among other things, changes in China’s political and economic conditions. Since
July 2005, the Renminbi has no longer been pegged to the U.S. Dollar at a
constant exchange rate. 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 Renminbi may appreciate or depreciate within a flexible
peg range 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 Renminbi exchange rate and lessen intervention in the
foreign exchange market.
Because
substantially all of our earnings and cash assets are denominated in Renminbi,
but our reporting currency is the U.S. dollar, fluctuations in the exchange rate
between the U.S. dollar and the Renminbi will affect our balance sheet and our
earnings per share in U.S. dollars. In addition, appreciation or depreciation in
the value of the Renminbi 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 in the future
that will be exchanged into U.S. dollars and earnings from, and the value of,
any U.S. dollar-denominated investments we make in the future.
53
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 in an effort to reduce our exposure to foreign currency exchange
risk. 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 Renminbi into foreign
currencies.
Most of
the transactions of our company are settled in Renminbi and U.S. dollars. In the
opinion of the directors, our company is not exposed to significant foreign
currency risk.
Inflation
Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although we do not believe that inflation has had
a material impact on our financial position or results of operations to date, a
high rate of inflation in the future may have an adverse effect on our ability
to maintain current levels of gross margin and selling, general and
administrative expenses as a percentage of sales revenue if the selling prices
of our products do not increase with these increased costs.
Company’s
Operations are Substantially in China
While
less than 1% of our sales are outside of China, substantially all of our
operations are conducted in China and are subject to various political,
economic, and other risks and uncertainties inherent in conducting business in
China. Among other risks, our company and its subsidiaries’ operations are
subject to the risks of restrictions on transfer of funds; export duties,
quotas, and embargoes; domestic and international customs and tariffs; changing
taxation policies; foreign exchange restrictions; and political conditions and
governmental regulations. Additional information regarding such risks can be
found under the heading “Risk Factors” in this prospectus.
Our
company is in the business of manufacturing and selling bromine and crude salt,
which are extracted from concentrated underground brine water
reserves. The government has granted our company the mineral rights
to tap and extract brine water resources from reserves underneath approximately
24 square kilometers (9.27 square miles) of land in Weifang City, Shandong
Province, China, and we are applying for the mineral rights to 10 square
kilometers of land on which we plan to construct a salt farm in Dongying City,
Shandong Province. China. We also use our self-developed processing technology
to manufacture and sell brominated specialty chemicals. Our business operations
are conducted in two segments, bromine and crude salt, and brominated specialty
chemical products. We conduct all of our operations in China, in close proximity
to China’s chemical and pharmaceutical manufacturing base and its rapidly
growing market.
We
manufacture and sell bromine and crude salt, and manufacture and sell brominated
specialty chemicals, including decabromodiphenyl ether and decabromodiphenyl
ethane, which are used as flame retardants in a variety of applications such as
automobiles, electronic appliances and equipment, furniture and construction
materials; and also including hydrobromic acid which is used to produce other
bromine compounds, and itself is widely used in a variety of industries such as
medicine, dyeing and perfume. We conduct all of our operations in China and sell
substantially all of our products in China, in close proximity to China’s
chemical and pharmaceutical manufacturing base and its rapidly growing
market.
We have
been in the bromine and crude salt production business since 2003 when our first
plant opened. In this segment of our business, we mainly manufacture bromine and
crude salt for customers in China’s chemical and pharmaceutical industries.
Bromine is a basic and fundamental raw material widely used in the chemical,
flame retardant, agriculture pesticide, dyeing, oilfield and medicine
industries. We believe that we are one of the largest bromine producers in China
in terms of output and capacity.
We have
been following the Chinese government’s policy to effectively explore brine
water to jointly produce both bromine and crude salt. Crude salt has been
extensively used for industrial purposes as a basic chemical raw material. China
is the largest producer of crude salt and is also the largest crude salt
consumer in the world. We are the largest privately-owned
crude salt producer producing crude salt from seawater in China in terms of
production capacity and output.
Bromine
is a corrosive liquid that is extremely difficult to store. As such, we have
invested in a bromine reservoir with a storage capacity of 2,000 metric tons of
bromine. Such storage capacity enables us to store bromine for the purpose of
producing bromine compounds for our own needs. More importantly, this
also allows us to implement an arbitrage strategy of purchasing bromine from
smaller producers when the price is lower and selling the stockpile later at
higher prices, allowing us to capitalize on the spread in price caused by price
volatility over time. We have been able to implement this strategy by purchasing
bromine from smaller producers such as Changyi City Liyu Salt Chemical Co., Ltd,
Weifang Huanhai Salt Chemical Co., Ltd and Chanyi Pudong Salt Chemical Co., Ltd.
Our scalable bromine production capacity, together with our strategic investment
in our bromine storage reservoir, has consolidated our position as a prominent
supplier in the market, so much so that we have gained a certain influence
in the bromine market in China.
While we
currently derive a substantial part of revenues from sales of bromine and crude
salt, sales from brominated specialty chemicals have made an increasing
contribution to our total revenues and we expect they will continue to be a
focus of our company.
Our
brominated specialty chemicals include decabromodiphenyl ether,
decabromodiphenyl ethane and hydrobromic acid. Decabromodiphenyl ether and
decabromodiphenyl ethane can serve as flame retardants due to their excellent
thermal stability and low toxicity, and thus have been widely accepted by the
market and are undergoing a rapid growth stage in China. Brominated flame
retardants are the most widely used flame retardants in China. Approximately 50%
of all flame retardants used in China are brominated flame retardants. These
same characteristics also allow them to be widely used in a variety of other
areas including polymer composite materials, plastic, fiber and building
materials. We anticipate that the Chinese government will in the
future tighten the implementations of rules enacted in the compulsory
application of flame retardants on construction materials to lessen damages from
fire disasters. Our hydrobromic acid is used to produce other bromine
compounds, and itself is widely used in a variety of industries such as
medicine, dyeing and perfume. We are among the top three decabromodiphenyl ether
and decabromodiphenyl ethane producers in China in terms of production
capacity.
55
We use
our self-developed processing technology to manufacture and sell brominated
specialty chemicals. We also invest in bromine production facilities and
assemble high-caliber bromine reservoirs, agitated reactors, buffer tankers, and
pipes into a reaction system to optimize output and improve product quality
while maintaining production safety with our self-developed and patented
processing technologies. We believe we have the most advanced brominated
specialty chemicals production line in China.
We have
been conducting research and development in Jiaozhou City, Shandong Province in
an effort to process bromine from seawater through our seawater concentration
and bromine processing technology, so that our business would be sustained by
the unlimited supply of bromine and crude salt from seawater. We believe our
efforts to this point have been successful and we plan to begin using our
Dongying City plant to produce bromine directly from open seawater by June 2011.
We plan to use our Dongying facilities to produce bromine directly from sea
water and do not expect to need to open any additional facilities or acquire any
additional land.
We
believe that we have developed a reputation in the brominated specialty chemical
market for quality through investment in technology and improvement of the
quality of our products. For instance, we have obtained one exclusive
patent license and have five others pending for brominated specialty chemical
processing technologies and have implemented a rigorous quality inspection
system pursuant to ISO9001 standards since 2003.
We
believe we have the ability to leverage our scalable bromine production capacity
and further establish a vertically integrated chain to solidify our competitive
edge in the bromine industry and brominated specialty chemicals industry. We
currently have a production capacity of 2,500 metric tons of decabromodiphenyl
ether, 4,000 metric tons of decabromodiphenyl ethane and 12,350 metric tons in
hydrobromic acid. We are among the top three decabromodiphenyl ether and
decabromodiphenyl ethane producers in terms of capacity. This vertical
production chain integration has provided sources for additional premium
revenues in that we are insulated from bromine shortages and price volatility,
and we are poised to expand our production capacity for brominated specialty
chemicals in the future. More importantly, the supply of bromine has been a key
barrier for other producers to enter into the brominated specialty chemical
industry or to expand their capacity. In turn, brominated specialty chemicals
can provide protection for our bromine business. Due to the physical
characteristics of brominated specialty chemicals, which are packaged powders,
and easier to store than bromine, we can expand the production of our brominated
specialty chemicals when the price for bromine is lower.
Since our
inception we have been implementing strategic acquisitions of smaller bromine
and crude salt producers. This strategy is consistent with the government’s
efforts to eliminate smaller bromine producers and require all producers to be
licensed. There are currently approximately 75 licensed bromine producers in
Shandong Province. Our company has acquired the operating facilities and related
mining permits of five smaller bromine producers and has acquired one additional
bromine plant in Dongying City, Shandong Province. Altogether, we now own and
operate 7 bromine plants possessing 18 bromine production lines with a
production capacity of 18,000 metric tons per year. While we do not currently
have any agreements or commitments to do so, we anticipate extending our
footprint to other Laizhou Bay area bromine plants, salt pans and salt
mines. We plan to continue to acquire smaller bromine and crude salt
producers around the Weifang City area to reinforce our competitive strength,
maintain our resource reserves and consolidate our leading position in the
bromine and crude salt industry. We also plan to expand and diversify our
resources inventory by acquiring proven salt mines within Shandong Province. To
the extent we are determined to develop this cross-region business, we will need
to acquire, construct or enter into agreements with additional bromine plants
and salt plants in order to expand our capacity and achieve our goal of becoming
the largest bromine and crude salt producer in China.
56
Our
Products
Crude
Salt and Bromine
Our
production of crude salt and bromine comes from the processing of natural brine
water, a concentrated underground salt water. There has been a very long
tradition in China for individuals and companies to produce crude salt from the
brine water through evaporation. However, the brine water contains many
unprocessed ionic compositions besides dissolved sodium chloride. Today,
to make the best use of brine water resources with an emphasis on sustainable
economy, the Chinese government has urged companies to comprehensively utilize
natural brine water resources by producing both bromine and crude
salt.
Crude
salt is a widely used basic material for producing caustic soda and soda ash,
which in turn have been the basic chemical products widely used in glass
products, the metallurgical industry, textile industry and oil industry. In
China, crude salt is also used to produce edible table salt as a
condiment.
The
natural resources for bromine mainly exist in the sea, in underground brine
water, in salt rock from ancient marine sediments and in salt lakes. Because of
the vast amount of seawater, bromic contents in the ocean constitute 99% of the
overall bromine reserves on the earth. The bromic concentration of seawater is
approximately 65 micrograms per liter, whereas it is only about 0.10 microgram
per liter in salt rock. In some areas, such as the Shandong Province brine
fields surrounding the Laizhou Bay, the underground brine water content is
approximately 300-360 micrograms per liter.
Bromine
is a halogen element and a red volatile liquid at standard room temperature. Its
reactivity is between those of chlorine and iodine. Elemental bromine is
used to manufacture a wide variety of bromine compounds used in a variety of
industries such as the chemical, flame retardant, agriculture pesticide, dyeing,
oilfield and medicine industries. Bromine is also used to form intermediates in
organic synthesis, in which it is preferred over iodine due to its lower
cost. Our bromine is commonly used in producing brominated flame
retardants, fumigants, water purification compounds, dyes, medicines and
disinfectants. According to statistics published by the China Crude Salt
Association, we are one of the largest producers of crude salt and bromine
in China, as measured by annual capacity and output.
Processing
of Bromine and Crude Salt
The
underground brine water we utilize is a complicated salt-water combination. The
brine water contains a variety of ionic compositions in which different ions
have close interdependent relationships. Ions in the brine water can be reunited
to form dissolved soluble salts such as sodium chloride, potassium chloride,
calcium sulfate, potassium sulfate and other similar soluble salts. Through the
brine water processing process, we are able to separate and precipitate the
soluble salts away from the water.
Bromine
is the first component we extract when processing the natural underground brine
water. The bromine exists in the form of bromine sodium and potassium bromide
and other soluble salts.
The
bromine extraction and crude salt production process is as follows:
·
Brine
water is pumped from underground reserves through extraction wells by
subaqueous pumps.
·
The
brine water then passes through transmission pipelines to storage
reservoirs.
·
The
brine water then moves to a bromine refining plant. Through the addition
of chlorine, we are able oxidize the bromide ion and extract the bromine
from the brine water.
·
The
bromine is then blown out using compressed air and absorbed by sulfur
dioxide or soda.
·
After
bromine extraction, the remaining brine water is pumped to our brine pans
where it is left to evaporate, resulting in crude
salt.
The raw
materials needed for this process include brine water, vitriol, chlorine, sulfur
and coal. We also currently consume a portion of our bromine in order to produce
brominated specialty chemicals.
57
The
following graphic representation further illustrates the bromine extraction and
crude salt production process:
Brominated Specialty
Chemicals
Our
brominated specialty chemicals include decabromodiphenyl ether,
decabromodiphenyl ethane and hydrobromic acid. Decabromodiphenyl ether and
decabromodiphenyl ethane can serve as flame retardants due to their excellent
thermal stability and low toxicity, and thus have been widely accepted by the
market and are undergoing a rapid growth stage in China. These same
characteristics also allow them to be widely used in a variety of other areas
including polymer composite materials, plastic, fiber and building materials. In
China the brominated flame retardant is the most widely used flame retardant due
to its excellent capability and relatively lower price. Hydrobromic acid is a
byproduct resulting from the production of decabromodiphenyl ether and
decabromodiphenyl ethane. It is used to produce other bromine compounds and
itself is used in the medical, dye and perfume industries. We anticipate that
the Chinese government will in the future tighten the implementation of rules
enacted in the compulsory application of flame retardants on construction
materials to lessen damages from fire disasters.
We use
our self-developed processing technology to manufacture and sell brominated
specialty chemicals. We also invest in bromine production facilities and
assemble high-caliber bromine reservoirs, agitated reactors, buffer tankers and
pipes into a reaction system to optimize output and improve product quality,
while maintaining production safety with our self-developed processing
technologies. The self-developed technologies mainly include the
processing method of highly thermal-stable decabromodiphenyl ethane and a
processing method of high-purity decabromodiphenyl ethane.
58
Market
Background
Crude
salt
In China
crude salt primarily comes from three sources: seawater, salt mines and lakes.
Crude salt extracted from sea water accounts for approximately 48.84% of China’s
total salt output, salt mines account for approximately 40.33% and lakes account
for the remaining 10.31%. The primary industrial application of crude salt is in
the industrial caustic soda and soda ash production process, which accounts for
approximately 79% of China’s total crude salt output. Caustic soda is used in
many industries, mostly as a strong chemical base in the manufacture of pulp and
paper, textiles, drinking water, soaps and detergents and as a drain cleaner.
Soda ash is used as a water softener. Approximately 13% is used for producing
edible salt, and the remaining 8% is used in other assorted applications such as
melting snow.
In the
past decade, the demand for crude salt has mainly been driven by the fast
growing downstream caustic soda and soda ash
industry. China’s total production of crude salt reached 63.35 million tons in
2007, making China the world’s largest producer and consumer of crude salt.
China has remained the largest producer of crude salt, with total output of
72.75 million tons in 2009. A demand analysis of the downstream caustic soda and
soda ash industry, conducted by the China Salt Industry Association, showed that
China was the largest producer of soda ash in the world and CAGR for soda ash
output has been increasing at a rate of 11.86% over the past five years. Caustic
soda output has a CAGR of 20.5% over the past five years. Due to transportation
and cost factors, caustic soda and soda ash producers purchase crude salt from
suppliers in close proximity to them. According to 2010 statistics from the
Weifang City Crude Salt Association, Shandong Province accounts for 22.5% of the
capacity of caustic soda and soda ash in China, and the production capacity for
both reached 12.2 million tons in 2009. Capacity at this level requires 19
million tons of crude salt annually, which exceeds the current market supply.
This imbalance leaves significant room for growth in the crude salt industry.
China is still in the middle stages of industrialization and due to strong
economic growth in China, the soda ash and caustic soda production capacity is
expected to continue to grow. Soda ash production capacity is expected to grow
by an additional 10 million tons by 2012, and production capacity for caustic
soda is expected to grow by 8.6 million tons by 2011, leading to annual crude
salt demand of approximately 29 million tons. We believe that the growth rate
for caustic soda and soda ash will exceed the GDP growth rate in the coming five
years.
Bromine
The
world’s production capability for bromine was approximately 439 thousand tons in
2009, excluding the United States, an increase from 413 thousand tons in 2008,
according the U.S. Geological Survey. We expect the new application of using
bromine to reduce the discharge of mercury will increase demand for bromine by
150 thousand tons by 2015, which translates into 15% to 20% of current world
output, and a market of $400 to $500 million.
The
growth rate for bromine production in China has significantly outpaced the rest
of the world in recent years. In 2009, China produced approximately 126 thousand
tons of bromine. As the main raw material for bromine compounds, China’s bromine
output also increased rapidly with a CAGR of over 25% from 2005 to 2007, making
it the third largest bromine producing country in the world. Bromine produced in
China primarily comes from refining brine water, and there are approximately 75
bromine producers in Weifang City, Shandong Province, which produce
approximately 85% of all the bromine produced in China. China’s bromine
producers are mainly concentrated in the area surrounding the Laizhou Bay,
particularly in the coastal area of Northern Weifang City, Shandong Province.
The bromine we produce is used to manufacture a wide variety of bromine
compounds used in the chemical and medical industries. Bromine is commonly used
to produce brominated flame retardants, fumigants, water purification compounds,
dyes, medicines and disinfectants.
Worldwide,
the largest end-markets for bromine include brominated flame retardant, which
are used as a plastic additive that decreases plastic’s flammable
characteristics by chemically eliminating combustion components such as oxygen,
heat and fuel from plastic. Drilling fluids represents the second major end-use
segment of bromine used in oil field chemicals. In 2009, the largest end-markets
for bromine in China included brominated flame retardants, which accounted for
approximately 49%; organic intermediates, which accounted for approximately 19%;
and oil field chemicals, which accounted for approximately 15% of the bromine
consumed in China.
59
Brominated Flame
Retardants
Brominated
flame retardant is the most widely used flame retardant both in the world and
China. Worldwide, approximately 65-70% of all flame retardant is used as an
additive in plastics. Plastic is widely used in construction materials,
electronics and appliances, and brominated flame retardants can be used as an
additive to help prevent damage or loss as a result of fire. Plastics in China
in recent years have been increasing with modern industry’s increased reliance
on plastics, mainly in automobiles and electronics, propelling the flame
retardant market to grow at a CAGR of 20%. We expect the CAGR for flame
retardants in China to reach 15% within the next five years as the use of
plastics increases and the benefits of flame retardant as an additive to
plastics become more widely known. Additionally, in 2006 the Chinese government
has promulgated a compulsory national standard requiring the application of
flame retardants in all construction materials used in public places, plastics
used in electronics, and furniture. While the Chinese government has made little
effort to enforce this requirement, we nevertheless expect the market for flame
retardants to increase as the government increases its focus on the prevention
of fire damage.
Organic
Intermediate
The
application of bromine in organic intermediate mainly includes medical
intermediate and agricultural pesticide intermediate. Bromine can be used to
produce brominated medicines and brominated medicine intermediates. There are
approximately 40 different categories of medicine that use bromine as a raw
material in some manner, however the primary applications include anti-cancer
brominated drugs, new-type analgesics and other intermediates. Demand for
bromine in the pharmaceutical market is driven by demand in the pharmaceutical
market as a whole. We expect that the Chinese pharmaceutical market will
continue to grow at a CAGR of approximately 20% for the near future, making
the Chinese pharmaceutical market the 3rd largest
pharmaceutical market in the world. Bromine’s
low toxicity, decomposition rate and high work efficiency make it ideal for use
in pesticide. Worldwide, brominated pesticides are used more than any other form
of pesticides.
Brominated
Specialty Chemicals
Our
specialty chemical products are brominated compounds. Our brominated specialty
chemicals, such as decabromodiphenyl ether, decabromodiphenyl ethane and
hydrobromic acid can be used in a variety of applications, such as flame
retardants, medicines, dyes, and water purification compounds. Primarily, our
brominated specialty chemical products are used in the production of flame
retardants. Brominated flame retardant is the most widely used flame retardant
in the world and in China as well. In China, brominated flame retardants are
mainly produced in Shandong Province. Bromine’s excellent thermal stability and
low toxicity make our brominated specialty chemicals ideal flame
retardants.
Brominated
flame retardants are added to plastic materials, which are widely used in
automobiles, electronics, construction materials and furniture to prevent
damages from fire. Since 2002, the explosive growth of the electronics and
automobile industries has propelled the flame retardant industry to accelerate
at a high CAGR of approximately 20%. The application of flame retardant in
automobiles is in the interior plastics, which typically account for
approximately 10% of an automobile’s weight. Demand for flame retardants in the
automobile industry is driven by demand in the fast-growing Chinese automobile
industry as a whole.
Brominated
flame retardant is also used in the electronics industry as an additive to the
plastics used in electronics. Demand is driven by demand for products such as
computers, mobile phones, televisions, DVDs, and household appliances. The
electronics market is undergoing a period of high growth due to increased
disposable income among Chinese residents. The application of flame retardant in
these two areas accounts for approximately 80% of the demand for flame retardant
in China. Due to a relatively low rate of penetration in this market, we expect
the CAGR for the flame retardant industry to remain steady at 15% in the
next five years.
60
Brominated
flame retardants also have a variety of applications in construction. Due to the
Chinese government’s massive infrastructure and initiatives to promote
industrialization and urbanization, the Chinese construction market has grown at
a rate of approximately 15% in recent years. We expect demand for brominated
flame retardants in construction materials to grow in the coming years as the
Chinese government begins to tighten enforcement on its mandate to use flame
retardants in all public construction.
Our
hydrobromic acid is a byproduct that is produced during the production process
for our other brominated specialty chemicals. It can be further processed into
other compounds such as sodium bromide. It can also be used in medicine to
produce sedatives and anesthetics, or as a catalyst in the oil field
industry.
Our
Geographic Location
Our
production facilities are located in the Shandong Province in North China. Our
working region extends from latitude N 37°01’ to N 37°08’ and from longitude E
119°05’ to E 119°12’, in the northern region of the Coastal Economic Development
Zone, Weifang City. We have two working fields, one extends from the Bailang
River to the west of the Yu River and the other from the Dan River to the west
of the BeiHai Road. We have six bromine plants scattered on three salt farms and
five brominated specialty chemicals workshops in the working region, and the
area is 9.18 square miles (5,875 acres). In addition we have a bromine
plant in Dongying City, Shandong Province, and we are leasing land to construct
our fourth salt farm covering 10 square kilometers. Our location is shown on the
map below:
61
The locations of our bromine plants and
salt fields in Weifang City are shown on the map below:
The
Shandong Province working region is located at the east end of the North
Shandong Plain and on the south bank of the Laizhou Bay Area. The geotectonic
location bestrides the North China Platte (I), Luxi Plate, Yishu Fracture Zone
(III) and Buried Lifting Area of the Weifang Depression (IV). The surface of the
working region is covered by 4 V-level structure units including the Dongying
Sag of Dongying Depression (IV) of the North China Depression, the Buried
Lifting Area of Guangrao, the Niutou sag and the Buried Lifting Area of
Shuanghe. Based on comprehensive analysis of various geologic data done by a
third party, authorized by the Weifang Land Resource Bureau, it is believed that
beneath the major working zones are Neocene deposits of resourceful shallow
brine water. Within the working region in Weifang City, Shandong Province, the
brine water ore body has 3-4 layers of brine water; the thickness of each layer
varies from 15 meters to 50 meters. The thickest layers are located in the east
and north part of the working region where our production sites are located,
whereas towards the south and west the layers become thinner.
Our
production sites border Rongwu highway, Xinsha Road and DaLaiLong Railway to the
south and can connect to the 309 state highway, JiQing highway and the
Jiaozhou-Jinan railway. The production sites are 10 miles away from the Weifang
Harbor. There is a specialized railway line which connects our plants to
the DaLaiLong Railway. The ground of the production facilities is classified as
coastal alluvial – marine plain with an average height of two to four
meters above sea level. The terrain is relatively flat.
We are
also leasing 10 square kilometers of land in Dongying City, Shandong Province,
where we plan to construct a salt farm. It is located in the area from Xiaoqing
River, Dongying City to the east of the ZhiMai River. We are currently planning
to construct salt pans on this salt field. We expect to complete construction
and reach 100% capacity in 2011. Once we reach capacity, we expect this salt
farm to yield an additional 350,000 tons per year, for a total of 1.37 million
tons of crude salt including our current capacity of 1.02 million tons crude
salt.
62
The location of our bromine plant and
salt farm in Dongying City is shown on the map below:
Our
Reserves
Brine
water is underground concentrated seawater, containing a high percentage of
salt, bromine, potassium, magnesium and other minerals. The brine water is
mainly used to process crude salt and bromine due to their high economic value.
A band of brine water lies around the south bank of Laizhou Bay with a length of
120 km and a width of 10-20 km. The brine water is originated from seawater. It
formed when seawater evaporated and concentrated during the ebbing stage of the
transgress period and was then buried beneath the land around Laizhou Bay. The
layout of the underground brine water around Laizhou Bay, Shandong Province is
shown below:
63
In
January 2009 the Weifang Municipal Land Resource Bureau commissioned Shandong
Fangyuan Geology Information Engineering Co., Ltd to conduct a study of
non-reserve mineralized material included in the assets of Shandong
Haiwang, which was later reviewed and accepted by the Weifang Municipal Land
Resource Bureau. The reserve study was conducted, reviewed and accepted as
a pre-condition for us to consolidate the mining permits of six separate bromine
plants into a uniform mineral right certificate as required by the Shandong
Provincial Land Resources Bureau. This study determined the occurrences and
burying conditions, distribution range and characteristics of natural brine
water occurring in these assets, and analyzed the creation, supply and
exploration conditions of these properties. The study concludes that there
are non-reserve mineralized materials of bromine in the amount of 561,000 metric
tons and that the natural brine water resources of these assets collectively
stand at about 1.7 billion cubic meters. In addition, it estimates non-reserve
mineralized materials in these three assets collectively at approximately 191.44
million tons for rock salt (liquid NaCl), 26.86 million tons of magnesium
chloride, 21.85 million tons of magnesium sulfate and 4.96 million tons of
calcium sulfate.
Our
Opportunity and Competitive Strengths
We
believe our long-term experience in producing bromine, crude salt and
brominated specialty chemicals in Shandong province has positioned us
as a leader in the industry. Our business is growing at a rapid pace as demand
for our products in China increases. We currently operate on a 24 square
kilometer brine field in Weifang City, Shandong Province and 10 square
kilometers of brine field in Dongying City, Shandong Province, where we plan to
construct a salt pan and will jointly produce crude salt and bromine from
underground concentrated seawater resources. We currently have crude salt
production capacity of approximately 1.02 million tons and bromine production
capacity of approximately 18,000 tons, and we expect our crude salt production
capacity to increase to 1.37 million tons by the time our new plant in Dongying
City, Shandong Province reaches capacity. As our bromine production capacity
increases, so too will our production capacity for brominated specialty
chemicals. We now have a production capacity of 2,500 metric tons of
decabromodiphenyl ether, 4,000 metric tons of decabromodiphenyl ethane and
12,350 metric tons of hydrobromic acid.
We
believe the following strengths differentiate us from our competitors in our
market in China:
·
We are one of the largest
crude salt, bromine and brominated specialty chemical companies in China,
and one of only a few companies in China with annual production capacities
of 1 million tons of crude salt, 10,000 tons of bromine and 2,000 metric
tons of brominated flame
retardant.
o
85%
of China’s bromine output and one third of the crude salt processed from
seawater in China comes from Weifang City, Shandong Province and the
balance largely comes from the neighboring Laizhou Bay Area. We have
successfully executed a series of strategic acquisitions of smaller crude
salt and bromine plants. Consequently, we have seven bromine plants and a
working area of 9.27 square miles on which to extract brine water and to
produce crude salt and bromine. Geologically our working region is in the
area of high brine water concentration around Laizhou Bay, which has
enabled us to produce at a lower cost while maintaining a higher product
quality. In China, there are currently only four producers producing crude
salt from seawater with annual crude salt output exceeding 1 million tons,
only four producers with annual bromine capacity exceeding 10,000 tons and
only three producers with capacity for brominated flame retardants of over
2,000 tons.
·
We have invested in technology
designed to significantly improve the purity of our bromine; and we have
obtained one exclusive license to a patent and have filed five other
patents which are pending approval for safe and scalable production
technology to produce high-quality brominated specialty chemical
products.
o
We
have developed technologies to purify bromine to a grade of 99%, meeting
the clients’ demand for high-quality bromine. Shandong Haiwang has
cooperated with Qingdao Science & Technology University to develop
bromine re-extraction technology to enhance the brine water extraction
from 65%, which is the level at inception, to 90%, thus significantly
increasing bromine output. Our level of 90% is significantly higher
than the average level in the industry of 80%. Shandong Haiwang obtained
one exclusive patent license in 2008 and has filed five patent
applications with the China Intellectual Property Bureau in 2009, all for
processing technology of certain kinds of brominated specialty chemicals.
The application of these patents on our specialty chemicals production has
increased our new product offerings through more cost-effective
approaches. During the past three years, Shandong Haiwang has
completed fifteen projects applying scientific and technological findings
in industry in four areas of brominates specialty chemicals, including
medicine intermediates, dyeing intermediates, flame retardants and new
materials. Among the fifteen completed projects, the product quality
of eight projects has been certified by the Shandong Provincial Technology
Bureau as reaching leading domestic levels and three have been certified
as reaching leading international
levels.
64
·
We have obtained
relative influence in China’s bromine industry due to our scale
production and superior storage capacity which limits price
volatility.
o
Since
bromine is a corrosive liquid and difficult to store, we have invested in
bromine reservoirs with a superior bromine storage capacity of 2,000 tons
of bromine. The storage capacity enables us to store bromine for producing
bromine compounds. More importantly, we can implement an arbitrage
strategy of storing our own bromine or purchasing bromine from smaller
producers at lower prices and selling the stockpile later at higher
prices, so that we can capitalize on the spread from the price volatility
over time. Many bromine producers in Weifang are typically smaller
ones who lack sales channels and whose bromine is of relatively low
quality. Shandong Haiwang has proactively acquired bromine from these
producers to purify and sell to Shandong Haiwang’s existing customer
base. Our scalable bromine production capacity, together with our
strategic investment in bromine storage reservoirs and active bromine
acquisition strategy has consolidated our position as a leader in the
market and given us the ability, albeit limited, to have a certain amount
of influence.
·
We benefit from economies of
scale as a result of operating multiple similarly-sized bromine
plants.
o
Because
we operate six bromine plants in Weifang City and one plant in Dongying
city, we are able to purchase for these plants raw materials such as
chlorine, brimstone and coal in bulk and receive favorable discounts in
comparison to the prices the seven separate plants would have needed to
pay for similar purchases. We are also able to use our office
headquarters, research facilities and other relatively fixed-cost items to
benefit multiple locations, effectively decreasing the cost per plant and
per unit of products sold. Similarly, we can sell bromine from multiple
plants to meet large orders if necessary. Through long-term
operation of our bromine plants and crude salt pans, we have accumulated
excellent industrial experience, and we have introduced such knowledge and
know-how to the other six acquired plants. We have enhanced
production efficiency in raw materials and electricity, due in part to the
economies of scale achieved and in part to greater utilization of our
production capacity.
·
We benefit from extending the
downstream production of our brominated specialty chemicals to command a
premium as result of vertical integration of the production chain.
Our large-scale bromine production has strategic importance in producing
and expanding our brominated specialty
chemicals.
o
Our
brominated specialty chemicals are used as flame retardants, and are
widely used in China due to their superior thermal stability. They are
also being used more as an intermediate in water purification compounds,
dyes, medicines and disinfectants. The production of brominated
specialty chemicals, complementary to our large-scale bromine production,
has provided sources for additional premium revenues in that we are
insulated from shortages of bromine and its price volatility and we are
poised to expand our production capacity of brominated specialty chemicals
in the future. More importantly the supply of bromine has been a key
barrier for any producer to enter into the brominated specialty chemical
industry or to expand their capacity. In turn brominated specialty
chemicals can provide protection for our bromine business. Due to the
physical characteristics of brominated specialty chemicals that render it
easier to store than bromine, we can expand the production of our
brominated specialty chemicals when the bromine price is
lower.
·
Our joint production of crude
salt and bromine is highly encouraged by the local government, and the
government is eliminating smaller players who do not produce
both.
o
In
order to efficiently utilize brine water resources, the Weifang City local
government has ordered all bromine plants to jointly produce crude salt
and bromine, in turn, smaller plants with sole production of either
chemical are forced to either cease operation or be acquired by larger
plants that do produce both. In addition, since 2009 government rules have
required that salt producers with a capacity of less than 300 thousand
tons must cease production and be acquired by one of a few qualified
companies, among which Shandong Haiwang is listed. This policy has given
us a great advantage as a policy-favored entity and has presented us the
opportunity to acquire those smaller plants that fail to meet the
requirements of the policy.
