SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K/A
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date
of
Report (Date of earliest event reported): April 14, 2008
SMARTHEAT
INC.
(Exact
Name of Registrant as Specified in Charter)
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Nevada
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333-139649
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98
-0514768
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(State
or other jurisdiction
of
incorporation)
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(Commission
File Number)
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(IRS
Employer
Identification
No.)
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A-1,
10, Street 7
Shenyang
Economic and Technological Development Zone
Shenyang,
China
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110027
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: +86
(24) 2519-7699
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Pacific
Goldrim Resources, Inc.
1445
Pendrell Street, Suite 202
Vancouver,
British Columbia
Canada
V6C 1S3
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(Former
name or former address, if changed since last
report)
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Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
·
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
·
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 DFR
240.14a-12)
·
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
·
Pre-commencement
communications pursuant to Rule 13e-4 (c) under the Exchange Act (17 CFR
240.13e-4(c))
CURRENT
REPORT ON FORM 8-K
SMARTHEAT
INC.
TABLE
OF CONTENTS
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Page
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Item
1.01
Entry
into a Material Definitive Agreement.
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3
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Item
2.01
Completion
of Acquisition of Disposition of Assets
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4
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The
Share Exchange
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4
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Description
of our Company
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6
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Description
of our Business
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6
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Management
Discussion and Analysis of Plan of Operations
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13
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Risk
Factors
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21
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Security
Ownership of Certain Beneficial Owners and
Management
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36
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Executive
Officers and Directors
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37
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Certain
Relationships and Related Transactions
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39
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Item
3.02
Unregistered
Sales of Equity Securities.
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39
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Item
4.01
Changes
in Registrant's Certifying Accountant
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41
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Item
5.01
Changes
in Control of Registrant
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42
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Item
5.02
Departure
of Directors or Principal Officers; Election of Directors; Appointment
of
Principal Officers.
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42
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Item
5.03
Amendments
to Articles of Incorporation or Bylaws, Change in Fiscal
Year
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43
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Item
5.06
Change
in Shell Company Status
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43
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Item
9.01
Financial
Statements and Exhibits
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43
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On
April
14, 2008, Pacific Goldrim Resources, Inc., a Nevada corporation (the "Company"),
entered into and consummated a series of agreements which resulted in the
acquisition of all of share capital of Shenyang Taiyu Machinery & Electronic
Equipment Co., Ltd, a plate heat exchange products company organized under
the
laws of the People's Republic of China ("Taiyu"), the divestiture of the
Company's prior exploration business, and the change of the Company's name
to
SmartHeat Inc.
The
name
change was accomplished on April 14, 2008 by merging the Company's wholly owned
subsidiary SmartHeat Inc., a Nevada corporation ("SmartHeat"), into the
Company.
The
acquisition of Taiyu's share capital was accomplished pursuant to the terms
of a
Share Exchange Agreement dated April 14, 2008 (the "Share Exchange Agreement")
by and among SmartHeat, Taiyu and all of the shareholders of Taiyu (the "Taiyu
Shareholders"). At the closing under the Share Exchange Agreement all
of the equitable and legal rights, title and interests in and to Taiyu's share
capital in the amount of Yuan 25,000,000 was exchanged for an aggregate of
18,500,000 shares of SmartHeat common stock (the "Share
Exchange"). As a result of the Share Exchange, Taiyu became a
wholly-owned subsidiary of SmartHeat.
In
addition, the following actions occurred under the terms of the Share Exchange
Agreement:
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Immediately
following the closing of the Share Exchange, the Company transferred
all
of its pre-closing assets and liabilities (other than the obligation
to
pay a $10,000 fee to the Company's audit firm) to a wholly owned
subsidiary, PGR Holdings, Inc., a Nevada corporation ("SplitCo"),
under
the terms of an Agreement of Conveyance, Transfer and Assignment
of Assets
and Assumption of Obligations dated April 14, 2008 (the "Transfer
Agreement"). The Company also sold all of the outstanding
capital stock of SplitCo to Jason Schlombs (the former director and
officer, and a major shareholder, of the Company) pursuant to a Stock
Purchase Agreement dated April 14, 2008 (the "Split-Off Agreement")
in
exchange for the surrender of 2,500,000 shares of the Company's common
stock held by Mr. Schlombs (the
"Split-Off").
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As
a condition to the closing of the Share Exchange, Mr. Jun Wang, the
Chairman and Chief Executive Officer of Taiyu was appointed to the
board
of directors of the Company and Mr. Schlombs, the former sole member
of
the board of directors of the Company resigned, effective as of the
close
of business on April 15, 2008. As a requirement to listing the
Company's common stock on the NASDAQ Capital Market or other exchange,
the
Company will seek to add additional independent directors and increase
the
size of the board of directors following the Share
Exchange. The board's composition (and that of its committees)
will be subject to the corporate governance provisions of its primary
trading market, including the requirement for appointment of independent
directors in accordance with the Sarbanes-Oxley Act of 2002, and
regulations adopted by the SEC and NASD pursuant
thereto.
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Also
as a condition to the closing of the Share Exchange, Mr. Schlombs
resigned
as the President, Chief Executive Officer, Secretary and Treasurer
of the
Company and Mr. Jun Wang was appointed as President and Chief Executive
Officer, Ms. Zhijuan Guo was appointed as Chief Financial Officer
and Ms.
Huajun Ai was appointed as Corporate
Secretary.
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Each
of
the Share Exchange Agreement, Transfer Agreement, and Split-Off Agreement
contained such representations, warranties, obligations and conditions as are
customary for transactions of the type governed by such agreements.
As
a
result of the Share Exchange and the cancellation of the 2,500,000 shares of
the
Company's common stock pursuant to the Split-Off Agreement, there are 22,549,900
shares of the Company's common stock issued and outstanding, approximately
82.04% of which are held by the former Taiyu Shareholders. The
shareholders of the Company immediately prior to the completion of these
transactions hold the remaining 17.96% of the issued and outstanding share
capital of SmartHeat.
As
of the
date of the Share Exchange Agreement and currently, there were no material
relationships between the Company and Taiyu, or any of their respective
affiliates, directors or officers, or any associates of their respective
officers or directors, other than in respect of the Share Exchange
Agreement.
The
foregoing description of the Share Exchange Agreement, Transfer Agreement,
and
Split-Off Agreement do not purport to be complete and is qualified in its
entirety by reference to the complete text of the Share Exchange Agreement,
Transfer Agreement, and Split-Off Agreement which are filed as exhibits hereto
and incorporated herein by reference.
Item
2.01 Completion
of Acquisition of Disposition of Assets
The
Share Exchange
The
Share Exchange
On
April
14, 2008, the Company entered into the Share Exchange Agreement with Taiyu
and
the Taiyu Shareholders. Upon closing of the Share Exchange on April
14, 2008, the Company acquired all of the equitable and legal rights, title
and
interests in and to the share capital of Taiyu and Taiyu became a wholly-owned
subsidiary of the Company. Pursuant to the Share Exchange Agreement,
at closing, the Taiyu Shareholders received an aggregate of 18,500,000 shares
of
the Company's common stock in exchange for all of their equitable and legal
rights, title and interests in and to Taiyu's share capital in the amount of
Yuan 25,000,000.
Immediately
following the closing of the Share Exchange, under the terms of the Transfer
Agreement, except for fees up to an amount of $10,000 due and owing to the
Company's audit firm as of April 14, 2008, the Company transferred all of its
pre-closing assets and liabilities to SplitCo. Immediately thereafter
pursuant to the Split-Off Agreement, the Company transferred all of its interest
in SplitCo to Mr. Schlombs in exchange for the surrender and cancellation of
2,500,000 shares of the Company's common stock held by him. After
giving effect to the cancellation of those shares in the Split-Off, the
stockholders of the Company immediately preceding the Share Exchange held
4,049,900 shares of the Company's common stock before giving effect to the
stock
issuances in the Share Exchange. Such 4,049,900 shares constitute the
Company's "public float" prior to the Share Exchange and will continue to
represent the shares of our common stock held for resale without further
registration by the holders thereof until such time as the applicability of
Rule
144 of the Securities Act of 1933, as amended, (the "Securities Act") or other
exemption from registration under the Securities Act permits sales of the shares
issued to the Taiyu Shareholders, or a registration statement has been declared
effective with respect to such shares. Pursuant to the plan of
distribution described in a registration statement on Form SB-2 filed by the
Company during 2006, the registered public float shares may be sold in one
or
more transactions, including block transactions; on such public markets or
exchanges as the common stock may from time to time be trading; in privately
negotiated transactions; or in any combination of these methods of distribution
and as otherwise described in the Form SB-2 Registration Statement.
As
a
result of the Share Exchange and the Split-Off, Taiyu became a wholly-owned
subsidiary of the Company and the Taiyu Shareholders now hold approximately
82.04% of the Company's outstanding common stock. The shareholders of
the Company immediately prior the Share Exchange and Split-Off hold the
remaining 17.96% of the issued and outstanding shares of the Company's common
stock.
Prior
to
the closing of the Share Exchange, there were no options or warrants to purchase
shares of capital stock of SmartHeat or Taiyu outstanding and neither the
Company nor Taiyu had adopted an equity incentive plan or otherwise reserved
shares for issuance as incentive awards to officers, directors, employees and
other qualified persons in the future.
The
shares of the Company's common stock issued to the Taiyu Shareholders in
connection with the Share Exchange were not registered under the Securities
Act,
in reliance upon the exemption from registration provided by Regulation S
promulgated under the Securities Act. These securities may not be
offered or sold in the United States absent registration or an applicable
exemption from the registration requirements. Certificates
representing these shares contain a legend stating the same.
As
of the
date of the Share Exchange Agreement there were no material relationships
between the Company and Taiyu, or any of their respective affiliates, directors
or officers, or any associates of their respective officers or directors, other
than in respect of the Share Exchange Agreement.
Changes
Resulting from the Share Exchange
The
Company intends to carry on Taiyu's business as its sole line of
business. The Company has relocated its executive offices to A-1, 10,
Street 7, Shenyang Economic and Technological Development Zone, Shenyang 110027,
Peoples Republic of China, and its telephone number is +86 (24)
2519-7699.
The
stockholders of the Company immediately preceding the Share Exchange will not
be
required to exchange their existing Goldrim stock certificates for certificates
of the Company stating its new name, since the OTC Bulletin Board will consider
the existing stock certificates as constituting "good delivery" in securities
transactions subsequent to the Share Exchange. The American Stock
Exchange and Nasdaq SmallCap Market will also consider the submission of
existing stock certificates as "good delivery," in the event that the Company's
shares are ever listed on those exchanges. The Company cannot be
certain that it will receive approval to list its common stock on any exchange
or market should it apply for such listing.
Changes
to the Board of Directors
Mr.
Jun
Wang, the Chairman and Chief Executive Officer of Taiyu was appointed to the
board of directors of the Company effective as of the closing on June 14,
2008. Mr. Jason Schlombs resigned as a director, effective as of the
close of business on June 15, 2008. As a result, Mr. Jun Wang became
our sole member of our board of directors.
Following
the Share Exchange, Mr. Schlombs resigned as President, Chief Executive Officer,
Secretary and Treasurer of the Company and Mr. Jun Wang was appointed as
President and Chief Executive Officer, Ms. Zhijuan Guo as Chief Financial
Officer and Ms. Huajun Ai as Corporate Secretary.
The
sole
director holds office for a one-year term until the election and qualification
of his successor(s). Officers are elected by the board of directors
and serve at the discretion of the board.
Accounting
Treatment; Change of Control
The
Share
Exchange is being accounted for as a "reverse acquisition," since the
stockholders of Taiyu own a majority of the outstanding shares of the Company's
common stock immediately following the Share Exchange. Taiyu is
deemed to be the acquiror in the reverse acquisition. Consequently,
the assets and liabilities and the historical operations that will be reflected
in the financial statements prior to the Share Exchange will be those of Taiyu
and will be recorded at the historical cost basis of Taiyu, and the consolidated
financial statements after completion of the Share Exchange will include the
assets and liabilities of the Company and Taiyu, historical operations of Taiyu
and operations of the Company from the closing date of the Share
Exchange. Except as described in the previous paragraphs, no
arrangements or understandings exist among present or former controlling
stockholders with respect to the election of members of the Company's board
of
directors and, to our knowledge, no other arrangements exist that might result
in a change of control of the Company. Further, as a result of the
issuance of the shares of the Company common stock pursuant to the Share
Exchange, a change in control of the Company occurred on the date of the
consummation of the Share Exchange. The Company will continue to be a
"small business issuer," as defined under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), following the Share Exchange.
Tax
Treatment
The
Split-Off of SplitCo will result in taxable income to the Company in an amount
equal to the difference between the fair market value of the assets transferred
and the Company's tax basis in the assets. Any gain recognized, to
the extent not offset by the Company's net operating losses carry-forwards,
if
any, will be subject to federal income tax at regular corporate income tax
rates.