65
·
We have received several
awards in recognition of our leading position in the industry, our
excellent credit record with banks and customers, our efforts to deliver
qualified products and our investment in technological research and
development.
o
As
early as 2003, Shandong Haiwang was certified as an ISO9001 quality
management system compliant, certified as an ISO14001 environmental
management system compliant and as a GB/T28001 vocational healthy
management system compliant in 2006. Shandong Haiwang was credentialed as
one of the most creditworthy clients by Weifang Banking Association and
was granted AA grade by all of its banks in light of its no-default record
in bank loans. The Weifang Municipal Tax Bureau also granted Shandong
Haiwang status as one of the most creditworthy tax
payers.
o
In
2009 Shandong Haiwang was jointly credentialed as a good-faith enterprise
in Shandong Province by 14 provincial government authorities, such as the
People’s Bank of China, Shandong Provincial Industrial and Commercial
Bureau, Shandong Provincial Tax Bureau and Shandong Provincial Safe
Production Supervision Bureau.
o
In
2009, Shandong Provincial Industrial and Commercial Bureau further
certified “Kite Capital” as a famous trademark for its bromine
products.
o
In
2009, Shandong Haiwang was certified as a high-technology enterprise by
the Shandong Provincial Science and Technology Bureau in recognition of
its brominated specialty chemicals. In 2006, Shandong Haiwang’s
research and development department was accredited as a provincial-level
research and development center by the Shandong Provincial Committee of
Economy and Information Technology. In 2006, Shandong Haiwang was also
certified as a provincial-level bromine compounds engineering research and
development center by the Shandong Provincial Committee of Science and
Technology.
·
We have attained a reputation
for quality among our long-term customers who are mainly large and in some
cases publicly traded companies in the chemical, specialty chemical and
pharmaceutical industries.
o
Due
to the high level of quality of the products we offer, Shandong Haiwang
has accumulated a substantial client base in the fast growing chemical,
specialty chemical and pharmaceutical industries and has built up
long-term client relationships. These clients are mostly located in
economically developed provinces such as Shandong Province, Jiangsu
Province, Zhejiang Province and Guangdong Province. The clients are
mostly leading companies in their respective industries. Some are
publicly listed companies in China, such as Yaxing Chemical Stock Company
Ltd, among others. Due to its strong bargaining power, Shandong
Haiwang normally grants one month of credit to these large customers,
which is shorter than many of our competitors. Shandong Haiwang has never
incurred bad debts with these large
customers.
·
We are easily accessible to
our customers due to our physical location, which lowers logistics costs
for us and our customers.
o
Shandong
Haiwang is located in Shandong Province with one of the most developed
highway networks in China. It is close to economically advanced
areas such as Jiangsu Province and Zhejiang Province. Shandong
Haiwang enjoys low transportation costs due to its location which is only
10 miles away from Weifang Harbor as well as its specialized railway line
directly connected to Shandong Dalailong Railway covering the Laizhou Bay
Area cities.
Our
Strategies
We plan
to become China’s largest crude salt and bromine company and to increase our
position as a leading company in the brominated specialty chemicals industry. We
intend to achieve this goal by implementing the following
strategies:
·
We plan to acquire smaller
local bromine plants to enlarge our brine water reserves and consequently
our production capacity.
o
We
plan to use a portion of the proceeds from this public offering to acquire
local smaller unlicensed bromine plants to enlarge our brine water
reserves. We expect that doing so may allow Shandong Haiwang to quickly
increase its bromine and crude salt production capacity and solidify its
leading position. However, at present we do not have in place any
agreements or understandings regarding any acquisitions of any bromine
plants.
66
·
We plan to construct new
brominated specialty chemical plants to meet the fast growing market
demand.
o
We
plan to increase our brominated specialty chemicals capacity by 2,500 tons
with the proceeds of this public offering. We expect we may accomplish the
growth by constructing new plants based on our patented processing
technologies.
·
We plan to expand our reach to
other resource-rich regions and construct or acquire bromine plants and
salt pans.
o
We
began to expand our geographic reach through the acquisition of a bromine
plant in Dongying City, Shandong Province in 2009. The abundant brine
water resources, lower level of competition, lower acquisition cost and
successful post-acquisition integration have reinforced our determination
to expand our brine water reserves and our production capacity in other
resource-rich regions in the Laizhou Bay Area. However, at present
we do not have in place any agreements or understandings regarding any
construction or acquisition of bromine plants and salt
pans.
·
We intend to expand and
diversify our salt resource inventory through acquisitions of proven salt
mines in Shandong Province.
o
Shandong
Haiwang’s current crude salt is mostly from the underground brine water
which is replenished by the sea. However, we are exploring acquisition
opportunities of proven salt mines with high salt content in Shandong
Province. We believe the addition of salt reserves in salt mines would
help realize our goal as the largest crude salt producer in China.
However, at present we do not have in place any agreements or
understandings regarding any acquisitions of salt
mines.
·
We will leverage Shandong
Haiwang’s research achievements to develop a new series of brominated
specialty chemicals used as environment-friendly agricultural pesticide,
medicine intermediates and dye
intermediates.
o
Shandong
Haiwang has obtained one exclusive license to a patent, and has five
patent applications pending, and has completed fifteen projects applying
scientific and technological findings in industrial uses. We believe that,
by virtue of these proven research achievements, we will develop
environmentally-friendly, high-quality and cost-efficient brominated
specialty chemicals to enhance our
revenues.
·
We will seek to continue to
strengthen our brand image in order to better position our company to
penetrate and grow strategic client
accounts.
o
Shandong
Haiwang’s famous mark and famous brand products are valuable. Shandong
Haiwang will seek to associate its products with the brands in an effort
to gain customer loyalty and acceptance of our products during the process
of growing new strategic clients.
·
We plan to begin using our
Dongying City plant to produce bromine directly from open seawater by June
2011.
o
We have been conducting research
and development in Jiaozhou City, Shandong Province in an effort to
process bromine from seawater through our seawater concentration and
bromine processing technology, so that our business would be sustained by
the unlimited supply of bromine and crude salt from seawater. We believe
our efforts have been successful and we plan to use our Dongying
facilities to produce bromine directly from seawater and do not expect to
need to open any additional facilities or acquire any additional
land.
Sales
and Marketing
As of
February 2, 2011, we had an in-house sales staff of twenty-five employees. Our
customers send their orders to us, usually with a retainer paid in advance. We
generally grant a one month credit term to long-term large customers. Our
in-house sales staff then satisfies these orders based on our production
condition and inventories. Many of our customers have a long-term
relationship with us. While we expect this to continue due to continuing
high demand for basic chemical materials and specialty chemical products, this
cannot be guaranteed.
67
Principal
Customers
For the
year ended June 30, 2010, our revenues from bromine and crude salt were
approximately $45,122,000. We sell our products to a broad base of
customers.
The
following table details our top 10 customers in our bromine and crude salt
segment for the year ended June 30, 2010:
Top 10 Bromine and Crude Salt Segment Customers
Fiscal 2010 Sales
Percentage of
Segment
Revenue
Suzhou
City Hualun Chemical Co., Ltd
$
4,506,037
10
%
Shandong
Xinfa Chemical Co., Ltd
$
3,282,361
7
%
Shandong Yangmei
Hengtong Chemical Co., Ltd
$
3,171,756
7
%
Shandong
Yangmei Hentong Chemical Share Co., Ltd
$
3,050,533
7
%
Ningbo
Donggang Electric and Chemical Co., Ltd
$
2,690,024
6
%
Lianyungang
Rongcheng Chemical Co., Ltd
$
2,529,034
6
%
Shandong
Aluminum Co., Ltd
$
2,495,106
6
%
Zhejiang
Pulokang Pharmaceutical Company Limited
$
1,984,807
4
%
Changyi
Salt Co., Ltd
$
1,613,490
4
%
Shandong
Morui Chemical Co., Ltd
$
1,497,041
3
%
During
the year ended June 30, 2010, sales to our three largest customers in the
bromine and crude salt segment, based on net sales made to such customers,
aggregated $10.96 million, or approximately 16.9% of total net sales (24% of
segment sales). Sales to our largest customer represented approximately 6.95% of
total net sales (10% of segment sales). At June 30, 2010, amounts due from
our three largest customers totaled $1.35 million.
During
the year ended June 30, 2009, sales to our three largest bromine customers,
based on net sales derived from such customers, aggregated $13.41 million, or
approximately 32% of total bromine and crude salt net sales. Sales to our
largest customer represented approximately 14.63% of total net sales. At
June 30, 2009, amounts due from our three largest customers totaled
approximately $1.93 million.
For the
year ended June 30, 2009, revenues from our bromine and crude salt business were
approximately $42 million. We had the following customer that
accounted for over 10% of our bromine and crude salt business for the year ended
June 30, 2009.
Customer
Revenue
Percentage of Segment’s
Revenue
Shandong
Yangmei Hengtong Chemical Stock Co., Ltd
$
7,294,000
17.37
%
For the
years ended June 30, 2010 and June 30 2009, revenues from our specialty
chemicals business were approximately $19.47 million and $7.68 million,
respectively. None of our major customers accounted for over 10% or more
of our brominated specialty chemicals business for the year ended June 30, 2010
and June 30, 2009.
68
The
following table details our top 10 customers in our brominated specialty
chemicals segment for the year ended June 30, 2010:
Top 10 Brominated Specialty Chemicals Segment Customers
Fiscal 2010 Sales
Percentage
of Segment
Revenue
Jinan
Taixing Fine Chemical Co., Ltd
$
1,290,195
7
%
Jiangsu
Dacheng Medicine Chemical Co., Ltd
$
1,226,359
6
%
Shandong
Hongkun Export Co., Ltd
$
1,103,668
6
%
Yuyao
City Cangsheng Plastic Chemical Co., Ltd
$
1,047,990
5
%
Zhejiang
Jiuzhou Pharmaceutical Share Co., Ltd
$
906,607
5
%
Shandong
Weifang Longwei Industrial Co., Ltd
$
823,939
4
%
Taizhou
Dadi Fine Chemical Co., Ltd
$
812,498
4
%
Ningbo
Daqi Plastic Chemical Co., Ltd
$
724,122
4
%
Nanjing
Anyang Chemical Co., Ltd
$
718,682
4
%
Nanjing
Dongfang Plastic Co., Ltd
$
710,898
4
%
Principal
Suppliers
Our
principal suppliers during fiscal 2010 were Weifang Hanting District Power
Company, Shandong Haiheng Chemical Co., Ltd., Shandong Dadi Salt Group Co.,
Ltd. and Shandong Aluminum Co., Ltd. Our principal suppliers during 2009
were Weifang Hanting District Power Company, Shandong Haiheng Chemical Co., Ltd,
Shandong Ruitai Chemicals Co., LTD and Shouguang City Xingyi Fuel Commercial
Company Limited.
During
the 12 months ended June 30, 2010 and 2009, we purchased 22% and 22% of our raw
materials from Weifang Hanting District Power Company, respectively.
As of June 30, 2010 and 2009, accounts payable due to our suppliers were
zero.
All of our raw materials are readily
available and our business would not be materially impacted by the loss of any
one supplier.
Competition
The
markets for our products have been experiencing increased levels of demand as
China continues its accelerated growth. Nevertheless, the markets for our
products are highly competitive. To date, our sales have been mainly
limited to customers within China (less than 1% of our sales are to overseas
customers) and we expect that our sales will remain primarily domestic for the
immediate future. Our marketing strategy involves developing long-term
ongoing working relationships with customers based on large multi-year
agreements which foster mutually advantageous relationships.
We
believe we have a leading position in the industry with greater resources, sales
channels and market penetration than our competitors. We compete by providing
the highest quality bromine at the best price. Our reservoir is a significant
advantage over our competitors in that it allows us to purchase bromine from
smaller bromine producers when market prices are low and then resell that
bromine when market prices are high. While the bromine we purchase from other
producers is not as high quality as ours, we purify such bromine to meet our
standards before reselling it.
Our
principal competitors in the bromine and crude salt business are Shandong Haihua
Group, Shouguang City Haoyuan Chemical Co., Ltd, Shandong Dadi Salt Chemical
Co., Ltd, Changyi Mingkang Bromine Co., Ltd, and Weifang Longwei Industrial Co.,
Ltd.
Our
principal competitors in the brominated specialty chemicals business are
Shandong Shouguang Weidong Chemical Company Ltd., Shandong Tianyi Chemical
Company Limited., Shandong Sino-Israel Bromine Compounds Company Limited and
Shandong Yucheng Chemical Company Ltd.
69
Employees
As of
February 2, 2011, we had a total of 669 employees, of whom 94% are with
Shandong Haiwang, 1% with Shandong Kehai and 5% with Dongying Haihui, and all of
whom are full time. Approximately 11.8% of our employees are management
personnel and 3.8% are sales and procurement staff. 10% of our employees
have a college degree or higher. None of our employees is represented by a
union.
Our
employees in China participate in a state
pension arrangement organized by the municipal and provincial
governments. We are required to contribute to the arrangement at a
rate of 20% of the average monthly salary. In addition, we are required by
Chinese law to cover employees in China with other types of social
insurance. Our total contribution may amount to 31% of the average monthly
salary. We have purchased social insurance for all of our employees.
Expenses related to social insurance were approximately $902,000 for the 2010
fiscal year.
Intellectual
Property
We have
obtained one exclusive patent license and filed five patent applications, which
are pending approval, for safe and scalable production technology to produce
high-quality brominated specialty chemical products. In addition, Shandong
Haiwang has used “Century Haiwang” for years as the brand name on its well-known
crude salt products, and “Kite Capital” for bromine and bromine compounds. In
2009, Shandong Haiwang applied for and registered “Century Haiwang” as a
trademark with China’s SAIC Trademark Office, in Class No. 1, which relates
to crude salt, chlorine, bromine, flame retardants, industrial salt, alcohol and
acid. The registration is valid from June 7, 2009 to June 6, 2019. In 2001,
Shandong Haiwang applied for and registered “Kite Capital” as a trademark with
China’s SAIC Trademark Office. Kite Capital is also in Class No. 1. The
registration is valid from March 21, 2001 to March 20, 2011. As registered
trademarks “Century Haiwang” and “Kite Capital” are exclusively owned by
Shandong Haiwang for products within the range limited by Class No. 1; any
identical or similar trademark may not be used on commodities involved in Class
No. 1. Shandong Haiwang does not currently own any trademark on “Century
Haiwang” and “Kite Capital” outside of Class No. 1.
Research
and Development
We focus our research and development
efforts on improving our development efficiency and the quality of our products.
Recently, we have also been focusing our efforts on developing techniques to
process bromine directly from open seawater. For the fiscal years ended June 30,2010 and 2009, we spent $84,761 and $61,452, respectively, on research and
development activities. The cost of such research and development activities is
not borne directly by customers; instead, such amounts are an element of general
and administrative expenses.
70
Our
Corporate Structure
Overview
We are a
holding company incorporated in the British Virgin Islands that owns all of the
outstanding capital stock of Haiwang HK, our wholly owned subsidiary in Hong
Kong. Haiwang HK, in turn, owns all of the outstanding capital stock of WFOE,
our operating subsidiary based in Weifang City, China. WFOE has entered into
control agreements with all of the shareholders of Shandong Haiwang, which
agreements allow WFOE to control Shandong Haiwang. Through our ownership of
Haiwang HK, Haiwang HK’s ownership of WFOE and WFOE’s control agreements with
Shandong Haiwang, we control Shandong Haiwang. Additionally, Shandong Haiwang
has two wholly-owned subsidiaries, Shandong Kehai and Dongying
Haihui.
Our
current corporate structure is as follows:
Equity
interest
Contractual
arrangements including Exclusive Technical and Consulting Service
Agreement, Proxy Agreement, Operating Agreement and Exclusive Equity
Interest Purchase Agreement. For a description of these agreements,
see “Corporate Structure— Contractual Arrangements with Shandong Haiwang
and Shandong Haiwang’s Shareholders.”
Contractual
arrangements including Exclusive Equity Interest Purchase Agreement,
Equity Interest Pledge Agreement, Operating Agreement and Proxy Agreement.
For a description of these agreements, see “Corporate Structure—
Contractual Arrangements with Shandong Haiwang and Shandong Haiwang’s
Shareholders.”
71
Corporate
History – Shandong Haiwang
Shandong
Haiwang was organized by our chairman, Mr. Chunbin Yang, as a limited
liability company on January 27, 2003 with a registered capital of RMB 4.23
million (approximately $511,830), when Mr. Yang began to build the first bromine
plant. In 2006, Shandong Haiwang increased its registered capital to RMB 12.98
million (approximately $1,605,000) and changed its form into a joint stock
limited company. In 2009, Shandong Haiwang increased its registered
capital to RMB 60 million (approximately $8,467,000). From 2004 to 2008,
Shandong Haiwang acquired the operating assets and mineral rights of five
additional bromine plants in purchases from separate sellers. In November 2009,
Shandong Haiwang acquired Dongying Haihui Industrial and Trade Co. Ltd, a
bromine company in Dongying City, Shandong Province. At present, Shandong
Haiwang operates three salt farms with an annual capacity of 1.02 million metric
tons of crude salt and seven bromine plants with an annual capacity of 18, 000
metric tons. Shandong Haiwang also leases one salt farm in Dongying City,
Shandong Province. This salt farm is currently under construction. We expect to
complete construction and reach 100% capacity in 2011. Once we reach capacity,
we expect this salt farm to yield an additional 350,000 tons per year. In
addition, Shandong Haiwang currently has annual production capacity of 2,500
metric tons of decabromodiphenyl ether, 4,000 metric tons decabromodiphenyl
ethane and 12,350 metric tons hydrobromic acid.
Corporate History – WFOE, Haiwang HK
and Haiwang
Haiwang
was incorporated in the British Virgin Islands on October 18, 2010 as a limited
liability company. Haiwang’s wholly owned subsidiary, Haiwang HK, was
incorporated in Hong Kong on October 26, 2009 as a limited liability company.
Other than the equity interest in Haiwang HK, Haiwang does not own any assets or
conduct any operations.
Mr.
Chunbin Yang, Mr. Tongjiang Sun and Mr. Xiusheng Cui are key members of
management of both Haiwang and Shandong Haiwang and have controlled more than
50% of the voting ownership interests in both entities since their respective
inception dates. Haiwang and Shandong Haiwang have been considered under common
management since October 18, 2010 (the inception date of Haiwang) and therefore
our financial statements include both companies presented on a combined basis
from October 18, 2010 to December 31, 2010. The financial statements are solely
those of the consolidated statements of Shandong Haiwang and its subsidiaries
for the fiscal years ended June 30, 2010 and June 30, 2009, for the interim
period ended December 31, 2009 and for the period from July 1, 2010 through
October 17, 2010. On January 17, 2011, Mr. Chunbin Yang, Mr. Tongjiang Sun
and Mr. Xiusheng Cui signed a cooperation agreement and agreed that they would
continue to vote in concert on corporate matters with respect to Haiwang and
Shandong Haiwang.
WFOE was
incorporated on January 25, 2011 as a domestic Chinese company, 100% owned by
Haiwang HK. Chinese laws and regulations currently do not prohibit or restrict
foreign ownership in chemical businesses. However, Chinese laws and regulations
do prevent direct foreign investment in certain industries. In connection with
the formation of Haiwang, Haiwang HK and WFOE, we caused WFOE to enter into
certain control agreements with Shandong Haiwang and its shareholders, pursuant
to which we, by virtue of our ownership of Haiwang HK and Haiwang HK’s ownership
of WFOE, control Shandong Haiwang.
On
February 1, 2011, WFOE, Shandong Haiwang and each of the shareholders of
Shandong Haiwang entered into the Control Agreements. Through the Control
Agreements, we can substantially influence Shandong Haiwang’s daily operations
and financial affairs, appoint its senior executives and approve all matters
requiring shareholder approval. As a result of the agreement, WFOE will absorb
100% of the expected losses and gains of Shandong Haiwang, which results in WFOE
being the primary beneficiary of Shandong Haiwang.
Contractual
Arrangements with Shandong Haiwang and Its Shareholders
We
conduct our business in China through our subsidiary, WFOE. WFOE, in turn,
conducts it business through Shandong Haiwang, which we consolidate as a
variable interest entity. WFOE and Shandong Haiwang operate in connection with a
series of control agreements, rather than through an equity ownership
relationship.
72
Chinese
laws and regulations currently do not prohibit or restrict foreign ownership in
selling crude salt, bromine and brominated specialty chemicals businesses. To
protect our company’s shareholders from possible future foreign ownership
restrictions, Shandong Haiwang and all of the shareholders of Shandong Haiwang
entered into a series of contractual arrangements. Under PRC laws, each of WFOE
and Shandong Haiwang is an independent legal entity and neither of them is
exposed to liabilities incurred by the other party. Other than pursuant to the
contractual arrangements between WFOE and Shandong Haiwang, Shandong Haiwang
does not transfer any other funds generated from its operations to WFOE.
Effective February 1, 2011, WFOE entered into a functionally identical set of
Control Agreements with Shandong Haiwang, which agreements provide as
follows.
Exclusive
Technical and Consulting Service Agreement. Shandong Haiwang and
WFOE have entered into an Exclusive Technical and Consulting Service Agreement
with WFOE, which agreement provides that WFOE will be the exclusive provider of
technical and consulting services to Shandong Haiwang, as appropriate, and that
Shandong Haiwang will in turn pay 100% of its profits to WFOE for such
services. In addition to such payment, Shandong Haiwang and WFOE have
entered into an agreement to reimburse WFOE for WFOE’s expenses (other than
WFOE’s income taxes) incurred in connection with its provision of services under
the agreement. Payments will be made on a quarterly basis, with any over-
or underpayment to be reconciled once Shandong Haiwang’s annual net profits, as
applicable, are determined at its fiscal year end. The term of this
agreement is twenty years from the date thereof.
Proxy
Agreement. Each of the shareholders of Shandong Haiwang has
executed a Proxy Agreement authorizing WFOE to exercise any and all shareholder
rights associated with his ownership in Shandong Haiwang, as appropriate,
including the right to attend shareholders’ meetings, the right to execute
shareholders’ resolutions, the right to sell, assign, transfer or pledge any or
all of the equity interest in Shandong Haiwang, as appropriate, and the right to
vote such equity interest for any and all matters. The term of the Proxy
Agreement is twenty years from the date thereof.
Equity Interest
Pledge Agreement. WFOE and the shareholders of Shandong Haiwang have
entered in Equity Interest Pledge Agreements, pursuant to which each such
shareholder pledges all of his shares of Shandong Haiwang, as appropriate, to
WFOE in order to guarantee cash-flow payments under the applicable Exclusive
Technical and Consulting Service Agreement. If Shandong Haiwang or any of
its respective shareholders breaches its respective contractual obligations,
WFOE, as pledgee, will be entitled to certain rights, including the right to
foreclose on the pledged equity interests. Such Shandong Haiwang shareholders
have agreed not to dispose of the pledged equity interests or take any actions
that would prejudice WFOE’s interest. The equity pledge agreement has a term of
twenty years from the date thereof.
Exclusive Equity
Interest Purchase Agreement. Each of the shareholders of Shandong Haiwang
has entered into an Exclusive Equity Interest Purchase Agreement, which provides
that WFOE will be entitled to acquire such shares from the current shareholders
upon certain terms and conditions, if such a purchase is or becomes allowable
under PRC laws and regulations. The Exclusive Equity Interest Purchase
Agreement also prohibits the current shareholders of Shandong Haiwang from
transferring any portion of their equity interests to anyone other than WFOE.
WFOE has not yet taken any corporate action to exercise this right of purchase,
and there is no guarantee that it will do so or will be permitted to do so by
applicable law at such time as it may wish to do so. The term of this
agreement is twenty years from the date thereof.
Operating
Agreement.
Pursuant to the Operating Agreement among WFOE, Shandong Haiwang and each of the
shareholders of Shandong Haiwang, WFOE provides guidance and instructions on
Shandong Haiwang’s daily operations and financial affairs. The shareholders of
Shandong Haiwang must designate the candidates recommended by WFOE as their
representatives on their board of directors. WFOE has the right to appoint
senior executives of Shandong Haiwang. In addition, WFOE agrees to guarantee
Shandong Haiwang’s performance under any agreements or arrangements relating to
Shandong Haiwang’s business arrangements with any third party. Shandong Haiwang,
in return, agrees to pledge its accounts receivable and all of its assets to
WFOE. Moreover, Shandong Haiwang agrees that without the prior consent of WFOE,
Shandong Haiwang will not engage in any transactions that could materially
affect its assets, liabilities, rights or operations, including, without
limitation, incurrence or assumption of any indebtedness, sale or purchase of
any assets or rights, incurrence of any encumbrance on any of its assets or
intellectual property rights in favor of a third party or transfer of any
agreements relating to its business operation to any third party.
73
Description
of Property
We do not
own any land under PRC laws, although we have land use rights for most of the
land where our plants are located, with the exception of the land we lease in
Dongying City where we plan to construct a salt farm. Our executive offices are
located at Haiwang Street, Yangzi Ave, Coastal Economic Development Zone,
Weifang City, Shandong Province, People’s Republic of China, which is also the
headquarters of Shandong Haiwang. These offices are located on approximately
43,633 square meters of land owned by Chinese government. The land use right for
the land expires on June 1, 2058.
Shandong
Haiwang has land use rights to five properties totaling nearly 87.08 acres
located on the south bank of Laizhou Bay on the Shandong Peninsula of China.
Shandong Haiwang is currently applying for the land use certificates for one
property, which is accessible by road. Shandong Haiwang has a specialized
railway line connected to Dalaiyang railway and the Weifang port is only 10
miles away. Shandong Haiwang leases a parcel of land of approximately 10 square
kilometers located in Dongying City, Shandong Province. Under PRC laws, we may
not be able to obtain the property certificates to the buildings on this leased
land because we do not have the land use rights for the underlying land.
However, if we obtain the land use rights for the land from the applicable local
government authorities, then we can apply for the property certificates to the
buildings on such land in accordance with the PRC laws.
Our
company does not own any property but has entered into contracts with the local
government to acquire land use rights for a period of 50 years. The
contracts require us to pay a one-time land use right premium.
Shandong
Haiwang currently operates six bromine plants located on three salt farms
covering an area of approximately 24 square kilometers in the Coastal Economic
Development Zone of Weifang City, Shandong Province, and one plant in Dongying
City, Shandong Province. Shandong Haiwang also leases another salt farm of 10
square kilometers in Dongying City, Shandong Province. Shandong Haiwang has
obtained land use right certificates for five out of its seven bromine plants.
For the other two plants, Shandong Haiwang leases the land for the one in
Dongying City, Shandong Province, and is now applying to the local Land and
Resources Bureau for the land use right certificate for the last remaining
Weifang City plant. The largest bromine plant currently operating is over 2,500
hectares and has an annual capacity of 3,000 tons of bromine.
Each of
the seven properties is in production stage where bromine extraction and crude
salt production are performed. The facilities each include wells, which are used
to extract natural brine from underground, natural brine transmission pipelines,
natural brine storage reservoirs, bromine refining equipment, wastewater
transport pipes and brine drying pans.
The
equipment and facilities described above were constructed at the time of
acquisition of each of our respective properties using the latest technology and
equipment. As such, they do not currently require modernization. Because
bromine is a highly corrosive liquid, the equipment undergoes inspection and
maintenance each year. For instance, the subaqueous pumps, in particular, need
regular inspection and often require maintenance or replacement.
As of
June 30, 2010, our company had invested approximately $28.3 million in its seven
production facilities and paid approximately $17.82 million in land use right
premiums. In addition, the company estimates that equipment maintenance
will cost approximately $1 million each year and it will invest approximately $2
million in new extraction wells.
74
Each of
the seven bromine production facilities described in the table below is provided
with electricity and water by local government utilities.
The
No. 2 and No. 4 plants are located on the No. 1 Salt Farm. The No. 1 Plant
is located on the No. 2 Salt Farm. The No. 3, No. 5 and No. 6 plants are
located on the No. 3 Salt Farm.
(2)
The
No. 2 plant is the only plant used to produce brominated specialty
chemicals.
(3)
The
No. 7 plant is on leased land in Dongying
City
We are
subject to a variety of governmental regulations related to environmental
protection. The major PRC environmental regulations applicable to us include the
Environmental Protection Law and the Environmental Impact Appraisal
Law.
The
Environmental Protection Law sets out the legal framework for environmental
protection in the PRC. The Ministry of Environmental Protection (“MEP”) of the
PRC is primarily responsible for the supervision and administration of
environmental protection work nationwide and formulating national waste
discharge limits and standards. Local environmental protection authorities at
the county level and above are responsible for the environmental protection in
their jurisdictions.
Companies
that discharge contaminants must report and register with the MEP or the
relevant local environment protection authorities. Companies discharging
contaminants in excess of the discharge limits prescribed by the central or
local authorities must pay discharge fees for the excess in accordance with
applicable regulations, and are also responsible for the treatment of the
excessive discharge. Government authorities can impose different penalties on
individuals or companies in violation of the Environmental Protection Law,
depending on the individual circumstances of each case and the extent of
contamination. Such penalties include warnings, fines, impositions of deadlines
for remedying the contamination, orders to stop production or use, orders to
re-install contamination prevention and treatment facilities which have been
removed without permission or left unused, administrative actions against
relevant responsible persons or companies, or orders to close down those
enterprises. Where the violation is serious, the persons or companies
responsible for the violation may be required to pay damages to victims of the
contamination. Where serious environmental contamination occurs in violation of
the provisions of the Environmental Protection Law which results in serious loss
of public and private property, persons or enterprises directly responsible for
such contamination may be held criminally liable.
Regulation
on Work Safety
Our
operating activities involve hazardous materials. We are subject to a variety of
governmental regulations related to work safety. The major PRC regulations
related to work safety applicable to us include the Work Safety Law, the
Regulation on Work Safety Licenses and the Regulation on the Safety
Administration of Hazardous Chemicals.
The Work
Safety Law was adopted at the Standing Committee of the People’s Congress on
June 29, 2002, and was promulgated for implementation as of
November 1, 2002. The Work Safety Law is applicable to the work safety for
entities engaging in production and business operation activities within the
PRC. Such entities must comply with the Work Safety Law and other relevant laws
and regulations concerning work safety and strengthen the administration of work
safety, establish and perfect the system of responsibility for work safety,
ensure conditions for safe production, and ensure safety in
production.
Regulation on Work Safety
Licenses
The
Regulation on Work Safety Licenses was promulgated by the State Council on
January 13, 2004 and came into force on the same date. According to this
regulation, an enterprise engaging in the production of hazardous chemicals,
must apply for a work safety license before production.
76
To obtain
a work safety license, the enterprise must satisfy certain work safety
conditions, which mainly include: (i) establishing and improving a system
for work safety, and formulating a complete set of work safety rules;
(ii) investing in safety satisfying applicable work safety requirements;
(iii) establishing administrative entities for work safety and installing
full-time work safety administrative personnel, who have passed the appraisal
conducted by the competent authority; (iv) ensuring that special personnel
have passed the appraisal conducted by the competent authority, and have
obtained qualification certificates for special operations; (v) ensuring
employees have gone through work safety education and training;
(vi) ensuring premises, work sites, safety facilities, equipment and
technology meet the requirements of the relevant work safety laws, regulations,
standards and rules; (vii) providing employees with labor protection
articles which are up to the national standards or standards of the industrial
sector concerned; and (viii) establishing emergency rescue plans for
accidents, and appointing entities or personnel specializing in emergency
rescue, and providing necessary emergency rescue materials and
equipment.
The valid
period for a work safety license is three years. If a work safety license needs
to be extended upon its expiration, the enterprise shall go through the
extension procedures three months prior to such expiration with the
administrative department from which the license is issued.
Regulation
on Safety Administration of Dangerous Chemicals
The
Regulation on Safety Administration of Dangerous Chemicals was promulgated by
the State Council on January 26, 2002, and took effect on March 15,2002. This regulation sets forth general requirements for the production and
operation of certain chemicals that are considered dangerous and listed in the
Dangerous Chemicals Catalogue. The Regulation on Safety Administration of
Dangerous Chemicals was further supplemented and elaborated by subsequent
regulations and rules. The State Administration of Work Safety of the PRC, and
other relevant state government authorities formulate and from time to time
adjust the chemicals included in the Dangerous Chemicals Catalogue. Under PRC
law, the production, operation, storage, transportation of chemicals in the
Dangerous Chemicals Catalogue and the industrial use of such chemicals require
specific regulatory approval, licenses and permits.
Regulation
on the Administration of Production License for Industrial Products
The PRC
Regulation on the Administration of Production License for Industrial Products
was promulgated by the State Council on July 9, 2005 and became effective on
September 1, 2005. The Implementation Rules for the PRC Regulation on the
Administration of Production License for Industrial Products was promulgated by
the State General Administration of Quality Supervision, Inspection and
Quarantine on November 11, 2005 and became effective on the same day, and
amended on April 21, 2010.
The
Regulation on the Administration of Production License for Industrial Products
and its implementation rules prescribe that (i) the state shall implement the
system of production license for enterprises undertaking the production of
certain important industrial products including hazardous chemicals, (ii) the
Catalogue of Industrial Products ( the “Catalogue”) subject to the system of
production license by the state shall be formulated by the applicable department
of the State Council in charge of production licenses for industrial products
together with the relevant departments of the State Council, and be announced to
the public upon the approval of the State Council after soliciting the opinions
of consumer associations and industrial associations for the relevant products;
(iii) an enterprise shall meet the following conditions for obtaining a
production license: having the business license; having professional technicians
qualified for the products it produces; having production conditions and a means
of inspection and quarantine that are suitable for the products it produces;
having technical documents and technique documents matching the products it
produces; having sound and effective quality control systems and responsibility
systems; the product must comply with the relevant national standards,
industrial standards and requirements for ensuring personal health and personal
and property safety; compliance with the provisions of state industrial policy,
and having no detrimental conditions such as backward technique, high energy
costs, environmental pollution, or waste of resources, as explained by public
proclamation of the state, (iv) the period of validity of a production license
shall be five years, but the period of validity of the production license for
food processing enterprises shall be three years; (v) at the expiration of the
period of validity of a production license, if the enterprise continues
production, it shall, six months before the expiration of the period of validity
of the production license, apply for renewal of the license from the department
of production licenses for industrial products at the provincial government
level.
77
According
to the Notice of the Announcement of the Fourth Series of the Hazardous
Chemicals under the Administration of Product License and Work Schedule
promulgated by the State General Administration of Quality Supervision,
Inspection and Quarantine on December 21, 2008, bromine was listed into the
Catalogue on the same day, requiring bromine producers to obtain the Production
License for Industrial Products for its legal production of
bromine.
Laws
and Regulations Relating to Mineral Resources
The
Mineral Resources Law of the PRC (“Mineral Resources Law”) was promulgated by
the Standing Committee of the People’s Congress on March 19, 1986 and became
effective on October 1, 1986. On August 29, 1996, the Standing Committee of the
People’s Congress amended the Mineral Resources Law. The amended Mineral
Resources Law became effective on January 1, 1997.
The
Mineral Resources Law and its implementation rules prescribe that (i) all
mineral resources of the PRC, including such resources on the earth’s surface or
underground, are owned by the State. The State ownership of mineral resources
shall remain unchanged notwithstanding that ownership or the right to use the
land to which such mineral resources are attached has been granted to a
different entity or individual; (2) the Ministry of Land and Resources (“MLR”)
of the PRC is responsible for the supervision and administration of the mining
and exploration of mineral resources nationwide. The geology and mineral
resources departments of provincial government are responsible for the
supervision and administration of the exploration, development and mining of
mineral resources within their respective jurisdictions; (3) enterprises engaged
in the mining or exploration of mineral resources must obtain mining and
exploration permits, as the case may be, which are transferable only in certain
circumstances as provided under PRC laws, subject to approval by relevant
administrative authorities; (4) the MLR and the geological and mineral resources
department of the provincial government authorized by the MLR are responsible
for the granting of exploration and mining permits. Generally, holders of
exploration permits and mining permits have those rights and obligations as
prescribed by laws. Anyone who exploits mineral resources must pay a resources
tax and resources compensation levy in accordance with relevant regulations of
the State. In accordance with the Provisional Regulations on Resources Tax of
the PRC, the amount of the resource tax is computed on the basis of the taxable
amount. In accordance with the Administrative Rules on the Levy of Mineral
Resources Compensation, the resources compensation levy shall be calculated
based on the sales revenue of the mineral products, compensation levy rate and
coefficient of mining recovery rate.
All of
our bromine and crude salt production facilities have been authorized by the
local land and resources departments and are included under a single permit,
which was originally issued in July 2003. Shandong Haiwang acquired the assets
of five bromine plants from 2004 to 2008. Each bromine plant had a mining
permit at the time of acquisition. However, the mining permits of all six
bromine plants were combined into one single mining permit in July 2009. We also
acquired one bromine plant in Dongying City, Shandong Province on leased land.
The production is under the mining permit of the lessor in compliance with
relevant regulations. In addition, all of our operations are subject to and have
passed government safety inspections.
Regulations
on the Production of Salt
The
Administrative Rules of Salt Industry was promulgated by the State Council on
February 9, 1990 and became effective on March 2, 1990. According to this
regulation, the salt resources belong to the state, and the enterprise which
exploits the salt and underground brine shall obtain a mining permit first. The
regulation requires that any enterprise which plans to be engaged in salt
production shall obtain approval from the salt administrative department at
the provincial government level prior to making an application for the business
license from the local department for industry and commerce.
The
Administrative Rules of Salt Industry in Shandong Province was promulgated by
the Standing Committee of the People’s Congress of Shandong Province on October26, 2000 and became effective on December 1, 2000. On July 30, 2004, the
Standing Committee of the People’s Congress of Shandong Province amended the
Administrative Rules of Salt Industry in Shandong Province and the amended
administrative rules became effective on the same day. The Administrative Rules
of Salt Industry in Shandong Province reconfirms that the salt resources
belong to the state, and the enterprise which exploits salt and underground
brine shall obtain a mining permit first. The administrative rules prescribe
that the enterprise engaged in salt production shall first be approved by the
salt administrative department at the provincial government level and obtain the
salt production license issued by the aforementioned salt administrative
department, and then it can proceed with its establishment registration with the
local department for industry and commerce and start salt
production.
78
Regulation
Restriction
on Foreign Ownership
The
principal regulation governing foreign ownership of chemical businesses in the
PRC is the Foreign Investment Industrial Guidance Catalogue, effective as of
December 11, 2007 (the “Catalogue”). The Catalogue classifies the various
industries into four categories: encouraged, permitted, restricted and
prohibited. As confirmed by the government authorities, Shandong Haiwang is
engaged in a permitted industry.
The
National Development and Reform Commission (“NDRC”) and MOFCOM periodically
jointly revise the Foreign Investment Industrial Guidance Catalogue. As such,
there is a possibility that our company’s business may fall outside the scope of
the definition of a permitted industry in the future. Should this occur, we
would face a limit or restriction on foreign investment, the likes of which we
are currently not subject to.
Regulation
of Foreign Currency Exchange and Dividend Distribution
Foreign
Currency Exchange
The
principal regulations governing foreign currency exchange in China are the
Foreign Exchange Administration Regulations (1996), as amended, and the
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange
(1996). Under these regulations, Renminbi are freely convertible for current
account items, including the distribution of dividends, interest payments, trade
and service-related foreign exchange transactions, but not for most capital
account items, such as direct investment, loan, repatriation of investment and
investment in securities outside China, unless the prior approval of SAFE or its
local counterparts is obtained. In addition, any loans to an operating
subsidiary in China that is a foreign invested enterprise, cannot, in the
aggregate, exceed the difference between its respective approved total
investment amount and its respective approved registered capital amount.
Furthermore, any foreign loan must be registered with SAFE or its local
counterparts for the loan to be effective. Any increase in the amount of the
total investment and registered capital must be approved by MOFCOM or its local
counterpart. We may not be able to obtain these government approvals or
registrations on a timely basis, if at all, which could result in a delay in the
process of making these loans.
The
dividends paid by the subsidiary to its shareholder are deemed shareholder
income and are taxable in China. Pursuant to the Administration Rules of the
Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested
enterprises in China may purchase or remit foreign exchange, subject to a cap
approved by SAFE, for settlement of current account transactions without the
approval of SAFE. Foreign exchange transactions under the capital account are
still subject to limitations and require approvals from, or registration with,
SAFE and other relevant PRC governmental authorities.
Dividend
Distribution
The
principal regulations governing the distribution of dividends by foreign holding
companies include the Wholly Foreign Owned Enterprise Law (1986), as amended,
and the Administrative Rules under the Wholly Foreign Owned Enterprise Law
(1990), as amended.
Under
these regulations, WFOEs in China may pay dividends only out of their retained
profits, if any, determined in accordance with PRC accounting standards and
regulations. In addition, WFOEs in China are required to allocate at least 10%
of their respective retained profits each year, if any, to fund certain reserve
funds unless these reserves have reached 50% of the registered capital of the
enterprises. These reserves are not distributable as cash
dividends.
Notice
75
On
October 21, 2005, SAFE issued Notice 75, which became effective as of
November 1, 2005. According to Notice 75, prior registration with the
local SAFE branch is required for PRC residents to establish or to control an
offshore company for the purposes of financing that offshore company with assets
or equity interests in an onshore enterprise located in the PRC. An amendment to
registration or filing with the local SAFE branch by such PRC resident is also
required for the injection of equity interests or assets of an onshore
enterprise in the offshore company or overseas funds raised by such offshore
company, or any other material change involving a change in the capital of the
offshore company.
79
Moreover,
Notice 75 applies retroactively. As a result, PRC residents who have
established or acquired control of offshore companies that have made onshore
investments in the PRC in the past are required to complete the relevant
registration procedures with the local SAFE branch. Under the relevant rules,
failure to comply with the registration procedures set forth in Notice 75
may result in restrictions being imposed on the foreign exchange activities of
the relevant onshore company, including the increase of its registered capital,
the payment of dividends and other distributions to its offshore parent or
affiliate and capital inflow from the offshore entity, and may also subject
relevant PRC residents to penalties under PRC foreign exchange administration
regulations.
PRC
residents who control our company are required to register with SAFE in
connection with their investments in us. Such individuals have completed this
process. If we use our equity interest to purchase the assets or equity interest
of a PRC company owned by PRC residents in the future, such PRC residents will
be subject to the registration procedures described in Notice 75.
New
M&A Regulations and Overseas Listings
On
August 8, 2006, six PRC regulatory agencies, including the Ministry of
Commerce, the State Assets Supervision and Administration Commission, the State
Administration for Taxation, the State Administration for Industry and Commerce,
CSRC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became
effective on September 8, 2006. This New M&A Rule, among other things,
includes provisions that purport to require that an offshore special purpose
vehicle formed for purposes of overseas listing of equity interests in PRC
companies and controlled directly or indirectly by PRC companies or individuals
obtain the approval of CSRC prior to the listing and trading of such special
purpose vehicle’s securities on an overseas stock exchange.
On
September 21, 2006, CSRC published on its official website procedures
regarding its approval of overseas listings by special purpose vehicles. The
CSRC approval procedures require the filing of a number of documents with the
CSRC and it would take several months to complete the approval process. The
application of this new PRC regulation remains unclear with no consensus
currently existing among leading PRC law firms regarding the scope of the
applicability of the CSRC approval requirement.
Our PRC
counsel, Beijing Kang Da Law Firm, has advised us that, based on their
understanding of the current PRC laws and regulations:
·
We
currently control our Chinese affiliate, Shandong Haiwang, by virtue of
WFOE’s VIE agreements with Shandong Haiwang but not through equity
interest acquisition nor asset acquisition which are stipulated in the New
M&A Rule; and
·
In
spite of the above, CSRC currently has not issued any definitive rule or
interpretation concerning whether offerings like ours under this
prospectus are subject to this new
procedure.
Intellectual
Property Rights
Our intellectual property, including
our trademarks and patents, is an important component of our business. As of
December 31, 2010, we owned one exclusive patent license and had five patent
applications pending approval from the State Administration of Intellectual
Property (“SAIP”).
Trademark
The PRC
has domestic laws for the protection of rights in copyrights, patents,
trademarks and trade secrets. The PRC is also a signatory to all of the world’s
major intellectual property conventions, including:
·
Convention
establishing the World Intellectual Property Organization (WIPO
Convention) (June 4, 1980);
·
Paris
Convention for the Protection of Industrial Property (March 19,
1985);
The
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
(November 11, 2001).
The PRC
Trademark Law, adopted in 1982 and revised in 2001, with its implementation
rules adopted in 2002, protects registered trademarks. The Trademark Office of
the State Administration of Industry and Commerce (“SAIC”) handles trademark
registrations and grants trademark registrations for a term of ten
years.
Shandong
Haiwang has used “Century Haiwang” for years as the brand name on its well-known
crude salt products, and “Kite Capital” for bromine and bromine compounds. In
2009, Shandong Haiwang applied for and registered “Century Haiwang” as a
trademark with China’s SAIC Trademark Office, in Class No. 1, which relates
to crude salt, chlorine, bromine, flame retardants, industrial salt, alcohol and
acid. The registration is valid from June 7, 2009 to June 6, 2019. In 2001,
Shandong Haiwang applied for and registered “Kite Capital” as a trademark with
China’s SAIC Trademark Office. Kite Capital is also in Class No. 1. The
registration is valid from March 21, 2001 to March 20, 2011. As registered
trademarks “Century Haiwang” and “Kite Capital” are exclusively owned by
Shandong Haiwang for products within the range limited by Class No. 1; any
identical or similar trademark may not be used on commodities involved in Class
No. 1. Shandong Haiwang does not currently own any trademark on “Century
Haiwang” and “Kite Capital” outside of Class No. 1. In the event of
trademark infringement, the SAIC has the authority to fine the infringer and to
confiscate or destroy the infringing products. In addition to actions taken by
SAIC, Shandong Haiwang would be entitled to sue an infringer for
compensation.
Regulations
on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their
PRC Subsidiaries
An
offshore company may invest equity in a PRC company, which will become the PRC
subsidiary of the offshore holding company after investment. Such equity
investment is subject to a series of laws and regulations generally applicable
to any foreign-invested enterprise in China, which include the Wholly Foreign
Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the
Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time
to time, and their respective implementing rules; the Tentative Provisions on
the Foreign Exchange Registration Administration of Foreign-Invested Enterprise;
and the Notice on Certain Matters Relating to the Change of Registered Capital
of Foreign-Invested Enterprises.
Under the
aforesaid laws and regulations, the increase of the registered capital of a
foreign-invested enterprise is subject to the prior approval by the original
approval authority of its establishment. In addition, the increase of registered
capital and total investment amount shall both be registered with SAIC and
SAFE.
Shareholder
loans made by offshore parent holding companies to their PRC subsidiaries are
regarded as foreign debts in China for regulatory purposes, which are subject to
a number of PRC laws and regulations, including the PRC Foreign Exchange
Administration Regulations, the Interim Measures on Administration on Foreign
Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts
and its implementation rules, and the Administration Rules on the Settlement,
Sale and Payment of Foreign Exchange.
Under
these regulations, the shareholder loans made by offshore parent holding
companies to their PRC subsidiaries shall be registered with SAFE. Furthermore,
the total amount of foreign debts that can be borrowed by such PRC subsidiaries,
including any shareholder loans, shall not exceed the difference between the
total investment amount and the registered capital amount of the PRC
subsidiaries, both of which are subject to the governmental
approval.
The
Foreign Corrupt Practices Act, or the FCPA, prohibits companies and individuals
subject to FCPA jurisdiction from providing to foreign officials any “corrupt
payments” (i.e.,
bribes, kickbacks, and similar benefits) in order to obtain any unfair advantage
with respect to government contracts, regulatory approvals, licenses, and other
government actions for the purpose of obtaining or retaining business. The FCPA
applies to: (1) “issuers” – U.S. and foreign companies subject to SEC
jurisdiction; (2) “domestic concerns” – individuals who are citizens, nationals
or residents of the United States and companies with a principal place of
business in the United States or organized under U.S. law; and (3) “other
persons” – foreign companies or persons who act in the United States to further
a corrupt payment. The term “other persons” has been interpreted broadly to
include foreign entities that send an email in furtherance of a corrupt act to a
U.S. recipient, or that clear a corrupt payment through a U.S. bank. The FCPA
requires issuers to maintain accurate books and records that do not misrepresent
their payments or expenses. Issuers are also liable for the accuracy of their
majority-owned subsidiaries’ books and records and are required to act in good
faith to encourage their minority-owned subsidiaries to adopt reasonable
internal accounting controls intended to avoid corrupt payments. Issuers,
domestic concerns and other persons may be liable for the actions of their
foreign subsidiaries and agents if they know or should know that a subsidiary or
agent is likely to make a corrupt payment to a foreign official.
Issuers,
domestic concerns and other persons subject to the FCPA are subject to severe
criminal and civil penalties for violations of the FCPA. Entities that make
corrupt payments may be fined as much as $2 million per violation, or twice the
amount of the benefit sought in return for the payment. Individuals may be fined
up to $100,000 and/or imprisoned for up to five years. Issuers who violate the
FCPA’s books and records requirements are subject to fines up to $25 million,
and individuals can be fined up to $5 million and/or imprisoned for up to 20
years. Companies may not indemnify their officers or employees for FCPA
violations.
On
January 20, 2011, our board of directors adopted a Foreign Corrupt Practices Act
Policy, which applies to all of our directors, officers, employees, agents and
underwriters, including our principal executive officer, principal financial
officer, and principal accounting officer. Our FCPA Policy requires our
directors, officers, employees, agents and underwriters to adhere to strict
anti-corruption policies and practices. The policy also requires that
prospective agents and underwriters of our company and Shandong Haiwang be
familiarized with and agree to adopt our anti-corruption standards and
expectations for ethical conduct, prior to entering into any engagement with any
of them, and that we perform due diligence, from time to time, to ensure such
compliance.
82
Management
Executive
Officers and Directors
The
following table sets forth our executive officers and directors, their ages and
the positions held by them:
Name
Age
Role
Since
Chunbin
Yang(1)(7)
48
Chairman
of the Board and Director, Chief Executive Officer
2003
Tongjiang
Sun(1)(7)
42
Director,
Chief Marketing Officer
2003
Chengguang
Wang(1)
38
Chief
Financial Officer
2003
Chuanqiang
Wang(1)
38
Vice
General Manager, Corporate Secretary
2004
Xiusheng
Cui(1)
49
Vice
General Manager, Chief Operating Officer
2003
Shigang
Xu(1)
39
Vice
General Manager, Chief Sales Officer
2003
Shangxue
Liu(1)
58
Vice
General Manager, Chief Technology Officer
2003
Guilin
Sun(1)(2)(3)(4)(5)
57
Independent
Director
2011
Ningwu
Shen(1)(2)(3)(4)(6)
68
Independent
Director
2011
Dennis
O. Laing(1)(2)(3)(4)(6)
65
Independent
Director
2011
(1)
The individual’s business address
is Haiwang Street Yangzi Ave., Coastal Economic Development Zone, Weifang
City, Shandong Province, People’s Republic of China
261108.
(2)
Member of audit
committee.
(3)
Member of compensation
committee.
(4)
Member of nominating
committee.
(5)
Class I director whose term
expires in 2011.
(6)
Class II director whose term
expires in 2012.
(7)
Class III director whose term
expires in 2013.
Chunbin Yang. Mr. Yang
has served as Chairman of Shandong Haiwang since its inception in June 2003.
Before founding Shandong Haiwang, he served as manager of Weifang City Hanting
District Salt Chemical Group and the general manager of the Hanting District No.
1 and No. 2 salt farms from 1995 to 2003. From 1982 to 1985, he served as
production chief of Weifang Hanting District Salt Co. Ltd and the vice general
manager of the Weifang Hanting No.1 Salt Farm. He graduated from Shandong
Provincial Salt College in 1982, and obtained his EMBA degree from TsingHua
University in 2007. Mr. Yang as a representative to the Shandong Provincial
Peoples’s Congress since 2003 and was elected as the vice chairman of the
Weifang City Salt Industry Association. In November 2010 Mr. Yang was
elected as a member of the advisory committee of the Shandong Salt Group and the
safety advisory committee of the Shandong Chemical Industry Academy. He was
awarded the Shandong Elite Entrepreneur Award in 2005; he was recognized as an
Advanced Worker of the Shandong Salt Industry in 2006, 2007 and 2008; he was
named as one of the Ten Most Contributory Persons in Weifang City since the
Reform in 2009 and as one of One Hundred Most Contributory Persons in Weifang
City since the Foundation of China PRC in 2009. Mr. Yang was selected as a
director because of his experience in the bromine and crude salt industry and
his extensive knowledge of Shandong Haiwang’s operations as its
founder.
Tongjiang Sun. Mr. Sun was
appointed as Chief Executive Officer and a Director of Shandong Haiwang in July
2003 and was subsequently appointed as a Director and Chief Marketing Officer of
Haiwang. Prior to joining Shandong Haiwang, he served as the vice general
manager of Hanting District No. 2 Salt Farm from 1999 to 2003 and vice general
manger of Hanting District Salt Farm from 1995 to 1999. Prior to that, he served
as the office director of Weifang City Hanting District Salt Co., Ltd from 1991
to 1995. Mr. Sun graduated from Qingdao Chemical University in 1991. Mr. Sun was
selected as a director because of his management experience in the bromine and
crude salt industry.
Chengguang Wang. Mr. Wang was
appointed as Chief Financial Officer in October 2008 and prior to his
appointment, he had served as the financial manager of Shandong Haiwang since
July 2003. From 1996 to 2003, he worked at Weifang Tongxin Certified Public
Accountants as an auditor and audit manager. Mr. Wang graduated from Shandong
University in 1996.
83
Chuanqing Wang. Mr. Wang was
appointed as vice general manager and corporate secretary in June, 2004. Prior
to his appointment, he served as office secretary of Hanting District, Weifang
City from 1996 to 2004. Mr. Wang graduated from Shandong University in 1996 and
obtained an MBA degree from Dalian University of Technology in
2004.
Xiusheng Cui. Mr. Cui was
appointed as a vice general manager and the Chief Operating Officer in July
2003. Prior to his appointment, Mr. Cui worked in Hanting District No.2 salt
farm, Weifang City from 1979 to 2003 as a worker, director of production and
vice general manager.
Shigang Xu. Mr. Xu was
appointed as a vice general manager and Chief Sales Officer in July 2006. From
2003 to 2006 he served as director of the sales and marketing department of
Shandong Haiwang. From 1993 to 2003 Mr. Xu served as the sales director of
Hanting District No. 2 salt farm, Weifang City. Mr. Xu graduated from Hanting
District Institute of Technology, Weifang City.
Shangxue Liu. Mr. Liu was
appointed as a vice general manager and Chief Technology Officer in July 2003.
Prior to his appointment, Mr. Liu served as a vice general manager of Hanting
District No. 2 Salt Farm, Weifang City from 1994 to 2003.
Guilin Sun. Mr. Sun was
appointed as an independent director in 2011. Mr. Sun is an experienced expert
in salt chemical industry. He has been the director of the planning department
of the Weifang City Salt Bureau since 1986. Prior to that he served in a number
of salt chemical plants. He graduated with a mechanical engineering major from
Weifang City Television and Broadcast University in 1982. He is now a senior
engineer and has published a number of theses on salt chemical periodicals. Mr.
Sun was chosen as a director because of his extensive experience in the salt
chemical industry.
Ningwu Shen. Mr.
Shen was appointed as an independent director in 2011. Mr. Shen joined Dongfeng
Auto Group in 1968, where he has served as the chief engineer, chief financial
officer, vice general manager and vice chairman of the board of directors. Mr.
Shen is a senior engineer and a qualified senior foreign trade economist. Mr.
Shen received a bachelor degree from Tsinghua University. Mr. Shen was chosen as
a director because of his financial and engineering background.
Dennis O. Laing.
Mr. Laing was appointed as an independent director in 2011. Mr. Laing has
practiced law in Richmond, Virginia for over 30 years. Mr. Laing’s law practice
centers upon business and corporate law with a special interest in the energy,
healthcare and technology sectors. Mr. Laing received a bachelor’s degree in
government from the University of Virginia and a law degree from the University
of Richmond. Mr. Laing currently serves as a director of Sino-Global Shipping
America, Ltd, a shipping agency service provider that is listed on the NASDAQ
Capital Market. Mr. Laing has been chosen as a director because we believe his
legal experience as well as his experience serving on the board of another
Chinese company listed in the U.S. will be beneficial to the guidance of our
company.
Family
Relationships
There is
no family relationship among any of our officers or directors.
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 ten 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 as set forth in our discussion below in
“Related Party Transactions,” 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 SEC.
84
Executive
Compensation
The
following table shows the annual compensation paid by us for the fiscal years
ended June 30, 2010 and 2009 to Chunbin Yang, our principal executive
officer.
Summary
Compensation Table – Named Executive Officer
All Other
Name and principal position
Year
Salary
Bonus
Compensation
Total
Chunbin
Yang,
2010
$
27,224
$
—
$
—
$
27,224
principal
executive officer
2009
$
27,224
$
—
$
—
$
27,224
Employment
Agreements
Generally
Under
Chinese law, we may only terminate employment agreements without cause and
without penalty by providing notice of non-renewal one month prior to the date
on which the employment agreement is scheduled to expire. If we fail to provide
this notice or if we wish to terminate an employment agreement in the absence of
cause, then we are obligated to pay the employee one month’s salary for each
year we have employed the employee. We are, however, permitted to terminate an
employee for cause without penalty to our company, where the employee has
committed a crime or the employee’s actions or inactions have resulted in a
material adverse effect to us.
Our
employment agreements with our executive officers generally provide for a term
of ten years, and a salary to be paid monthly. The agreements also provide that
executive officers are to work an average of forty hours per week and are
entitled to all legal holidays as well as other paid leave in accordance with
PRC laws and regulations and our internal work policies. Under such agreements,
our executive officers can be terminated for cause without further compensation.
The employment agreements also provide that we will pay for all mandatory social
security programs for our executive officers in accordance with PRC regulations.
During the agreement our executive officers are subject to keep trade secrets
confidential. In addition, our employment agreements with our executive officers
prevent them from rendering services for our competitors for a period of two (2)
years after termination of employment.
Chunbin
Yang
We
entered into an employment agreement with our chief executive officer, Mr.
Chunbin Yang effective September 1, 2010. Under the terms of that employment
agreement, Mr. Yang is entitled to the following:
·
Base
compensation of RMB 180,000 (approximately $27,224), payable in 12 equal
monthly installments of RMB 15,000 (approximately $2,268)
each.
·
Payment
of social insurance.
·
Reimbursement
of reasonable expenses incurred by Mr.
Yang.
Mr. Yang
has agreed during the term of the agreement to:
·
keep
confidential and not disclose the confidential
information;
·
take
and implement all appropriate measures to protect the confidentiality of
the confidential information;
85
·
not
disclose, transmit, exploit or otherwise use for his own account or for
others, elements of confidential
information;
Mr. Yang
has also agreed not to compete with our company directly or indirectly during
his employment and for a period of 2 years afterwards.
Mr.
Yang’s agreement may be terminated at any time by either party upon presentation
of 30 days’ prior notice.
Board
of Directors and Board Committees
Our board
of directors currently consists of 5 directors. We expect that all current
directors will continue to serve after this offering. There are no family
relationships between any of our executive officers and directors.
The
directors will be divided into three classes, as nearly equal in number as the
then total number of directors permits. Class I directors shall face re-election
at our annual general meeting of shareholders in 2011 and every three years
thereafter. Class II directors shall face re-election at our annual general
meeting of shareholders in 2012 and every three years thereafter. Class III
directors shall face re-election at our annual general meeting of shareholders
in 2013 and every three years thereafter.
If the
number of directors changes, any increase or decrease will be apportioned among
the classes so as to maintain the number of directors in each class as nearly as
possible. Any additional directors of a class elected to fill a vacancy
resulting from an increase in such class will hold office for a term that
coincides with the remaining term of that class. Decreases in the number of
directors will not shorten the term of any incumbent director. These board
provisions could make it more difficult for third parties to gain control of our
company by making it difficult to replace members of the Board of
Directors.
A
director may vote in respect of any contract or transaction in which he is
interested, provided, however that the nature of the interest of any director in
any such contract or transaction shall be disclosed by him at or prior to its
consideration and any vote on that matter. A general notice or disclosure to the
directors or otherwise contained in the minutes of a meeting or a written
resolution of the directors or any committee thereof of the nature of a
director’s interest shall be sufficient disclosure and after such general notice
it shall not be necessary to give special notice relating to any particular
transaction. A director may be counted for a quorum upon a motion in respect of
any contract or arrangement which he shall make with our company, or in which he
is so interested and may vote on such motion.
There are
no membership qualifications for directors. Further, there are no share
ownership qualifications for directors unless so fixed by us in a general
meeting.
The Board
of Directors maintains a majority of independent directors who are deemed to be
independent under the definition of independence provided by NASDAQ Listing Rule
5605(a)(15). Guilin Sun, Ningwu Shen, and Dennis O. Laing are our independent
directors.
There are
no other arrangements or understandings pursuant to which our directors are
selected or nominated.
Mr.
Chunbin Yang currently holds both the positions of Chairman of the Board and
Chief Executive Officer. These two positions have not been consolidated into one
position; Mr. Yang simply holds both positions at this time. We do not have a
lead independent director because we believe our independent directors are
encouraged to freely voice their opinions on a relatively small company board.
We believe this leadership structure is appropriate because we are a smaller
reporting company in the process of listing on a public exchange; as such we
deem it appropriate to be able to benefit from the guidance of Mr. Yang as both
our principal executive officer and Chairman of our board.
86
Our Board
of Directors plays a key role in our risk oversight. The Board of Directors
makes all relevant company decisions. As such, it is important for us to have
our Chief Executive Officer serve on the Board as he plays a key role in the
risk oversight of our company. As a smaller reporting company with a small board
of directors, we believe it is appropriate to have the involvement and input of
all of our directors in risk oversight matters.
Board
Committees
Currently,
three committees have been established under the board: the audit committee, the
compensation committee and the nominating committee. Mr. Ningwu Shen is the
chairman of our audit committee, Mr. Dennis O. Laing is the Chairman of our
compensation committee, and Mr. Guilin Sun is the chairman of our nominating
committee. The audit committee is responsible for overseeing the accounting and
financial reporting processes of our company and audits of the financial
statements of our company, including the appointment, compensation and oversight
of the work of our independent auditors. The compensation committee of the board
of directors reviews and makes recommendations to the board regarding our
compensation policies for our officers and all forms of compensation, and also
administers our incentive compensation plans and equity-based plans (but our
board retains the authority to interpret those plans). The nominating committee
of the board of directors is responsible for the assessment of the performance
of the board, considering and making recommendations to the board with respect
to the nomination or election of directors and other governance issues. The
nominating committee considers diversity of opinion and experience when
nominating directors.
Board
of Directors Designee
In
connection with this offering, we have agreed to allow our Placement Agents to
have one non-voting designee present at all meetings of our Board of Directors
for a period of one year following the effective date of this
offering.
Although
our Placement Agents’ designee will not be able to vote, he may nevertheless
influence the outcome of matters submitted to the Board of Directors for
approval. We have agreed to reimburse the designee for his expenses for
attending our Board meetings, subject to a maximum reimbursement of $6,000
annually, which amount is not more than the reimbursement payable to our
directors. The designee will be required to certify that such travel expenses
are not reimbursed by any other party. As of the date of this prospectus, Mr.
John McAuliffe is serving as our Placement Agents’ designee to our Board of
Directors.
Duties
of Directors
Under
British Virgin Islands law, our directors have a duty to act honestly, in good
faith and with a view to our best interests. Our directors also have a duty to
exercise the care, diligence and skills that a reasonably prudent person would
exercise in comparable circumstances. See “Description of Share
Capital—Differences in Corporate Law” for additional information on our
directors’ fiduciary duties under British Virgin Islands law. In fulfilling
their duty of care to us, our directors must ensure compliance with our amended
and restated memorandum and articles of association. We have the right to seek
damages if a duty owed by our directors is breached.
The
functions and powers of our board of directors include, among
others:
·
appointing
officers and determining the term of office of the
officers;
·
authorizing
the payment of donations to religious, charitable, public or other bodies,
clubs, funds or associations as deemed
advisable;
·
exercising
the borrowing powers of the company and mortgaging the property of the
company;
·
executing
checks, promissory notes and other negotiable instruments on behalf of the
company; and
·
maintaining
or registering a register of mortgages, charges or other encumbrances of
the company.
Interested
Transactions
A
director may vote, attend a board meeting or sign a document on our behalf with
respect to any contract or transaction in which he or she is interested. A
director must promptly disclose the interest to all other directors after
becoming aware of the fact that he or she is interested in a transaction we have
entered into or are to enter into. A general notice or disclosure to the board
or otherwise contained in the minutes of a meeting or a written resolution of
the board or any committee of the board that a director is a shareholder,
director, officer or trustee of any specified firm or company and is to be
regarded as interested in any transaction with such firm or company will be
sufficient disclosure, and, after such general notice, it will not be necessary
to give special notice relating to any particular transaction.
87
Remuneration
and Borrowing
The
directors may receive such remuneration as our board of directors may determine
from time to time. Each director is entitled to be repaid or prepaid all
traveling, hotel and incidental expenses reasonably incurred or expected to be
incurred in attending meetings of our board of directors or committees of our
board of directors or shareholder meetings or otherwise in connection with the
discharge of his or her duties as a director. The compensation committee will
assist the directors in reviewing and approving the compensation structure for
the directors. Our board of directors may exercise all the powers of the company
to borrow money and to mortgage or charge our undertakings and property or any
part thereof, to issue debentures, debenture stock and other securities whenever
money is borrowed or as security for any debt, liability or obligation of the
company or of any third party.
Qualification
A
director is not required to hold shares as a qualification to
office.
Limitation
on Liability and Other Indemnification Matters
British
Virgin Islands law does not limit the extent to which a company’s memorandum and
articles of association may provide for indemnification of officers and
directors, except to the extent any such provision may be held by the British
Virgin Islands courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a
crime.
Under our
amended and restated memorandum and articles of association, we may indemnify
our directors, officers and liquidators against all expenses, including legal
fees, and against all judgments, fines and amounts paid in settlement and
reasonably incurred in connection with civil, criminal, administrative or
investigative proceedings to which they are party or are threatened to be made a
party by reason of their acting as our director, officer or liquidator. To be
entitled to indemnification, these persons must have acted honestly and in good
faith with a view to the best interest of the company and, in the case of
criminal proceedings, they must have had no reasonable cause to believe their
conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted for our directors, officers or persons controlling our company under
the foregoing provisions, we have been informed that in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
Director
Compensation
All
directors hold office until the next annual meeting of shareholders at which
their respective class of directors is re-elected and until their successors
have been duly elected and qualified. There are no family relationships among
our directors or executive officers. Officers are elected by and serve at the
discretion of the Board of Directors. Employee directors do not receive any
compensation for their services. Non-employee directors are entitled to receive
$10,000 per year for serving as directors and may receive option grants from our
company. In addition, non-employee directors are entitled to
receive reimbursement for their actual travel expenses for each Board of
Directors meeting attended.