Description
of our Company
We
were
incorporated in the State of Nevada on August 4, 2006 under the name Pacific
Goldrim Resources, Inc. as an exploration stage corporation that intended to
engage in the exploration of silver, lead and zinc. On April 14, 2008
we changed our name to SmartHeat Inc. and acquired all of the equity interests
in Shenyang Taiyu Machinery & Electronic Equipment Co., Ltd. ("Taiyu"), a
privately held company formed under the laws of the People's Republic of China
("China") engaged in the design, manufacture, sale, and servicing of plate
heat
exchange products in China.
Prior
to
our acquisition of Taiyu, we were in the development stage and had minimal
business operations. We had no interest in any property, but had the
right to conduct exploration activities on thirteen (13) mineral title cells
covering 270.27 hectares (667.85 acres) in the Slocan Mining Division of
southeastern British Columbia, Canada. In connection with the
acquisition of Taiyu, we transferred our prior assets and liabilities to a
wholly owned subsidiary and sold all of the outstanding capital stock of that
subsidiary to our former director and officer in exchange for 2,500,000 shares
of our common stock.
Taiyu
was
formed in July, 2002 under the laws of China and is headquartered in Shenyang
City, Liaoning Province, China. Taiyu designs, manufactures, sells,
and services plate heat exchangers ("PHEs"), compact plate heat exchanger units
("PHE Units"), and heat meters. Taiyu is an authorized dealer of
Sondex A/S, one of the world's leading PHE manufacturers. Taiyu sells
PHEs under the Sondex brand name and PHE Units under the Taiyu brand
name.
Description
of our Business
We
design, manufacture, sell, and service PHEs, PHE Units and heat meters for
a
broad range of industries, including petroleum refining,
petrochemicals, power generation, metallurgy, food & beverage, and chemical
processing. We sell PHEs under the Sondex brand and PHE Units that
are designed by our engineers and assembled with Sondex plates under our Taiyu
brand name. We are one of three authorized dealers of Sondex PHEs for
the industrial and energy sectors in China. Our Sondex distribution
territory is North China.
Industry
Overview
The
PHE
is a device which transfers energy, usually in the form of heat, from one fluid
to another across a solid surface. PHE analysis and design involves
both convection and conduction. PHEs were first invented in the mid
1920s to control pressure and temperature, and to increase energy efficiency
in
industrial use. The most common heat transfer product used
commercially up to date are shell-and-tube heat exchangers, which are still
being used in older buildings and manufacturing facilities in
China. This technology is being rapidly replaced by plate heat
exchangers which achieve superior heat transfer efficiency because of a larger
heat transfer surface area. PHEs can be installed in old buildings as
well as new ones since they are smaller than the traditional heat exchangers
and
fit with in existing installations.
Today,
heat exchangers are used in heat and power generation, HVAC and refrigeration,
chemicals & petrochemicals, steel & metallurgy, aeronautics, textiles,
food and beverage processing and various other manufacturing
industries. Heat transfer equipment is also being employed in new
energy applications such as wind, solar, biomass and waste
disposal.
Within
the PHE industry, manufacturers are differentiated primarily based upon their
reputation and the technology, improved efficiency, and durability of their
products. Given the growing importance of energy conservation and
waste reduction, PHEs are likely to play an increasingly important role in
many
industries.
Market
Overview
The
global market for heat transfer products and compact PHE Units in 2006 was
approximately $12 billion and $2.3 billion, respectively according to Alfa
Laval, a leading manufacturer in our industry. Large international
PHE producers include: Alfa Laval, Sondex, GEA, Tranter SWEP, Danfoss, and
Hisaka Works.
Heat
transfer technology was introduced to China in the 1960's from Russia, mainly
for applications in the petroleum industry. Foreign manufacturers
began to sell in China on a large commercial scale in the 1980's and have since
dominated the Chinese market. As domestic producers sprang up in the
late 1980's and 1990's they began to take an increasingly larger share of the
market. The past decade has seen the rise of many domestic
manufacturers along with joint venture operations between local and
international firms. Today the market is split between domestic
firms, foreign JVs and direct imports.
China
Heat Association believes that the domestic market for PHE products has been
growing at an annual rate of about 30% since 2000 and that it will continue
to
grow at a similar rate until 2010 due to the continuation of industrialization
and urbanization trends in China. New environmental policies and
regulations are also expected to have a positive impact on the demand for PHE
products.
Products
PHEs
PHEs
are
used in a wide range of industries with the principal demand originating in
the
following industries: petroleum refining, petrochemicals, power generation,
metallurgy, food & beverage, and chemical processing. PHEs are
constructed through the use of specifically manufactured stainless steel,
titanium, and nickel plates welded together and are often referred to as the
"PHE" within PHE Units. The quantity and size of the plates used
along with the total size of the PHE will vary according to the particular
application requirements but generally do not exceed the size of a large
refrigerator.
As
one of
the three authorized dealers of Sondex PHEs in China, we import finished
stainless steel plates from Sondex and assemble customized PHEs based on
client's specifications. All PHE design is done in-house by our
engineers utilizing Sondex tailored Paradox software. In the initial
year of our operations, the PHE was the cornerstone of our product
line. As an authorized Sondex dealer, we established a reputation as
a high quality provider of PHEs in China. In May 2003, we began to
sell customized PHE Units containing Sondex plates. While our direct
third-party sales of PHEs have declined in recent years, the quantity of plates
supplied through Sondex has continued to grow as they are incorporated in the
PHE Units we sell.
PHE
Units
PHE
Units
are mainly used in petroleum refining, chemicals and petrochemicals, energy
generation, HVAC, steel, medical, electronics, food & beverage processing
and other manufacturing sectors to reduce energy waste through heat recovery,
improve temperature and pressure controls and cool equipment. PHE
Units are built by integrating PHEs with various pumps, temperature sensors,
valves, and automated control systems to form a "unit" which is used along
with
other units to form a "PHE network" installed in the local district heating
systems. We specialize in making PHE Units for HVAC systems in
residential and commercial buildings.
According
to China's Ministry of Construction data, 2007 domestic demand for PHE Units
in
China was estimated at $139 million, and combined with the replacement of shell
and tube heat exchangers is expected to increase by approximately 70% annually
through 2010.
We
began
designing, manufacturing and selling our branded PHE Units in May
2003. Our PHE Units are designed in-house by our system engineers
employing online customized CAD design software based on Solid Works software
which is integrated with our real-time enterprise resource planning system
databases. This advanced design platform provides the following
benefits:
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We
can provide accurate price quotes
instantly;
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Our
purchasing function is immediately notified of any additional material
orders needed; and,
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Our
manufacturing operations are able to schedule production so that
goods are
delivered on a just-in-time basis.
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The
production and sale of PHE Units have been central to the Company's
growth. PHE Units require a comparatively higher level of technical
skill and knowledge of the application markets and this is reflected in the
price. In the recent years, PHE Unit sales have contributed
significantly to our revenue growth and high margins. Less than five
years after entering the market, we have emerged as a leading domestic producer
of PHE Units, with approximately 8%share of the market in China.
Heat
Meters
Heating
companies in many western countries have long used meters to measure customer
heat usage and invoice customers. However, Chinese residents and
commercial customers are largely billed based on the square footage of their
utilized space. Meters indicate heat in legal heat units and the
calibration of meters in many countries is regulated by government agencies
and
subject to local or national guidelines. Due to rising energy costs
and the increased sensitivity to environmental issues, Chinese government and
local utility companies have recently made the use of heat meters compulsory
in
several cities in China. As of January 2007, heat meters are required
by law in the cities of Tianjin, Xingtai, Chengde, and Handan.
Using
our
established relationships with provincial governments and utility companies
throughout China, we introduced our patented heat meters to the market during
the second quarter of 2006. Sales to date have been
insignificant. However, in 2008 we plan to work with the various
government entities to establish a national heating standard and become an
active participant in China's heat meter market in the coming
years.
Production
We
conduct all manufacturing activities at our Shenyang plant. We
generally operate on an 8 hour shift, with the exception of the high season
from
May to November, during which we may operate the plant for 11-12 hours a
day. Production is driven by orders from clients and is scheduled on
a just-in-time delivery basis. Our Shenyang facility currently has
the capacity to produce 10 PHEs, 3 PHE Units, and 50 heat meters per
day.
Marketing
Since
our
entry into the market for PHE Units in May 2003, the Taiyu brand name has been
promoted in conjunction with quality production and first-rate service by means
of our successful track record, industry trade fairs and establishing and
maintaining positive relationships with local governments in Beijing, Shenyang,
Urumqi, Shandong, Jiangsu and Shanghai. We attend the bi-annual HVAC
trade fair in Shanghai and Chinese environmental protection forums and we visit
the local utilities companies, oil refiners, steel and food & beverage
companies. Marketing costs are generally funded through working
capital and expensed as incurred.
Suppliers
Plates
Plates1
are
supplied by Sondex under the terms of our Sondex authorized dealer
arrangement. We generally order stainless steel plates 2-3 months in
advance based on production needs and forecasted sales. Plate
purchases generally constitute 40% of our total annual raw material
purchases. While we are an authorized dealer, annual or quarterly
purchasing prices are not fixed and fluctuate according to Sondex's most recent
pricing list.
1
All
plates sold by Sondex to Taiyu contain gaskets unless otherwise
specified.
Components
Components
generally include pumps, valves, pipes, and electronic meters purchased from
a
variety of international (Siemens, Wilo A.G., Honeywell) and domestic suppliers
who have been certified to meet Taiyu's quality
specifications. Components are ordered on an as needed
basis. Plates and components together constituted approximately 98%
of raw materials purchases in 2007.
Customers
We
sell
both directly through our sales force and through a network of 29 national
distributors located throughout China. Our customer base consists
mainly of large companies with the 10 largest customers accounting for over
60%
of our total sales. The 10 largest customers and respective revenues
during 2007 are as follows:
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Customer
Name
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Sales ($000s) 2007
|
|
% of Sales 2007
|
|
|
Dalkia
(Jiamusi) Heat & Power
|
|
$
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2,790
|
|
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21.0
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%
|
|
Urumqi
Heat Power Co. Ltd
|
|
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1,256
|
|
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9.5
|
%
|
|
Sinopec
Shenli Oil Field
|
|
|
892
|
|
|
6.7
|
%
|
|
Shenyang
Huanggu Thermo Electric Heating Inc.
|
|
|
848
|
|
|
6.4
|
%
|
|
Northern
United Electric Co. Ltd., Qingshan
|
|
|
634
|
|
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4.8
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%
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|
YSKN
(Beijing) Machinery & Elec Dev. Co.
|
|
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527
|
|
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4.0
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%
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|
Shenyang
Power Co., Ltd., No.3
|
|
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452
|
|
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3.4
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%
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|
Tianjin
Binhai Machinery & Elec Equip Co. Ltd
|
|
|
423
|
|
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3.2
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%
|
|
Shenyang
Longyan Heating Co., Ltd
|
|
|
373
|
|
|
2.8
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%
|
|
Yingkou
Development and Construction Co. Ltd
|
|
|
362
|
|
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2.7
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%
|
|
Sales
to Top 10 Customers
|
|
$
|
8,557
|
|
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64.5
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%
|
|
Total
Sales
|
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$
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13,273
|
|
|
|
|
Each
sale
can range from $2,500 to $500,000 and up depending on the client's
needs. Contract implementation generally takes one to six
months. Outstanding receivables are collected upon completion of work
with the exception of a 10% warranty hold-back that remains unpaid and
outstanding for 12-18 months following delivery and contract
completion. All of our work is performed based on written contracts
and there are no oral contracts. Historically, the Company has not
had any uncollected warranty hold-backs.
Intellectual
Property
We
use
the Taiyu brand name on all the PHE Units and heat meters we sell. We
have applied to the China Trademark Bureau for the registration of this trade
name and we are awaiting approval of our application. We believe that
the Taiyu brand name is recognized in China's heating industry for quality
and
efficiency. We have five registered patents in China for both PHE
products and heat meters.
These
patents are integral to our ability to create and design PHEs and PHE
Units. To the extent third parties utilize such patents in their
work, we do not receive royalties or licensing fees from any such third
parties.
Research
and Development
To
maintain our competitive edge in the marketplace and keep pace with new
technologies, constant research and development work is required to find
improved efficiencies in design, cost, and energy capture. While the
core technology for plate production remains with Sondex, our competitive
advantage in the market stems from our engineering and system design
capabilities.
Research
and development costs are funded through working capital and expensed as
incurred. We plan to spend approximately $110,000 in 2008 on
identifying new industry applications for PHEs, improving the accuracy of heat
meters, designing heat meters for industrial usage, developing multifunctional
PHE units and modifying PHE designs to meet the current market
demand.
While
we
have no formal written alliances with the universities, we work with several
professors who are heat transfer experts on an individual consulting
basis.
Governmental
and Environmental Regulation
While
our
PHE & PHE Units business and products are not subject to any material
regulation by the Chinese government or other national agency, we have obtained
National Safety Certification for our PHE products and we are an ISO 9000
certified manufacturer. The National Safety Certification is not
required for either production or sale of PHE products. However,
obtaining this certification confirms our commitment to safety and
quality. For companies in industries utilizing high temperatures or
pressure in their production processes, the certification is of critical
importance in choosing a PHE provider. Of over 500 companies selling
PHEs in China, we believe that only 30 companies have obtained this
certification.