88
Summary
Compensation Table FY 2010 – Directors
Name
Director
Fees earned
or paid in
cash
Total(1)
Chunbin
Yang(2)
$
0
$
0
Tongjiang
Sun(2)
$
0
$
0
Guilin
Sun(3)
$
0
$
0
Ningwu
Shen(3)
$
0
$
0
Dennis
O. Laing(3)
$
0
$
0
(1)
None
of the directors received any common share awards, option awards,
nonqualified deferred compensation earnings or non-equity incentive plan
compensation in fiscal year
2010.
(2)
Mr.
Yang and Mr. Tongjiang Song received payment in their capacities as
officers of our company and/or subsidiaries/affiliates but did not receive
any compensation for serving as directors of our
company.
(3)
Messers.
Guilin Sun, Ningwu Shen and Dennis O. Laing did not become directors until
fiscal 2011 and did not receive any payment in fiscal
2010.
Limitation
of Director and Officer Liability
Under
British Virgin Islands law, each of our directors and officers, in performing
his or her functions, is required to act honestly and in good faith with a view
to our best interests and exercise the care, diligence and skill that a
reasonably prudent person would exercise in comparable circumstances. Our
amended and restated memorandum and articles of association provide that, to the
fullest extent permitted by British Virgin Islands law or any other applicable
laws, our directors will not be personally liable to us or our shareholders for
any acts or omissions in the performance of their duties. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. These provisions will not limit the liability
of directors under United States federal securities laws.
We may
indemnify any of our directors or anyone serving at our request as a director of
another entity against all expenses, including legal fees, and against all
judgments, fines and amounts paid in settlement and reasonably incurred in
connection with legal, administrative or investigative proceedings. We may only
indemnify a director if he or she acted honestly and in good faith with the view
to our best interests and, in the case of criminal proceedings, the director had
no reasonable cause to believe that his or her conduct was unlawful. The
decision of our board of directors as to whether the director acted honestly and
in good faith with a view to our best interests and as to whether the director
had no reasonable cause to believe that his or her conduct was unlawful, is in
the absence of fraud sufficient for the purposes of indemnification, unless a
question of law is involved. The termination of any proceedings by any judgment,
order, settlement, conviction or the entry of no plea does not, by itself,
create a presumption that a director did not act honestly and in good faith and
with a view to our best interests or that the director had reasonable cause to
believe that his or her conduct was unlawful. If a director to be indemnified
has been successful in defense of any proceedings referred to above, the
director is entitled to be indemnified against all expenses, including legal
fees, and against all judgments, fines and amounts paid in settlement and
reasonably incurred by the director or officer in connection with the
proceedings.
We may
purchase and maintain insurance in relation to any of our directors or officers
against any liability asserted against the directors or officers and incurred by
the directors or officers in that capacity, whether or not we have or would have
had the power to indemnify the directors or officers against the liability as
provided in our amended and restated memorandum and articles of
association.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted for our directors, officers or persons controlling our company under
the foregoing provisions, we have been informed that in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
89
Related
Party Transactions
Sales
to Related Parties
For the fiscal years ended June 30,2010 and 2009, Shandong Haiwang had sales of $0 and $1.56 million, respectively,
to Shandong Haiheng Chemical Co., Ltd. Shandong Haiwang has a 10% ownership
stake in Shandong Haiheng Chemical Co., Ltd. and sells them crude salt. Shandong
Haiwang also had sales of $224,000 and $841,000 to Weifang Haike Chemical Co.,
Ltd for the fiscal years ended June 30, 2010 and 2009, respectively. Weifang
Haike Chemical Co., Ltd is owned by key members of Shandong Haiwang’s management
and Shandong Haiwang also sells them crude salt. These sales were made at
prevailing market prices.
Purchases
from Related Parties
For the fiscal years ended June 30,2010 and 2009, Shandong Haiwang had total purchases of $1.96 million and $1.46
million, respectively, from Shandong Haiheng Chemical Co., Ltd. Shandong Haiwang
purchases various raw materials from Shandong Haiheng Chemical Co., Ltd. These
purchases were made at prevailing market prices.
Contractual
Arrangements with Domestic Companies and their Shareholders
We
operate our business in China through a series of contractual arrangements with
Shandong Haiwang and its shareholders, who are related parties. For a
description of these contractual arrangements, see “Our Corporate Structure –
Contractual Arrangements with Domestic Companies and their
Shareholders.”
Related
Party Guarantee
We have the following short-term bank
loans which are guaranteed by either our Chairman and Chief Executive Officer
Mr. Yang, or Weifang Haike Chemical Co. Ltd., which is owned by Shangxue Liu,
the Chief Technology Officer of Shandong Haiwang.
Mr.
Chunbin Yang and Weifang Haike Chemical Co., Ltd, both as guarantors, guaranteed
for Shandong Haiwang’s short-term loan of $8,838,000 and $0 as of June 30, 2010
and 2009, respectively. Mr. Chunbin Yang individually guaranteed for Shandong
Haiwang’s short-term bank loan of $1,308,000 and $1,465,000,
respectively
Loan
Due from Related Parties
As of
June 30, 2009, loans due from Shandong Haiheng Chemical Co., Ltd and Weifang
Haike Chemical Co., Ltd were $1,667,000 and $443,000, respectively. Shandong
Haiwang provided interest bearing loans to these parties with interest rates
ranging from 5% to 6%. Amounts due from these parties were fully collected as of
June 30, 2010.
Loan
Due to Related Parties
As of
December 31, 2010, June 30, 2010 and June 30, 2009, loans due to Weifang Haike
Chemical Co., Ltd were $0, $1,437,000 and $0, respectively. The largest amount
outstanding during the six months ended December 31, 2010, the year ended June30, 2010 and the year ended June 30, 2009, were $1,437,000, $1,523,000 and $0
respectively. The loans were non-interesting bearing and the interest expense in
each respective period was $0.
Legal
Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties and an adverse result in these or other matters may arise
from time to time that may harm our business. We are currently not aware of any
such legal proceedings or claims that we believe will have a material adverse
affect on our business, financial condition or operating
results.
90
Principal
Shareholders
The
following table sets forth information with respect to beneficial ownership of
our common shares by:
·
Each
person who is known by us to beneficially own more than 5% of our
outstanding common shares;
·
Each
of our directors and named executive officers;
and
·
All
directors and named executive officers as a
group.
The
number and percentage of common shares beneficially owned is based on 21,180,000
outstanding prior to completion of the offering (assuming the pro rata issuance
of 21,130,000 shares to our existing shareholders prior to completion of this
offering). Information with respect to beneficial ownership has been furnished
by each director, officer or beneficial owner of more than 5% of our common
shares. Beneficial ownership is determined in accordance with the rules of the
SEC and generally requires that such person have voting or investment power with
respect to securities. In computing the number of common shares beneficially
owned by a person listed below and the percentage ownership of such person,
common shares underlying options, warrants or convertible securities held by
each such person that are exercisable or convertible within 60 days of February2, 2011 are deemed outstanding, but are not deemed outstanding for computing the
percentage ownership of any other person. Except as otherwise indicated in the
footnotes to this table, or as required by applicable community property laws,
all persons listed have sole voting and investment power for all common shares
shown as beneficially owned by them. Unless otherwise indicated in the
footnotes, the address for each principal shareholder is in the care of Haiwang
Resources & Technology Ltd., Haiwang Street, Yangzi Ave., Coastal Economic
Development Zone, Weifang City, Shandong Province, China 430010. As of the date
of the prospectus, we had 10 shareholders of record.
Named
Executive Officers and Directors
Amount of
Beneficial
Ownership(1)
Percentage
Ownership(2)
Chunbin
Yang, Chairman and Chief Executive Officer
10,309,386
(3)
48.675
%
Tongjiang
Sun, Director and Chief Marketing Officer
2,854,916
(4)
13.493
%
Xiusheng
Cui, Vice General Manager and Chief Operating Officer
2,537,703
(5)
11.98
%
Chuanqiang
Wang, Vice General Manager and Corporate Secretary
79,298
(6)
0.374
%
Shigang
Xu, Vice General Manager and Chief Sales Officer
79,298
(7)
0.374
%
Shangxue
Liu, Vice General Manager and Chief Technology Officer
2,537,703
(8)
11.98
%
Guilin
Sun, Director
0
*
Ningwu
Shen, Director
0
*
Dennis
O. Laing, Director
0
*
All
Directors and Executive Officers as a Group (6 people)
18,398,304
86.876
%
*
Less than
1%.
(1)
Beneficial ownership is
determined in accordance with the rules of the SEC and includes voting or
investment power with respect to the common
shares.
(2)
The number of our common shares
outstanding used in calculating the percentage for each listed person
excludes the common shares underlying options held by such
person.
(3)
Includes the 7,236,168 shares
held by Brilliant Shine Investments Limited, of which Mr. Yang has sole
voting and disposition power; the 1,036,702 shares held by All Thrive
Limited, which is wholly owned by Ms. Jincai Wu, Mr. Yang’s wife; the
1,022,994 shares held by Better Trend Limited, which is wholly owned by
Ms. Xiaoyang Yang, Mr. Yang’s daughter; and the 1,014,522 shares held by
Bloom Team Limited, which is wholly owned by Mr. Chunxiang Yang, Mr.
Yang’s brother.
(4)
Tongjiang
Sun has the sole power to direct the voting and disposition of the
2,854,916 shares held by Boom Luck Enterprises
Limited.
(5)
Xiusheng
Cui has the sole power to direct the voting and disposition of the
2,537,703 shares held by Cai Hui
Limited.
(6)
Chuanqiang
Wang has shared power to direct the voting and disposition of the 79,298
shares held by Cheng Xing
Limited.
(7)
Shigang
Xu has shared power to direct the voting and disposition of the 79,298
shares held by Cheng Xing
Limited.
91
(8)
Shangxue
Liu has sole power to direct the voting and disposition of the 2,537,703
shares held by Brimful Thousand
Limited.
Description
of Share Capital
We were
incorporated as an international business company under the International
Business Companies Act, 1984, in the British Virgin Islands on October 26, 2010
under the name “Haiwang Resources & Technology Ltd.” As of the date of this
prospectus, we have authorized 50,000,000 common shares, of $0.001 par
value.
The
following are summaries of the material provisions of our amended and restated
memorandum and articles of association that will be in force at the time of the
closing of this offering and the BVI Act, insofar as they relate to the material
terms of our common shares. The forms of our amended and restated memorandum and
articles of association are filed as exhibits to the registration statement of
which this prospectus is a part.
Common
Shares
General
All of
our issued common shares are fully paid and non-assessable. Certificates
representing the common shares are issued in registered form. Our shareholders
who are non-residents of the British Virgin Islands may freely hold and vote
their common shares.
Distributions
The
holders of our common shares are entitled to such dividends as may be declared
by our board of directors subject to the BVI Act.
Voting
rights
Any
action required or permitted to be taken by the shareholders must be effected at
a duly called annual or special meeting of the shareholders entitled to vote on
such action and may not be effected by a resolution in writing. At each general
meeting, each shareholder who is present in person or by proxy (or, in the case
of a shareholder being a corporation, by its duly authorized representative)
will have one vote for each common share which such shareholder
holds.
Election
of directors
Delaware
law permits cumulative voting for the election of directors only if expressly
authorized in the certificate of incorporation. The laws of the British Virgin
Islands, however, do not specifically prohibit or restrict the creation of
cumulative voting rights for the election of our directors. Cumulative voting is
not a concept that is accepted as a common practice in the British Virgin
Islands, and we have made no provisions in our amended and restated memorandum
and articles of association to allow cumulative voting for elections of
directors.
Meetings
We must
provide written notice of all meetings of shareholders, stating the time, place
and, in the case of a special meeting of shareholders, the purpose or purposes
thereof, at least 10 days before the date of the proposed meeting to those
persons whose names appear as shareholders in the register of members on the
date of the notice and are entitled to vote at the meeting. Our board of
directors shall call a special meeting upon the written request of shareholders
holding at least 30% of our outstanding voting shares. In addition, our board of
directors may call a special meeting of shareholders on its own motion. A
meeting of shareholders may be called on short notice: (a) if it is so
agreed by shareholders holding not less than 90% of the common shares entitled
to vote on the matters to be considered at the meeting, or 90% of the common
shares of each class or series entitled to vote together as a class or series,
together with not less than 90% of the remaining votes; or (b) if all
shareholders holding common shares entitled to vote on the matters to be
considered at the meeting have waived notice of the meeting, and presence at the
meeting shall be deemed to constitute waiver for this purpose.
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At any
meeting of shareholders, a quorum will be present if there are shareholders
present in person or by proxy representing not less than 50% of the issued
common shares entitled to vote on the resolutions to be considered at the
meeting. Such quorum may be represented by only a single shareholder or proxy.
If no quorum is present within two hours of the start time of the meeting, the
meeting shall be dissolved if it was requested by shareholders. In any other
case, the meeting shall be adjourned to the next business day, and if
shareholders representing not less than one-third of the votes of the common
shares or each class of shares entitled to vote on the matters to be considered
at the meeting are present within one hour of the start time of the adjourned
meeting, a quorum will be present. If not, the meeting will be dissolved. No
business may be transacted at any general meeting unless a quorum is present at
the commencement of business. If present, the chair of our board of directors
shall be the chair presiding at any meeting of the shareholders.
A
corporation that is a shareholder shall be deemed for the purpose of our amended
and restated memorandum and articles of association to be present in person if
represented by its duly authorized representative. This duly authorized
representative shall be entitled to exercise the same powers on behalf of the
corporation which he represents as that corporation could exercise if it were
our individual shareholder.
Protection
of minority shareholders
We would
normally expect British Virgin Islands courts to follow English case law
precedents, which permit a minority shareholder to commence a representative
action, or derivative actions in our name, to challenge (1) an act which is
ultra vires or illegal, (2) an act which constitutes a fraud against the
minority by parties in control of us, (3) the act complained of constitutes
an infringement of individual rights of shareholders, such as the right to vote
and pre-emptive rights and (4) an irregularity in the passing of a
resolution which requires a special or extraordinary majority of the
shareholders.
Pre-emptive
rights
There are
no pre-emptive rights applicable to the issue by us of new common shares under
either British Virgin Islands law or our amended and restated memorandum and
articles of association.
Transfer
of common shares
Subject
to the restrictions in our amended and restated memorandum and articles of
association, the lock-up agreements with our Placement Agents described in
“Shares Eligible for Future Sale— Lock-Up Agreements” and applicable securities
laws, any of our shareholders may transfer all or any of his or her common
shares by written instrument of transfer signed by the transferor and containing
the name and address of the transferee. Our board of directors may resolve by
resolution to refuse or delay the registration of the transfer of any common
share. If our board of directors resolves to refuse or delay any transfer, it
shall specify the reasons for such refusal in the resolution. Our directors may
not resolve or refuse or delay the transfer of a common share unless:
(a) the person transferring the shares has failed to pay any amount due in
respect of any of those shares; or (b) such refusal or delay is deemed
necessary or advisable in our view or that of our legal counsel in order to
avoid violation of, or in order to ensure compliance with, any applicable,
corporate, securities and other laws and regulations.
Liquidation
If we are
wound up and the assets available for distribution among our shareholders are
more than sufficient to repay all amounts paid to us on account of the issue of
shares immediately prior to the winding up, the excess shall be distributable
pari passu among those shareholders in proportion to the amount paid up
immediately prior to the winding up on the shares held by them, respectively. If
we are wound up and the assets available for distribution among the shareholders
as such are insufficient to repay the whole of the amounts paid to us on account
of the issue of shares, those assets shall be distributed so that, to the
greatest extent possible, the losses shall be borne by the shareholders in
proportion to the amounts paid up immediately prior to the winding up on the
shares held by them, respectively. If we are wound up, the liquidator appointed
by us may, in accordance with the BVI Act, divide among our shareholders in
specie or kind the whole or any part of our assets (whether they shall consist
of property of the same kind or not) and may, for such purpose, set such value
as the liquidator deems fair upon any property to be divided and may determine
how such division shall be carried out as between the shareholders or different
classes of shareholders.
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Calls
on common shares and forfeiture of common shares
Our board
of directors may from time to time make calls upon shareholders for any amounts
unpaid on their common shares in a notice served to such shareholders at least
14 days prior to the specified time of payment. The common shares that have been
called upon and remain unpaid are subject to forfeiture.
Redemption
of common shares
Subject
to the provisions of the BVI Act, we may issue shares on terms that are subject
to redemption, at our option or at the option of the holders, on such terms and
in such manner as may be determined by our amended and restated memorandum and
articles of association and subject to any applicable requirements imposed from
time to time by, the BVI Act, the SEC, the NASDAQ Global Select Market or NASDAQ
Global Market, or by any recognized stock exchange on which our securities are
listed.
Modifications
of rights
All or
any of the special rights attached to any class of shares may, subject to the
provisions of the BVI Act, be amended only pursuant to a resolution passed at a
meeting by a majority of the votes cast by those entitled to vote at a meeting
of the holders of the shares of that class.
Changes
in the number of shares we are authorized to issue and those in
issue
We may
from time to time by resolution of our board of directors:
·
amend
our memorandum of association to increase or decrease the maximum number
of shares we are authorized to
issue;
·
subject
to our memorandum, divide our authorized and issued shares into a larger
number of shares; and
·
subject
to our memorandum, combine our authorized and issued shares into a smaller
number of shares.
Untraceable
shareholders
We are
entitled to sell any shares of a shareholder who is untraceable, provided
that:
·
all
checks or warrants in respect of dividends of these shares, not being less
than three in number, for any sums payable in cash to the holder of such
shares have remained uncashed for a period of twelve years prior to the
publication of the notice and during the three months referred to in the
third bullet point below;
·
we
have not during that time received any indication of the whereabouts or
existence of the shareholder or person entitled to these shares by death,
bankruptcy or operation of law; and
·
we
have caused a notice to be published in newspapers in the manner
stipulated by our amended and restated memorandum and articles of
association, giving notice of our intention to sell these shares, and a
period of three months has elapsed since such
notice.
The net
proceeds of any such sale shall belong to us, and when we receive these net
proceeds we shall become indebted to the former shareholder for an amount equal
to the net proceeds.
Inspection
of books and records
Under
British Virgin Islands Law, holders of our common shares are entitled, upon
giving written notice to us, to inspect (i) our amended and restated
memorandum and articles of association, (ii) the register of members,
(iii) the register of directors and (iv) minutes of meetings and
resolutions of members, and to make copies and take extracts from the documents
and records. However, our directors can refuse access if they are satisfied that
to allow such access would be contrary to our interests. See “Where You Can Find
Additional Information.”
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Rights
of non-resident or foreign shareholders
There are
no limitations imposed by our amended and restated memorandum and articles of
association on the rights of non-resident or foreign shareholders to hold or
exercise voting rights on our shares. In addition, there are no provisions in
our amended and restated memorandum and articles of association governing the
ownership threshold above which shareholder ownership must be
disclosed.
Issuance
of additional common shares
Our
amended and restated memorandum and articles of association authorizes our board
of directors to issue additional common shares from authorized but unissued
shares, to the extent available, from time to time as our board of directors
shall determine.
Differences
in Corporate Law
The BVI
Act and the laws of the British Virgin Islands affecting British Virgin Islands
companies like us and our shareholders differ from laws applicable to U.S.
corporations and their shareholders. Set forth below is a summary of the
material differences between the provisions of the laws of the British Virgin
Islands applicable to us and the laws applicable to companies incorporated in
the United States and their shareholders.
Mergers
and similar arrangements
Under the
laws of the British Virgin Islands, two or more companies may merge or
consolidate in accordance with Section 170 of the BVI Act. A merger means
the merging of two or more constituent companies into one of the constituent
companies and a consolidation means the uniting of two or more constituent
companies into a new company. In order to merge or consolidate, the directors of
each constituent company must approve a written plan of merger or consolidation,
which must be authorized by a resolution of shareholders.
While a
director may vote on the plan of merger or consolidation even if he has a
financial interest in the plan, the interested director must disclose the
interest to all other directors of the company promptly upon becoming aware of
the fact that he is interested in a transaction entered into or to be entered
into by the company.
A
transaction entered into by our company in respect of which a director is
interested (including a merger or consolidation) is voidable by us unless the
director’s interest was (a) disclosed to the board prior to the transaction
or (b) the transaction is (i) between the director and the company and
(ii) the transaction is in the ordinary course of the company’s business
and on usual terms and conditions.
Notwithstanding
the above, a transaction entered into by the company is not voidable if the
material facts of the interest are known to the shareholders and they approve or
ratify it or the company received fair value for the transaction.
Shareholders
not otherwise entitled to vote on the merger or consolidation may still acquire
the right to vote if the plan of merger or consolidation contains any provision
which, if proposed as an amendment to the amended and restated memorandum or
articles of association, would entitle them to vote as a class or series on the
proposed amendment. In any event, all shareholders must be given a copy of the
plan of merger or consolidation irrespective of whether they are entitled to
vote at the meeting to approve the plan of merger or consolidation.
The
shareholders of the constituent companies are not required to receive shares of
the surviving or consolidated company but may receive debt obligations or other
securities of the surviving or consolidated company, other assets, or a
combination thereof. Further, some or all of the shares of a class or series may
be converted into a kind of asset while the other shares of the same class or
series may receive a different kind of asset. As such, not all the shares of a
class or series must receive the same kind of consideration.
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After the
plan of merger or consolidation has been approved by the directors and
authorized by a resolution of the shareholders, articles of merger or
consolidation are executed by each company and filed with the Registrar of
Corporate Affairs in the British Virgin Islands.
A
shareholder may dissent from a mandatory redemption of his shares, an
arrangement (if permitted by the court), a merger (unless the shareholder was a
shareholder of the surviving company prior to the merger and continues to hold
the same or similar shares after the merger) or a consolidation. A shareholder
properly exercising his dissent rights is entitled to a cash payment equal to
the fair value of his shares.
A
shareholder dissenting from a merger or consolidation must object in writing to
the merger or consolidation before the vote by the shareholders on the merger or
consolidation, unless notice of the meeting was not given to the shareholder. If
the merger or consolidation is approved by the shareholders, the company must
give notice of this fact to each shareholder within 20 days who gave written
objection. These shareholders then have 20 days to give to the company their
written election in the form specified by the BVI Act to dissent from the merger
or consolidation, provided that in the case of a merger, the 20 days starts when
the plan of merger is delivered to the shareholder.
Upon
giving notice of his election to dissent, a shareholder ceases to have any
shareholder rights except the right to be paid the fair value of his shares. As
such, the merger or consolidation may proceed in the ordinary course
notwithstanding his dissent.
Within
seven days of the later of the delivery of the notice of election to dissent and
the effective date of the merger or consolidation, the company must make a
written offer to each dissenting shareholder to purchase his shares at a
specified price per share that the company determines to be the fair value of
the shares. The company and the shareholder then have 30 days to agree upon the
price. If the company and a shareholder fail to agree on the price within the 30
days, then the company and the shareholder shall, within 20 days immediately
following the expiration of the 30-day period, each designate an appraiser and
these two appraisers shall designate a third appraiser. These three appraisers
shall fix the fair value of the shares as of the close of business on the day
prior to the shareholders’ approval of the transaction without taking into
account any change in value as a result of the transaction.
Shareholders’
suits
There are
both statutory and common law remedies available to our shareholders as a matter
of British Virgin Islands law. These are summarized below:
Prejudiced
members
A
shareholder who considers that the affairs of the company have been, are being,
or are likely to be, conducted in a manner that is, or any act or acts of the
company have been, or are, likely to be oppressive, unfairly discriminatory or
unfairly prejudicial to him in that capacity, can apply to the court under
Section 184I of the BVI Act, inter alia, for an order that his shares be
acquired, that he be provided compensation, that the Court regulate the future
conduct of the company, or that any decision of the company which contravenes
the BVI Act or our amended and restated memorandum and articles of association
be set aside.
Derivative
actions
Section 184C
of the BVI Act provides that a shareholder of a company may, with the leave of
the Court, bring an action in the name of the company to redress any wrong done
to it.
Just
and equitable winding up
In
addition to the statutory remedies outlined above, shareholders can also
petition for the winding up of a company on the grounds that it is just and
equitable for the court to so order. Save in exceptional circumstances, this
remedy is only available where the company has been operated as a quasi
partnership and trust and confidence between the partners has broken
down.
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Indemnification
of directors and executive officers and limitation of liability
British
Virgin Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except to
the extent any provision providing indemnification may be held by the British
Virgin Islands courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a
crime.
Under our
amended and restated memorandum and articles of association, we indemnify
against all expenses, including legal fees, and against all judgments, fines and
amounts paid in settlement and reasonably incurred in connection with legal,
administrative or investigative proceedings for any person who:
·
is
or was a party or is threatened to be made a party to any threatened,
pending or completed proceedings, whether civil, criminal, administrative
or investigative, by reason of the fact that the person is or was our
director; or
·
is
or was, at our request, serving as a director or officer of, or in any
other capacity is or was acting for, another body corporate or a
partnership, joint venture, trust or other
enterprise.
These
indemnities only apply if the person acted honestly and in good faith with a
view to our best interests and, in the case of criminal proceedings, the person
had no reasonable cause to believe that his conduct was unlawful.
This
standard of conduct is generally the same as permitted under the Delaware
General Corporation Law for a Delaware corporation.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers or persons controlling us under the
foregoing provisions, we have 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.
Anti-takeover provisions in our
amended and restated memorandum and articles of
association
Some
provisions of our amended and restated memorandum and articles of association
may discourage, delay or prevent a change in control of our company or
management that shareholders may consider favorable, including provisions that
provide for a staggered board of directors and prevent shareholders from taking
an action by written consent in lieu of a meeting. However, under British Virgin
Islands law, our directors may only exercise the rights and powers granted to
them under our amended and restated memorandum and articles of association, as
amended and restated from time to time, as they believe in good faith to be in
the best interests of our company.
Directors’
fiduciary duties
Under
Delaware corporate law, a director of a Delaware corporation has a fiduciary
duty to the corporation and its shareholders. This duty has two components: the
duty of care and the duty of loyalty. The duty of care requires that a director
act in good faith, with the care that an ordinarily prudent person would
exercise under similar circumstances. Under this duty, a director must inform
himself of, and disclose to shareholders, all material information reasonably
available regarding a transaction that is material to the company. The duty of
loyalty requires that a director act in a manner he reasonably believes to be in
the best interests of the corporation. He must not use his corporate position
for personal gain or advantage. This duty prohibits self-dealing by a director
and mandates that the best interest of the corporation and its shareholders take
precedence over any interest possessed by a director, officer or controlling
shareholder and not shared by the shareholders generally. In general, actions of
a director are presumed to have been made on an informed basis, in good faith
and in the honest belief that the action taken was in the best interests of the
corporation. However, this presumption may be rebutted by evidence of a breach
of one of the fiduciary duties. Should such evidence be presented concerning a
transaction by a director, a director must prove the procedural fairness of the
transaction and that the transaction was of fair value to the
corporation.
97
Under
British Virgin Islands law, our directors owe the company certain statutory and
fiduciary duties including, among others, a duty to act honestly, in good faith,
for a proper purpose and with a view to what the directors believe to be in the
best interests of the company. Our directors are also required, when exercising
powers or performing duties as a director, to exercise the care, diligence and
skill that a reasonable director would exercise in comparable circumstances,
taking into account without limitation, the nature of the company, the nature of
the decision and the position of the director and the nature of the
responsibilities undertaken. In the exercise of their powers, our directors must
ensure neither they nor the company acts in a manner which contravenes the BVI
Act or our memorandum and articles of association, as amended and re-stated from
time to time. A shareholder has the right to seek damages for breaches of duties
owed to us by our directors.
Shareholder
action by written consent
Under the
Delaware General Corporation Law, a corporation may eliminate the right of
shareholders to act by written consent by amendment to its certificate of
incorporation. British Virgin Islands law provides that shareholders may approve
corporate matters by way of a written resolution without a meeting signed by or
on behalf of shareholders sufficient to constitute the requisite majority of
shareholders who would have been entitled to vote on such matter at a general
meeting; provided that if the consent is less than unanimous, notice must be
given to all non-consenting shareholders. However, our amended and restated
memorandum and articles of association do not permit shareholders to act by
written consent.
Shareholder
proposals
Under the
Delaware General Corporation Law, a shareholder has the right to put any
proposal before the annual meeting of shareholders, provided it complies with
the notice provisions in the governing documents. A special meeting may be
called by the board of directors or any other person authorized to do so in the
governing documents, but shareholders may be precluded from calling special
meetings. British Virgin Islands law and our amended and restated memorandum and
articles of association allow our shareholders holding not less than 30% of the
votes of the outstanding voting shares to requisition a shareholders’ meeting.
We are not obliged by law to call shareholders’ annual general meetings, but our
amended and restated memorandum and articles of association do permit the
directors to call such a meeting. The location of any shareholders’ meeting can
be determined by the board of directors and can be held anywhere in the
world.
Cumulative
voting
Under the
Delaware General Corporation Law, cumulative voting for elections of directors
is not permitted unless the corporation’s certificate of incorporation
specifically provides for it. Cumulative voting potentially facilitates the
representation of minority shareholders on a board of directors since it permits
the minority shareholder to cast all the votes to which the shareholder is
entitled on a single director, which increases the shareholder’s voting power
with respect to electing such director. As permitted under British Virgin
Islands law, our amended and restated memorandum and articles of association do
not provide for cumulative voting. As a result, our shareholders are not
afforded any less protections or rights on this issue than shareholders of a
Delaware corporation.
Removal
of directors
Under the
Delaware General Corporation Law, a director of a corporation with a classified
board may be removed only for cause with the approval of a majority of the
outstanding shares entitled to vote, unless the certificate of incorporation
provides otherwise. Under our amended and restated memorandum and articles of
association, directors can be removed from office, with cause, by a resolution
of shareholders or by a resolution of directors passed at a meeting of directors
called for the purpose of removing the director or for purposes including the
removal of the director.
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Transactions
with interested shareholders
The
Delaware General Corporation Law contains a business combination statute
applicable to Delaware public corporations whereby, unless the corporation has
specifically elected not to be governed by such statute by amendment to its
certificate of incorporation, it is prohibited from engaging in certain business
combinations with an “interested shareholder” for three years following the date
that such person becomes an interested shareholder. An interested shareholder
generally is a person or group who or which owns or owned 15% or more of the
target’s outstanding voting shares within the past three years. This has the
effect of limiting the ability of a potential acquirer to make a two-tiered bid
for the target in which all shareholders would not be treated equally. The
statute does not apply if, among other things, prior to the date on which such
shareholder becomes an interested shareholder, the board of directors approves
either the business combination or the transaction which resulted in the person
becoming an interested shareholder. This encourages any potential acquirer of a
Delaware public corporation to negotiate the terms of any acquisition
transaction with the target’s board of directors. British Virgin Islands law has
no comparable statute. However, our amended and restated memorandum and articles
of association expressly provide for the same protection afforded by the
Delaware business combination statute.
Dissolution;
Winding Up
Under the
Delaware General Corporation Law, unless the board of directors approves the
proposal to dissolve, dissolution must be approved by shareholders holding 100%
of the total voting power of the corporation. Only if the dissolution is
initiated by the board of directors may it be approved by a simple majority of
the corporation’s outstanding shares. Delaware law allows a Delaware corporation
to include in its certificate of incorporation a supermajority voting
requirement in connection with dissolutions initiated by the board. Under the
BVI Act and our amended and restated memorandum and articles of association, we
may appoint a voluntary liquidator by a resolution of the shareholders or by
resolution of directors.
Variation
of rights of shares
Under the
Delaware General Corporation Law, a corporation may vary the rights of a class
of shares with the approval of a majority of the outstanding shares of such
class, unless the certificate of incorporation provides otherwise. Under our
amended and restated memorandum and articles of association, if at any time our
shares are divided into different classes of shares, the rights attached to any
class may only be varied, whether or not our company is in liquidation, by a
resolution passed at a meeting by a majority of the votes cast by those entitled
to vote at a meeting of the holders of the issued shares in that
class.
Amendment
of governing documents
Under the
Delaware General Corporation Law, a corporation’s governing documents may be
amended with the approval of a majority of the outstanding shares entitled to
vote, unless the certificate of incorporation provides otherwise. As permitted
by British Virgin Islands law, our amended and restated memorandum and articles
of association may be amended by a resolution of shareholders and, subject to
certain exceptions, by a resolution of directors. Any amendment is effective
from the date it is registered at the Registry of Corporate Affairs in the
British Virgin Islands.
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Shares
Eligible for Future Sale
Prior to
this offering, there has been no market for our common shares, and a liquid
trading market for our common shares may not develop or be sustained after this
offering. Future sales of substantial amounts of common shares, including common
shares issued upon exercise of outstanding options and exercise of the warrants
offered in this prospectus in the public market after this offering or the
anticipation of those sales could adversely affect market prices prevailing from
time to time and could impair our ability to raise capital through sales of our
equity securities.
Upon the
completion of the minimum offering, we will have outstanding 25,680,000 common
shares, assuming no exercise of outstanding options and not including any shares
underlying the Placement Agent Warrant. Of these common shares, the 4,500,000
common shares sold in this offering will be freely tradable without restriction
under the Securities Act, except that any shares purchased by our “affiliates,”
as that term is defined in Rule 144 of the Securities Act, may generally only be
sold in compliance with the limitations of Rule 144 described below. The
remaining approximately 21,180,000 common shares outstanding will be restricted
shares held by existing shareholders that could be sold pursuant to Rule 144. We
have not agreed to register these restricted shares. We have not issued any
warrants to purchase our common shares or other securities convertible into our
common shares.
Rule
144
In
general, under Rule 144 as currently in effect, beginning 90 days after the
effective date of the registration statement of which this prospectus is a part,
a person (or persons whose shares are aggregated) who is deemed to be an
affiliate of our company at the time of sale, or at any time during the
preceding three months, and who has beneficially owned restricted shares for at
least six months, would be entitled to sell within any three-month period a
number of our common shares that does not exceed the greater of 1% of the then
outstanding common shares or the average weekly trading volume of common shares
during the four calendar weeks preceding such sale. Sales under Rule 144 are
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about our company. In addition, sales
by our affiliates may be subject to the terms of lock-up agreements. See “Shares
Eligible for Future Sale – Lock-Up Agreements.”
A person
who has not been our affiliate at any time during the three months preceding a
sale, and who has beneficially owned his or her common shares for at least six
months, would be entitled under Rule 144 to sell such shares without regard to
any manner of sale, notice provisions or volume limitations described above. Any
such sales must comply with the public information provision of Rule 144 until
our common shares have been held for one year.
Rule
701
Securities
issued in reliance on Rule 701 are also restricted and may be sold by
shareholders other than affiliates of our company subject only to manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its six-month holding period requirement.
Lock-Up
Agreements
Each of
our executive officers, directors and individuals who on the effective date of
the registration statement of which this prospectus is a part are the beneficial
owners of more than 5% of our common shares, has agreed not to register, offer,
sell, contract to sell or grant any of our common shares or any securities
convertible into or exercisable or exchangeable for our common shares or any
warrants to purchase our common shares (including, without limitation,
securities of our company which may be deemed to be beneficially owned by such
individuals in accordance with the rules and regulations of the Securities and
Exchange Commission and securities which may be issued upon the exercise of a
stock option or warrant) for a period of one hundred eighty (180) days
after the date of effectiveness or commencement of sales of this public
offering. Upon the expiration of these lock-up agreements, additional common
shares will be available for sale in the public market.
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Summary
of Shares Available for Future Sale
The
following table summarizes the total shares potentially available for future
sale assuming completion of this offering.
Minimum Offering
Shares
Date Available for Sale
Outstanding Common
Shares Prior to Completion
of Offering: 21,180,000
After
180 days from the date of effectiveness or commencement of sales of the
public offering
Common Shares Underlying Placement
Agent Warrant: 450,000
After
180 days from the date of effectiveness or commencement of sales of the
public offering
Shares
Offered in this Offering: 4,500,000
After
the date of this prospectus, these shares will be freely
tradable.
Maximum
Offering
Shares
Date
Available for Sale
Outstanding
Common Shares Prior to Completion of Offering: 21,180,000
After
180 days from the date of effectiveness or commencement of sales of the
public offering
Common
Shares Underlying Placement Agent Warrant: 517,500
After
180 days from the date of effectiveness or commencement of sales of the
public offering
Shares
Offered in this Offering: 5,175,000
After
the date of this prospectus, these shares will be freely
tradable.
Taxation
The
following summary sets forth the material British Virgin Islands, PRC and United
States federal income tax consequences to certain holders of the acquisition,
ownership, and disposition of our common shares covered by this prospectus,
based upon laws and relevant interpretations thereof in effect as of the date of
this prospectus, all of which are subject to change. The summary does not deal
with all possible tax consequences relating to an investment in our common
shares, such as the tax consequences under state, local and other tax laws. As
used in this discussion, references to “we,”“us” or “our” refer to Haiwang
Resources & Technology Ltd.
British
Virgin Islands Taxation
Under the
BVI Act as currently in effect, a holder of common shares who is not a resident
of the British Virgin Islands is exempt from British Virgin Islands income tax
on dividends paid with respect to the common shares and all holders of common
shares are not liable to the British Virgin Islands for income tax on gains
realized during that year on sale or disposal of such shares. The British Virgin
Islands does not impose a withholding tax on dividends paid by a company
incorporated or re-registered under the BVI Act.
There are
no capital gains, gift or inheritance taxes levied by the British Virgin Islands
on companies incorporated or re-registered under the BVI Act. In addition,
shares of companies incorporated or re-registered under the BVI Act are not
subject to transfer taxes, stamp duties or similar charges.
There is
no income tax treaty or convention currently in effect between the United States
and the British Virgin Islands or between China and the British Virgin
Islands.
PRC
Taxation
The
following is a summary of the material PRC tax consequences of the acquisition,
ownership and disposition of our common shares.
You
should consult with your own tax adviser regarding the PRC tax consequences of
the acquisition, ownership and disposition of our common shares in your
particular circumstances.
Resident
Enterprise Treatment
On
March 16, 2007, the Fifth Session of the Tenth National People’s Congress
passed the EIT Law, which became effective on January 1, 2008. Under the
EIT Law, enterprises are classified as “resident enterprises” and “non-resident
enterprises.” Pursuant to the EIT Law and its implementing rules, enterprises
established outside the PRC whose “de facto management bodies” are located in
the PRC are considered “resident enterprises” and subject to the uniform 25%
enterprise income tax rate on their worldwide taxable income. According to the
implementing rules of the EIT Law, “de facto management body” refers to a
managing body that in practice exercises overall management control over the
production and business, personnel, accounting and assets of an
enterprise.
101
On
April 22, 2009, the State Administration of Taxation (“SAT”) issued the
Notice on the Issues Regarding Recognition of Enterprises that are Domestically
Controlled as PRC Resident Enterprises Based on the De Facto Management Body
Criteria, which was retroactively effective as of January 1, 2008. This
notice provides that an overseas incorporated enterprise that is domestically
controlled by Chinese enterprises or Chinese group enterprises will be
recognized as a “tax-resident enterprise” if it satisfies all of the following
conditions: (i) the senior management responsible for daily production/business
operations are primarily located in the PRC, and the location(s) where such
senior management execute their responsibilities are primarily in the PRC; (ii)
strategic financial and personnel decisions are made or approved by
organizations or personnel located in the PRC; (iii) major properties,
accounting ledgers, company seals and minutes of board meetings and shareholder
meetings, etc., are maintained in the PRC; and (iv) 50% or more of the board
members with voting rights or senior management habitually reside in the
PRC.
Given the
short history of the EIT Law and lack of applicable legal precedent, it remains
unclear how the PRC tax authorities will determine the resident enterprise
status of a company organized under the laws of a foreign (non-PRC)
jurisdiction, such as us and/or Haiwang HK. If the PRC tax authorities determine
that we are and/or Haiwang HK is a “resident enterprise” under the EIT Law, a
number of tax consequences could follow. First, we and/or Haiwang HK could be
subject to the enterprise income tax at a rate of 25% on our and/or Haiwang HK’s
worldwide taxable income, as well as PRC enterprise income tax reporting
obligations. Second, the EIT Law provides that dividend income between
“qualified resident enterprises” is exempt from enterprise income tax. As a
result, if we and Haiwang HK are each treated as a “qualified resident
enterprise,” all dividends paid from WFOE to us (through Haiwang HK) should be
exempt from the PRC enterprise income tax.
As of the
date of this prospectus, there has not been a definitive determination as to the
“resident enterprise” or “non-resident enterprise” status of us and Haiwang HK
because the aforementioned criteria only apply to an overseas incorporated
company controlled by Chinese enterprises or Chinese group enterprises, and in
our case, we are controlled by Chinese individuals but not Chinese enterprises.
However, because it is not anticipated that we or Haiwang HK would receive
dividends or generate other income in the near future, we and Haiwang HK are not
expected to have any income that would be subject to the 25% enterprise income
tax on worldwide taxable income in the near future. We or Haiwang HK will make
any necessary tax payment if we or Haiwang HK (based on future clarifying
guidance issued by the PRC), or the PRC tax authorities, determine that we are
or Haiwang HK is a resident enterprise under the EIT Law, and if we or Haiwang
HK were to have income in the future.
Dividends
From WFOE
If
Haiwang HK is not treated as a resident enterprise under the EIT Law, then
dividends that Haiwang HK receives from WFOE may be subject to PRC withholding
tax. The EIT Law and the implementing rules of the EIT Law provide that (A) an
income tax rate of 25% normally will be applicable to investors that are
“non-resident enterprises” that (i) have an establishment or place of business
inside the PRC, and (ii) have income in connection with their establishment or
place of business that is sourced from the PRC or is earned outside the PRC but
has an actual connection with their establishment or place of business inside
the PRC, and (B) a PRC withholding tax at a rate of 10% normally will be
applicable to dividends payable to non-resident enterprises that (i) do not have
an establishment or place of business in the PRC or (ii) have an establishment
or place of business in the PRC, but the relevant income is not effectively
connected with such establishment or place of business, to the extent such
dividends are derived from sources within the PRC.
As
described above, the PRC tax authorities may determine the resident enterprise
status of entities organized under the laws of foreign jurisdictions on a
case-by-case basis. Haiwang HK is a holding company and substantially all of its
income may be derived from dividends. Thus, if Haiwang HK is considered a
“non-resident enterprise” under the EIT Law and the dividends paid to Haiwang HK
are considered income sourced within the PRC, such dividends received may be
subject to PRC withholding tax as described in the foregoing
paragraph.
The State
Council of the PRC or a tax treaty between the PRC and the jurisdiction in which
the non-resident enterprise resides may reduce such income or withholding tax,
with respect to such non-resident enterprise. Pursuant to the Arrangement
between the Mainland of China and the Hong Kong Special Administrative Region
for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With
Respect to Taxes on Income (the “PRC-Hong Kong Tax Treaty”), and relevant
circulars issued by the SAT, if the Hong Kong resident enterprise that is not
deemed to be a conduit by the PRC tax authorities owns more than 25% of the
equity interests in a PRC resident enterprise, the 10% PRC withholding tax on
the dividends the Hong Kong resident enterprise receives from the PRC resident
enterprise is reduced to 5%.
102
We are a
British Virgin Islands holding company that owns a 100% equity interest in
Haiwang HK, a Hong Kong company, which owns a 100% equity interest in WFOE, a
PRC company. As a result, if Haiwang HK were treated as a “non-resident
enterprise” under the EIT Law, then dividends that it receives from WFOE
(assuming such dividends were considered sourced within the PRC) (i) should be
subject to a 5% PRC withholding tax, if the PRC-Hong Kong Tax Treaty were
applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax
authorities may deem Haiwang HK to be a conduit not entitled to treaty
benefits), should be subject to a 10% PRC withholding tax. Similarly, if we were
treated as a “non-resident enterprise” under the EIT Law and Haiwang HK were
treated as a “resident enterprise” under the EIT Law, then dividends that we
receive from Haiwang HK (assuming such dividends were considered sourced within
the PRC) may be subject to a 10% PRC withholding tax. Any such taxes on
dividends could materially reduce the amount of dividends, if any, we could pay
to our shareholders.
As of the
date of this prospectus, there has not been a definitive determination as to our
or Haiwang HK’s “resident enterprise” or “non-resident enterprise” status. As
described above, however, neither WFOE nor Haiwang HK are expected to pay any
dividends in the near future. WFOE and Haiwang HK will make any necessary tax
withholding if, in the future, WFOE or Haiwang HK were to pay any dividends and
WFOE or Haiwang HK (based on future clarifying guidance issued by the PRC), or
the PRC tax authorities, determine that Haiwang HK is or we are a non-resident
enterprise under the EIT Law.
Dividends
that Non-PRC Resident Investors Receive From Us; Gain on the Sale or Transfer of
Our Common Shares
If we are
determined to be a resident enterprise under the EIT Law and dividends payable
to (or gains realized by) our investors that are not tax residents of the PRC
(“non-resident investors”) are treated as income derived from sources within the
PRC, then the dividends that the non-resident investors receive from us and any
such gain derived by such investors on the sale or transfer of our common shares
may be subject to income tax under the PRC tax laws. As indicated below, under
the PRC tax laws, we would not have an obligation to withhold PRC income tax
with respect to gains that non-resident investors may realize from the sale or
transfer of our common shares (regardless of whether such gains would be
regarded as income from sources within the PRC), but we would have an obligation
to withhold PRC income tax at the applicable rate described below (subject to
reduction by applicable tax treaties) on dividends that non-resident investors
receive from us if such dividends are regarded as income derived from sources
within the PRC.
Under the
EIT Law and its implementing rules, PRC withholding tax at the rate of 10% is
applicable to dividends payable to non-resident investors that are enterprises
(but not individuals) and that (i) do not have an establishment or place of
business in the PRC or (ii) have an establishment or place of business in the
PRC but the relevant income is not effectively connected with the establishment
or place of business, to the extent that such dividends are deemed to be sourced
within the PRC. Similarly, any gain realized on the transfer of our common
shares by such
investors also is subject to 10% PRC income tax if such gain is regarded as
income derived from sources within the PRC.
Under the
PRC Individual Income Tax Law and its implementing rules, a potential 20% PRC
withholding tax may be applicable to dividends payable to non-resident investors
who are individuals and who (i) are not domiciled in the PRC and do not reside
in the PRC or (ii) are not domiciled in the PRC and have resided in the PRC for
less than one year, to the extent that such dividends are deemed to be sourced
within the PRC. Similarly, any gain realized on the transfer of our common
shares by such investors may be subject to a 20% PRC income tax if such gain is
regarded as income derived from sources within the PRC.
The
dividends paid by us to non-resident investors in respect to our common shares,
or the gain non-resident investors may realize from the sale or transfer of our
common shares, may be treated as PRC-sourced income and, as a result, may be
subject to PRC income tax. In such event, we may be required to withhold the
applicable PRC income tax on any dividends paid to non-resident investors. In
addition, non-resident investors in our common shares may be responsible for
paying the applicable PRC income tax on any gain realized from the sale or
transfer of our common shares if such non-resident investors and the gain
satisfy the requirements under the PRC tax laws. However, under the PRC tax
laws, we would not have an obligation to withhold PRC income tax with respect to
the gains that non-resident investors (including U.S. investors) may realize
from the sale or transfer of our common shares.
103
If we
were to pay any dividends in the future, and if we (based on future clarifying
guidance issued by the PRC), or the PRC tax authorities, determine that we must
withhold PRC tax on any dividends payable by us under the PRC tax laws, we will
make any necessary tax withholding on dividends payable to our non-resident
investors. If non-resident investors as described under the PRC tax laws
(including U.S. investors) realize any gain from the sale or transfer of our
common shares and if such gain were considered as PRC-sourced income, such
non-resident investors would be responsible for paying the applicable PRC income
tax on the gain from the sale or transfer of our common shares. As indicated
above, under the PRC tax laws, we would not have an obligation to withhold PRC
income tax with respect to the gains that non-resident investors (including U.S.
investors) may realize from the sale or transfer of our common
shares.
On
December 10, 2009, the SAT released Circular on Strengthening the
Administration of Enterprise Income Tax on Non-resident Enterprises’ Equity
Transfer Income (“Circular 698”) that reinforces the taxation of certain equity
transfers by non-resident investors through overseas holding vehicles. Circular
698 is retroactively effective from January 1, 2008. Circular 698 addresses
indirect equity transfers as well as other issues. According to Circular 698,
where a non-resident investor that indirectly holds an equity interest in a PRC resident
enterprise through a non-PRC offshore holding company indirectly transfers an
equity interest in the PRC resident enterprise by selling an equity interest in
the offshore holding company, and the latter is located in a country or
jurisdiction where the actual tax burden is less than 12.5% or where the
offshore income of its residents is not taxable, the non-resident investor is
required to provide the PRC tax authorities in charge of that PRC resident
enterprise with certain relevant information within 30 days from the date of the
execution of the equity transfer agreement. The PRC tax authorities in charge
will evaluate the offshore transaction for tax purposes. In the event that the
PRC tax authorities determine that such transfer is abusing forms of business
organization and a reasonable commercial purpose for the offshore holding
company other than the avoidance of PRC income tax liability is lacking, the PRC
tax authorities will have the power to re-assess the nature of the equity
transfer under the doctrine of substance over form. If the SAT’s challenge of a
transfer is successful, it may deny the existence of the offshore holding
company that is used for tax planning purposes and subject the non-resident
investor to PRC tax on the capital gain from such transfer. Because Circular 698
has a short history, there is uncertainty as to its application. We (or a
non-resident investor) may become at risk of being taxed under Circular 698 and
may be required to expend valuable resources to comply with Circular 698 or to
establish that we (or such non-resident investor) should not be taxed under
Circular 698, which could have a material adverse effect on our financial
condition and results of operations (or such non-resident investor’s investment
in us).
Penalties
for Failure to Pay Applicable PRC Income Tax
A
non-resident investor in us may be responsible for paying PRC income tax on any
gain realized from the sale or transfer of our common shares if such non-resident
investor and the gain satisfy the requirements under the PRC tax laws, as
described above.
According to the EIT Law and its
implementing rules, the PRC Tax Collection Administration Law (the “Tax
Administration Law”) and its implementing rules, the Provisional Measures for
the Administration of Source-based Withholding of Enterprise Income Tax for
Non-Resident Enterprises (the “Administration Measures”) and other applicable
PRC laws or regulations (collectively the “Tax Related Laws”), where any gain
derived by a non-resident investor from the sale or transfer of our common
shares is subject to any income tax in the
PRC, and such non-resident investor fails to file any tax return or pay tax in
this regard pursuant to the Tax Related Laws, such investor may be subject to
certain fines, penalties or punishments, including without limitation: (1) if
the non-resident investor fails to file a tax return and present the relevant
information in connection with tax payments, the competent PRC tax authorities
may order it to do so within the prescribed time limit and may impose a fine up
to RMB 2,000, and in egregious cases, may impose a fine ranging from RMB 2,000
to RMB 10,000; (2) if the non-resident investor fails to file a tax return or
fails to pay all or part of the amount of tax payable, the non-resident investor
may be required to pay the unpaid tax amount payable, a surcharge on overdue tax
payments (the daily surcharge is 0.05% of the overdue amount, beginning from the
day the deferral begins) and a fine ranging from 50% to 500% of the unpaid
amount of the tax payable; (3) if the non-resident investor fails to file a tax
return and to pay the tax within the prescribed time limit according to the
order by the PRC tax authorities, the PRC tax authorities may collect and check
information about the income receivable by the non-resident investor in the PRC
from other payers (the “Other Payers”) who
will pay amounts to such non-resident investor, and send a “Notice of Tax
Issues” to the Other Payers to collect and recover the tax payable and overdue
fines imposed on such non-resident investor from the amounts otherwise payable
to such non-resident investor by the Other Payers; (4) if the non-resident
investor fails to pay the tax payable within the prescribed time limit as
ordered by the PRC tax authorities, a fine may be imposed on the non-resident
investor ranging from 50% to 500% of the unpaid tax payable, and the PRC tax
authorities may, upon approval by the director of the tax bureau (or sub-bureau)
of, or higher than, the county level, take the following compulsory measures:
(i) notify in writing the non-resident investor’s bank or other financial
institution to withhold from the account thereof for payment of the amount of
tax payable, and (ii) detain, seal off, or sell by auction or on the market the
non-resident investor’s commodities, goods or other property in a value
equivalent to the amount of tax payable; or (5) if the non-resident investor
fails to pay all or part of the amount of tax payable or the surcharge for the
overdue tax payment, and cannot provide a guarantee to the PRC tax authorities,
the tax authorities may notify the frontier authorities to prevent the
non-resident investor or its legal representative from leaving the
PRC.
104
United
States Federal Income Taxation
General
The
following is a summary of the material U.S. federal income tax consequences of
the acquisition, ownership and disposition of our common shares. The discussion
below of the U.S. federal income tax consequences to “U.S. Holders” will apply
to a beneficial owner of our common shares that is for U.S. federal income tax
purposes:
·
an
individual citizen or resident of the United
States;
·
a
corporation (or other entity treated as a corporation) that is created or
organized (or treated as created or organized) in or under the laws of the
United States, any state thereof or the District of
Columbia;
·
an
estate whose income is includible in gross income for U.S. federal income
tax purposes regardless of its source;
or
·
a
trust if (i) a U.S. court can exercise primary supervision over the
trust’s administration and one or more U.S. persons are authorized to
control all substantial decisions of the trust, or (ii) it has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
A
beneficial owner of our common shares that is described above is referred to
herein as a “U.S. Holder.” If a beneficial owner of our common shares is not
described as a U.S. Holder and is not an entity treated as a partnership or
other pass-through entity for U.S. federal income tax purposes, such owner will
be considered a “Non-U.S. Holder.” The material U.S. federal income tax
consequences applicable specifically to Non-U.S. Holders are described below
under the heading “Non-U.S. Holders.”
This
summary is based on the Internal Revenue Code of 1986, as amended (the “Code”),
its legislative history, Treasury regulations promulgated thereunder, published
rulings and court decisions, all as currently in effect. These authorities are
subject to change or differing interpretations, possibly on a retroactive
basis.
This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to any particular holder based on such holder’s individual
circumstances. In particular, this discussion considers only holders that
purchase common shares pursuant to this offering and own and hold our common
shares as capital assets within the meaning of Section 1221 of the Code, and
does not discuss the potential application of the alternative minimum tax or the
U.S. federal income tax consequences to holders that are subject to special
rules, including:
·
financial
institutions or financial services
entities;
·
broker-dealers;
105
·
persons
that are subject to the mark-to-market accounting rules under Section 475
of the Code;
·
tax-exempt
entities;
·
governments
or agencies or instrumentalities
thereof;
·
insurance
companies;
·
regulated
investment companies;
·
real
estate investment trusts;
·
certain
expatriates or former long-term residents of the United
States;
·
persons
that actually or constructively own 5% or more of our voting
shares;
·
persons
that acquired our common shares pursuant to an exercise of employee
options, in connection with employee incentive plans or otherwise as
compensation;
·
persons
that hold our common shares as part of a straddle, constructive sale,
hedging, conversion or other integrated transaction;
or
·
persons
whose functional currency is not the U.S.
dollar.
This
discussion does not address any aspect of U.S. federal non-income tax laws, such
as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as
discussed herein, any tax reporting obligations applicable to a holder of our
common shares. Additionally, this discussion does not consider the tax treatment
of partnerships or other pass-through entities or persons who hold our common
shares through such entities. If a partnership (or other entity classified as a
partnership for U.S. federal income tax purposes) is the beneficial owner of our
common shares, the U.S. federal income tax treatment of a partner in the
partnership generally will depend on the status of the partner and the
activities of the partnership. This discussion also assumes that any
distribution made (or deemed made) in respect of our common shares and any
consideration received (or deemed received) by a holder in connection with the
sale or other disposition of such common shares will be in U.S.
dollars.
We have
not sought, and will not seek, a ruling from the Internal Revenue Service
(“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the description herein, and its
determination may be upheld by a court. Moreover, there can be no assurance that
future legislation, regulations, administrative rulings or court decisions will
not adversely affect the accuracy of the statements in this
discussion.
THIS
DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON SHARES.
IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR COMMON SHARES IS URGED TO
CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO
SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON
SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S.
TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX
TREATIES.
U.S.
Holders
Taxation
of Cash Distributions Paid on Common Shares
Subject
to the passive foreign investment company (“PFIC”) rules discussed below, a U.S.
Holder generally will be required to include in gross income as ordinary income
the amount of any cash dividend paid on our common shares. A cash distribution
on such common shares generally will be treated as a dividend for U.S. federal
income tax purposes to the extent the distribution is paid out of our current or
accumulated earnings and profits (as determined for U.S. federal income tax
purposes), although we do not intend to calculate such earnings and profits.
Such dividend generally will not be eligible for the dividends-received
deduction generally allowed to U.S. corporations in respect of dividends
received from other U.S. corporations. The portion of such cash distribution, if
any, in excess of such earnings and profits will be applied against and reduce
(but not below zero) the U.S. Holder’s adjusted tax basis in our common shares.
Any remaining excess generally will be treated as gain from the sale or other
taxable disposition of such common shares.
106
With
respect to non-corporate U.S. Holders for taxable years beginning before January1, 2013, any such cash dividends may be subject to U.S. federal income tax at
the lower applicable regular long term capital gains tax rate (see “—Taxation on
the Disposition of Common Shares” below) provided that (1) our common shares are
readily tradable on an established securities market in the United States or, in
the event we are deemed to be a PRC “resident enterprise” under the EIT Law, we
are eligible for the benefits of the Agreement between the Government of the
United States of America and the Government of the People’s Republic of China
for the Avoidance of Double Taxation and the Prevention of Tax Evasion with
Respect to Taxes on Income (the “U.S.-PRC Tax Treaty”), (2) we are not a PFIC,
as discussed below, for either the taxable year in which such dividend was paid
or the preceding taxable year, and (3) certain holding period requirements are
met. Under published IRS authority, common shares are considered for purposes of
clause (a) above to be readily tradable on an established securities market in
the United States only if they are listed on certain exchanges, which presently
include the NASDAQ Global Select Market and the NASDAQ Global Market. Although
we intend to apply to have our common shares listed on the NASDAQ Global Select
Market or the NASDAQ Global Market, we cannot guarantee that such application
will be approved, and, even if such application is approved, we cannot guarantee
that our common shares will continue to be listed on such exchange. U.S. Holders
should consult their own tax advisors regarding the availability of the lower
rate for any cash dividends paid in respect to our common shares. For taxable
years beginning on or after January 1, 2013, the regular U.S. federal income tax
rate applicable to such dividends currently is scheduled to return to the
regular U.S. federal income tax rate generally applicable to ordinary
income.
Any such
dividends generally will constitute foreign source income for U.S. foreign tax
credit limitation purposes and generally will constitute “passive category
income,” but could, in the case of certain U.S. Holders, constitute “general
category income.” If a PRC income tax applies to any cash dividends
paid to a U.S. Holder on our common shares, such tax should be treated as a
foreign tax eligible for a deduction from such holder’s U.S. federal taxable
income or a foreign tax credit against such holder’s U.S. federal income tax
liability (subject to applicable conditions and limitations). In addition, if
such PRC tax applies to any such dividends, an individual U.S. Holder may be
entitled to a reduced rate of withholding under the U.S.-PRC Tax Treaty if such
holder is considered a resident of the United States for purposes of, and
otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders
should consult their own tax advisors regarding the deduction or credit for any
such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax
Treaty.
Taxation
on the Disposition of Common Shares
Upon a
sale or other taxable disposition of our common shares, and subject to the PFIC
rules discussed below, a U.S. Holder should recognize capital gain or loss in an
amount equal to the difference between the amount realized and the U.S. Holder’s
adjusted tax basis in the common shares.
The
regular U.S. federal income tax rate on capital gains recognized by U.S. Holders
generally is the same as the regular U.S. federal income tax rate on ordinary
income, except that long-term capital gains recognized by non-corporate U.S.
Holders generally are subject to U.S. federal income tax at a maximum regular
rate of 15% for taxable years beginning before January 1, 2013 (but currently
scheduled to increase to 20% for taxable years beginning on or after January 1,2013). Capital gain or loss will constitute long-term capital gain or loss if
the U.S. Holder’s holding period for the common shares exceeds one year. The
deductibility of capital losses is subject to various limitations. Subject to
the U.S.-PRC Tax Treaty, any such gain or loss generally will be U.S. source
income or loss for U.S. foreign tax credit limitation purposes.
If a PRC
income tax applies to any gain from the disposition of our common shares by a
U.S. Holder, such tax should be treated as a foreign tax eligible for a
deduction from such holder’s U.S. federal taxable income or a foreign tax credit
against such holder’s U.S. federal income tax liability (subject to applicable
conditions and limitations). In addition, if such PRC tax applies to any gain,
such U.S. Holder should be entitled to treat such gain as PRC source under the
U.S.-PRC Tax Treaty if such holder is considered a resident of the United States
for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax
Treaty. U.S. Holders should consult their own tax advisors regarding
the deduction or credit for any such PRC tax and their eligibility for the
benefits of the U.S.-PRC Tax Treaty.
107
Passive
Foreign Investment Company Rules
A foreign
(i.e., non-U.S.) corporation will be a PFIC if either (a) at least
75% of its gross income in a taxable year of the foreign corporation, including
its pro rata share of the gross income of any corporation in which it is
considered to own at least 25% of the shares by value, is passive income, or (b)
at least 50% of its assets in a taxable year of the foreign corporation,
ordinarily determined based on fair market value and averaged quarterly over the
year, including its pro rata share of the assets of any corporation in which it
is considered to own at least 25% of the shares by value, are held for the
production of, or produce, passive income. Passive income generally includes
dividends, interest, rents and royalties (other than certain rents or royalties
derived from the active conduct of a trade or business), and gains from the
disposition of passive assets.
Based on
the expected composition (and estimated values) of the assets and the nature of
the income of us and our subsidiaries and our current plans of operation, we do
not expect to be treated as a PFIC for our current taxable year or in the near
future. However,
our actual PFIC status for our current taxable year or any subsequent taxable
year will not be determinable until after the end of such taxable year.
Accordingly, there can be no assurance in respect to our status as a PFIC for
our current taxable year or any subsequent taxable year.
If we are
determined to be a PFIC for any taxable year (or portion thereof) that is
included in the holding period of a U.S. Holder of our common shares, and such
U.S. Holder did not make either a timely qualified electing fund (“QEF”)
election for our first taxable year as a PFIC in which the U.S. Holder held (or
was deemed to hold) our common shares, or a mark-to-market election, as
described below, such holder generally will be subject to special rules in
respect to:
·
any
gain recognized by the U.S. Holder on the sale or other disposition of its
common shares; and
·
any
“excess distribution” made to the U.S. Holder (generally, any
distributions to such U.S. Holder during a taxable year of the U.S. Holder
that are greater than 125% of the average annual distributions received by
such U.S. Holder in respect of the common shares during the three
preceding taxable years of such U.S. Holder or, if shorter, such U.S.
Holder’s holding period for the common
shares).
Under
these rules,
·
the
U.S. Holder’s gain or excess distribution will be allocated ratably over
the U.S. Holder’s holding period for the common
shares;
·
the
amount allocated to the U.S. Holder’s taxable year in which the U.S.
Holder recognized the gain or received the excess distribution, or to the
period in the U.S. Holder’s holding period before the first day of our
first taxable year in which we qualified as a PFIC, will be taxed as
ordinary income;
·
the
amount allocated to other taxable years (or portions thereof) of the U.S.
Holder and included in its holding period will be taxed at the highest tax
rate in effect for that year and applicable to the U.S. Holder;
and
·
the
interest charge generally applicable to underpayments of tax will be
imposed in respect of the tax attributable to each such other taxable year
of the U.S. Holder.
In
general, if we are determined to be a PFIC, a U.S. Holder may avoid the PFIC tax
consequences described above in respect to our common shares by making a timely
QEF election to include in income its pro rata share of our net capital gains
(as long-term capital gain) and other earnings and profits (as ordinary income),
on a current basis, in each case whether or not distributed, in the taxable year
of the U.S. Holder in which or with which our taxable year ends. A U.S. Holder
may make a separate election to defer the payment of taxes on undistributed
income inclusions under the QEF rules, but if deferred, any such taxes will be
subject to an interest charge.
The QEF
election is made on a shareholder-by-shareholder basis and, once made, can be
revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF
election by attaching a completed IRS Form 8621 (Return by a Shareholder of a
Passive Foreign Investment Company or Qualified Electing Fund), including the
information provided in a PFIC annual information statement, to a timely filed
U.S. federal income tax return for the taxable year to which the election
relates. Retroactive QEF elections generally may be made only by filing a
protective statement with such return and if certain other conditions are met or
with the consent of the IRS.
In order
to comply with the requirements of a QEF election, a U.S. Holder must receive
certain information from us. Upon request from a U.S. Holder, we will endeavor
to provide to the U.S. Holder no later than 90 days after the request such
information as the IRS may require, including a PFIC annual information
statement, in order to enable the U.S. Holder to make and maintain a QEF
election. However,
there is no assurance that we will have timely knowledge of our status as a PFIC
in the future or of the required information to be provided.
108
If a U.S.
Holder has made a QEF election in respect to our common shares, and the special
tax and interest charge rules do not apply to such common shares (because of a
timely QEF election for our first taxable year as a PFIC in which the U.S.
Holder holds (or is deemed to hold) such common shares or a purge of the PFIC
taint pursuant to a purging election, as described below), any gain recognized
on the sale or other taxable disposition of such common shares generally will be
taxable as capital gain and no interest charge will be imposed. As discussed
above, U.S. Holders of a QEF are currently taxed on their pro rata shares of the
QEF’s earnings and profits, whether or not distributed. In such case, a
subsequent distribution of such earnings and profits that were previously
included in income should not be taxable as a dividend to such U.S. Holders. The
adjusted tax basis of a U.S. Holder’s common shares in a QEF will be increased
by amounts that are included in income, and decreased by amounts distributed but
not taxed as dividends, under the above rules. Similar basis adjustments apply
to property if by reason of holding such property the U.S. Holder is treated
under the applicable attribution rules as owning common shares in a
QEF.