Conversely,
heat meters require a license for production and sale. We obtained
this license on August 12, 2005. The license is valid for 3 years
through August 11, 2008 at which time it will need to be renewed. The
Safety Bureau conducts site visits and inspections of documents on a periodic
basis to verify adherence to the standards.
While
heat meters are only required in four cities in which local legislation has
been
passed on requiring the installation of heat meters and so far no national
legislation has been passed requiring heat meters in the rest of China, expected
legislation in the coming year mandating such would likely impact National
certification standards. We plan to work with both the National and
local governments in establishing such standards.
Our
business and company registrations are in compliance with the laws and
regulations of the municipal governments of Shenyang and China.
We
are
subject to China's National Environmental Protection Law as well as local laws
regarding pollutant discharge, air, water, and noise pollution, with which
we
comply.
Competition
The
Company competes only in the domestic Chinese market. We believe our
competitive advantages lie in our superior engineering and design skills, our
affiliation with Sondex, the longevity and efficiency of the Sondex plates
we
use, our just-in-time delivery and the reliable after sale service we provide
through our local service centers.
PHEs
Alfa
Laval has the largest market share in mainland China. An assortment
of other foreign producers hold an aggregate market share of 20%, and the rest
of the market is divided among multiple domestic producers. While we
believe the quality or our PHEs is considered on par with Alfa Laval's, our
prices are approximately 15% lower. In comparison with the other
domestic producers, our prices are approximately 15% higher.
PHE
Units
According
to data from the China Heating Association, we were the leading producer and
seller of PHE Units in China in 2007, representing 8% of the market, followed
by
Danfoss, and Accessen (a Sino-US JV established by Denmark's Accessen and
utilizing Alfa Laval plates as well as their own plates in their PHE
Units). Danfoss competes directly with us for the local heat and
power companies' contracts in larger cities, while Accessen targets the
petrochemical, metallurgy and HVAC sectors.
As
the
majority of projects are awarded on a bid basis, prices among leading
competitors are difficult to assess. For certain projects, we do not
bid, but negotiate directly with the customers. We have done prior
projects with some of the customers we negotiate with, including our largest
customer in 2007, Dalkia, a JV between Dalkia and the local government in
Heilongjiang province. Dalkia is the leading provider of energy
services in Europe, active in multiple energy projects in China and is a
subsidiary of Veolia EDF.
Heat
Meters
The
market for heat meters is extremely fragmented with multiple overseas and
domestic producers and no established leaders. Currently, the
industry lacks National product standards which will be needed if legislation
requiring heat meters for all residential and commercial spaces is passed during
2008-2010. Two of our goals for the near future are to become an
integral player in the establishment of National Heat Meter Standards and a
leading supplier of heat meters in China.
Seasonality
We
typically experience stronger third and fourth calendar quarters and weaker
first and second calendar quarters due to the seasonal related fluctuations
in
sales volumes. Customer demand for heat exchange products is also
influenced by weather.
Description
of Property
Our
headquarters and manufacturing facilities are located in Shenyang's Economic
and
Technological Development Zone, Shenyang City, Liaoning Province,
PRC. We own two buildings which include our office headquarters and
primary manufacturing facilities. We have been granted the right to
use the land in Shenyang by the Municipal administration of state-owned land
through June 2055.
In
addition to the two buildings in Shenyang, we own four vehicles, two dual beam
cranes and other special equipment.
As
of
April 14, 2007, we had 131 full-time employees. We plan to hire
additional employees during 2008 as shown below:
|
Function
Unit
|
|
Current Number of
Employees
|
|
Recruitment Budget
|
|
Total after the Budget
|
|
|
CEO
|
|
|
1
|
|
|
0
|
|
|
1
|
|
|
Technology
Department
|
|
|
19
|
|
|
3
|
|
|
22
|
|
|
Heat
Meter Department
|
|
|
4
|
|
|
0
|
|
|
4
|
|
|
Manufacturing
Department
|
|
|
18
|
|
|
28
|
|
|
46
|
|
|
Logistics
Department
|
|
|
6
|
|
|
0
|
|
|
6
|
|
|
Quality
Department
|
|
|
4
|
|
|
1
|
|
|
5
|
|
|
Marketing
Department
|
|
|
3
|
|
|
0
|
|
|
3
|
|
|
After-sale
Service Department
|
|
|
5
|
|
|
1
|
|
|
6
|
|
|
Finance
Department
|
|
|
6
|
|
|
0
|
|
|
6
|
|
|
Administrative
Department
|
|
|
9
|
|
|
0
|
|
|
9
|
|
|
Sales
Department
|
|
|
56
|
|
|
7
|
|
|
63
|
|
We
maintain strong ties with our employees and staff and retention is
stable. Our employee contracts adhere to both State and Provincial
employment and all social security regulations. All compensation
including social insurance is paid in a timely manner to authorities and
employees. There have been no disputes and there are no collective
bargaining agreements.
Our
sales
personnel are eligible to receive annual bonuses based on pre-established sales
targets. Production employees are also eligible for annual bonuses
based on product quality ratios, customer complaint ratios, new product
invention, and product inventory.
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 have an adverse affect on our
business, financial conditions, or operating results. We are
currently not aware of any such legal proceedings or claims that will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.
Forward-Looking
Statements
The
information in this report contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. All statements other than statements of historical fact made
in this report including, without limitation, statements regarding our future
financial position
or results, levels of activity, events, trends or plans, are forward-looking
statements. In particular, the statements herein regarding industry
prospects and our future results of operations or financial position are
forward-looking statements. Forward-looking statements generally can
be identified by the use of forward-looking terminology such as “may,” “will,”
“expect,” “intend,” “project,” “estimate,” “anticipate,” or “believe” or the
negative thereof or any variation thereon or similar
terminology. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, there is no assurance that
such
expectations will be accomplished. Forward-looking statements reflect our
current expectations and are inherently uncertain. Our actual results
may differ significantly from our expectations. Some factors that
might cause or contribute to such discrepancy include those factors listed
in
the section "Risk Factors" beginning on page 19 of this Report on Form
8-K.
All
subsequent written and oral forward-looking statements attributable to us,
or
persons acting on our behalf, are expressly qualified in their entirety by
these
cautionary statements. We assume no duty to update or revise our
forward-looking statements based on changes in internal estimates or
expectations or otherwise.
Management
Discussion and Analysis of Plan of Operations
The
following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not
be construed to imply that the results discussed herein will necessarily
continue into the future, or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future. Such
discussion represents only the best present assessment of our
management.
Our
management's discussion and analysis of our financial condition and results
of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at
the
date of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our
estimates and assumptions. We base our estimates on historical
experience and on various other factors that we believe are reasonable under
the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
This
discussion should be read in conjunction with the other sections of this Report,
including "Risk Factors," "Description of Business" and the Financial Statements
attached hereto as Item 9.01 and the related exhibits. The various
sections of this discussion contain a number of forward-looking statements,
all
of which are based on our current expectations and could be affected by the
uncertainties and risk factors described throughout this Report. See
"Forward-Looking Statements." Our actual results may differ
materially.
While
our
significant accounting policies are more fully described in Note 1 to our
combined financial statements, we believe that the following accounting policies
are the most critical to aid you in fully understanding and evaluating this
management discussion and analysis.
Overview
We
are
one of three authorized OEMs of Sondex PHEs in China, specializing in the
manufacturing, sale, research, and servicing of PHEs, PHE Units and heat meters
for a broad range of industries
such as petroleum refinement, petrochemicals, power generation, metallurgy,
food
& beverage, and chemical processing. We also sell PHEs under the
Sondex brand and PHE Units that are designed by us and using PHEs that are
assembled with Sondex plates under our Taiyu brand name.
Our
revenue is subject to fluctuations due to the timing of sales of high-value
products, the impact of seasonal spending patterns, the timing and size of
projects our customers perform, changes in overall spending levels in the
industry and other unpredictable factors that may affect customer ordering
patterns. Any significant delays in the commercial launch or any lack
or delay of commercial acceptance of new products, unfavorable sales trends
in
existing product lines, or impacts from the other factors mentioned above,
could
adversely affect our revenue growth or cause a sequential decline in quarterly
revenue. Due to the possibility of fluctuations in our revenue and
net income or loss, we believe that quarterly comparisons of our operating
results are not a good indication of future performance.
Basis
of Presentation
The
audited financial statements as of December 31, 2007 and 2006, that are
presented are those of Taiyu rather than SmartHeat because Taiyu is our
operating business, and SmartHeat's acquisition of Taiyu was deemed completed
on
April 14, 2008. A detailed description of this acquisition
transaction is provided under the section titled “Share Exchange” in 2.01 of
this Report on Form 8-K. The financial statements are prepared in
accordance with generally accepted accounting principles in the United States
of
America ("US GAAP"). The accompanying pro forma combined balance
sheet presents the accounts of SmartHeat, and Taiyu as if SmartHeat’s
acquisition of Taiyu occurred on December 31, 2007. The accompanying
pro forma combined statements of operations present the accounts of Taiyu and
SmartHeat for the year ended December 31, 2007 as if acquisition occurred on
January 1, 2007. The acquisition of Taiyu by SmartHeat has been
accounted for as recapitalization of Taiyu as Taiyu’s shareholders will be the
majority shareholders of the Company.
Principle
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its 55% owned subsidiary, Qingdao Yushi Heat Power Equipment Co.,
Ltd (Yushi). Yushi is engaged in manufacturing and selling of heat
power equipment. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during
the
reporting year. Significant estimates, required by management,
include the recoverability of long-lived assets and the valuation of
inventories. Actual results could differ from those
estimates.
Accounts
and Retentions Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns
to
evaluate the adequacy of these reserves.
Accounts
receivable is net of unearned interest. Unearned interest represents
imputed interest on accounts receivable with due dates over one year from the
invoice date discounted at the Company's borrowing rate for the
year.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods
comprises direct material, direct production cost and an allocated portion
of
production overheads.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated
depreciation. Expenditures for maintenance and repairs are expensed
as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from
the
respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using
the straight-line method with a 10% salvage value and estimated lives ranging
from 5 to 20 years as follows:
|
|
|
|
20
years
|
|
|
Vehicle
|
|
|
5
years
|
|
|
Office
Equipment
|
|
|
5
years
|
|
|
Production
Equipment
|
|
|
5
- 10 years
|
|
Revenue
Recognition
Our
revenue recognition policies are in compliance with Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (“SAB”) 104. Sales revenue
is recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectibility is reasonably
assured. Payments received before all of the relevant criteria for
revenue recognition are recorded as unearned revenue.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial
reporting purposes, RMB has been translated into United States dollars ("USD")
as the reporting currency. Assets and liabilities are translated at
the exchange rate in effect at the balance sheet date. Revenues and
expenses are translated at the average rate of exchange prevailing during the
reporting period. Translation adjustments arising from the use of
different exchange rates from period to period are included as a component
of
stockholders' equity as "Accumulated other comprehensive
income." Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant
fluctuation in exchange rate for the conversion of RMB to USD after the balance
sheet date.
The
Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
“Reporting Comprehensive Income.” Comprehensive income is comprised
of net income and all changes to the statements of stockholders’ equity, except
those due to investments by stockholders, changes in paid-in capital and
distributions to stockholders.
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the
accounting for business combinations. Under SFAS 141R, an acquiring
entity will be required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with limited
exceptions. SFAS 141R will change the accounting treatment for
certain specific items, including:
| |
·
|
Acquisition
costs will be generally expensed as
incurred;
|
| |
·
|
Noncontrolling
interests (formerly known as “minority interests” – see SFAS 160
discussion below) will be valued at fair value at the acquisition
date;
|
| |
·
|
Acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount
or the
amount determined under existing guidance for non-acquired
contingencies;
|
| |
·
|
In-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition
date;
|
| |
·
|
Restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date;
and
|
| |
·
|
Changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
SFAS
141R
also includes a substantial number of new disclosure
requirements. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15,
2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1,
2009. We expect SFAS 141R will have an impact on accounting for
business combinations once adopted but the effect is dependent upon acquisitions
at that time.
Noncontrolling
Interests in Consolidated Financial Statements – An Amendment of ARB No.
51
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation
of a
subsidiary. Specifically, this statement requires the recognition of
a noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The
amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income
statement. SFAS 160 clarifies that changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial
interest. In addition, this statement requires that a parent
recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation
date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling
interest. SFAS 160 are effective for fiscal years, and interim
periods within those fiscal years,
beginning on or after December 15, 2008. Like SFAS 141R discussed
above, earlier adoption is prohibited. We have not completed our
evaluation of the potential impact, if any, of the adoption of SFAS 160 on
our
consolidated financial position, results of operations and cash
flows.