Although
a determination as to our PFIC status will be made annually, an initial
determination that we are a PFIC generally will apply for subsequent years to a
U.S. Holder who held our common shares while we were a PFIC, whether or not we
meet the test for PFIC status in those subsequent years. A U.S. Holder who makes
the QEF election discussed above for our first taxable year as a PFIC in which
the U.S. Holder holds (or is deemed to hold) our common shares, however, will
not be subject to the PFIC tax and interest charge rules discussed above in
respect to such common shares. In addition, such U.S. Holder will not be subject
to the QEF inclusion regime in respect to such common shares for any of our
taxable years that end within or with a taxable year of the U.S. Holder and in
which we are not a PFIC. On the other hand, if the QEF election is not effective
for each of our taxable years in which we are a PFIC and during which the U.S.
Holder holds (or is deemed to hold) our common shares, the PFIC rules discussed
above will continue to apply to such common shares unless the holder makes a
“purging election” in respect to such common shares. A purging election
generally creates a deemed sale of such common shares at their fair market
value. The gain recognized by the purging election generally will be subject to
the special tax and interest charge rules treating the gain as an excess
distribution, as described above. As a result of the purging election, the U.S.
Holder generally will increase the adjusted tax basis in its common shares by
the gain recognized and also will have a new holding period in its common shares
for purposes of the PFIC rules.
Alternatively,
if a U.S. Holder, at the close of its taxable year, owns common shares in a PFIC
that are treated as marketable stock, the U.S. Holder may make a mark-to-market
election in respect to such common shares for such taxable year. If the U.S.
Holder makes a valid mark-to-market election for the first taxable year of the
U.S. Holder in which the U.S. Holder holds (or is deemed to hold) our common
shares and for which we are determined to be a PFIC, such holder generally will
not be subject to the PFIC rules described above in respect to its common
shares. Instead, in general, the U.S. Holder will include as ordinary income
each year the excess, if any, of the fair market value of its common shares at
the end of its taxable year over the adjusted tax basis in its common shares.
The U.S. Holder also will be allowed to take an ordinary loss in respect of the
excess, if any, of the adjusted tax basis of its common shares over the fair
market value of its common shares at the end of its taxable year (but only to
the extent of the net amount of previously included income as a result of the
mark-to-market election). The U.S. Holder’s adjusted tax basis in its common
shares will be adjusted to reflect any such income or loss amounts, and any
further gain recognized on a sale or other taxable disposition of the common
shares will be treated as ordinary income.
The
mark-to-market election is available only for stock that is regularly traded on
a national securities exchange that is registered with the Securities and
Exchange Commission, including the NASDAQ Global Select Market and the NASDAQ
Global Market, or on a foreign exchange or market that the IRS determines has
rules sufficient to ensure that the market price represents a legitimate and
sound fair market value. Although we intend to apply to have our common shares
listed on the NASDAQ Global Select Market or the NASDAQ Global Market, we cannot
guarantee that such application will be approved, and, even if such application
is approved, we cannot guarantee that our common shares will continue to be
listed on such exchange. U.S. Holders should consult their own tax advisors
regarding the availability and tax consequences of a mark-to-market election in
respect to our common shares under their particular
circumstances.
109
If we are
a PFIC and, at any time, have a foreign subsidiary that is classified as a PFIC,
a U.S. Holder of our common shares generally should be deemed to own a portion
of the shares of such lower-tier PFIC, and generally could incur liability for
the deferred tax and interest charge described above if we receive a
distribution from, or dispose of all or part of our interest in, or the U.S.
Holder otherwise were deemed to have disposed of an interest in, the lower-tier
PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to
a U.S. Holder no later than 90 days after the request the information that may
be required to make or maintain a QEF election in respect to the lower-tier
PFIC. However,
there is no assurance that we will have timely knowledge of the status of any
such lower-tier PFIC or that we will be able to cause the lower-tier PFIC to
provide the required information. A mark-to-market election would not be
available in respect to such lower-tier PFIC. U.S. Holders are urged to consult
their own tax advisors regarding the tax issues raised by lower-tier
PFICs.
A U.S.
Holder that owns (or is deemed to own) common shares in a PFIC during any
taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or
not a QEF election or mark-to-market election is or has been made) and any other
information as may be required by the U.S. Treasury Department.
The rules
dealing with PFICs and with the QEF and mark-to-market elections are very
complex and are affected by various factors in addition to those described
above. Accordingly, U.S. Holders of our common shares should consult their own
tax advisors concerning the application of the PFIC rules to our common shares
under their particular circumstances.
Additional
Taxes After 2012
For
taxable years beginning after December 31, 2012, U.S. Holders that are
individuals, estates or trusts and whose income exceeds certain thresholds
generally will be subject to a 3.8% Medicare contribution tax on unearned
income, including, among other things, cash dividends on, and capital gains from
the sale or other taxable disposition of, our common shares, subject to certain
limitations and exceptions. U.S. Holders should consult their own tax
advisors regarding the effect, if any, of such tax on their ownership and
disposition of our common shares.
Non-U.S.
Holders
Cash
dividends paid to a Non-U.S. Holder in respect to our common shares generally
will not be subject to U.S. federal income tax unless such dividends are
effectively connected with the Non-U.S. Holder’s conduct of a trade or business
within the United States (and, if required by an applicable income tax treaty,
are attributable to a permanent establishment or fixed base that such holder
maintains in the United States).
In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain attributable to a sale or other taxable disposition of our
common shares unless such gain is effectively connected with its conduct of a
trade or business in the United States (and, if required by an applicable income
tax treaty, is attributable to a permanent establishment or fixed base that such
holder maintains in the United States) or the Non-U.S. Holder is an individual
who is present in the United States for 183 days or more in the taxable year of
sale or other taxable disposition and certain other conditions are met (in which
case, such gain from U.S. sources generally is subject to U.S. federal income
tax at a 30% rate or a lower applicable tax treaty rate).
Cash
dividends and gains that are effectively connected with the Non-U.S. Holder’s
conduct of a trade or business in the United States (and, if required by an
applicable income tax treaty, are attributable to a permanent establishment or
fixed base in the United States) generally will be subject to U.S. federal
income tax (but not the Medicare contribution tax) at the same regular U.S.
federal income tax rates as applicable to a comparable U.S. Holder and, in the
case of a Non-U.S. Holder that is a corporation for U.S. federal income tax
purposes, also may be subject to an additional branch profits tax at a 30% rate
or a lower applicable tax treaty rate.
Backup
Withholding and Information Reporting
In
general, information reporting for U.S. federal income tax purposes will apply
to cash distributions made on our common shares within the United States to a
U.S. Holder (other than an exempt recipient) and to the proceeds from sales and
other dispositions of our common shares by a U.S. Holder (other than an exempt
recipient) to or through a U.S. office of a broker. Payments made (and sales and
other dispositions effected at an office) outside the United States will be
subject to information reporting in limited circumstances. In addition, pursuant
to recently enacted legislation, certain information concerning a U.S. Holder’s
adjusted tax basis in its common shares and adjustments to that tax basis and
whether any gain or loss with respect to such common shares is long-term or
short-term also may be required to be reported to the IRS.
110
Moreover,
backup withholding of U.S. federal income tax at a rate of 28% for taxable years
beginning before January 1, 2013 (but currently scheduled to increase to 31% for
taxable years beginning on or after January 1, 2013), generally will apply to
cash dividends paid on our common shares to a U.S. Holder (other than an exempt
recipient) and the proceeds from sales and other dispositions of our common
shares by a U.S. Holder (other than an exempt recipient), in each case
who:
·
fails
to provide an accurate taxpayer identification
number;
·
is
notified by the IRS that backup withholding is required;
or
·
in
certain circumstances, fails to comply with applicable certification
requirements.
A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status, under penalties of perjury, on a duly executed applicable IRS Form W-8
or by otherwise establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS. Holders are urged to consult their own tax advisors regarding the
application of backup withholding and the availability of and procedures for
obtaining an exemption from backup withholding in their particular
circumstances.
Enforceability
of Civil Liabilities
We are
incorporated under the laws of the British Virgin Islands with limited
liability. We are incorporated in the British Virgin Islands because of certain
benefits associated with being a British Virgin Islands corporation, such as
political and economic stability, an effective judicial system, a favorable tax
system, the absence of exchange control or currency restrictions and the
availability of professional and support services. However, the British Virgin
Islands has a less developed body of securities laws as compared to the United
States and provides protections for investors to a lesser extent. In addition,
British Virgin Islands companies may not have standing to sue before the federal
courts of the United States.
Substantially
all of our assets are located outside the United States. In addition, a majority
of our directors and officers are nationals and/or residents of countries other
than the United States, and all or a substantial portion of such persons’ assets
are located outside the United States. As a result, it may be difficult for
investors to effect service of process within the United States upon us or such
persons or to enforce against them or against us, judgments obtained in United
States courts, including judgments predicated upon the civil liability
provisions of the securities laws of the United States or any state
thereof.
We have
appointed CT Corporation System as our agent to receive service of process with
respect to any action brought against us in the United States District Court for
the Southern District of New York under the federal securities laws of the
United States or of any State of the United States or any action brought against
us in the Supreme Court of the State of New York in the County of New York under
the securities laws of the State of New York.
Beijing
Kang Da Law Firm, our counsel as to Chinese law, has advised us that there is
uncertainty as to whether the courts of China would (1) recognize or
enforce judgments of United States courts obtained against us or such persons
predicated upon the civil liability provisions of the securities laws of the
United States or any state thereof, or (2) be competent to hear original
actions brought in each respective jurisdiction, against us or such persons
predicated upon the securities laws of the United States or any state
thereof.
111
Beijing
Kang Da Law Firm has advised us that the recognition and enforcement of foreign
judgments are provided for under the Chinese Civil Procedure Law. Chinese courts
may recognize and enforce foreign judgments in accordance with the requirements
of the Chinese Civil Procedure Law based either on treaties between China and
the country where the judgment is made or in reciprocity between jurisdictions.
China does not have any treaties or other agreements with the British Virgin
Islands nor the United States that provide for the reciprocal recognition and
enforcement of foreign judgments. As a result, it is uncertain whether a Chinese
court would enforce a judgment rendered by a court in either of these two
jurisdictions.
We have
been advised by Kaufman & Canoles, our counsel as to British Virgin
Islands law, that the United States and the British Virgin Islands do not have a
treaty providing for reciprocal recognition and enforcement of judgments of
courts of the United States in civil and commercial matters and that a final
judgment for the payment of money rendered by any general or state court in the
United States based on civil liability, whether or not predicated solely upon
the U.S. federal securities laws, is unlikely to be enforceable in the British
Virgin Islands. We have also been advised by Kaufman & Canoles that a
final and conclusive judgment obtained in U.S. federal or state courts under
which a sum of money is payable as compensatory damages (i.e., not being a sum
claimed by a revenue authority for taxes or other charges of a similar nature by
a governmental authority, or in respect of a fine or penalty or multiple or
punitive damages) may be the subject of an action on a debt in the court of the
British Virgin Islands under the common law doctrine of obligation.
Placement
We have
engaged Chardan Capital Markets, LLC and Financial West Group as Placement
Agents to conduct this offering on a “best efforts, minimum/maximum” basis. The
offering is being made without a firm commitment by the Placement Agents, who
have no obligation or commitment to place any of our shares. None of our
officers, directors or affiliates may purchase shares in this
offering.
Unless
sooner withdrawn or canceled by either us or the Placement Agents, the offering
will continue until the earlier of (i) a date mutually acceptable to us and the
Placement Agents after which the minimum of 4,500,000 shares is sold, or
(ii) the Offering Termination Date. The Placement Agents have agreed in
accordance with the provisions of SEC Rule 15c2-4 to cause all funds received by
the Placement Agents for the sale of the common shares to be promptly deposited
in an escrow account maintained by SunTrust Bank, N.A. Escrow Agent as escrow
agent for the investors in the offering. The Escrow Agent will exercise
signature control on the escrow account and will act based on joint instructions
from our company and the Placement Agents. On the closing date for the offering,
net proceeds in the escrow account maintained by the Escrow Agent will be
delivered to our company. We will not be able to use such proceeds in China,
however, until we complete certain remittance procedures in China. If we do not
complete this offering before the Offering Termination Date, all amounts will be
promptly returned as described below. If we complete this offering, then on the
closing date, we will issue shares to the investors and the Placement Agent
Warrant to the Placement Agents to place, on our behalf, such number of our
shares as equal to 10% of the offered shares sold to investors. In the event of
any dispute between our company and the Placement Agents, including about
whether at least 4,500,000 shares have been sold and whether and how funds are
to be reimbursed, the Escrow Agent is entitled to petition a court of competent
jurisdiction to resolve any such dispute.
Investors
must pay in full for all common shares at the time of investment. Payment for
the common shares may be made (i) by check, bank draft or money order made
payable to “SunTrust Bank” and delivered to the Placement Agents no less than
four business days before the date of closing, or (ii) by authorization of
withdrawal from securities accounts maintained with the Placement Agents. If
payment is made by authorization of withdrawal from securities accounts, the
funds authorized to be withdrawn from a securities account will continue to
accrue interest, if any interest is to accrue on such amounts, at the
contractual rates until closing or termination of the offering, but a hold will
be placed on such funds, thereby making them unavailable to the purchaser until
closing or termination of the offering. If a purchaser authorizes the Placement
Agents to withdraw the amount of the purchase price from a securities account,
the Placement Agents will do so as of the date of closing. The Placement Agents
will inform prospective purchasers of the anticipated date of closing. If
payment is made by check, investors should make all checks payable to the Escrow
Agent.
Proceeds
deposited in escrow with the Escrow Agent may not be withdrawn by investors
prior to the earlier of the closing of the offering or the Offering Termination
Date. If the offering is withdrawn or canceled or if the 4,500,000 share minimum
offering is not reached and proceeds therefrom are not received by us on or
prior to the Offering Termination Date, all proceeds will be promptly returned
by the Escrow Agent without interest or deduction to the persons from which they
are received (within one business day) in accordance with applicable securities
laws. All such proceeds will be placed in a non-interest bearing account pending
such time.
112
Pursuant
to the placement agent agreement to be entered into by and between the Placement
Agents and us, the obligations of the Placement Agents to solicit offers to
purchase the shares and of investors solicited by the Placement Agents to
purchase our common shares will be subject to approval of certain legal matters
by counsel to the Placement Agents. The Placement Agents’ ability to complete
this “best efforts minimum/maximum” transaction is dependent upon the existence
of stable U.S. trading markets. As such, the Placement Agents’ obligations under
the placement agreement are also subject to various conditions which are
customary in transactions of this type, including that, our common shares shall
be listed for trading on the NASDAQ Global Select Market or the NASDAQ Global
Market as of the closing of this offering. The Placement
Agents reserve the right not to proceed with this offering if the market
for securities in general or political, financial or economic conditions will
have so materially changed that, in the sole judgment of the Placement Agents,
it will be impracticable to offer or sell (or if market conditions (including
demand) are otherwise unsuitable for the offer or sale of) our
shares.
Pursuant
to the placement agent agreement, we have agreed to indemnify the Placement
Agents against certain liabilities, including liabilities under the Securities
Act of 1933, or to contribute to payments the Placement Agents may be required
to make in respect of those liabilities.
The
Placement Agents are offering the common shares, subject to prior sale, when, as
and if issued to and accepted by it, subject to conditions contained in the
placement agreement, such as the receipt by the Placement Agents of a comfort
letter from our independent certified public accountant and legal
opinions.
The
Placement Agents intend to offer our common shares to their retail customers
only in states in which we are permitted to offer our common shares. We have
relied on an exemption to the blue sky registration requirements afforded to
“covered securities”. Securities listed on the NASDAQ Global Select Market or
the NASDAQ Global Market are “covered securities.” If we were unable to meet the
listing standards of the NASDAQ Global Select Market or the NASDAQ Global
Market, then we would be unable to rely on the covered securities exemption to
blue sky registration requirements and we would need to register the offering in
each state in which we planned to sell shares. Consequently, we will not
complete this offering unless we meet the listing requirements of the NASDAQ
Global Select Market or the NASDAQ Global Market.
In
connection with this offering, the Placement Agents or certain of the securities
dealers may distribute prospectuses electronically. No forms of prospectus other
than printed prospectuses and electronically distributed prospectuses that are
printable in Adobe PDF format will be used in connection with this
offering.
The
address of Chardan Capital Markets, LLC is 17 State Street, Suite 1600, NewYork, NY10004. The address of Financial West Group is 4510 E. Thousand Oaks
Blvd., Westlake Village, CA91362.
Foreign
Regulatory Restrictions on Purchase of our Shares
We have
not taken any action to permit a public offering of our shares outside the
United States or to permit the possession or distribution of this prospectus
outside the United States. People outside the United States who come into
possession of this prospectus must inform themselves about and observe any
restrictions relating to this offering of our shares and the distribution of
this prospectus outside the United States.
113
Commissions
and Discounts
The
Placement Agents have advised us that they propose to offer the common shares to
the public at the initial public offering price on the cover page of this
prospectus. The following table shows the public offering price, Placement
Agents fee to be paid by us to the Placement Agents and the proceeds, before
expenses, to us.
Total
Per Share
Minimum Offering
Maximum Offering
Assumed
public offering price
$
$
$
Assumed
Placement discount(1)
$
$
$
Assumed
Proceeds, before expenses, to us(2)
$
$
$
We expect
our total cash expenses for this offering to be approximately $650,000,
exclusive of the above commissions. In addition, we will pay the Placement
Agents a non-accountable expense allowance of 2% of the amount of the offering.
The Placement Agents must sell at least the minimum number of securities offered
(4,500,000 common shares) if any are sold. The Placement Agents are required to
use only their best efforts to sell the securities offered. The offering will
terminate upon the earlier of: (i) a date mutually acceptable to us and our
Placement Agents after which the minimum offering is sold or (ii) the
Offering Termination Date. Until we sell at least 4,500,000 shares, all investor
funds will be held in an escrow account maintained by the Escrow Agent. If we do
not sell at least 4,500,000 shares by the Offering Termination Date, all funds
will be promptly returned to investors (within one business day) without
interest or deduction. If we complete this offering, then on the closing date,
we will issue shares to investors and the Placement Agent Warrant to our
Placement Agents.
Placement
Agent Warrant
We have
agreed to sell to the Placement Agents, on the closing date of this offering, at
a price of $100, the Placement Agent Warrant to purchase such number of our
shares as equal to 10% of the offered shares sold to investors. The
Placement Agent Warrant shall be exercisable at any time, in whole or in part,
commencing on the date of this prospectus and expiring three years from that
date, at a price per share equal to 120% of the public offering price of our
shares (or at such higher price allowed by FINRA). The Placement
Agent Warrant contains standard provisions regarding stock splits and certain
other corporate actions consistent with FINRA rules, and also includes a
provision for cashless exercise.
The
Placement Agent Warrant will be restricted from sale, transfer, assignment or
hypothecation for a period of 180 days from the date of this prospectus except
to officers or partners (not directors) of the Placement Agents and any other
Placement Agents, members of the selling group and/or their officers or partners
in compliance with FINRA Rule 5110(g) and may be exercised as to all or a lesser
number of our shares. Upon exercise of the Placement Agent Warrant,
the holders thereof shall receive the same securities as offered to and
purchased by the public in this offering.
Market
and Pricing Considerations
There is
not an established market for our common shares. We negotiated with our
Placement Agents to determine the offering price of our common shares in this
offering using a multiple of approximately 7 times our trailing 12 months
after-tax net income as of December 31, 2010. Noting past offerings completed by
our Placement Agents, we believe that this multiple approximates the valuation
multiple utilized in similar offerings for similarly sized companies. The other
principal factors considered in determining our public offering price
were:
114
·
The
history of, and the prospects for, our company and the industry in which
we compete;
·
An
assessment of our management, its past and present operation, and the
prospects for, and timing of, our future
revenues;
·
The
present state of our development;
and
·
The
factors listed above in relation to market values and various valuation
measures of other companies engaged in activities similar to
ours.
An active
trading market for our common shares may not develop. It is possible that after
this offering the common shares will not trade in the public market at or above
the initial offering price.
The
exercise price for the Placement Agents Warrant issued to our Placement Agents
in connection with, and conditional on the closing of, this offering has been
negotiated between our company and the Placement Agents. The exercise price of
the Placement Agent Warrant, along with the length of time the Placement Agents
must wait before exercise are influenced by the valuation attributed by FINRA in
its calculation of the acceptability of aggregate placement
consideration.
Discretionary
Shares
The
Placement Agents will not sell any shares in this offering to accounts over
which it exercises discretionary authority, without first receiving written
consent from those accounts.
Application
for Listing on the NASDAQ Global Select Market or the NASDAQ Global
Market
We intend
to apply to list our common shares on the NASDAQ Global Select Market or the
NASDAQ Global Market under the symbol “NACL.” As this offering is a best-efforts
minimum/maximum offering, our common shares would not be admitted for listing
until the completion of the offering. If so admitted, we expect our common
shares to begin trading on the NASDAQ Global Select Market or the NASDAQ Global
Market on the day following the closing of this offering. If our common shares
are eventually listed on the NASDAQ Global Select Market or the NASDAQ Global
Market, we will be subject to continued listing requirements and corporate
governance standards, and we cannot guarantee that our common shares will
continue to be listed on such exchange. We expect these new rules and
regulations to significantly increase our legal, accounting and financial
compliance costs. We and our Placement Agents agree that we will not close this
offering unless we satisfy the listing standards of the NASDAQ Global Select
Market or the NASDAQ Global Market and will be able to trade on the NASDAQ
Global Select Market or the NASDAQ Global Market. There can be no assurance that
we will receive such admission.
Legal
Matters
Certain
matters as to U.S. federal law in connection with this offering will be passed
upon for us by Kaufman & Canoles, P.C. The validity of the shares and
certain legal matters relating to the offering as to British Virgin Islands law
will be passed upon for us by Kaufman & Canoles, P.C. Certain legal
matters relating to the offering as to Chinese law will be passed upon for us by
Beijing Kang Da Law Firm, People’s Republic of China. Kaufman &
Canoles, P.C. may rely upon Beijing Kang Da Law Firm with respect to matters
governed by PRC law. Loeb & Loeb LLP has acted as counsel to the Placement
Agents with respect to certain matters as to U.S. federal law in connection with
this offering.
115
Experts
Financial
statements as of June 30, 2010 and 2009, and for the fiscal years then ended
appearing in this prospectus, have been included herein and in the registration
statement in reliance upon the report of Bernstein & Pinchuk LLP, an
independent registered public accounting firm, appearing elsewhere herein, and
upon the authority of that firm as experts in accounting and
auditing.
Interests
of Experts And Counsel
Attorneys
with Kaufman & Canoles, P.C., representing our company with respect to this
offering beneficially own 84,720 common shares of our company as of the
date of this prospectus.
Where
You Can Find More Information
We have
filed with the SEC under the Securities Act a registration statement on
Form S-1 relating to the common shares we are offering by this prospectus.
This prospectus, which constitutes part of the registration statement filed with
the SEC, does not contain all the information included in the registration
statement and the exhibits and schedules thereto. For further information with
respect to us and our common shares, you should refer to the registration
statement and its exhibits. Statements contained in this prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete, and, where the contract, agreement or other document is an exhibit to
the registration statement, any statement with respect to such contract,
agreement or document is qualified by the provisions of such exhibit. You may
examine and copy the registration statement, including the exhibits, at the
SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C.
20549. You can obtain a copy of all or a portion of the registration statement
by mail from the Public Reference Section of the SEC at the same address, upon
payment of prescribed fees. You may obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a
website that contains periodic reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
The address of the website is http://www.sec.gov.
As a
result of this offering, we will become subject to the information and periodic
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
SEC.
Effect of exchange rate
fluctuation on cash and cash equivalents
146
(14
)
Net increase (decrease) in cash
and cash equivalents
2,384
(6,232
)
Cash and cash equivalents at
beginning of period
4,009
7,283
Cash and cash equivalents at end
of period
$
6,393
$
1,051
Supplemental disclosure of cash
flow information
Interest
paid
$
1,039
$
642
Income taxes
paid
$
1,312
$
841
See notes to combined and
consolidated
financial
statements
F-5
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization
and principal activities
Haiwang
Resources & Technology Ltd (“Haiwang BVI”) was incorporated in the British
Virgin Islands on October 18, 2010. Its wholly owned subsidiary
Haiwang (Hong Kong) resources & Technology (“Haiwang HK”) was established in
Hong Kong on October 26, 2010.
Shandong
Haiwang Chemical Stock Co., Ltd (“Shandong Haiwang”) was incorporated in Weifang
City, Shangdong Province, the People ’s Republic of China (the “PRC”) on January27, 2003, with a registered capital of RMB4.23 million (US$512 thousands (“k”)).
In 2006, Shandong Haiwang increased its registered capital to RMB 12.98 million
(approximately $1,605,000) and reorganized into a joint stock limited
company. In 2009, Shandong Haiwang increased its registered capital
to RMB60 million (US$8,467k).
Shandong
Kehai is a wholly-owned subsidiary of Shandong Haiwang since September
2006.
(ii)
Shandong
Haiwang acquired 100% equity interest in Dongying Haihui on
November 6, 2009 with a consideration of RMB2,000,000
(US$293k)
F-6
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Haiwang
BVI and Shandong Haiwang and their subsidiaries, are collectively referred to as
the “Company”. Mr. Chunbin Yang, Mr. Tongjiang Sun and Mr.Xiusheng Cui are key
management in both Haiwang BVI and Shandong Haiwang and have controlled more
than 50% of the voting ownership interests in both entities since their
respective inception dates. Haiwang BVI and Shandong Haiwang were considered
under common management since October 18, 2010 (the inception date of Haiwang
BVI) and therefore the financial statements include both companies presented on
a combined basis from October 18, 2010 to December 31, 2010. The financial
statements are solely those of consolidated statements of Shandong Haiwang and
its subsidiaries for the fiscal year ended June 30, 2010 and June 30, 2009, for
the interim period ended December 31, 2009 and for the period from July 1, 2010
through October 17, 2010. The Company is principally engaged in manufacturing
and trading bromine, crude salt and bromine compounds in China. The Company also
generates rental income from renting out some of its brine pans and buildings to
lessees.
On
January 17, 2010, Mr. Chunbin Yang, Mr. Tongjiang Sun and Mr.Xiusheng Cui signed
a cooperation agreement and agreed that they would continue to vote in concert
on corporate matters in Haiwang BVI and Shandong Haiwang.
2.
Summary
of significant accounting policies
(a) Basis
of presentation
The
combined and consolidated financial statements of the Company have been prepared
in accordance with the accounting principles generally accepted in the United
States of America (“U.S. GAAP”).
(b) Basis
of Consolidation
The
combined and consolidated financial statements include the accounts of the
Company and its subsidiaries as of December 31, 2010 and June 30, 2010. Dongying
Haihui is included for the period from November 6, 2009 (date of acquisition)
through December 31, 2010. All material intercompany transactions have been
eliminated in consolidation. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included, and such
adjustments are of a normal recurring nature.
(c) Foreign
currency translation and transaction
The
functional currency of the Company is Renminbi (“RMB”), and PRC is the primary
economic environment in which the Company operates.
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transactions. The resulting exchange differences are included in the
determination of net income for the respective periods.
For
financial reporting purposes, the financial statements of the Company prepared
using RMB, are translated into Company’s reporting currency, the United States
Dollars (“U.S. dollars”). Assets and liabilities are translated
using the exchange rate at each balance sheet date. Revenue and
expenses are translated
using average rates
prevailing during each
reporting period, and owners’ equity is translated at historical
exchange rates.
Adjustments resulting from
the translation are recorded as a separate component of accumulated other
comprehensive income in owners’ equity.
The exchange rates applied are as
follows:
2010
2009
RMB exchange rate at December 31,
6.6118
RMB exchange rate at June 30,
6.7889
Average RMB exchange
rate for
the six
months ended
December
31,
6.7241
6.8386
F-7
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(d) Use of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Management makes these estimates using the best
information available at the time the estimates are made. Significant
estimates and judgments made by our management include: (i) estimates of profits
and losses on contracts in process; (ii) accrual of estimated liabilities; and
(iii) contingencies and litigation. However actual results could
differ from those estimates.
(e) Investment in
affiliate
The Company follows Accounting Standards Codification
(“ASC”) No. 325 “Investments” for its investment
in affiliate. According to ASC 325-20-35-3 the Company changed from equity
method to cost method for accounting of its investment in affiliate as the
equity interest held in Shandong Haiheng decreased from 50% to 10% on September20, 2008. The Company discontinued accruing its share of the earnings
or losses of the affiliate, the earnings or losses that relate to the equity
interest retained by the Company that were previously accrued remain as a part
of the carrying amount of the investment. Dividends received by the Company in
subsequent periods that exceed the Company’s share of earnings for such periods
shall be applied in reduction of the carrying amount of the
investment.
(f) Related parties
A party
is considered to be related to the Company if:
(a)
the
party, directly or indirectly through one or more intermediaries, (i)
controls, is controlled by, or is under common control with, the Company;
(ii) has an interest in the Company that gives it significant influence
over the Company; or (iii) has joint control over the
Company;
(b)
the
party is an associate;
(c)
the
party is a member of the key management personnel of the
Company;
(d)
the
party is a close member of the family of any individual referred to in (a)
or (b);
(e)
the
party is an entity that is controlled, jointly controlled or significantly
influenced by or for which significant voting power in such entity resides
with, directly or indirectly, any individual referred to in (b) or (c);
or
(f)
The
party is a post-employment benefit plan for the benefit of the employees
of the Company, or of any entity that is a related party of the
Company.
F-8
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(g) Cash and cash equivalents
Cash and
cash equivalents represent cash on hand and deposits held at call with banks.
The Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash
equivalents.
(h) Loans and accounts receivable
Loans and receivables are non-derivative
financial assets with fixed or determinable payments that are not quoted in an
active market. Such assets are subsequently carried at amortized cost using the effective
interest method less any allowance for impairment. Amortized cost is calculated
taking into account any discount or premium on acquisition and includes fees
that are an integral part of the effective interest rate and transaction costs. Gains and losses are
recognized in the consolidated statements of comprehensive income when the loans
and receivables are derecognized or impaired, as well as through the
amortization process.
The allowance for doubtful accounts is
the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts
receivable. The Company determines the allowance
based on aging data, historical collection experience, customer specific facts
and economic conditions. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered
remote. The Company did not have any off-balance-sheet credit
exposure related to its customers. As of December 31, 2010 and June 30, 2010, the allowance for doubtful accounts was $331k and $322k respectively. No additional provision was required.
(i)
Inventories
Inventories
consist mainly of raw materials and finished goods. Inventories are stated at
the lower of cost or market value. Cost is determined using the first in first
out method.
(j) Property and
equipment
The
Company states plant and equipment at cost less accumulated depreciation. The
Company computes depreciation using the straight-line method over the estimated
useful lives of the assets with 5% residual value.
Estimated
useful lives of property and equipment:
Useful Life
Property
and improvements
10-20 years
Machinery
and equipment
1-10
years
Transportation
equipment
4
years
Office
equipment
1-5
years
The
Company eliminates the cost and related accumulated depreciation of assets sold
or otherwise retired from the accounts and includes any gain or loss in the
statement of income. The Company charges maintenance, repairs and minor renewals
directly to expenses as incurred; major additions and betterment to buildings
and equipment are capitalized.
Asset
Retirement Obligation
The
Company follows ASC No. 410 sub topic 20, “Asset Retirement Obligations” (“ASC
410-20”), which established a uniform methodology for accounting for estimated
reclamation and abandonment costs. ASC 410-20 requires the fair value of a
liability for an asset retirement obligation to be recognized in the period in
which the legal obligation associated with the retirement of the long-lived
asset is incurred. When the liability is initially recorded, the offset is
capitalized by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset.
To settle the liability, the obligation is paid, and to the extent there is a
difference between the liability and the amount of cash paid, a gain or loss
upon settlement is recorded. Currently, there are no reclamation or abandonment
obligations associated with the land being utilized for
exploitation.
F-9
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Impairment of long-lived
assets
The
Company applies the provisions of ASC No. 360 Sub topic 10, "Impairment or
Disposal of Long-Lived Assets"(ASC 360-10) issued by the Financial Accounting
Standards Board ("FASB"). ASC 360-10 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair
value.
The
Company tests long-lived assets, including property, plant and equipment and
intangible assets subject to periodic amortization, for recoverability at least
annually or more frequently upon the occurrence of an event or when
circumstances indicate that the net carrying amount is greater than its fair
value. Assets are grouped and evaluated at the lowest level for their
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the future estimated cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the
amount of impairment by comparing the carrying amount of the asset to its fair
value. The estimation of fair value is generally measured by discounting
expected future cash flows as the rate the Company utilizes to evaluate
potential investments. The Company estimates fair value based on the information
available in making whatever estimates, judgments and projections are considered
necessary. There were no impairment losses in
the six months ended December 31, 2010 and
2009.
(k)
Statutory surplus
reserve
The
Company is required to set aside 10% of its income after income taxes determined
in accordance with PRC accounting regulations to the statutory surplus reserve
until the balance reaches 50% of the paid-in capital or registered capital,
after which further appropriation will be at the directors’
recommendation.
(l)
Revenue
recognition
Revenue
is recognized when there are probable economic benefits to the Company and when
the revenue can be measured reliably, on the following bases:
a)
Sales
of goods and rental income. In accordance with ASC Topic 605-10-S99, Revenue Recognition,
the Company recognizes revenue, net of any taxes, when persuasive evidence
of a customer or distributor arrangement exists or acceptance occurs,
receipt of goods by customer occurs or the service has been rendered, the
price is fixed or determinable, and collectability is reasonably
assured.
b)
Interest
income, on an accrual basis using the effective interest method by
applying the rate that discounts the estimated future cash receipts
through the expected life of the loans to their net carrying
amount.
(m)
Cost
of sales
When the
criteria for revenue recognition have been met, costs incurred are recognized as
cost of revenue. Cost of revenue (exclusive of depreciation and amortization)
primarily includes direct labor, materials and the applicable share of overhead
expense directly related goods delivered.
F-10
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Rental
cost mainly includes the depreciation expense of the leased
building.
(n)
Operating
expenses
Operating
expenses include: salaries, bonus, and social insurance of management,
administrative and sales personal, traveling cost, entertainment expenses,
depreciation of equipment, office rental expenses, professional service fee,
office supply, R&D expenses, bad debt provision, etc. Advertising costs are
expensed as incurred.
(o)
Taxation
a)
Income
tax
The
Company is governed by the Income Tax Law of the People’s Republic of China. The
Company accounts for income tax using the liability method prescribed by ASC
740, “Income Taxes”. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted tax rates that will be in effect in the
year in which the differences are expected to reverse. The Company records a
valuation allowance to offset deferred tax assets if based on the weight of
available evidence, it is more-likely-than-not that some portion, or all, of the
deferred tax assets will not be realized. The effect on deferred taxes of a
change in tax rates is recognized as income or loss in the period that includes
the enactment date. Pursuant to accounting standards related to the accounting
for uncertainty in income taxes, the evaluation of a tax position is a two-step
process. The first step is to determine whether it is more likely than not that
a tax position will be sustained upon examination, including the resolution of
any related appeals or litigation based on the technical merits of that
position. The second step is to measure a tax position that meets the
more-likely-than-not threshold to determine the amount of benefit to be
recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50% likelihood of being realized
upon ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. The accounting standard also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition.
b)
Value-added tax and business
tax
PRC
Value-added Tax
The
Company’s products that are sold in the PRC are generally subject to a Chinese
VAT at a rate of 17%. The VAT may be offset by VAT we pay on raw materials and
other materials included in the cost of producing their finished product.
Accrued VAT payables are subject to a 10% surtax, which includes urban
maintenance and construction taxes and additional education fees.
PRC
Business Tax
Revenues
from rental of brine pan to contractors are subject to a PRC business tax of 5%,
with a surtax of 0.5%. The Company pays business tax on gross
revenues.
c)
Deferred
tax
The Company adopts ASC Topic 740 and uses liability method to
accounts for income
taxes. Under
this method, deferred tax assets and liabilities are
recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and any operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A valuation
allowance is provided to reduce the amount of deferred tax asset if it is considered more likely
than not that some portion, or all, of the deferred tax assets will not be
realized. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
F-11
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
d)
Uncertain tax
positions
The Company adopts ASC Topic 740-10-25-5 through 740-10-25-7 and 740-10-25-13, which prescribes a more likely than not
threshold for financial statement recognition and measurement of a tax position
taken or expected to be
taken in a tax return. This Interpretation also provides guidance on recognition
of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, accounting for income
taxes in interim periods, and income tax disclosures. As of December 31, 2010 and June30, 2010, the Company did not have
any interest and penalties associated with tax positions and the Company did not have any
significant unrecognized
uncertain tax positions.
(p)
Shipping and handling fees and costs
The Company partly bears the expenses for shipping and
handling. The Company classifies shipping and handling costs as part
of selling
expenses, which amounted
to $1,460k and 2,073k for six months ended December 31, 2010 and 2009 respectively.
(q)
Comprehensive
income
Accumulated other comprehensive income,
as presented on the accompanying consolidated balance
sheets are the cumulative foreign currency translation
adjustments.
(r)
Commitments and
contingencies
In the normal course of business, the
Company is subject to loss contingencies, such as legal proceedings and claims
arising out of its business, that cover a wide range of matters, including,
among others, government
investigations, product and environmental liability, and tax matters. In
accordance with ASC No.
450 Sub topic 20, “Loss Contingencies”, the Company records accruals for such
loss contingencies when it is probable that a liability has been incurred
and the amount of loss can
be reasonably estimated. Historically, the Company has not experienced any
material service
liability
claims.
(s)
Fair value of financial
instruments
The Company adopted the guidance of
ASC820 for fair value measurements which clarifies the definition of fair value,
prescribes methods for measuring fair value, and establishes a fair value
hierarchy to classify the inputs used in measuring fair value as
follows:
• Level 1-Inputs are unadjusted quoted
prices in active markets for identical assets or liabilities available
at the measurement date.
• Level 2-Inputs are unadjusted quoted
prices for similar assets and liabilities in active markets, quoted prices for
identical or similar assets and liabilities in markets that are not
active, inputs other than
quoted prices that are observable, and inputs derived from or corroborated by
observable market data.
F-12
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
• Level 3-Inputs are unobservable inputs
which reflect the reporting entity’s own assumptions on what assumptions
the market participants
would use in pricing the asset or liability based on the best available
information.
The carrying amounts reported in the
balance sheets for cash, accounts receivable, loans payable, accounts payable
and accrued expenses, and amounts due to related parties approximate their fair market
value based on the short-term maturity of these instruments. The Company did not
have any nonfinancial assets or liabilities that are measured at fair value on a
recurring basis as of December 31, 2010 and June 30, 2010.
ASC 825-10 “Financial Instruments,” allows entities to voluntarily choose
to measure certain financial assets and liabilities at fair value (fair value
option). The fair value option may be elected on an instrument-by-instrument
basis and is irrevocable,
unless a new election date occurs. If the fair value option is elected for an
instrument, unrealized gains and losses for that instrument should be reported
in earnings at each subsequent reporting date. The Company did not elect to
apply the fair value option to any outstanding
instruments.
(t)
Recently issued accounting
standards
In July
2010, the FASB issued Accounting Standard Update (“ASU”) 2010-20, “Receivables
(Topic 310): Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses”. This ASU amends Topic 310 to
improve the disclosures that an entity provides about the credit quality of its
financing receivables and the related allowance for credit losses. As a result
of these amendments, an entity is required to disaggregate by portfolio segment
or class certain existing disclosures and provide certain new disclosures about
its financing receivables and related allowance for credit losses. For public
entities, the disclosures as of the end of a reporting period are effective for
interim and annual reporting periods ending on or after December 15, 2010. The
disclosures about activity that occurs during a reporting period are effective
for interim and annual reporting periods beginning on or after December 15,2010. Except for the expanded disclosure requirements, the adoption of this ASU
is not expected to have a material impact on the Company’s consolidated
financial statements.
ASU No.
2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements. This Update amends ASC 820
subtopic 10 that requires new disclosures about transfers in and out of Levels 1
and 2 and activity in Level 3 fair value measurements. This Update also amends
ASC 820 subtopic 10 to clarify certain existing disclosures. The new disclosures
and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010.
ASU No.
2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary. This Update amends ASC 810 subtopic 10 and related
guidance to clarify that the scope of the decrease in ownership provisions of
the Subtopic and related guidance applies to (i) a subsidiary or group of assets
that is a business or nonprofit activity; (ii) a subsidiary that is a business
or nonprofit activity that is transferred to an equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a non-controlling interest in an entity, but does not
apply to: (i) sales of in substance real estate; and (ii) conveyances of
petroleum and gas mineral rights. The amendments in this Update are effective
beginning in the period that an entity adopts FAS 160 (now included in ASC 810
subtopic 10).
In
February 2010, the FASB issued Accounting Standards Update (ASU) 2010-09 to
amend ASC 855, Subsequent Events, whose effective date is for interim or annual
reporting periods ending after June 15, 2010. As a result, ASU No. 2010-09
excludes SEC reporting entities from the requirement to disclose the date on
which subsequent events have been evaluated; In addition, it modifies the
requirement to disclose the date on which subsequent events have been evaluated
in reissued financial statements to apply only to such statements that have been
restated to correct an error or to apply U.S. GAAP
retrospectively.
F-13
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(u)
Significant
risks
Credit
risk
Financial
instruments that potentially expose the Company to concentrations of credit risk
consist primarily of cash, cash equivalents, accounts receivables and other
receivable. The Company places its cash and cash equivalents, amounted to
$6,387k and $3,814k as of December 31, 2010 and June 30, 2010 with financial
institutions that management believes is of high-credit ratings and
quality.
The
Company conducts credit evaluations of customers and generally does not require
collateral or other security from its customers. The Company establishes an
allowance for doubtful accounts primarily based upon the age of the receivables
and factors surrounding the credit risk of specific customers.
Foreign
currency risk
A
majority of the Company’s sales and expenses transactions and a significant
portion of the Company’s assets and liabilities are denominated in RMB. The RMB
is not freely convertible into foreign currencies. In the PRC, certain foreign
exchange transactions are required by law to be transacted only by authorized
financial institutions at exchange rates set by the People’s Bank of China
(“PBOC). Remittances in currencies other than RMB by the Company in China must
be processed through the PBOC or any other China foreign exchange regulatory
body which require certain supporting documentation in order to affect the
remittance.
The
Company receives Commercial Notes (Bank Acceptance) from the customers in lieu
of the payments for accounts receivable. Most of the Commercial Notes have a
maturity of less than six months. As of December 31, 2010 and June 30, 2010, the
Company had notes receivable of $5,456k and $7,295k,
respectively.
Due from
owners are rental receivables from above owners who lease brine pans from the
Company. Lu Junping, Shen Zhaofa
and Wang Yunyu hold 1.2%, 0.4% and
0.4% of the ownership of the Company respectively.
The
Company reviews its inventories periodically for possible obsolete or damaged
goods to determine if any allowance is needed. As of December 31, 2010 and June30, 2010, the Company determined that no allowance was necessary.
The
Company rents part of its brine pans to lessees. The rental income is recorded
on an accrual basis based upon the lease term. Rental receivable represents
outstanding brine pan rental receivables from lessees.
For the six months ended December 31, 2010 and 2009, depreciation expense totaled $952k and $1,186k
respectively.
13.
ACQUISITIONS
OF A BUSINESS
On
November 6, 2009, Shandong Haiwang acquired Dongying city Haihui Industrial and
Trade Co. Ltd (“Dongying Haihui”), a company engages in production and sales of
bromine, for the purpose of expanding the Company’s production capacity.
Shangdong Haiwang paid $293k for the purchase of 100% equity in Dongying
Haihui.
The
accounts of Dongying Haihui have been consolidated in the financial statements
since November 6, 2009; all intercompany transactions have been eliminated. The
following table summarizes the allocation of purchase price to the fair value of
the Company’s share of the net assets acquired as of the acquisition
date:
Land use
rights are amortized over 50 years with $0 residual value. For the six months
ended December 31, 2010 and 2009, the aggregated amortization expenses were
$210k and $126k respectively. Amortization of land use rights attributable to
future periods is as follows:
For years ended June 30,
Amortization
US $(’000)
2011
$
183
2012
366
2013
366
2014
366
2015
366
2016 and there
after
15,865
Total
$
17,512
As
of December 31, 2010, land use rights with a net book value of
$11,238k ($10,083k as of June 30, 2010) are pledged as collateral in
connection with the bank loan of $13,957k ($16,185k as of June 30, 2010) granted
to the Company.
F-18
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Deferred
tax assets are generated by provision of accounts receivable which are not
tax-deductible under PRC tax law until the receivable is actually write
off.
17.
NOTES
PAYABLE
The
Company purchases raw materials from its suppliers and delivers Commercial Notes
(Bank Acceptance) to the suppliers in lieu of the payments for accounts payable.
Most of the Commercial Notes have a maturity of less than six months. As of
December 31, 2010 and June 30, 2010, the Company had notes payable of $6,050k
and $6,201k, respectively
i).
Haiwang Resources & Technology Ltd is incorporated in the
BVI. Under the current law of the BVI, Haiwang Resources &
Technology Ltd is not subject to tax on income or capital
gains. Additionally, upon payments of dividends by the Company to its
shareholders, no BVI withholding tax will be imposed.
ii).
Haiwang HK was incorporated in Hong Kong and does not conduct any substantial
operations of its own. No provision for Hong Kong profits tax has been made in
the financial statements as Haiwang HK has no assessable profits for the
quarters ended December 31, 2010. Additionally, upon payments of dividends by
Haiwang HK to its shareholders, no Hong Kong withholding tax will be
imposed.
iii). Shandong
Haiwang Chemical Stock Co., Ltd and its subsidiaries, being incorporated in the
PRC, are governed by the income tax law of the PRC and is subject to PRC
enterprise income tax (“EIT”). Effective from January 1, 2008, the
EIT rate of PRC was changed from 33% of to 25%, and applies to both domestic and
foreign invested enterprises.
For Six months ended
December 31,
2010
2009
US $(’000)
US $(’000)
(Unaudited)
(Unaudited)
PRC federal statutory tax
rate
25
%
25
%
Pre-tax
income
19,012
3,790
Computed expected income tax
expense
4,753
948
Effect of
non-deductible
expenses
25
2
Effect of tax
holidays
-
-
4,778
950
F-20
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Fixed 5.81% annual
rate, Guaranteed by Weifang Haike
Chemical Co., Ltd
4,537
-
China Construction Bank Weifang
Gaoxin Branch
Floating rate, 10% down benchmark interest
rate of the lending
date (annual rate 5.3100 %), adjustable in line with basic
interest rate announced by PBOC every 12
months.
4,537
4,419
Industrial Bank Weifang
Branch
Fixed 5.3100% annual rate, Guaranteed by the Chairman Mr.
Chunbin
Yang and pledged with land use right No.
2009-G232 of the Company 28,773 m2 and land use right No. 2009-G231
of the Company 30,443 m2 with a total net book
value
of $1,486k as of June 30, 2010.
1,344
1,308
Shanghai Pudong Development Bank
Jinan Branch
Fixed 5.3100% annual rate, Guaranteed by the Chairman Mr.
Chunbin
Yang and Weifang
Haike Chemical Co., Ltd.
-
2,946
Shanghai Pudong Development Bank
Jinan Branch
Fixed 5.3100% annual rate, Guaranteed by the Chairman Mr.
Chunbin
Yang and Weifang
Haike Chemical Co., Ltd.
-
2,946
Evergrowing Bank Qingdao
Development Area Branch
Floating lending rate,
annual rate
5.3100%, adjustable in line with basic
interest rate announced by PBOC every month. Guaranteed by the Chairman Mr.
Chunbin
Yang and Weifang
Haike Chemical Co., Ltd.
-
2,946
Bank of Communications Hanting
Branch
Floating lending rate,
annual rate
5.3100%, adjustable in line with basic
interest rate changes
announced by
PBOC every
time. Pledged with land use right No.
2007-c191 of the Company 195,683 m2 with a net book value
of
$1,079k as of June30, 2010.
-
2,946
Shanghai
Pudong Development Bank Weifang Branch
Fixed annual rate 5.3100%,. And Guaranteed by Weifang Haike Chemical Co.,
Ltd.
3,025
-
Shanghai
Pudong Development Bank Weifang Branch
Fixed annual 5.3100%, Guaranteed by Weifang Haike Chemical Co.,
Ltd.
3,025
-
Evergrowing
Bank Qingdao Development Area Branch
Fixed annual rate 5.3100%, Guaranteed by Weifang Haike Chemical Co.,
Ltd
3,781
-
$
20,249
$
17,511
F-21
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
As
of December
31,
2010,
short-term bank borrowings have maturity terms ranging from two to twelve
months. There are a total of $32,173k
and $5,156 unused bank facilities as of December 31,2010 and June 30, 2010,
respectively. Interest expense incurred on short-term loan for the six months
ended December 31, 2010 and 2009 are $678 k and $263 k,
respectively.
Floating lending rate, 5% up
benchmark interest rate of the lending date (annual rate 5.4%), adjustable
in line with basic interest rate announced by PBOC every 12 months.
Pledged with land use right No. 2008-c103 of the Company 328,000 m2
with a net book value of $4,261k.
Floating lending rate,
5% up benchmark interest
rate of the lending
date (annual rate 5.4%), adjustable in line with basic
interest rate announced by PBOC every 12 months. Pledged with land use right No.
2008-c105 (77,927
m2 of total 233,889 m2) of the Company with a net book value
of $1,012k..
Floating lending rate,
5% up benchmark interest
rate of the lending
date (annual rate 5.4%), adjustable in line with basic
interest rate announced by PBOC every 12 months. Pledged with land use right No.
2006-c078 of 96,815
m2 of the Company with a net book value
of $218k.
212
1,473
November 19, 2011
China Construction Bank Gaoxin
District Branch
Floating lending rate,
5% up benchmark interest
rate of the lending
date (annual rate 5.4%), adjustable in line with basic
interest rate announced by PBOC every 12 months. Pledged with land use right No.
2008-c105 (155,962
m2 of total 233,889 m2) of the Company with a net book value
of $2,026k.
Floating lending rate,
5% up benchmark interest
rate of the lending
date (annual rate 5.6700%), adjustable in line with basic
interest rate announced by PBOC every 12 months. Pledged with land use right No.
2008-c103 of the
Company 328,000 m2 with a net book value
of $4,261k.
Floating lending rate,
5% up benchmark interest rate of
the lending date (annual rate 5.67%), adjustable in line with basic
interest rate announced by PBOC every 12 months. Pledged with land use right No.
2010-G-71 of the
Company 41,644 m2 with a net book value
of $572 k
756
-
November 4,
2011
China Construction Bank Gaoxin
District Branch
Floating lending rate,
5% up benchmark interest rate of
the lending date (annual rate 5.67%), adjustable in line with basic
interest rate announced by PBOC every 12 months. Pledged with land use right No.
2010-G-77 of the
Company 59,499 m2 with a net book value
of $1,514 k
907
-
November 4,
2013
Total Long-term
Loan
12,613
11,931
Less: Current
portion
(2,480
)
(1,473
)
$
10,133
$
10,458
F-22
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Interest expense incurred on long-term
bank loans for the six months ended December 31, 2010 and 2009 are $302 k and
$310 k, respectively.
23.
RENTAL
INCOME AND COST
For six months ended
December 31,
2010
2009
US $(’000)
(Unaudited)
US $(’000)
(Unaudited)
Rental
income
Brine pan rental
income
$
1,913
$
1,454
Property rental
income
89
107
$
2,002
$
1,561
Rental cost
Brine pan rental
cost
$
1,639
$
1,707
Property rental
cost
266
234
$
1,905
$
1,941
The Company leases part of its brine pans to contractors and in return
collects rental according to
rental contracts. The
brine pan rental cost represents the cost of processed brine water flown to the
salt pans for instilling crude salt.
A property owned by the Company is leased to
local government. The property rental cost includes the depreciation expense, property tax and business tax of rental income related to
the property.
F-23
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
24.
OTHER
INCOME AND OTHER COST
For six months ended
December 31,
2010
2009
US $(’000)
(Unaudited)
US $(’000)
(Unaudited)
Other
income
Sale of raw
material
$
485
$
465
Other cost
Cost of sale of raw
material
$
338
$
364
Sale of raw material represents the sale
of material originally purchased by the Company for manufacturing use and
subsequently sold.
The
balance represents outstanding payment for the purchase of raw material from
Shandong Haiheng.
For six months ended
December 31,
2010
2009
US $(’000)
(Unaudited)
US $(’000)
(Unaudited)
Purchase from related
parties:
Shandong Haiheng Chemical Co.,
Ltd
$
962
$
1,377
$
962
$
1,377
Mr.
Chunbin Yang along with Weifang Haike Chemical Co., Ltd provided guarantee for
Shandong Haiwang’s short-term bank loan of $0 and $8,838k as of December 31,2010 and June 30, 2010 respectively. Mr. Chunbin Yang individually provided
guarantee for Shandong Haiwang’s short-term bank loan of $1,344k and $1,308k as
of December 31, 2010 and June 30, 2010 respectively. Weifang Haike Chemical Co.,
Ltd individually provided guarantee for Shandong Haiwang’s short-term bank loan
of $14,368k and $0 as of December 31, 2010 and June 30, 2010
respectively.
Shandong
Haiwang holds 10% equity interest in Shandong Haiheng Chemical Co., Ltd. The
Company purchases raw material from Shandong Haiheng. Market price was used for
both the sales and purchase transactions with related parties.
F-25
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
26.
BUNINESS
SEGMENTS
The Company follows ASC Topic 280 “Segment report”, which requires the Company to provide
certain information about their operating segments. This classification is
based on the nature of the products consistent with the method by which the
Company’s chief operating decision-maker
assesses the operating performance and allocates resources. The Company
has two reportable segments: bromine and crude salt and specialty chemical products.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
For six months ended
December 31,
Reconciliations
2010
2009
US $(’000)
US $(’000)
(Unaudited)
(Unaudited)
Total
segment operating income
$
20,126
$
4,493
Corporate
income (expenses)
(
374
)
(366
)
Other
income (expense), net
(740
)
(336
)
Income
tax expense
(4,778
)
(950
)
Total
consolidated net income
$
14,234
$
2,840
27.
MAJOR
CUSTOMERS AND VENDORS
No
customers account for more than 10% of total sales for the six months ended
December 31, 2010 and 2009.
One of
the vendors-Yangzi Power Supplying Company accounted for 17% and 21% of the
total purchases for the six months period ended December 31, 2010 and
2009.
F-27
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
28.
COMMITMENTS
AND CONTINGENCIES
The following table sets forth the
Company’s contractual obligations as of
December 31, 2010:
Rental
payments
US $(’000)
Year ended June 30,
2011
$
584
2012
1,168
2013
1,168
2014
1,168
2015
1,168
2016 and
thereafter
10,730
Total
$
15,986
In
February 2010, Shandong Haiwang signed a lease agreement with Shandong Wangdao
Aquaculture Co., Ltd (“Wangdao”) in Dongying City, Shandong Province. The
agreement states Shandong Haiwang would lease two pieces of aquatic land from
Wangdao, one for the period from February 1, 2010 to January 31, 2025, and the
other for the period from January 1, 2011 to December 31, 2025. Shandong Haiwang
would convert these two pieces of aquatic land into salt pans. The annual rental
is RMB1.05 (US$0.15) per square meters. On December 20, 2010, Shandong Haiwang
and Wangdao agreed that the rental payments shall start and shall be calculated
after the construction of salt pan has been finished and the actual area of the
salt pan could be determined. The construction of the first salt pan was
finished on December 15, 2010 and the actual area is approximately 6 million
square meters, the exact area will be determined after measurement.
29.
SUBSEQUENT
EVENT
The
Company has evaluated subsequent events from the balance sheet date through the
date that the financial statements are issued or are available to be issued. The
following were noted which were required to be disclosed:
1) On
January 25, 2011, Haiwang HK set up a wholly-owned subsidiary, Beijing Binhai
Yintai Technology Co., Ltd (“WFOE”).
2)
On February 1, 2011, a series of agreements were entered into among WFOE,
Shandong Haiwang and its shareholders, providing WFOE the ability to control
Shandong Haiwang, including its financial interest as described
below.
Exclusive
Technical and Consulting Service Agreement. Shandong Haiwang
and WFOE have entered into an Exclusive Technical and Consulting Service
Agreement with WFOE, which agreement provides that WFOE will be the exclusive
provider of technical and consulting services to Shandong Haiwang, as
appropriate, and that Shandong Haiwang will in turn pay 100% of its profits to
WFOE for such services. In addition to such payment, Shandong Haiwang
and WFOE have entered into an agreement to reimburse WFOE for WFOE’s expenses
(other than WFOE’s income taxes) incurred in connection with its provision of
services under the agreement. Payments will be made on a quarterly
basis, with any over- or underpayment to be reconciled once Shandong Haiwang’s
annual net profits, as applicable, are determined at its fiscal year
end. The term of this agreement is twenty years from the date
thereof.
F-28
HAIWANG
RESOURCES & TECHNOLOGY LTD
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Proxy
Agreement. Each of the shareholders of Shandong Haiwang has
executed a Proxy Agreement authorizing WFOE to exercise any and all shareholder
rights associated with his ownership in Shandong Haiwang, as appropriate,
including the right to attend shareholders’ meetings, the right to execute
shareholders’ resolutions, the right to sell, assign, transfer or pledge any or
all of the equity interest in Shandong Haiwang, as appropriate, and the right to
vote such equity interest for any and all matters. The term of the
Proxy Agreement is twenty years from the date thereof.
Equity Interest
Pledge Agreement. WFOE and the shareholders of Shandong Haiwang have
entered in Equity Interest Pledge Agreements, pursuant to which each such
shareholder pledges all of his shares of Shandong Haiwang, as appropriate, to
WFOE in order to guarantee cash-flow payments under the applicable Exclusive
Technical and Consulting Service Agreement. If Shandong Haiwang or
any of its respective shareholders breaches its respective contractual
obligations, WFOE, as pledgee, will be entitled to certain rights, including the
right to foreclose on the pledged equity interests. Such Shandong Haiwang
shareholders have agreed not to dispose of the pledged equity interests or take
any actions that would prejudice WFOE’s interest. The equity pledge agreement
has a term of twenty years from the date thereof.
Exclusive Equity
Interest Purchase Agreement. Each of the shareholders of Shandong Haiwang
has entered into an Exclusive Equity Interest Purchase Agreement, which provides
that WFOE will be entitled to acquire such shares from the current shareholders
upon certain terms and conditions, if such a purchase is or becomes allowable
under PRC laws and regulations. The Exclusive Equity Interest
Purchase Agreement also prohibits the current shareholders of Shandong Haiwang
from transferring any portion of their equity interests to anyone other than
WFOE. WFOE has not yet taken any corporate action to exercise this right of
purchase, and there is no guarantee that it will do so or will be permitted to
do so by applicable law at such time as it may wish to do so. The
term of this agreement is twenty years from the date thereof.
Operating
Agreement.
Pursuant to the Operating Agreement among WFOE, Shandong Haiwang and each of the
shareholders of Shandong Haiwang, WFOE provides guidance and instructions on
Shandong Haiwang’s daily operations and financial affairs. The shareholders of
Shandong Haiwang must designate the candidates recommended by WFOE as their
representatives on their board of directors. WFOE has the right to appoint
senior executives of Shandong Haiwang. In addition, WFOE agrees to guarantee
Shandong Haiwang’s performance under any agreements or arrangements relating to
Shandong Haiwang’s business arrangements with any third party. Shandong Haiwang,
in return, agrees to pledge its accounts receivable and all of its assets to
WFOE. Moreover, Shandong Haiwang agrees that without the prior consent of WFOE,
Shandong Haiwang will not engage in any transactions that could materially
affect its assets, liabilities, rights or operations, including, without
limitation, incurrence or assumption of any indebtedness, sale or purchase of
any assets or rights, incurrence of any encumbrance on any of its assets or
intellectual property rights in favor of a third party or transfer of any
agreements relating to its business operation to any third party.
Based on
these exclusive agreements, The Company’s involvement constitutes power that is
most significant to the variable interest entity (“VIE”), Shandong Haiwang, when
it has unconstrained decision making ability over key operational functions
within the entity. The Company consolidates the VIE, as required by generally
accepted accounting principles in the United States (“US
GAAP”).
Assets
recognized as a result of consolidating VIEs do not represent additional assets
that could be used to satisfy claims against the Company’s general assets.
Conversely, liabilities recognized as a result of consolidating these VIEs do
not represent additional claims on the Company’s general assets; rather, they
represent claims against the specific assets of the consolidated VIEs. The
Company is the primary beneficiary of VIE, accordingly, the assets and
liabilities of VIE are included in the Company’s consolidated balance. The
Company reports VIE’s portion of consolidated net income and stockholders’
equity in the consolidated financial statements.
Report
of Independent Registered Public Accounting Firm
F-31
Consolidated
Balance Sheets
F-32
Consolidated
Statements of Income and Comprehensive Income
F-34
Consolidated
Statements of Owners’ Equity
F-38
Consolidated
Statements of Cash Flows
F-36
Notes
to Consolidated Financial Statements
F-39
– F-61
F-30
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Owners of
Shandong
Haiwang Chemical Stock Co., Ltd
We have
audited the accompanying consolidated balance sheets of Shandong Haiwang
Chemical Stock Co., Ltd (“the Company”) as of June 30, 2010 and 2009, and the
related consolidated statements of income and comprehensive income, owners’
equity, and cash flows for each of the years in the two-year period ended June30, 2010. The Company’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 the Company as of June 30, 2010 and
2009, and the results of its operations and its cash flows for each of the years
in the two-year period ended June 30, 2010 in conformity with accounting
principles generally accepted in the United States of America.
Shandong
Haiwang Chemical Stock Co., Ltd (“Shandong Haiwang”) was incorporated in Weifang
City, Shangdong Province, the People ’s Republic of China (the “PRC”) on January27, 2003, with a registered capital of RMB4.23 million (US$512 thousands (“k”)).
In 2006, Shandong Haiwang increased its registered capital to RMB 12.98 million
(approximately $1,605,000) and reorganized into a joint stock limited company.
In 2009, Shandong Haiwang increased its registered capital to RMB60 million
(US$8,467k). Shandong Haiwang and its subsidiaries (collectively the “Company”)
engage in manufacturing and trading bromine, crude salt and bromine compounds in
China. The Company also generates rental income from renting out some of its
brine pans and buildings to lessees.
Shandong
Kehai is a wholly-owned subsidiary of Shandong Haiwang since September
2006.
(ii)
Shandong
Haiwang acquired 100% equity interest in Dongying Haihui on
November 6, 2009 with a consideration of RMB2,000,000
(US$293k)
2.
Summary
of significant accounting policies
(a)
Basis
of presentation
The
consolidated financial statements of the Company have been prepared in
accordance with the accounting principles generally accepted in the United
States of America (“U.S. GAAP”).
F-39
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(b)
Basis
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries as of June 30, 2010 and 2009 and for the two years ended June 30,2010. Dongying Haihui is included as of June 30, 2010 and for the period from
November 6, 2009 (date of acquisition) through June 30, 2010. All material
intercompany transactions have been eliminated in consolidation.
(c)
Foreign
currency translation and
transaction
The
functional currency of the Company is Renminbi (“RMB”), and PRC is the primary
economic environment in which the Company operates.
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transactions. The resulting exchange differences are included in the
determination of net income for the respective periods.
For
financial reporting purposes, the financial statements of the Company prepared
using RMB, are translated into Company’s reporting currency, the United States
Dollars (“U.S. dollars”). Assets and liabilities are translated using the
exchange rate at each balance sheet date. Revenue and expenses are
translated using average rates prevailing during each reporting period, and
owners’ equity is translated at historical exchange rates. Adjustments resulting
from the translation are recorded as a separate component of accumulated other
comprehensive income in owners’ equity.
The
exchange rates applied are as follows:
2010
2009
RMB
exchange rate at June 30,
6.7889
6.8259
Average
RMB exchange rate for the year ended June 30,
6.8180
6.8259
(d)
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Management makes these estimates using the best
information available at the time the estimates are made. Significant
estimates and judgments made by our management include: (i) estimates of profits
and losses on contracts in process; (ii) accrual of estimated liabilities; and
(iii) contingencies and litigation. However actual results could differ
from those estimates.
A party
is considered to be related to the Company if:
(a)
the
party, directly or indirectly through one or more intermediaries, (i)
controls, is controlled by, or is under common control with, the Company;
(ii) has an interest in the Company that gives it significant influence
over the Company; or (iii) has joint control over the
Company;
(b)
the
party is an associate;
(c)
the
party is a member of the key management personnel of the
Company;
(d)
the
party is a close member of the family of any individual referred to in (a)
or (b);
(e)
the
party is an entity that is controlled, jointly controlled or significantly
influenced by or for which significant voting power in such entity resides
with, directly or indirectly, any individual referred to in (b) or (c);
or
(f)
The
party is a post-employment benefit plan for the benefit of the employees
of the Company, or of any entity that is a related party of the
Company.
(g)
Cash
and cash equivalents
Cash and
cash equivalents represent cash on hand and deposits held at call with banks.
The Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash
equivalents.
(h)
Loans
and accounts receivable
Loans and
receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. Such assets are subsequently
carried at amortized cost using the effective interest method less any allowance
for impairment. Amortized cost is calculated taking into account any discount or
premium on acquisition and includes fees that are an integral part of the
effective interest rate and transaction costs. Gains and losses are recognized
in the consolidated statements of comprehensive income when the loans and
receivables are derecognized or impaired, as well as through the
amortization process.
The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. The
Company determines the allowance based on aging data, historical collection
experience, customer specific facts and economic conditions. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The
Company did not have any off-balance-sheet credit exposure related to its
customers. As of June 30, 2010 and 2009, the allowance for
doubtful accounts was $322k and $195k. No additional provision was
required.
(i)
Inventories
Inventories
consist mainly of raw materials and finished goods. Inventories are stated at
the lower of cost or market value. Cost is determined using the first in first
out method.
F-41
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(j)
Property and
equipment
The
Company states plant and equipment at cost less accumulated depreciation. The
Company computes depreciation using the straight-line method over the estimated
useful lives of the assets with 5% residual value.