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements required under the accounting pronouncements, but does
not change existing guidance as to whether or not an instrument is carried
at
fair value. Additionally, it establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for fiscal year, including
financial statements for an interim period within the fiscal
year. The Company is currently evaluating the impact, if any, that
SFAS No. 157 will have on its financial statements.
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
Amendment of FASB Statements No. 87, 88, 106, and
132R
In
September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the
underfunded or overfunded status of a defined benefit postretirement plan as
an
asset or liability in its statement of financial position and to recognize
changes in the funded status in the year in which the changes occur through
accumulated other comprehensive income. Additionally, SFAS No. 158
requires employers to measure the funded status of a plan as of the date of
its
year-end statement of financial position. The new reporting
requirements and related new footnote disclosure rules of SFAS No. 158 are
effective for fiscal years ending after December 15, 2006. We adopted
the provisions of SFAS No. 158 for the year end 2006, and the effect of
recognizing the funded status in accumulated other comprehensive income was
not
significant. The new measurement date requirement applies for fiscal
years ending after December 15, 2008.
Fair
Value Option for Financial Assets and Financial
Liabilities
In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115.” The statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. The statement is effective as of the beginning
of an entity’s first fiscal year that begins after November 15,
2007. The Company is analyzing the potential accounting
treatment.
Considering
the Effects of Prior Year Misstatements in Current Year Financial
Statements
In
September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”), which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. The
Company adopted SAB 108 in the fourth quarter of 2006 with no impact on its
financial statements.
Year
Ended December 31, 2007 Compared to the Year Ended December 31,
2006
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
Year
Ended December 31
|
|
2007
|
|
2006
|
|
|
|
|
$
|
|
%
of Sales
|
|
$
|
|
%
of Sales
|
|
|
Sales
|
|
|
13,273,151
|
|
|
|
|
|
8,205,166
|
|
|
|
|
|
Cost
of sales
|
|
|
(8,667,353
|
)
|
|
65.0
|
%
|
|
(5,710,540
|
)
|
|
70.0
|
%
|
|
Gross
Profit
|
|
|
4,605,798
|
|
|
35.0
|
%
|
|
2,494,626
|
|
|
30.0
|
%
|
|
Operating
Expenses
|
|
|
(2,369,090
|
)
|
|
18.0
|
%
|
|
(1,642,721
|
)
|
|
20.0
|
%
|
|
Income
from Operation
|
|
|
2,236,708
|
|
|
17.0
|
%
|
|
851,905
|
|
|
10.0
|
%
|
|
Other
Income (Expenses), net
|
|
|
24,957
|
|
|
0.2
|
%
|
|
39,587
|
|
|
0.5
|
%
|
|
Net
Income
|
|
|
2,087,891
|
|
|
16.0
|
%
|
|
832,612
|
|
|
10.0
|
%
|
Sales. Net
sales for 2007 were approximately $13.27 million while our net sales in 2006,
were approximately $8.21 million, an increase in revenues of $5.06 million,
or
62%. The increase was due to growing demand for our product resulting
from rapid increase in newly-build residential communities in Shenyang City
and
surrounding area. We also increased the number of our sales
representatives to develop new customers in more cities in China. We believe
that our sales will continue to grow because we are strengthening our sales
efforts by hiring more sales personnel, increasing the sales channels, and
improving the quality of our products
Cost
of Sales. Cost
of sales for 2007 were approximately $8.67 million while our cost of sales
in
2006, were approximately $5.71 million, an increase of $2.96 million, or
52%. The increase in cost of sales can be attributed to the increase
of production and sales activities in 2007. Cost of sales as a
percentage of sales was approximately 65% for 2007 and 70% for
2006. The decrease in cost of sales as a percentage of sales in 2007
was mainly due to the economy of scale, higher the production volume, lower
the
cost of each product manufactured. We believe that our cost of sales
will continue to remain stable as we will improve the efficiency of
manufacturing facility.
Gross
Profit (Loss)
. Gross profit was $4.61 million for 2007 as compared to $2.49
million for 2006, representing gross margins of approximately 35% and 30% for
2007 and 2006, respectively. The increase in our gross profits and
gross profit margin was mainly due to the increase of sales activities and
due
to the economy of scale discussed above.
Operating
Expenses
. Operating expenses consisted of selling, general and administrative
expenses totaled approximately $2.37 million for 2007 as compared to $1.64
million for 2006, an increase of approximately $726,000 or 44%. The
increased in operating expenses was mainly due to proportional increase in
after-sale service, payroll, insurance and travel expenses with our increased
sales and production.
Quarter
Ended March 31, 2008 Compared to the Quarter Ended March 31,
2007
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
Fiscal
Quarter Ended March 31
|
|
2008
|
|
2007
|
|
| |
|
$
|
|
%
of sales
|
|
$
|
|
%
of sales
|
|
|
Sales
|
|
|
3,079,051
|
|
|
100
|
%
|
|
1,298,869
|
|
|
100
|
%
|
|
Cost
of Sales
|
|
|
2,112,956
|
|
|
69
|
%
|
|
842,421
|
|
|
65
|
%
|
|
Gross
Profit
|
|
|
966,095
|
|
|
31
|
%
|
|
456,448
|
|
|
35
|
%
|
|
Operating
Expenses
|
|
|
481,566
|
|
|
16
|
%
|
|
374,656
|
|
|
29
|
%
|
|
Income
from Operations
|
|
|
484,529
|
|
|
16
|
%
|
|
81,792
|
|
|
6
|
%
|
|
Other
Income (Expenses), net
|
|
|
91,691
|
|
|
3
|
%
|
|
91,548
|
|
|
7
|
%
|
|
Net
Income
|
|
|
471,263
|
|
|
15
|
%
|
|
161,869
|
|
|
12
|
%
|
Sales. Net
sales for the three months ended March 31, 2008 were approximately $3.08 million
while our net sales in same period for 2007 were approximately $1.30 million,
an
increase in revenues of $1.78 million, or about 137%. The increase
was due primarily to the expansion of our sales force, growth of our existing
sales channels to develop new customers and the extension of our customer base
into new regions in China. We believe that our sales will continue to grow
as we
strengthen our sales efforts by hiring more sales personnel, expanding sales
channels, and improving the quality of our products.
Cost
of Sales. Cost
of sales for the three months ended March 31, 2008 were approximately $2.11
million while our cost of sales for the same period in 2007, were approximately
$0.84 million, an increase of $1.27 million, or 151%. The increase in
cost of sales can be attributed to increases in our production and sales during
the period. Cost of sales as a percentage of sales was approximately 69%
for the first fiscal quarter of 2008 and 65% for the same period in 2007. The
increase in cost of sales as a percentage of sales in 2008 was mainly due to
increases in the costs of labor and raw materials as a result of overall
increases throughout China.
Gross
Profit (Loss). Gross
profit was $0.97 million for the quarter ended March 31, 2008 as compared to
$0.46 million for the same period in 2007, representing gross margins of
approximately 31% and 35% for the first quarter of 2008 and 2007,
respectively. The increase in our gross profits was mainly due to the
significant increase in our sales; while the decrease in our gross profit margin
was mainly due to increases in our cost of manufacturing and decreases in our
unit sales price as a way of attracting new customers in both new and existing
markets.
Operating
Expenses. Operating
expenses, consisting of selling, general and administrative expenses, totaled
approximately $0.48 million for the three months ended March 31, 2008 as
compared to $0.37 million for the same period in 2007, an increase of
approximately $0.11 million or 29%. The increase in operating
expenses was mainly due to proportional increases in after-sale service,
payroll, insurance and travel expenses, coupled with our increased sales and
production.
Net
Income. Our
net income for the three month period ended March 31, 2008 was $0.47 million
as
compared to approximately $0.16 million for the same period in 2007, an increase
of $0.31 million or 194%. This increase is attributable to economies
of scale combined with rapid growth in revenue and efficiency of operations.
Our
management believes that net income will continue to increase as we continue
to
increase our sales, offer better quality products and control our manufacturing
costs.
Liquidity
and Capital Resources
The
following is a summary of cash provided by or used in each of the indicated
types of activities during year ended December 31, 2007 and 2006:
|
|
|
2007
|
|
2006
|
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
$
|
3,047
|
|
$
|
(51,587
|
)
|
|
Investing
Activities
|
|
|
(909,280
|
)
|
|
(889,490
|
)
|
|
Financing
Activities
|
|
|
1,075,719
|
|
|
967,328
|
|
Net
cash
flow provided by operating activities was $3,047 in fiscal 2007, as compared
to
net cash flow used in operating activities of $51,587 in fiscal 2006. The
increase in net cash flow from operating activities in fiscal 2007 was mainly
due to decrease in inventory, increase in customer deposits, tax and other
payables. In addition, our net income has increased rapidly compared
to 2006 which brought more cash to the company, but at the same time, our
accounts receivable have increased which held back our cash
inflows.
Net
cash
flow used in investing activities was $909,280 for fiscal 2007, as compared
to
net cash used in investing activities of $889,490 in fiscal 2006. The
increase of net cash flow used in investing activities in fiscal 2007 was mainly
due to acquisition of manufacturing equipment and other office equipment and
furniture during the year.
Net
cash
flow provided by financing activities was $1,075,719 in fiscal 2007 as compared
to net cash provided by financing activities of $967,328 for fiscal 2006. The
increase of net cash flow provided by financing activities in fiscal 2007 was
mainly due to increased short term loans with banks and other third
parties.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the quarters ended March 31, 2008 and March 31,
2007:
| |
|
March 31, 2008
|
|
March 31, 2007
|
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
$
|
(53,084
|
)
|
$
|
229,124
|
|
|
Investing
Activities
|
|
|
(37,761
|
)
|
|
(129,067
|
)
|
|
Financing
Activities
|
|
|
(198,453
|
)
|
|
606,931
|
|
Net
cash
flow used in operating activities was $53,084 in the first quarter of 2008,
as
compared to net cash flow provided by operating activities of $229,124 in the
first quarter of 2007. The decrease in net cash flow from operating activities
in the 2008 first quarter was mainly due to an increase in retentions
receivable, advances to suppliers, other receivables and a decrease in tax
payable.
Net
cash
flow used in investing activities was $37,761 for the quarter ended March 31,
2008, as compared to $129,067 for the corresponding quarter of
2007. The decrease of net cash flow used in investing activities in
the first quarter of 2008 was mainly due to limited capital expenditures during
the quarter.
Net
cash
flow used in financing activities was $198,453 in the first quarter of 2008,
as
compared to net cash provided by financing activities of $606,931 for the first
quarter of 2007. The increase in the quarter ended March 31, 2008 was mainly
due
to repayment of amounts owed to shareholders and short-term loans.
Off-Balance
Sheet Arrangements
We
have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and
classified as stockholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We
do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.
The
Company is obligated for the following short term loans payable as of December
31, 2007:
|
|
|
Balance at December 31,
2007
|
|
| |
|
|
|
|
Short
term loan with China CITIC Bank in the PRC for 6, 000,000 RMB, or
$822,526. This loan was entered into on Apr 28, 2007 and is due
on Apr 12, 2008. This loan bears interest at 7.029% per
annum.
|
|
$
|
822,526
|
|
| |
|
|
|
|
|
Short
term loan with Citibank (China) Co., Ltd with branch in the PRC for
10,200,000 RMB. This loan was entered into on Jun 25, 2007 and
is due on Jun 24, 2008. This loan bears interest at 5.265% per
annum.
|
|
|
1,302,333
|
|
| |
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 and
2007
with a third party company in the PRC for total of 10, 300,000
RMB. Some of the loans will mature on various dates in year
2008 and some of the loans are payable on demand. These loans
bear interest at 6.903% per annum.
|
|
|
1,412,003
|
|
| |
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 with
another
third party company in the PRC for total of 2,850,000 RMB, or
$390,700. These loans are due on various dates in year
2008. These loans bear interest at 6.903% per
annum.
|
|
|
390,701
|
|
| |
|
|
|
|
|
The
Company entered into a short term loan with another third party company
in
the PRC for 5,050,000 RMB. This loan was entered into on Aug
31, 2005 and was due on Aug 31, 2006. This loan bears no
interest. Imputed interest on the loan was
immaterial. This loan became payable on demand after Aug 31,
2006.
|
|
|
692,293
|
|
| |
|
$
|
4,619,856
|
|
The
Company is obligated for the following short term loans payable as of March
31,
2008:
|
|
|
Balance at March 31,
2008 (US$)
|
|
| |
|
|
|
|
Short
term loan with China CITIC Bank in the PRC for 6,000,000 RMB, or
US$822,526. This loan was entered into on April 28, 2007 and is
due on April 12, 2008. This loan bears interest at 7.029% per
annum. This loan was repaid on April 12, 2008.
|
|
$
|
854,823
|
|
| |
|
|
|
|
|
Short
term loan with Citibank (China) Co., Ltd with branch in the PRC for
10,200,000 RMB, or US$1,398,295. This loan was entered into on
June 25, 2007 and is due on June 24, 2008. This loan bears
interest at 5.265% per annum. This loan was repaid in June 2008.
|
|
|
1,353,469
|
|
| |
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 and
2007
with a third party company in the PRC for total of 10,300,000 RMB,
or
US$1,412,003. Some of the loans will mature on various dates in
year 2008 and some of the loans are payable on demand. These
loans bear variable interest at 8.591% per annum for 2008 and 6.903%
per
annum for 2007.
|
|
|
1,205,870
|
|
| |
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 with
another
third party company in the PRC for total of 2,850,000 RMB, or
US$390,700. These loans are due on various dates in year
2008. These loans bear variable interest at 8.591% per annum
for 2008 and 6.903% per annum for 2007.
|
|
|
406,041
|
|
| |
|
|
|
|
|
The
Company entered into a short term loan with another third party company
in
the PRC for 5,050,000 RMB, or US$625,759. This loan was entered
into on August 31, 2005 and was due on August 31, 2006. This
loan bears no interest. Imputed interest on the loan was
immaterial. This loan became payable on demand after August 31,
2006.
|
|
|
719,476
|
|
| |
|
|
|
|
|
The
Company entered into a short term loan during the three months ended
March
31, 2008 with another third party company in the PRC for total of
800,000
RMB, or US$114,000. This loan is payable on demand with interest
rate of
8.591% per annum.
|
|
|
85,481
|
|
| |
|
|
|
|
|
|
|
$
|
4,625,160
|
|
Our
business and an investment in our securities are subject to a variety of
risks. The following risk factors describe the most significant
events, facts or circumstances that could have a material adverse effect upon
our business, financial condition, results of operations, ability to implement
our business plan, and the market price for our securities. Many of
these events are outside of our control The risks described below are not the
only ones facing our company. Additional risks not presently known to
us or that we currently believe are immaterial may also impair our business
operations. If any of these risks actually occurs, our business,
financial condition or results of operation may be materially adversely
affected. In such case, the trading price of our common stock could
decline and investors in our common stock could lose all or part of their
investment.
Risks
Related to Our Business
Our
relationship with Sondex has substantially contributed to our business and
its
growth. We could be adversely affected if that relationship
terminated
We
are
one of three authorized dealers appointed by Sondex A/S for PHEs in
China. Our territory is North China. Sondex is one of the
world's leading PHE manufacturers. Our sales of Sondex PHEs have
contributed to our reputation for the high quality of the products we
manufacture and sell. If our relationship with Sondex were to
terminate, our business, revenues, and results of operations could be adversely
affected.
Demand
for our products depends in large part upon the level of capital and maintenance
expenditures of our customers and the end users. These expenditures
have historically been cyclical in nature and vulnerable to economic
downturns. Decreased capital and maintenance spending by our
customers could have a material adverse effect on the demand for our products
and our business, financial condition and results of operations. In
addition, this historically cyclical nature of the demand for our products
limits our ability to make accurate long-term predictions about our
performance. Changing world economic and political conditions may
also reduce the willingness of our customers and prospective customers to
purchase our products and services. The seasonality of our business
results in significant operational challenges to our production and inventory
control functions.
We
derive a substantial part of our revenues from several major
customers. If we lose any of these customers or they reduce the
amount of business they do with us, our revenues may be seriously
affected.
Our
five
largest customers accounted for 48.5% of our revenues for the year ended
December 31, 2007 and our ten largest customers accounted for 64.5% our revenues
for the year ended December 31, 2007. Our largest customer accounted
for 21% of our revenues in the year ended December 31, 2007. These
customers may not maintain the same volume of business with us in the
future. If we lose any of these customers or they reduce the amount
of business they do with us, our revenues may be seriously
affected.
We
use estimates when accounting for contracts. Changes in estimates
could affect our profitability and overall financial
position.
Contract
accounting requires judgment relative to assessing risks, estimating contract
revenues and costs, and making assumptions for schedule and technical
issues. Due to the size and nature of many of our contracts, the
estimation of total revenues and costs at completion is complicated and subject
to many variables. For example, assumptions have to be made regarding
the length of time to complete the contract because costs also include expected
increases in wages and prices for materials. Similarly, assumptions
have to be made regarding the future impact of efficiency initiatives and cost
reduction efforts. Incentives, awards, or penalties related to
performance on contracts are considered in estimating revenue and profit rates
and are recorded when there is sufficient information to assess anticipated
performance. Because of the significance of the judgments and
estimation processes described above, it is possible that materially different
amounts could be obtained if different assumptions were used or if the
underlying circumstances were to change. Changes in underlying
assumptions, circumstances, or estimates may have a material adverse effect
upon
future period financial reporting and performance.
We
cannot be certain that our product innovations and marketing successes will
continue.
We
believe that our past performance has been based on, and our future success
will
depend, in part, upon our ability to continue to improve our existing products
through product innovation and to develop, market and produce new
products. We cannot assure you that we will be successful in
introducing, marketing and producing any new products or product innovations,
or
that we will develop and introduce in a timely manner innovations to our
existing products which satisfy customer needs or achieve market
acceptance. Our failure to develop new products and introduce them
successfully and in a timely manner could harm our ability to grow our business
and could have a material adverse effect on our business, results of operations
and financial condition.
With
any
technology, including the technology of our current and proposed products,
there
are risks that the technology may not successfully address all of our customers'
needs. While we have already established successful relationships
with our customers, there needs may change or vary. This may affect
the ability of our present or proposed products to address all of our customers'
ultimate technology needs in an economically feasible manner.
We
may not be able to keep pace with rapid technological changes and competition
in
our industry.
While
we
believe that we have hired or engaged personnel and outside consultants who
have
the experience and ability necessary to keep pace with advances in technology,
and while we continue to seek out and develop "next generation" technology
through our research and development efforts, there is no guarantee that we
will
be able to keep pace with technological developments and market demands in
this
evolving industry and market. In addition, our industry is highly
competitive. Although we believe that we have developed strategic
relationships to best penetrate the China market, we face competition from
other
manufacturers of product similar to our products. Some of our
competitors' advantages over us in both the areas of products, marketing, and
services include the following:
| |
·
|
Substantially
greater revenues and financial
resources;
|
| |
·
|
Stronger
brand names and consumer
recognition;
|
| |
·
|
The
capacity to leverage marketing expenditures across a broader portfolio
of
products;
|
| |
·
|
Pre-existing
relationships with potential
customers;
|
| |
·
|
More
resources to make acquisitions;
|
| |
·
|
Lower
labor and development costs;
and
|
| |
·
|
Broader
geographic presence.
|
We
will
face different market dynamics and competition if we expand our market to other
countries. In some international markets, our future competitors
would have greater brand recognition and broader distribution than we
have. We may not be as successful as our competitors in generating
revenues in international markets due to our inability to provide products
that
are attractive to the market in other countries, the lack of recognition of
our
brand, and other factors. As a result, any international expansion
efforts could be more costly and less profitable than our efforts in the
domestic market in China.
If
we are
not as successful as our competitors in our target markets, our sales could
decline, our margins could be negatively impacted and we could lose market
share, any of which could materially harm our business.
We
depend on a limited number of suppliers of components for our products and
if we
are unable to obtain these components when needed, we would experience delays
in
manufacturing our products and our financial results could be adversely
affected.
We
are a major purchaser of certain goods and raw materials that we use in the
manufacturing process of our products, and price changes for the commodities
we
depend on may adversely affect our profitability.
Our
profitability generally depends upon the margin between the cost to us of
certain goods used in the manufacturing process, such as plates, pumps, water
tanks, sensors and controlling systems and other raw materials as well as our
fabrication costs associated with converting such goods and raw materials
compared to the selling price of our products, and the overall supply of raw
materials. It is our intention to base the selling prices of our
products upon the associated raw materials costs to us. However, we
may not be able to pass all increases in raw material costs and ancillary
acquisition costs associated with taking possession of the raw materials through
to our customers. Although we are currently able to obtain adequate
supplies of raw materials, it is impossible to predict future
availability. With the rapid growth of China's economy, the demand
for certain raw materials is great while the supply may be more
limited. This may affect our ability to secure the necessary raw
materials in a cost-effective manner for production of our products at the
volume of purchase orders that we anticipate receiving. The inability
to offset price increases of raw material by sufficient product price increases,
and our inability to obtain raw materials, would have a material adverse effect
on our consolidated financial condition, results of operations and cash
flows.
Our
products may contain defects, which could adversely affect our reputation and
cause us to incur significant costs.
Despite
testing by us defects may be found in existing or new products. Any
such defects could cause us to incur significant return and exchange costs,
re-engineering costs, divert the attention of our engineering personnel from
product development efforts, and cause significant customer relations and
business reputation problems. Any such defects could force us to
undertake a product recall program, which could cause us to incur significant
expenses and could harm our reputation and that of our products. If
we deliver products with defects, our credibility and the market acceptance
and
sales of our products could be harmed.
Due
to the nature of our business and products, we may be liable for damages based
on product liability and warranty claims.
Due
to
the high pressures and temperatures at which many of our products are used
and
the fact that some of our products are relied upon by our customers or end
users
in their facilities or operations, or are
manufactured for relatively broad consumer use, we face an inherent risk of
exposure to claims in the event that the failure, use or misuse of our products
results, or is alleged to result, in bodily injury, property damage or economic
loss. We believe that we meet or exceed existing professional
specification standards recognized or required in the industries in which we
operate. We have been subject to claims in the past, none of which
have had a material adverse effect on our financial condition or results of
operations, and we may be subject to claims in the future. Although
we currently maintain product liability coverage, which we believe is adequate
for the continued operation of our business, such insurance may become difficult
to obtain or unobtainable in the future on terms acceptable to us and may not
cover warranty claims. A successful product liability claim or series
of claims against us, including one or more consumer claims purporting to
constitute class actions, in excess of our insurance coverage or a significant
warranty claim or series of claims against us could materially decrease our
liquidity and impair our financial condition.
We
may experience delays in launching our products, which would negatively impact
our position in the marketplace.
We
may
experience delays in bringing new products to market, due to design,
manufacturing or distribution problems. Such delays could adversely
affect our ability to compete effectively and may adversely affect our
relationship with our customers. Any such delays would adversely
affect our revenues and our ability to become profitable.
If
we are not able to manage our growth, we may not be
profitable.
Our
success will depend on our ability to expand and manage our operations and
facilities. There can be no assurance that we will be able to manage
our growth, meet the staffing requirements for our business or for additional
collaborative relationships or successfully assimilate and train new
employees. In addition, to manage our growth effectively, we may be
required to expand our management base and enhance our operating and financial
systems. If we continue to grow, there can be no assurance that the
management skills and systems currently in place will be adequate or that we
will be able to manage any additional growth effectively. Failure to
achieve any of these goals could have a material adverse effect on our business,
financial condition or results of operations.
We
face risks associated with managing international
operations.
Almost
all of our operations are conducted in China. There are a number of
risks inherent in doing business in such market, including the
following:
| |
·
|
unfavorable
political or economical factors;
|
| |
·
|
fluctuations
in foreign currency exchange
rates;
|
| |
·
|
potentially
adverse tax consequences;
|
| |
·
|
unexpected
legal or regulatory changes;
|
| |
·
|
lack
of sufficient protection for intellectual property
rights;
|
| |
·
|
difficulties
in recruiting and retaining personnel, and managing international
operations; and
|
| |
·
|
less
developed infrastructure.
|
We
may not be able to adequately protect our technology and other proprietary
rights.
Our
success will depend in part on our ability to obtain and protect our products,
methods, processes and other technologies, to preserve our trade secrets, and
to
operate without infringing on the proprietary rights of third parties both
domestically and abroad. We have patents and patent applications
pending in China, and have worked and continue to work closely with Chinese
patent officials to preserve our intellectual property
rights. Despite these efforts, any of the following occurrences may
reduce the value of our intellectual property:
| |
·
|
Our
applications for patents and trademarks relating to our business
may not
be granted and, if granted, may be challenged or
invalidated;
|
| |
·
|
Issued
patents and trademarks may not provide us with any competitive
advantages;
|
| |
·
|
Our
efforts to protect our intellectual property rights may not be effective
in preventing misappropriation of our
technology;
|
| |
·
|
Our
efforts may not prevent the development and design by others of products
or technologies similar to or competitive with, or superior to those
we
develop; or
|
| |
·
|
Another
party may obtain a blocking patent and we would need to either obtain
a
license or design around the patent in order to continue to offer
the
contested feature or service in our
products.
|
In
addition, while we have developed substantial goodwill for our Taiyu brand
in
China, our application for the registration of that mark is still pending and
there is no assurance that our application will be granted.
Effective
protection of intellectual property rights may be unavailable or limited in
certain foreign countries. If we are unable to adequately protect our
proprietary rights, then it would have a negative impact on our
operations.
We
may be subject to claims that we have infringed the proprietary rights of
others, which could require us to obtain a license or change our
designs.
Although
we do not believe that any of our products infringe the proprietary rights
of
others, there is no assurance that infringement or invalidity claims (or claims
for indemnification resulting from infringement claims) will not be asserted
or
prosecuted against us or that any such assertions or prosecutions will not
materially adversely affect our business. Regardless of whether any
such claims are valid or can be successfully asserted, defending against such
claims could cause us to incur significant costs and could divert resources
away
from our other activities. In addition, assertion of infringement
claims could result in injunctions that prevent us from distributing our
products. If any claims or actions are asserted against us, we may
seek to obtain a license to the intellectual property rights that are in
dispute. Such a license may not be available on reasonable terms, or
at all, which could force us to change our designs.
We
may need additional capital to execute our business plan and fund operations
and
may not be able to obtain such capital on acceptable terms or at
all.
Capital
requirements are difficult to plan in our rapidly changing
industry. Although we currently expect to have sufficient funding for
the next 12 months, we expect that we will need additional capital to fund
our
future growth.
Our
ability to obtain additional capital on acceptable terms or at all is subject
to
a variety of uncertainties, including:
| |
·
|
Investors'
perceptions of, and demand for, companies in our
industry;
|
| |
·
|
Investors'
perceptions of, and demand for, companies operating in
China
|
| |
·
|
Conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
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·
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Our
future results of operations, financial condition and cash
flows;
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·
|
Governmental
regulation of foreign investment in companies in particular
countries;
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·
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Economic,
political and other conditions in the United States, China, and other
countries; and
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·
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Governmental
policies relating to foreign currency
borrowings.
|
We
may be
required to pursue sources of additional capital through various means,
including joint venture projects and debt or equity financings. There
is no assurance that we will be successful in locating a suitable financing
transaction in a timely fashion or at all. In addition, there is no
assurance that we will be successful in obtaining the capital we require by
any
other means. Future financings through equity investments are likely
to be dilutive to our existing stockholders. Also, the terms of
securities we may issue in future capital transactions may be more favorable
for
our new investors. Newly issued securities may include preferences,
superior voting rights, the issuance of warrants or other derivative securities,
and the issuances of incentive awards under equity employee incentive plans,
which may have additional dilutive effects. Further, we may incur
substantial costs in pursuing future capital and/or financing, including
investment banking fees, legal fees, accounting fees, printing and distribution
expenses and other costs. We may also be required to recognize
non-cash expenses in connection with certain securities we may issue, such
as
convertible notes and warrants, which will adversely impact our financial
condition.
If
we
cannot raise additional funds on favorable terms or at all, we may not be able
to carry out all or parts of our strategy to maintain our growth and
competitiveness or to fund our operations. If the amount of capital
we are able to raise from financing activities, together with our revenues
from
operations, is not sufficient to satisfy our capital needs, even to the extent
that we reduce our operations accordingly, we may be required to cease
operations.
We
face risks associated with currency exchange rate
fluctuations.
Our
business could be subject to environmental
liabilities.
As
is the
case with manufacturers of similar products, we use certain hazardous substances
in our operations. Currently we do not anticipate any material
adverse effect on our business, revenues or results of operations, as
a result of compliance with Chinese environmental laws and
regulations. However, the risk of environmental liability and charges
associated with maintaining compliance with environmental laws is inherent
in
the nature of our business, and there is no assurance that material
environmental liabilities and compliance charges will not arise in the
future.
If
we lose our key personnel or are unable to attract and retain additional
qualified personnel, the quality of our services may decline and our business
may be adversely impacted.
We
rely
heavily on the expertise, experience and continued services of our senior
management, including our president and chief executive officer. Loss
of their services could adversely impact our ability to achieve our business
objectives. We believe our future success will depend upon our
ability to retain these key employees and our ability to attract and retain
other skilled personnel. The rapid growth of the economy in China has
caused intense competition for qualified personnel. We cannot
guarantee that any employee will remain employed by us for any definite period
of time or that we will be able to attract, train or retain qualified personnel
in the future and the loss of personnel could have a material adverse effect
on
our business and company. Qualified employees periodically are in
great demand and may be unavailable in the time frame required to satisfy our
customers' requirements. We need to employ additional personnel to
expand our business. There is no assurance that we will be able to
attract and retain sufficient numbers of highly skilled employees in the
future. The loss of personnel or our inability to hire or retain
sufficient personnel at competitive rates could impair the growth of our
business.
We
will incur significant costs as a result of operating as a public company,
our
management will be required to devote substantial time to new compliance
initiatives.
While
we
are a public company, our compliance costs to date have not been substantial
in
light of our limited operations. Taiyu has never operated as a public
company. As a public company with substantial operations, we will
incur increased legal, accounting and other expenses. The costs of
preparing and filing annual and quarterly reports, proxy statements and other
information with the SEC and furnishing audited reports to stockholders is
time-consuming and costly.
It
will
also be time-consuming, difficult and costly for us to develop and implement
the
internal controls and reporting procedures required by the Sarbanes-Oxley Act
of
2002 (the "Sarbanes-Oxley Act"). Certain members of our management
have limited or no experience operating a company whose securities are traded
or
listed on an exchange, nor with SEC rules and requirements, including SEC
reporting practices and requirements that are applicable to a publicly traded
company. We will need to recruit, hire, train and retain additional
financial reporting, internal controls and other personnel in order to develop
and implement appropriate internal controls and reporting
procedures. If we are unable to comply with the internal controls
requirements of the Sarbanes-Oxley Act, we may not be able to obtain the
independent accountant certifications required by the Sarbanes-Oxley
Act.
We
are
required to establish and maintain internal controls over financial reporting,
disclosure controls, and to comply with other requirements of the Sarbanes-Oxley
Act and the rules promulgated by the SEC thereunder. Our management,
including our Chief Executive Officer and Chief Financial Officer, cannot
guarantee that our internal controls and disclosure controls will prevent all
possible errors or all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. In addition, the
design of a control system must reflect the fact that there are resource
constraints and the benefit of controls must be relative to their
costs. Because of the inherent limitations in all control systems, no
system of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Corporation have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Further, controls can be circumvented by
individual acts of some persons, by collusion of two or more persons, or by
management override of the controls. The design of any system of
controls also is based in part upon certain assumptions about the likelihood
of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions. Over time, a control may become inadequate because of
changes in conditions or the degree of compliance with policies or procedures
may deteriorate. Because of inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and may not be
detected.
Because
we are not yet required to comply with rules requiring the adoption of certain
corporate governance measures, our stockholders have limited protections against
interested director transactions, conflicts of interest and similar
matters.
The
Sarbanes-Oxley Act, as well as the rules enacted by the SEC and the national
stock exchanges as a result of the Sarbanes-Oxley Act, require the
implementation of various measures relating to corporate
governance. These measures are designed to enhance the integrity of
corporate management and the securities markets and apply to securities which
are listed on those exchanges. Because we are not presently required
to comply with many of the corporate governance provisions, we have not yet
adopted these measures.
We
do not
have a board member that qualifies as an "audit committee financial
expert" or that qualifies as "independent" as that term is used in the
rules of the Securities and Exchange Commission or the Nasdaq Marketplace
Rules.
Until
we
comply with the corporate governance measures adopted by the national securities
exchanges after the enactment of Sarbanes-Oxley Act, regardless of whether
such
compliance is required, the absence of standards of corporate governance may
leave our stockholders without protections against interested director
transactions, conflicts of interest and similar matters and investors may be
reluctant to provide us with funds in the future if we determine it is necessary
to raise additional capital. We intend to comply with all applicable
corporate governance measures relating to director independence as soon as
practicable.
We
may be
unable to attract and retain those qualified officers, directors and members
of
board of directors committees required to provide for our effective management
because of the rules and regulations that govern publicly held companies,
including, but not limited to, certifications by principal executive
officers. The perceived personal risk associated with the
Sarbanes-Oxley Act may deter qualified individuals from accepting roles as
directors and executive officers.
Further,
some of these recent changes heighten the requirements for board or committee
membership, particularly with respect to an individual's independence and level
of experience in finance and accounting matters. We may have
difficulty attracting and retaining directors with the requisite
qualifications. If we are unable to attract and retain qualified
officers and directors, the management of our business and our ability to obtain
or retain the listing of our common stock on any stock exchange (assuming we
elect to seek and are successful in obtaining such listing) could be adversely
affected.
We
are a holding company that depends on cash flow from our wholly-owned subsidiary
to meet our obligations.
After
the
Share Exchange, we became a holding company with no material assets other than
the stock of our wholly-owned subsidiary. Accordingly, all our
operations will be conducted by Taiyu, our wholly-owned
subsidiary. We currently expect that the earnings and cash flow of
our subsidiary will primarily be retained and used by us in its
operations.
All
of Taiyu's liabilities survived the Share Exchange and there may be undisclosed
liabilities that could have a negative impact on our financial
condition.
Before
the Share Exchange, certain due diligence activities on the Company and Taiyu
were performed. The due diligence process may not have revealed all
liabilities (actual or contingent) of the Company and Taiyu that existed or
which may arise in the future relating to the Company's activities before the
consummation of the Share Exchange. Notwithstanding that all of the
Company's pre-closing liabilities were transferred to SplitCo pursuant to the
Transfer Agreement Split-Off, it is possible that claims for such liabilities
may still be made against us, which we will be required to defend or otherwise
resolve. The provisions and terms of the Transfer Agreement and
Split-Off may not be sufficient to protect us from claims and liabilities and
any breaches of related representations and warranties. Any
liabilities remaining from the Company's pre-closing activities could harm
our
financial condition and results of operations.
Because
Taiyu has become public by means of a share exchange, we may not be able to
attract the attention of major brokerage firms.
There
may
be risks associated with Taiyu's becoming public through the Share Exchange
Securities analysts of major brokerage firms may not provide coverage of us
since there is no incentive to brokerage firms to recommend the purchase of
our
common stock. No assurance can be given that brokerage firms will, in
the future, want to conduct any secondary offerings on our behalf.
Mr.
Jun
Wang, our director and Chief Executive Officer, was at one time the owner of
50%
of the equity in Beijing YSKN Machinery & Electronic Equipment Co., Ltd
("YSKN"), a company which is the record holder of 30.19% of our outstanding
common stock. He transferred his 50% interest in YSKN to a friend
and, by means of his personal relationship with that friend, believes that
he
has the right to the return of that 50% interest upon request. If Mr.
Wang were to do so, he would have substantial influence over the actions of
that
substantial stockholder. As a result, Mr. Wang could have significant
influence over all corporate actions requiring stockholder approval,
irrespective of how the Company's other stockholders may vote, including the
following actions:
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·
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elect
or defeat the election of our
directors;
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·
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amend
or prevent amendment of our certificate of incorporation or
bylaws;
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·
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effect
or prevent a merger, sale of assets or other corporate transaction;
and
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·
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control
the outcome of any other matter submitted to the shareholders for
vote.
|
The
interests of Mr. Wang may differ from the interests of other
stockholders. This may discourage a potential acquirer from making a
tender offer or otherwise attempting to obtain control of the Company, which
in
turn could reduce our stock price or prevent our stockholders from realizing
a
premium over our stock price.
Our
charter documents contain provisions that could discourage or prevent a
potential takeover, even if such a transaction would be beneficial to the
Company's stockholders.
The
Company's certificate of incorporation and By-Laws could make more difficult the
acquisition of the Company by means of a tender offer, a proxy contest or
otherwise, and the removal of incumbent officers and directors.
See
"Description of Securities."
New
accounting standards could result in changes to our methods of quantifying
and
recording accounting transactions, and could affect our financial results and
financial position.
Changes
to Generally Accepted Accounting Principles in the United States (GAAP) arise
from new and revised standards, interpretations, and other guidance issued
by
the Financial Accounting Standards Board, the SEC, and others. In
addition, the U.S. Government may issue new or revised Cost Accounting Standards
or Cost Principles. The effects of such changes may include
prescribing an accounting method where none had been previously specified,
prescribing a single acceptable method of accounting from among several
acceptable methods that currently exist, or revoking the acceptability of a
current method and replacing it with an entirely different method, among
others. Such changes could result in unanticipated effects on our
results of operations, financial position, and other financial
measures.
We
are subject to international economic and political risks over which we have
little or no control and may be unable to alter our business practice in time
to
avoid the possibility of reduced revenues.
Our
business is conducted in China. Doing business outside the United
States, particularly in China, subjects us to various risks, including changing
economic and political conditions, major work stoppages, exchange controls,
currency fluctuations, armed conflicts and unexpected changes in United States
and foreign laws relating to tariffs, trade restrictions, transportation
regulations, foreign investments and taxation. We have no control
over most of these risks and may be unable to anticipate changes in
international economic and political conditions and, therefore, unable to alter
out business practice in time to avoid the possibility of reduced
revenues.
China's
economic policies could affect our business.
Substantially
all of our assets are located in China and all of our revenue is derived from
our operations in China. Accordingly, our results of operations and
prospects are subject, to a significant extent, to the economic, political
and
legal developments in China.
While
China's economy has experienced significant growth in the past twenty years,
such growth has been uneven, both geographically and among various sectors
of
the economy. The Chinese government has implemented various measures
to encourage economic growth and guide the allocation of
resources. Some of these measures benefit the overall economy of
China, but they may also have a negative effect on us. For example,
operating results and financial condition may be adversely affected by the
government control over capital investments or changes in tax
regulations. The economy of China has been changing from a planned
economy to a more market-oriented economy. In recent years our
government has implemented measures emphasizing the utilization of market forces
for economic reform and the reduction of state ownership of productive assets,
and the establishment of corporate governance in business enterprises; however,
a substantial portion of productive assets in China are still owned by our
government. In addition, our government continues to play a
significant role in regulating industry development by imposing industrial
policies. It also exercises significant control over China's economic
growth through the allocation of resources, the control of payment of foreign
currency-denominated obligations, the setting of monetary policy and the
provision of preferential treatment to particular industries or
companies.
We
may have difficulty establishing adequate management, legal and financial
controls in China.
China
historically has not adopted a Western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining
a sufficient number of qualified employees to work in China. As a
result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.
Our
bank accounts are not insured or protected against
loss.
We
maintain our cash with various banks and trust companies located in
China. Our cash accounts are not insured or otherwise
protected. Should any bank or trust company 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 or trust company.
As
we have limited business insurance coverage in China, any loss which we suffer
may not be insured or may be insured to only a limited
extent.
The
insurance industry in China is still in an early state of development and
insurance companies located in China offer limited business insurance
products. In the event of damage or loss to our properties, our
insurance may not provide as much coverage as if we were insured by insurance
companies in the United States.
Tax
laws and regulations in China are subject to substantial revision, some of
which
may adversely affect our profitability.
The
Chinese tax system is in a state of flux, and it is anticipated that China's
tax
regime will be altered in the coming years. Tax benefits that we
presently enjoy may not be available in the wake of these changes, and we could
incur tax obligations to our government that are significantly higher than
anticipated. These increased tax obligations could negatively impact
our financial condition and our revenues, gross margins, profitability and
results of operations may be adversely affected as a result.
Certain
tax exemptions that we presently enjoy in China are scheduled to expire over
the
next several years.
As
a
substantial portion of our operations are located in a privileged economic
zone,
we are entitled to certain tax benefits. When these exemptions
expire, our income tax expenses will increase, reducing our net income below
what it would be if we continued to enjoy these exemptions.
We
may face judicial corruption in China.
Another
obstacle to foreign investment in China is corruption. There is no
assurance that we will be able to obtain recourse in any legal disputes with
suppliers, customers or other parties with whom we conduct business, if desired,
through China's poorly developed and sometimes corrupt judicial
systems.
If
relations between the United States and China worsen, investors may be unwilling
to hold or buy our stock and our stock price may
decrease.
At
various times during recent years, the United States and China have had
significant 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, whether or not directly related to our business, could reduce
the price of our common stock.
China
could change its policies toward private enterprise or even nationalize or
expropriate private enterprises.
Our
business is subject to significant political and economic uncertainties and
may
be affected by political, economic and social developments in
China. Over the past several years, the Chinese government of T 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 significantly 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 stockholders, or devaluations of currency
could cause a decline in the price of our common stock, should a market for
our common stock ever develop. Nationalization or expropriation could
even result in the total loss of your investment.
The
nature and application of many laws of China create an uncertain environment
for
business operations and they could have a negative effect on
us.
The
legal
system in China is a civil law system. Unlike the common law system,
the civil law system is based on written statutes in which decided legal cases
have little value as precedents. In 1979, China began to promulgate a
comprehensive system of laws and has since introduced many laws and regulations
to provide general guidance on economic and business practices in China and
to
regulate foreign investment. Progress has been made in the
promulgation of laws and regulations dealing with economic matters such as
corporate organization and governance, foreign investment, commerce, taxation
and trade. The promulgation of new laws, changes of existing laws and
the abrogation of local regulations by national laws could cause a decline
in
the price of our common stock. In addition, as these laws,
regulations and legal requirements are relatively recent, their interpretation
and enforcement involve significant uncertainty.
As
we import goods into and export goods out of China, fluctuation of the Renminbi
may affect our financial condition by affecting the volume of cross-border
money
flow.
Although
we use the United States dollar for financial reporting purposes, most of the
transactions affected by our operating subsidiaries are denominated in China's
Renminbi. The value of the Renminbi fluctuates and is subject to
changes in China'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 Renminbi 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.
We
may not be able to obtain regulatory approvals for our
products.
The
manufacture and sale of our products in China are regulated by The People's
Republic of China and the local provincial governments. Although our
licenses and regulatory filings are current, the uncertain legal environment
in
China and our industry may be vulnerable to local government agencies or other
parties who wish to renegotiate the terms and conditions of, or terminate their
agreements or other understandings with us.
It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in
China.
As
our
executive officers and several of our directors, including the chairman of
our
Board of Directors, are Chinese citizens, it may be difficult, if not
impossible, to acquire jurisdiction over these persons in the event a lawsuit
is
initiated against us and/or our officers and directors by a stockholder or
group
of stockholders in the United States. Also, because our operating
subsidiaries and assets are located in China, it may be extremely difficult
or
impossible for you to access those assets to enforce judgments rendered against
us or our directors or executive offices by United States courts. In
addition, the courts in China may not permit the enforcement of judgments
arising out of United States federal and state corporate, securities or similar
laws. Accordingly, United States investors may not be able to enforce
judgments against us for violation of United States securities
laws.
Risks
Related to Our Securities
Our
common stock price is subject to significant volatility, which could result
in
substantial losses for investors.
Prices
for our shares are determined in the marketplace and may accordingly be
influenced by many factors, including, but not limited to:
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limited
"public float" in the hands of a small number of persons whose sales
or
lack of sales could result in positive or negative pricing pressure
on the
market price for our common stock
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technological
innovations or new products and services by us or our
competitors;
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intellectual
property disputes;
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additions
or departures of key personnel;
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the
depth and liquidity of the market for the
shares;
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quarter-to-quarter
variations in our operating
results;
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announcements
about our performance as well as the announcements of our competitors
about the performance of their
businesses;
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investors'
evaluations of our future prospects and the food industry
generally;
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changes
in earnings estimates by, or failure to meet the expectations of,
securities analysts;
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our
dividend policy; and
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general
economic and market conditions.
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In
addition, the stock market often experiences significant price and volume
fluctuations that are unrelated to the operating performance of the specific
companies whose stock is traded. These market fluctuations could
adversely affect the trading price of our shares.
The
price
at which investors purchase shares of our common stock may not be indicative
of
the price that will prevail in the trading market. Investors may be
unable to sell their shares of common stock at or above their purchase price,
which may result in substantial losses.
Shares
of our common stock lack a significant trading
market.
Shares
of
our common stock are not eligible as yet for trading on any national securities
exchange. Our common stock may be quotation in the
over-the-counter market on the OTC Bulletin Board or in what are commonly
referred to as "pink sheets." These markets are highly
illiquid. Although we intend to apply for listing of our common stock
on an exchange, there can be no assurance if and when the initial listing
criteria could be met or if such application would be granted, or that the
trading of the common stock will be sustained. There is no assurance
that an active trading market in our common stock will develop, or if such
a
market develops, that it will be sustained. In addition, there is a
greater chance for market volatility for securities that quoted on the OTC
Bulletin Board as opposed to securities that trade on a national
exchange. This volatility may be caused by a variety of factors,
including the lack of readily available quotations, the absence of
consistent administrative supervision of "bid" and "ask" quotations and
generally lower trading volume. As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the common stock, or to obtain coverage for significant news events
concerning us, and the common stock would become substantially less attractive
for margin loans, for investment by financial institutions, as consideration
in
future capital raising transactions or other purposes.
Future
sales of shares of our common stock by our stockholders could cause our stock
price to decline.
We
cannot
predict the effect, if any, that market sales of shares of our common stock
or
the availability of shares of common stock for sale will have on the market
price prevailing from time to time. If our stockholders sell
substantial amounts of our common stock in the public market upon the
effectiveness of a registration statement, or upon the expiration of any holding
period under Rule 144, such sales could create a circumstance commonly referred
to as an "overhang" and in anticipation of which the market price of our common
stock could fall. The existence of an overhang, whether or not sales
have occurred or are occurring, also could make more difficult our ability
to
raise additional financing through the sale of equity or equity-related
securities in the future at a time and price that we deem reasonable or
appropriate. The shares of common stock issued in the Share Exchange
will be freely tradable upon the earlier of (i) effectiveness of a registration
statement covering such shares; and (ii) the date on which such shares may
be
sold without registration pursuant to Rule 144 under the Securities Act and
the
sale of such shares could have a negative impact on the price of our common
stock.
We
may issue additional shares of our capital stock or debt securities to raise
capital or complete acquisitions, which would reduce the equity interest of
our
stockholders.
Our
articles of incorporation authorizes the issuance of up to 75,000,000 shares
of
common stock, par value $.001 per share. There are approximately
52,450,100 authorized and unissued shares of our common stock which have not
been reserved and are available for future issuance. Although we have
no commitments as of the date of this offering to issue our securities, we
may
issue a substantial number of additional shares of our common stock, to complete
a business combination or to raise capital. The issuance of
additional shares of our common stock:
· may
significantly reduce the equity interest of our existing stockholders;
and
· may
adversely affect prevailing market prices for our common stock.
The
application of the "penny stock" rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
Our
common stock may be subject to the "penny stock" rules adopted under Section
15(g) of the Securities Exchange Act of 1934. The penny stock rules
apply to non-Nasdaq companies whose common stock trades at less than $5.00
per
share or that have tangible net worth of less than $5,000,000 ($2,000,000 if
the
company has been operating for three or more years). The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from those rules, to deliver a standardized risk disclosure
document prepared by the Securities and Exchange Commission, which contains
the
following:
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a
description of the nature and level of risk in the market for penny
stocks
in both public offerings and secondary
trading;
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a
description of the broker's or dealer's duties to the customer and
of the
rights and remedies available to the customer with respect to violation
to
such duties or other requirements of securities
laws;
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a
brief, clear, narrative description of a dealer market, including
"bid"
and "ask" prices for penny stocks and the significance of the spread
between the "bid" and "ask" price;
|
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a
toll-free telephone number for inquiries on disciplinary
actions;
|
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definitions
of significant terms in the disclosure document or in the conduct
of
trading in penny stocks; and
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such
other information and is in such form (including language, type,
size and
format), as the Securities and Exchange Commission shall require
by rule
or regulation.
|
Prior
to
effecting any transaction in penny stock, the broker-dealer also must provide
the customer with the following:
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the
bid and offer quotations for the penny
stock;
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the
compensation of the broker-dealer and our salesperson in the
transaction;
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the
number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market
for such stock; and
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monthly
account statements showing the market value of each penny stock held
in
the customer's account.
|
In
addition, the penny stock rules require that, prior to a transaction in a penny
stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment
for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitability
statement.
Many
brokers have decided not to trade penny stocks because of the requirements
of
the penny stock rules and, as a result, the number of broker-dealers willing
to
act as market makers in such securities is limited. If we remain
subject to the penny stock rules for any significant period, that could have
an
adverse effect on the market, if any, for our securities. If our
securities are subject to the penny stock rules, investors will find it more
difficult to dispose of our securities.
Our
management can obtain influence over a significant amount of our common stock,
giving them influence or control in corporate transactions and other matters,
and their interests could differ from those of other
stockholders.
Although,
our principal executive officers and directors currently do not own any of
our
outstanding common stock, this might change. Mr. Jun Wang, our
director and Chief Executive Officer, was at one time the owner of 50% of the
equity in Beijing YSKN Machinery & Electronic Equipment Co., Ltd ("YSKN"), a
company which is the record holder of 30.19% of our outstanding common
stock. He transferred his 50% interest in YSKN to a friend and, by
means of his personal relationship with that friend, believes that he has the
right to the return of that 50% interest upon request. If Mr. Wang
were to do so, he would have substantial influence over the actions of that
substantial stockholder and the ability to influence matters requiring a
shareholder vote, including the election of directors, the adoption of any
amendment to our articles of incorporation or bylaws, and the approval of
significant corporate transactions. Their control may delay or
prevent a change of control on terms favorable to our other stockholders and
may
adversely affect your voting and other stockholders rights.
We
have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our
common stock.
We
have
never paid cash dividends on our common stock and do not anticipate doing so
in
the foreseeable future. The payment of dividends on our common stock
will depend on earnings, financial condition and other business and economic
factors affecting it at such time as the board of directors may consider
relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if our stock price
appreciates.
Capital
outflow policies in China may hamper our ability to declare and pay dividends
to
our shareholders.
China
has
adopted currency and capital transfer regulations. These regulations
may require us to comply with complex regulations for the movement of
capital. Although our management believes that we will be in
compliance with these regulations, should these regulations or the
interpretation of them by courts or regulatory agencies change, we may not
be
able to pay dividends to our shareholders outside of China. In
addition, under current Chinese law, we must retain a reserve equal to 10
percent of net income after taxes, not to exceed 50 percent of registered
capital. Accordingly, this reserve will not be available to be
distributed as dividends to our shareholders. We presently do not
intend to pay dividends in the foreseeable future. Our management
intends to follow a policy of retaining all of our earnings to finance the
development and execution of our strategy and the expansion of our
business.
Security
Ownership of Certain Beneficial Owners and Management
The
following tables set forth certain information as of April 15, 2008 regarding
the number of shares of common stock beneficially owned by (i) each person
or
entity known to us to own more than 5% of our common stock; (ii) our Chief
Executive Officer and our two other officers (the "Named Executive Officers");
(iii) our director; and (iv) all of our executive officers and our director
as a
group.
Unless
otherwise indicated, each of the stockholders named in the table below has
sole
voting and investment power with respect to such shares of common
stock. Except as otherwise indicated, the address of each of the
stockholders listed below is: c/o Shenyang Taiyu Electronic & Machinery Co.,
Ltd., A-1, 10, Street 7, Shenyang Economic and Technological Development Zone,
Shenyang China. 110027.
Shares
of
common stock subject to options, warrants, or other rights currently exercisable
or exercisable within 60 days of April 14, 2008, are deemed to be beneficially
owned and outstanding for computing the share ownership and percentage of the
stockholder holding such options and warrants, but are not deemed outstanding
for computing the percentage of any other stockholder.
|
Name
of Beneficial Owner
|
|
Number
of
Shares
Beneficially
Owned
(1)(2)
|
|
Percentage
Beneficially
Owned
(1)(2)(3)
|
|
|
5%
Stockholders:
|
|
|
|
|
|
|
|
|
Beijing
YSKN Machinery & Electronic Equipment Co., Ltd (4)
|
|
|
6,808,000
|
|
|
30.19
|
%
|
|
Yang
In Cheol
|
|
|
3,848,000
|
|
|
17.06
|
%
|
|
ShenYang
ZhiCe Investment Co., Ltd
|
|
|
2,960,000
|
|
|
13.12
|
%
|
|
Directors
and Named Executive Officers
|
|
|
|
|
|
|
|
|
All
Directors and named Executive Officers as a group
|
|
|
—
|
|
|
—
|
|
|
(1)
|
Beneficial
ownership has been determined in accordance with Rule 13d-3 under
the
Securities and Exchange Act of 1934. Unless otherwise noted, we
believe that all person named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned
by
them.
|
|
(2)
|
Unless
otherwise indicated, includes shares owned by a spouse, minor children,
and relatives sharing the same home, as well as entities owned or
controlled by the named beneficial owner. Unless otherwise
noted, shares are owned of record and beneficially by the named beneficial
owner.
|
|
(3)
|
Based
on 22,549,900 shares of common stock issued and outstanding as of
April
14, 2008.
|
|
(4)
|
Beijing
YSKN Machinery & Electronic Equipment Co., Ltd ("YSKN") is a sales
agent of Taiyu and is owned by Messrs. Liu Tong Yue and Li Fang,
each
holding 50% of the equitable and legal rights, title and interests
in and
to the share capital of YSKN. Mr. Wang, our sole director,
President and Chief Executive Officer Mr. Jun Wang, our director
and Chief
Executive Officer, was at one time the owner of 50% of the equity
in YSKN.
He transferred his 50% interest in YSKN to Mr. Liu Tong Yue, a friend,
and, by means of his personal relationship with him, believes that
he has
the right to the return of that 50% interest upon request.
|
Executive
Officers and Directors
The
following persons became our executive officers and directors on April 14,
2008,
upon effectiveness of the Share Exchange and hold the positions set forth
opposite their respective names.
|
Name
|
Age
|
Position
|
| |
|
|
|
Jun
Wang
|
40
|
Sole
Member of Board of Directors, President & Chief Executive
Officer
|
| |
|
|
|
Zhijuan
Guo
|
43
|
Chief
Financial Officer and Treasurer
|
| |
|
|
|
Huajun
Ai
|
37
|
Corporate
Secretary
|
Our
directors hold office for one-year terms and until their successors have been
elected and qualified. Our officers are elected annually by the board
of directors and serve at the discretion of the board.
Jun
Wang, Chairman & CEO
Mr.
Wang
is one of the original founders of Taiyu in 2002. Prior to that, from
2000 to 2002, he was the Vice General Manager of Beijing HotNet
Company. From 1996 to 1999, he was a sales manager for Honeywell
International Inc. From 1994 to 1996, he was a sales manager for Alfa
Laval. Mr. Wang obtained his Master's degree in Engineering from
Tsinghua University in 1989.
Zhijuan
Guo, CFO
Ms.
Guo
was appointed Chief Financial Officer of Taiyu in 2002. Prior to that
time, from December, 2000 to June, 2002, she served as the Production Planning
Director of Shenyang Thermoelectric Co. Ltd. From March, 1999 to
November, 2000, she served as Auditing Director of Shenyang Dongyu Group
Corp. From July, 1993 to February, 1999, Ms. Guo served as Finance
Manager of Shenyang Dongyu Real Estate Development Company. Ms. Guo
obtained her MBA degree from Shenyang NorthEastern University in
2001.
Huajun
Ai, Corporate Secretary
Ms.
Ai
joined Taiyu in 2002 as Corporate Secretary. Prior to that time, from
December, 2000 to October, 2002, she served as an accountant at Shenyang Dongyu
International Trade Co., Ltd. Prior to that time, from July, 1994 to
November, 2000 Ms. Ai served as an accountant at Northeast Jincheng Industrial
Corp. Ms. Ai obtained her Bachelor's degree in Foreign Trade
Accounting from Shenyang North Eastern University in 1994.
There
are
no family relationships among our directors and executive officers.
Employment
Agreements
On
January 1, 2008, Taiyu entered into a three year employment agreement with
Mr.
Jun Wang, which agreement may be renewed at the end of the initial term upon
mutual agreement between Mr. Jun Wang and Taiyu. Either party shall
give written notice to the other party of its intension not to renew the
agreement at least 30 days prior to the end of the initial
term. Pursuant to the terms of the employment agreement, Mr. Jun Wang
shall receive a salary in an amount that is not less than the lowest minimum
wage per month paid in Shenyang and shall be based on the uniform wage and
incentive system in Shenyang. In addition, Mr. Jun Wang shall be entitled to
overtime pay in accordance with the applicable law.
On
January 1, 2008, Taiyu entered into a three year employment agreement with
Ms.
Zhijuan Guo, at terms identical to the terms of the employment agreement with
Mr. Jun Wang.
Executive
Compensation
The
following Summary Compensation Table sets forth, for the years indicated, all
cash and other compensation paid, distributed or accrued for services, including
salary and bonus amounts, rendered in all capacities by our Named Executive
Officers who received or are entitled to receive remuneration in excess of
$100,000 during the stated periods:
|
Name
and
Principal
Position
|
|
Year
|
|
Salary
($) (1)
|
|
Other
Annual Compensation ($)
|
|
Total
($) (1)
|
|
|
Jun
Wang
President
and
Chief Executive Officer
|
|
|
2005
|
|
|
17,808
|
|
|
—
|
|
|
17,808
|
|
| |
|
|
2006
|
|
|
18,000
|
|
|
—
|
|
|
18,000
|
|
| |
|
|
2007
|
|
|
18,000
|
|
|
—
|
|
|
18,000
|
|
|
Zhijuan
Guo
Treasurer
and Chief Financial Officer
|
|
|
2005
|
|
|
10,684
|
|
|
—
|
|
|
10,684
|
|
| |
|
|
2006
|
|
|
10,684
|
|
|
—
|
|
|
10,684
|
|
| |
|
|
2007
|
|
|
10,684
|
|
|
—
|
|
|
10,684
|
|
|
(1)
|
based
on an exchange rate of 7.3 Yuan =
$1.00
|
Outstanding
Equity Awards at Fiscal Year-End
As
of
December 31, 2007, there were no outstanding equity awards held by executive
officers of our company.
Board
Independence
Mr.
Wang
doe not qualify as "independent" director, as that term is defined by applicable
listing standards of The NASDAQ Stock Market and SEC rules, including the rules
relating to the independence standards of an audit committee and the
non-employee director definition of Rule 16b-3 promulgated under the Exchange
Act. As a requirement to listing the Company's common stock on The
NASDAQ Capital Market or other exchange, the Company intends to add independent
directors. The board's composition (and that of its committees) will
be subject to the corporate governance provisions of its primary trading market,
including the requirement for appointment of independent directors in accordance
with the Sarbanes-Oxley Act of 2002, and regulations adopted by the SEC and
NASD
pursuant thereto.
Director
Compensation
We
do not
currently compensate our directors for acting as such, although we may do so
in
the future, including with cash and/or equity. We reimburse our
directors for reasonable expenses incurred in connection with their service
as
directors. As of April 14, 2008, none of our directors received any
compensation from us.
Code
of Ethics
We
intend
to adopt a code of ethics that applies to our officers, directors and employees,
including our Chief Executive Officer and Chief Financial Officer, but have
not
done so to date due to our relatively small size.
Board
Committees
Audit
Committee
We
intend
to establish an audit committee of the board of directors, which will consist
of
independent directors, of which at least one director will qualify as a
qualified financial expert as defined in Item 407(d)(5)(ii) of Regulation
S-K. The audit committee's duties would be to recommend to
our board of directors the engagement of independent auditors to audit our
financial statements and to review our accounting and auditing
principles. The audit committee would review the scope, timing and
fees for the annual audit and the results of audit examinations performed by
the
internal auditors and independent public accountants, including their
recommendations to improve the system of accounting and internal
controls. The audit committee would at all times be composed
exclusively of directors who are, in the opinion of our board of directors,
free
from any relationship which would interfere with the exercise of independent
judgment as a committee member and who possess an understanding of financial
statements and generally accepted accounting principles.
Compensation
Committee
We
intend
to establish a compensation committee of the board of directors. The
compensation committee would review and approve our salary and benefits
policies, including compensation of executive officers. The
compensation committee would also administer our stock option plans and
recommend and approve grants of stock options under such plans.
Stock
Incentive Plans
We
have
currently no stock incentive plan adopted. We intend to adopt a stock
incentive plan in order to further the growth and general prosperity of the
Company by enabling our employees, contractors and service providers to acquire
our common stock, increasing their personal involvement in the Company and
thereby enabling the Company to attract and retain its employees, contractors
and service providers.
Certain
Relationships and Related Transactions
YSKN,
our
30.19% shareholder was one of our sales agent in 2006 and 2007 and one of our
suppliers in 2006. Sales through such sales agent amounted to
$226,105 and $174,901 in the years 2006 and 2007,
respectively. During the year 2006 we purchased raw material from
YSKN in the amount of 215,031; in the year 2007, however, we did not make any
purchases of raw material from YSKN. As of April 14, 2008, we
currently owe to YSKN $138,585 from a loan provided by YSKN. Our
sales agency relationship with YSKN will not continue after the Share
Exchange.
YSKN
is
held by Mr. Liu TongYue and Mr. Li Fang, each holding 50% of the equitable
and
legal rights, title and interests in and to the share capital of
YSKN. Mr. Wang, our sole director, President and Chief Executive
Officer, was at one time the owner of 50% of the equity in YSKN. He transferred
his 50% interest in YSKN to Mr. Liu Tong Yue, a friend ,and, by means of his
personal relationship with him,, believes that he has the right to the return
of
that 50% interest upon request.
Item
3.02 Unregistered
Sales of Equity Securities.
Pursuant
to the Share Exchange Agreement, we issued an aggregate of 18,500,000 shares
of
common stock to nine non-U.S. persons (as contemplated by Rule 902 under the
Securities Act of 1933). The consideration for the issuance of these
shares of common stock was the exchange by such nine non-U.S. persons of 100%
of
the share capital of Taiyu. These issuances were exempt from
registration requirements under Regulation S under the Securities Act of 1933,
as amended. The shares issued pursuant to Regulation S were issued in
an "offshore transaction" as defined in, and pursuant to, Rule 902 under the
Securities Act of 1933, on the basis that the purchaser was not offered the
shares in the United States and did not execute or deliver any agreement in
the
United States.
Description
of our Securities
The
following description of our securities and provisions of our articles of
incorporation and bylaws is only a summary. We refer to the copies of
our articles of incorporation and bylaws, copies of which have been incorporated
by reference as exhibits to this Report on Form 8-K. The following
discussion is qualified in its entirety by reference to such
exhibits.
Authorized
Capital Stock
The
total
number of stock authorized that may be issued by us is 75,000,000 shares of
common stock with a par value of $0.001 per share. No other class of
stock is authorized.
Capital
Stock Issued and Outstanding
After
giving effect to the Share Exchange and the Split-Off, our issued and
outstanding securities, on a fully diluted basis, is as follows:
| |
·
|
22,549,900
shares of common stock; approximately 82.04% of which shares will
be held
by the Taiyu Shareholders and approximately 17.96% of which are held
by
the existing shareholders of
SmartHeat;
|
| |
·
|
No
shares of preferred stock;
|
| |
·
|
No
options to purchase any capital stock or securities convertible into
capital stock; and
|
| |
·
|
No
warrants to purchase any capital stock or securities convertible
into
capital stock.
|
Description
of Common Stock
The
holders of common stock are entitled to one vote per share. Our
Articles of Incorporation does not provide for cumulative voting. The
holders of common stock are entitled to