Estimated
useful lives of property and equipment:
Useful Life
Property
and improvements
10-20 years
Machinery
and equipment
1-10
years
Transportation
equipment
4
years
Office
equipment
1-5
years
The
Company eliminates the cost and related accumulated depreciation of assets sold
or otherwise retired from the accounts and includes any gain or loss in the
statement of income. The Company charges maintenance, repairs and minor renewals
directly to expenses as incurred; major additions and betterment to buildings
and equipment are capitalized.
Asset
Retirement Obligation
The
Company follows ASC No. 410 sub topic 20, “Asset Retirement Obligations” (“ASC
410-20”), which established a uniform methodology for accounting for estimated
reclamation and abandonment costs. ASC 410-20 requires the fair value of a
liability for an asset retirement obligation to be recognized in the period in
which the legal obligation associated with the retirement of the long-lived
asset is incurred. When the liability is initially recorded, the offset is
capitalized by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset.
To settle the liability, the obligation is paid, and to the extent there is a
difference between the liability and the amount of cash paid, a gain or loss
upon settlement is recorded. Currently, there are no reclamation or abandonment
obligations associated with the land being utilized for
exploitation.
Impairment
of long-lived assets
The
Company applies the provisions of ASC No. 360 Sub topic 10, "Impairment or
Disposal of Long-Lived Assets"(ASC 360-10) issued by the Financial Accounting
Standards Board ("FASB"). ASC 360-10 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair
value.
The
Company tests long-lived assets, including property, plant and equipment and
intangible assets subject to periodic amortization, for recoverability at least
annually or more frequently upon the occurrence of an event or when
circumstances indicate that the net carrying amount is greater than its fair
value. Assets are grouped and evaluated at the lowest level for their
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the future estimated cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the
amount of impairment by comparing the carrying amount of the asset to its fair
value. The estimation of fair value is generally measured by discounting
expected future cash flows as the rate the Company utilizes to evaluate
potential investments. The Company estimates fair value based on the information
available in making whatever estimates, judgments and projections are considered
necessary. There were no impairment losses in the years ended June 30, 2010 and
2009,
F-42
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(k)
Statutory
surplus reserve
The
Company is required to set aside 10% of its income after income taxes determined
in accordance with PRC accounting regulations to the statutory surplus reserve
until the balance reaches 50% of the paid-in capital or registered capital,
after which further appropriation will be at the directors’
recommendation.
(l)
Revenue
recognition
Revenue
is recognized when there are probable economic benefits to the Company and when
the revenue can be measured reliably, on the following bases:
a)
Sales
of goods and rental income. In accordance with ASC Topic 605-10-S99, Revenue Recognition,
the Company recognizes revenue, net of any taxes, when persuasive evidence
of a customer or distributor arrangement exists or acceptance occurs,
receipt of goods by customer occurs or the service has been rendered, the
price is fixed or determinable, and collectability is reasonably
assured.
b)
Interest
income, on an accrual basis using the effective interest method by
applying the rate that discounts the estimated future cash receipts
through the expected life of the loans to their net carrying
amount.
(m)
Cost
of sales
When the
criteria for revenue recognition have been met, costs incurred are recognized as
cost of revenue. Cost of revenue (exclusive of depreciation and amortization)
primarily includes direct labor, materials and the applicable share of overhead
expense directly related goods delivered
.
Rental
cost mainly includes the depreciation expense of the leased
building.
(n)
Operating
expenses
Operating
expenses include: salaries, bonus, and social insurance of management,
administrative and sales personal, traveling cost, entertainment expenses,
depreciation of equipment, office rental expenses, professional service fee,
office supply, R&D expenses, bad debt provision, etc. Advertising costs are
expensed as incurred.
(o)
Taxation
a)
Income
tax
The
Company is governed by the Income Tax Law of the People’s Republic of China. The
Company accounts for income tax using the liability method prescribed by ASC
740, “Income Taxes”. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted tax rates that will be in effect in the
year in which the differences are expected to reverse. The Company records a
valuation allowance to offset deferred tax assets if based on the weight of
available evidence, it is more-likely-than-not that some portion, or all, of the
deferred tax assets will not be realized. The effect on deferred taxes of a
change in tax rates is recognized as income or loss in the period that includes
the enactment date. Pursuant to accounting standards related to the accounting
for uncertainty in income taxes, the evaluation of a tax position is a two-step
process. The first step is to determine whether it is more likely than not that
a tax position will be sustained upon examination, including the resolution of
any related appeals or litigation based on the technical merits of that
position. The second step is to measure a tax position that meets the
more-likely-than-not threshold to determine the amount of benefit to be
recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50% likelihood of being realized
upon ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. The accounting standard also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition.
F-43
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
b)
Value-added
tax and business tax
PRC
Value-added Tax
The
Company’s products that are sold in the PRC are generally subject to a Chinese
VAT at a rate of 17%. The VAT may be offset by VAT we pay on raw materials and
other materials included in the cost of producing their finished product.
Accrued VAT payables are subject to a 10% surtax, which includes urban
maintenance and construction taxes and additional education fees.
PRC
Business Tax
Revenues
from rental of brine pan to contractors are subject to a PRC business tax of 5%,
with a surtax of 0.5%. The Company pays business tax on gross
revenues.
c)
Deferred
tax
The
Company adopts ASC Topic 740 and uses liability method to accounts for income
taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and any operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. A
valuation allowance is provided to reduce the amount of deferred tax asset if it
is considered more likely than not that some portion, or all, of the deferred
tax assets will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
d)
Uncertain
tax positions
The
Company adopts ASC Topic 740-10-25-5 through 740-10-25-7 and
740-10-25-13, which prescribes a more likely than not threshold for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This Interpretation also provides guidance on recognition
of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, accounting for income taxes in interim periods,
and income tax disclosures. For the year ended June 30, 2010 and 2009, the
Company did not have any interest and penalties associated with tax positions
and the Company did not have any significant unrecognized uncertain tax
positions.
(p)
Shipping
and handling fees and costs
The
Company partly bears the expenses for shipping and handling. The Company
classifies shipping and handling costs as part of selling expenses, which
amounted to $3,353k and $3,533k for years ended June 30, 2010 and
2009, respectively.
F-44
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(q)
Comprehensive
income
Accumulated
other comprehensive income, as presented on the accompanying consolidated
balance sheets are the cumulative foreign currency translation
adjustments.
(r)
Commitments
and contingencies
In the
normal course of business, the Company is subject to loss contingencies, such as
legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among others, government investigations, product
and environmental liability, and tax matters. In accordance with ASC No.
450 Sub topic 20, “Loss
Contingencies”,
the Company records accruals for such loss contingencies when it is probable
that a liability has been incurred and the amount of loss can be reasonably
estimated. Historically, the Company has not experienced any material service
liability claims.
(s)
Fair
value of financial instruments
The
Company adopted the guidance of ASC820 for fair value measurements which
clarifies the definition of fair value, prescribes methods for measuring fair
value, and establishes a fair value hierarchy to classify the inputs used in
measuring fair value as follows:
• Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities available at the measurement date.
• Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, inputs other than quoted prices that are
observable, and inputs derived from or corroborated by observable market
data.
• Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The
carrying amounts reported in the balance sheets for cash, accounts receivable,
loans payable, accounts payable and accrued expenses, and amounts due to related
parties approximate their fair market value based on the short-term maturity of
these instruments. The Company did not have any nonfinancial assets or
liabilities that are measured at fair value on a recurring basis as of
June 30, 2010 and 2009.
ASC
825-10 “Financial Instruments,” allows entities to voluntarily choose to measure
certain financial assets and liabilities at fair value (fair value option). The
fair value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is
elected for an instrument, unrealized gains and losses for that instrument
should be reported in earnings at each subsequent reporting date. The Company
did not elect to apply the fair value option to any outstanding
instruments.
(t)
Recently
issued accounting standards
In July
2010, the FASB issued Accounting Standard Update (“ASU”) 2010-20, “Receivables
(Topic 310): Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses”. This ASU amends Topic 310 to improve the
disclosures that an entity provides about the credit quality of its financing
receivables and the related allowance for credit losses. As a result of these
amendments, an entity is required to disaggregate by portfolio segment or class
certain existing disclosures and provide certain new disclosures about its
financing receivables and related allowance for credit losses. For public
entities, the disclosures as of the end of a reporting period are effective for
interim and annual reporting periods ending on or after December 15, 2010. The
disclosures about activity that occurs during a reporting period are effective
for interim and annual reporting periods beginning on or after December 15,2010. Except for the expanded disclosure requirements, the adoption of this ASU
is not expected to have a material impact on the Company’s consolidated
financial statements.
F-45
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
ASU No.
2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements. This Update amends ASC 820
subtopic 10 that requires new disclosures about transfers in and out of Levels 1
and 2 and activity in Level 3 fair value measurements. This Update also amends
ASC 820 subtopic 10 to clarify certain existing disclosures. The new disclosures
and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010.
ASU No.
2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary. This Update amends ASC 810 subtopic 10 and related
guidance to clarify that the scope of the decrease in ownership provisions of
the Subtopic and related guidance applies to (i) a subsidiary or group of assets
that is a business or nonprofit activity; (ii) a subsidiary that is a business
or nonprofit activity that is transferred to an equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a non-controlling interest in an entity, but does not
apply to: (i) sales of in substance real estate; and (ii) conveyances of
petroleum and gas mineral rights. The amendments in this Update are effective
beginning in the period that an entity adopts FAS 160 (now included in ASC 810
subtopic 10).
In
February 2010, the FASB issued Accounting Standards Update (ASU) 2010-09 to
amend ASC 855, Subsequent Events, whose effective date is for interim or annual
reporting periods ending after June 15, 2010. As a result, ASU No. 2010-09
excludes SEC reporting entities from the requirement to disclose the date on
which subsequent events have been evaluated; In addition, it modifies the
requirement to disclose the date on which subsequent events have been evaluated
in reissued financial statements to apply only to such statements that have been
restated to correct an error or to apply U.S. GAAP retrospectively.
(u)
Significant
risks
Credit
risk
Financial
instruments that potentially expose the Company to concentrations of credit risk
consist primarily of cash, cash equivalents, accounts receivables and other
receivable. The Company places its cash and cash equivalents, amounted to
$3,814k and $7,279k as of June 30, 2010 and 2009, with financial institutions
that management believes is of high-credit ratings and quality.
The
Company conducts credit evaluations of customers and generally does not require
collateral or other security from its customers. The Company establishes an
allowance for doubtful accounts primarily based upon the age of the receivables
and factors surrounding the credit risk of specific customers.
Foreign
currency risk
A
majority of the Company’s sales and expenses transactions and a significant
portion of the Company’s assets and liabilities are denominated in RMB. The RMB
is not freely convertible into foreign currencies. In the PRC, certain foreign
exchange transactions are required by law to be transacted only by authorized
financial institutions at exchange rates set by the People’s Bank of China
(“PBOC). Remittances in currencies other than RMB by the Company in China must
be processed through the PBOC or any other China foreign exchange regulatory
body which require certain supporting documentation in order to affect the
remittance.
The
Company receives Commercial Notes (Bank Acceptance) from the customers in lieu
of the payments for accounts receivable. Most of the Commercial Notes have a
maturity of less than six months. As of June 30, 2010 and 2009, the Company had
notes receivable of $7,295k and $1,951k, respectively.
Due from
owners are rental receivables from above owners who lease brine pans from the
Company. Lu Junping. Shen Zhaofa and Wang Yunyu hold 1.2%, 0.4% and 0.4% of
the ownership of the Company respectively.
The
Company reviews its inventories periodically for possible obsolete or damaged
goods to determine if any allowance is needed. As of June 30, 2010 and 2009, the
Company determined that no allowance was necessary.
The
Company rents part of its brine pans to lessees. The rental income is recorded
on an accrual basis based upon the lease term. Rental receivable represents
outstanding brine pan rental receivables from lessees. As of October 31,2010the Company collected $2,207k of amounts outstanding at June 30,2010.
F-48
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
11.
PREPAYMENTS
As
of June 30,
2010
2009
US $(’000)
US $(’000)
Brine
pan lease payments
$
442
$
-
Advance
to purchase department
1,003
996
Prepaid
land lease payment
-
261
Advance
to suppliers
786
366
Others
119
90
$
2,350
$
1,713
Brine pan
lease payments represents prepaid rental for leasing brine pans in Dongying
City, Shandong Province. Advance to purchase department is for the purchase of
raw material and has been returned to the Company as of October 31,2010.
12.
PROPERY
AND EQUIPMENT, NET
Property
and equipment consist of the following:
As
of June 30,
2010
2009
US $(’000)
US $(’000)
Machinery
$
9,062
$
7,839
Plant
and buildings
7,718
6,681
Brine
pan & Motor pump well
5,589
4,771
Plastic
membrane
1,978
1,968
Motor
vehicle
531
548
Office
equipment
268
87
Construction
in process
3,147
768
Less:
accumulated depreciation
(6,883
)
(4,815
)
$
21,410
$
17,847
For the
years ended June 30, 2010 and 2009, depreciation expense totaled $2,313k and
$2,173k respectively. During years ended June 30, 2010 and 2009, property and
equipment with net book value of $23k and $13k were disposed
respectively.
13.
ACQUISITIONS
AND IMPAIRMENT OF INTANGIBLE ASSETS
On
November 6, 2009, Shandong Haiwang acquired Dongying Haihui Industrial and Trade
Co. Ltd (“Dongying Haihui”), a company engages in production and sales of
bromine, for the purpose of expanding the Company’s production capacity.
Shangdong Haiwang paid $293k for the purchase of 100% equity in Dongying
Haihui.
F-49
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The
accounts of Dongying Haihui have been consolidated in the financial statements
since November 6, 2009; all intercompany transactions have been eliminated. The
following table summarizes the allocation of purchase price to the fair value of
the Company’s share of the net assets acquired as of the acquisition
date:
Fixed
assets, Construction in process & deferred asset
1,126
Total
assets acquired
1,592
Less
current Liabilities
(1,299
)
Net
assets acquired
293
Total
$
293
14.
INVESTMENT
IN AFFILIATE
As
of June 30,
2010
2009
US $(’000)
US $(’000)
Shandong
Haiheng Chemical Co., Ltd
$
2,158
$
2,146
The
Company holds 10% equity interest in Shandong Haiheng Chemical Co., Ltd, and
equity interest is accounted for under the cost method.
15.
LAND
USE RIGHTS
As
of June 30,
2010
2009
US $(’000)
US $(’000)
Land
use rights cost
$
17,815
$
11,393
Less:
accumulated amortization
(570
)
(302
)
Land
use rights, net
$
17,245
$
11,091
F-50
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Land use
rights are amortized over 50 years with $0 residual value. For the years ended
June 30, 2010 and 2009, the aggregated amortization expenses were $265k and
$248k, respectively. Amortization of land use rights attributable to future
periods is as follows:
For
years ended June 30,
Amortization
US $(’000)
2011
$
356
2012
356
2013
356
2014
356
2015
356
2016
and there after
15,465
Total
$
17,245
As of
June 30, 2010, land use rights with a net book value of $10,083k (5,588k as of
June 30, 2009) are pledged as collateral in connection with the bank loan of
$16,185k(9,669k as of June 30, 2009) granted to the Company.
16.
DEFERRED
TAX ASSET
As
of June 30,
2010
2009
US $(’000)
US $(’000)
Deferred
tax asset
$
81
$
49
Deferred
tax assets are generated by provision of accounts receivable which are not
tax-deductible under PRC tax law until the receivable is actually write
off.
17.
NOTES
PAYABLE
The
Company purchases raw materials from its suppliers and delivers Commercial Notes
(Bank Acceptance) to the suppliers in lieu of the payments for accounts payable.
Most of the Commercial Notes have a maturity of less than six months. As of June30, 2010 and December 31, 2009, the Company had notes payable of $6,201k and
$17,580k, respectively
18.
ADVANCE
FROM CUSTOMERS
As
of June 30,
2010
2009
US $(’000)
US $(’000)
Advances
from customers
$
449
$
384
F-51
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The
advances from customers represent the upfront payment received from the
customers in accordance with the sales contracts payment schedule.
19.
OTHER
PAYABLES AND ACCRUALS
As
of June 30,
2010
2009
US $(’000)
US $(’000)
Payable
to salt pan lessees
$
907
$
741
Construction
related payable
348
-
Other
payables
278
366
Accrued
interest
166
-
Other
levies
149
95
Accrued
payroll
56
105
$
1,904
$
1,307
Payable
to salt pan lessees represents a one-time government compensation to the salt
pans lessees for requisition of land for public utilities construction. Shandong
Haiwang received the compensation from the government on behalf of the lessees
and shall distribute the amount to the lessees.
20.
TAX
PAYABLE
The
Company is governed by the income tax law of the PRC and is subject to PRC
enterprise income tax (“EIT”). Effective from January 1, 2008, the EIT
rate of PRC changed from 33% to 25%, and applies to both domestic and foreign
invested enterprises.
Floating
lending rate, 5% up benchmark interest rate of the lending date (annual
rate 5.6700%), adjustable in line with basic interest rate announced by
PBOC every 12 months. Pledged with land use right No. 2008-c103 of the
Company 328,000 Square meters (“m2”)
With
a net book value of $4,326k.
$
-
$
1,465
Industrial
Bank Weifang Branch
Fixed 5.31%
annual rate, Pledged with land use right No. 2008-c105 of the Company
79,294 m2 with
a net book value of $1,046k and guaranteed by the
Chairman Mr. Chunbin Yang
-
1,465
Bank
of China Kuiwen Branch
Fixed 8.2170%
annual rate, Pledged with land use right No. 2006-c078 of the Company
96,815 m2 with
a net book value of $216k.
-
1,465
Bank
of China Kuiwen Branch
Fixed 8.2170%
annual rate, Pledged with equipment of the Company evaluated at
$14,653k.
-
2,930
Bank
of China Kuiwen Branch
Fixed 7.9200%
annual rate, Pledged with land use right No. 2006-c078 of the Company
96,815 m2 with
a net book value of $216k.
-
879
China
Construction Bank Weifang Gaoxin Branch
Floating
rate, 10% down benchmark interest rate of the lending date (annual
rate 5.3100 %), adjustable in line
with basic interest rate announced by PBOC every 12
months.
4,419
-
Industrial
Bank Weifang Branch
Fixed 5.3100%
annual rate, Guaranteed by the Chairman Mr. Chunbin Yang and Pledged with
land use right No. 2009-G232 of the Company 28,773 m2 and
land use right No. 2009-G231 of the Company 30,443 m2 with
a total net book value of $1,486k.
1,308
-
Shanghai
Pudong Development Bank Jinan Branch
Fixed 5.3100%
annual rate, Guaranteed by the Chairman Mr. Chunbin Yang and Weifang Haike
Chemical Co., Ltd.
2,946
-
Shanghai
Pudong Development Bank Jinan Branch
Fixed 5.3100%
annual rate, Guaranteed by the Chairman Mr. Chunbin Yang and Weifang Haike
Chemical Co., Ltd.
2,946
-
Evergrowing
Bank Qingdao Development Area Branch
Floating
lending rate, annual rate 5.3100%, adjustable in line with basic interest
rate announced by PBOC every month. Guaranteed by the Chairman Mr.
Chunbin Yang and Weifang Haike Chemical Co., Ltd.
2,946
-
Bank
of Communications Hanting Branch
Floating
lending rate, annual rate 5.3100%, adjustable in line with basic interest
rate changes announced by PBOC every time. Pledged with land use right No.
2007-c191 of the Company 195,683 m2 with
a net book value of $1,079k.
2,946
-
$
17,511
$
8,204
F-54
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
As of
June 30, 2010, short-term bank borrowings have maturity terms ranging from
two to twelve months. There is a total of
$5,156k unused line of
credit as of
June 30, 2010
Floating
lending rate, 10% up benchmark interest rate of the lending date (annual
rate 7.56%), adjustable in line with basic interest rate announced by PBOC
every 12 months. Guaranteed by Hanting Power Supply Company and
pledged with The Company’s machinery valued at $6,303k.
Floating
lending rate, 5% up benchmark interest rate of the lending date (annual
rate 5.4%), adjustable in line with basic interest rate announced by PBOC
every 12 months. Pledged with land use right No. 2008-c103 of the Company
328,000 m2 with
a net book value of $4,261k..
Floating
lending rate, 5% up benchmark interest rate of the lending date (annual
rate 5.4%), adjustable in line with basic interest rate announced by PBOC
every 12 months. Pledged with land use right No. 2008-c105 (77,927 m2 of
total 233,889 m2)
of the Company with a net book value
of $1,012k..
Floating
lending rate, 5% up benchmark interest rate of the lending date (annual
rate 5.4%), adjustable in line with basic interest rate announced by PBOC
every 12 months. Pledged with land use right No. 2006-c078 of 96,815
m2 of
the Company with a net book value
of $218k.
Floating
lending rate, 5% up benchmark interest rate of the lending date (annual
rate 5.4%), adjustable in line with basic interest rate announced by PBOC
every 12 months. Pledged with land use right No. 2008-c105 (155,962 m2 of
total 233,889 m2)
of the Company with a net book value
of $2,026k.
Floating
lending rate, 5% up benchmark interest rate of the lending date (annual
rate 5.6700%), adjustable in line with basic interest rate announced by
PBOC every 12 months. Pledged with land use right No. 2008-c103 of the
Company 328,000 m2 with
a net book value of $4,261k.
Floating
lending rate, 10% up benchmark interest rate of the lending date (annual
rate 8.316%), adjustable in line with basic interest rate announced by
PBOC every 12 months. Guaranteed by Shandong Morui Chemical Co.,
Ltd.
The
balance of June 30, 2009 of $2,930k with maturity date of April 14, 2011 was
repaid in year 2010 in accordance with acceleration clause. $4,418k will
be repaid to bank in fiscal year 2012 and $6,040k will be repaid in fiscal year
2013. There are a total of $1,620k unused bank facilities as of June 30,2010.
The
Company leases part of its brine pans to contractors and in return
collects rental according to rental contracts. The brine pan rental cost
represents the cost of processed brine water flown to the salt pans for
instilling crude salt.
A
property owned by the Company is leased to local government. The property rental
cost includes the depreciation expense, property tax and business tax of rental
income related to the property.
Gain
from disposal of equity interest in Shandong Haiheng
$
-
$
1,253
F-56
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Prior to
September 20, 2008, Shandong Haiwang recognized investment
loss using equity method for its 50% equity interest in Shandong
Haiheng. On September 20, 2008, Shandong Haiwang disposed
its 40% interest in Shandong Haiheng in exchange for cash of RMB56 million
(US$8,204k), resulting in a gain of $1,253k. After the disposal Shandong
Haiwang adopted cost method to account for its 10% interest in Shandong
Haiheng.
Shandong
Haiheng Chemical Co., Ltd is an associate in which Shandong Haiwang holds 10%
ownership. Weifang Haike Chemical Co., Ltd’s owner is the key management of
Shandong Haiwang. Shandong Haiwang provided interest bearing loans to these
parties with interest rate range from 5% to 6%. Amounts due from these parties
were fully collected as of June 30, 2010.
The
related party balance for June 30, 2010 was outstanding receivables for products
sold to Weifang Haike Chemical Co., Ltd. The balance of June 30, 2009 was
advance payment to Shandong Haiheng Chemical Co., Ltd to purchase raw
material.
As
of June 30,
2010
2009
US $(’000)
US $(’000)
Due
to related company:
Shandong
Haiheng Chemical Co., Ltd
$
575
$
-
The
balance represents outstanding payment for the purchase of raw material from
Shandong Haiheng.
Mr.
Chunbin Yang along with Weifang Haike Chemical Co., Ltd provided guarantee for
the Company’s short-term bank loan of $8,838k and $0 as of June 30, 2010 and
2009. Mr. Chunbin Yang individually provided guarantee for the Company’s
short-term bank loan of $1,308k and $1,465k as of June 30, 2010 and 2009
respectively.
The
Company holds 10% equity interest in Shandong Haiheng Chemical Co., Ltd. Weifang
Haike Chemical Co., Ltd’s owner is a key management of Shandong Haiwang. The
Company sells crude salt to these parties and purchases raw material from them.
Market price was used for both the sales and purchase transactions with related
parties.
28.
BUNINESS
SEGMENTS
The
Company follows ASC Topic 280 “Segment report”, which requires the Company to
provide certain information about their operating segments. This
classification is based on the nature of the products consistent
with the method by which the Company’s chief operating decision-maker assesses
the operating performance and allocates resources. The Company has two
reportable segments: bromine and crude salt and specialty chemical
products.
Bromine
Specialty
and
Crude
Chemical
Segment
Consolidated
Salt
Products
Total
Corporate
Total
Jun
30 2010
Revenue
$
45,122
$
19,474
$
64,596
$
196
$
64,792
Cost
(31,913
)
(15,865
)
(47,778
)
(267
)
(48,045
)
Operation
expenses
(5,208
)
(137
)
(5,345
)
(968
)
(6,313
)
Income
(loss) from operations
8,001
3,472
11,473
(1,039
)
10,434
Total
assets
55,516
13,922
69,438
12,392
81,830
Depreciation
and amortization
1,912
164
2,076
337
2,413
Capital
expenditures
9,759
954
10,713
74
10,787
Jun
30 2009
Net
revenue
41,969
7,684
49,653
206
49,859
Cost
(29,103
)
(7,202
)
(36,305
)
(221
)
(36,526
)
Operation
expenses
(5,602
)
(103
)
(5,705
)
(479
)
(6,184
)
Income
(loss) from operations
7,264
379
7,643
(494
)
7,149
Total
assets
48,813
6,651
55,464
12,796
68,260
Depreciation
and amortization
1,698
112
1,810
339
2,149
Capital
expenditures
10,946
503
11,449
203
11,652
F-59
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30,
Reconciliations
2010
2009
US $(’000)
US $(’000)
Total
segment operating income
$
11,473
$
7,643
Corporate
income (expenses)
(1,039
)
(494
)
Other
income (expense), net
(1,336
)
(1,351
)
Loss
from discontinued operation
-
-
Extraordinary
gain
-
431
Income
tax expense
(2,336
)
(1,497
)
Total
consolidated net income
$
6,762
$
4,732
29.
MAJOR
CUSTOMERS AND VENDORS
One of
the Company’s customers accounted for 16% of the Company’s total sales for years
ended June 30, 2009. None of other customers account for more than 10% of total
sales for years ended June 30, 2010. Accounts receivable for this customer
accounted for 9% and 12% of the Company’s total accounts receivable as of June30, 2010 and 2009, respectively.
One of
the vendors-Yangzi Power Supplying Company accounted for 22%, 22% and of the
total purchases for the fiscal years ended June 30, 2010 and 2009
respectively.
In February
2010 Shandong Haiwang signed a lease agreement with Shandong Wangdao
Aquaculture Co., Ltd (“Wangdao”) in Dongying City, Shandong Province. The
agreement states Shandong Haiwang would lease two pieces of aquatic land
from Wangdao, one for the period from February 1, 2010 to January 31,2025, and the other for the period from January 1, 2011 to December 31,2025. Shandong Haiwang would convert these two pieces of aquatic land into
salt pans. The annual rental is RMB1.05 (US$0.15) per square
meters. On December 20, 2010, Shandong Haiwang and Wangdao agreed that the
rental payments shall start and shall be calculated after the
construction of salt pan has been finished and the actual area of the salt
pan could be determined. The construction of the first salt pan was
finished on December 15, 2010 and the actual area is 6,000,000 square
meters.
F-60
SHANDONG
HAIWANG CHEMICAL STOCK CO., LTD
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
31.
SUBSEQUENT
EVENT
The
Company has evaluated subsequent events from the balance sheet date through the
date that the financial statements are issued and material subsequent event is
as follows:
On
December 20, 2010, Shandong Haiwang and Wangdao had an amendment to the lease
agreement signed in February 2010 see Footnote #30 for
details.
F-61
No
dealer, salesperson or other person is authorized to give any information or to
represent anything not contained in this prospectus. You must not
rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its
date.
HAIWANG
RESOURCES & TECHNOLOGY, LTD
Common
Shares
Minimum Offering: 4,500,000 Shares
Maximum
Offering: 5,175,000 Shares
Prospectus
Chardan
Capital Markets, LLC
Financial
West Group
Until
____________ (90 days after the commencement of this offering), all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in
addition to the dealer’s obligation to
deliver a prospectus when acting as a placement agent and with respect to unsold
allotments or subscriptions.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 13.
Other Expenses of Issuance and
Distribution.
The
estimated expenses payable by us in connection with the offering described in
this registration statement (other than the placement discounts and commissions)
will be as follows. With the exception of the filing fees for the U.S.
Securities Exchange Commission, FINRA and NASDAQ, all amounts are
estimates.
U.S.
Securities Exchange Commission registration fee
$
3,589
FINRA
filing fee
$
3,548
NASDAQ
listing fee
$
125,000
Legal
fees and expenses for Chinese counsel*
$
80,000
Legal
fees and expenses for British Virgin Islands counsel*
$
12,000
Legal
fees and expenses for U.S. counsel*
$
200,000
Accounting
fees and expenses*
$
185,000
Printing
fees*
$
30,000
Miscellaneous*
$
10,863
Total
$
650,000
Item 14.
Indemnification
of Directors and
Officers
British
Virgin Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except to
the extent any such provision may be held by the British Virgin Islands courts
to be contrary to public policy, such as to provide indemnification against
civil fraud or the consequences of committing a crime. Under the amended and
restated memorandum and articles of association of the Registrant, the
Registrant may indemnify its directors, officers and liquidators against all
expenses, including legal fees, and against all judgments, fines and amounts
paid in settlement and reasonably incurred in connection with civil, criminal,
administrative or investigative proceedings to which they are party or are
threatened to be made a party by reason of their acting as our director, officer
or liquidator. To be entitled to indemnification, these persons must have acted
honestly and in good faith with a view to the best interest of the Registrant
and, in the case of criminal proceedings, they must have had no reasonable cause
to believe their conduct was unlawful.
The
Placement Agreement, the form of which is filed as Exhibit 1.1 to this
registration statement, will also provide for indemnification of the Registrant
and its officers and directors.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Item 15.
Recent Sales of Unregistered
Securities
In the
past three years, we issued 50,000 shares in the aggregate to ten shareholders
upon the formation of the Registrant in transactions that were not required to
be registered under the Securities Act of 1933. We also anticipate that we will
issue an additional 21,130,000 shares prior to completion of this offering. The
distribution of such issuance will largely track the original 50,000 shares
issuance. All such issuances are deemed to be exempt under the Securities
Act by virtue of Section 4(2) thereof as transactions not involving any public
offering.
Consent
of Kaufman & Canoles, British Virgin Islands counsel (included in
Exhibit 5.2) (1)
23.3
Consent
of Beijing Kang Da Law Firm (included in Exhibit 99.1)
(1)
24.1
Power
of Attorney (included at page II-5) (1)
99.1
Form
of Opinion of Beijing Kang Da Law Firm (1)
99.2
Code
of Business Conduct and Ethics (1)
(1)
Filed
herewith.
(2)
To be filed by
amendment.
(b)
Financial Statement Schedules
None.
Item 17.
Undertakings
The
Registrant hereby undertakes:
(a)
to file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement
to:
II-2
(i)
include any prospectus required
by section 10(a)(3) of the Securities
Act;
(ii)
reflect in the prospectus any
facts or events which, individually or together, represent a fundamental
change in the information in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration
statement; and
(iii)
include any material information
with respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(b)
that, for the purpose of
determining any liability under the Securities Act, each 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.
(c)
to file a post-effective
amendment to remove from registration any of the securities that remain
unsold at the end of the
offering.
(d)
to file a post-effective
amendment to include any financial statements required by Form 10-K at the
start of any delayed
offering or throughout a continuous
offering.
(e)
that insofar as indemnification
for liabilities arising under the Securities Act may be permitted to
directors, officers
and controlling persons of the Registrant, the Registrant has been advised
that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the Registration of expenses incurred or paid by a
director, officer or controlling person to 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 of 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.
(f)
that, for the purpose of
determining liability under the Securities Act to any purchaser, each
prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in reliance on Rule
430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or
made in any such document immediately prior to such date of first
use.
(g)
that, for the purpose of
determining liability of the Registrant under the Securities Act to any
purchaser in the initial distribution of the securities, 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 Registrant will be a seller to the purchaser
and will be considered to offer or sell such securities to such
purchaser:
(i)
any
preliminary prospectus or prospectus of the Registrant relating to the
offering filed pursuant to Rule
424;
(ii)
any
free writing prospectus relating to the offering prepared by or on behalf
of the Registrant or used or referred to by the
Registrant;
(iii)
the
portion of any other free writing prospectus relating to the offering
containing material information about the Registrant or its securities
provided by or on behalf of the Registrant;
and
(iv)
any
other communication that is an offer in the offering made by the
Registrant to the
purchaser.
(h)
to provide to the Placement
Agents at the closing specified in the placement agent agreements,
certificates in such denominations and registered in such names as
required by the Placement Agents to permit prompt delivery to each
purchaser.
II-3
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the People’s Republic of China, on February 2, 2011.
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below does
hereby constitute and appoint Chunbin Yang as his true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement and sign any registration statement for the same offering covered by
this Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, as amended and all
post-effective amendments thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated: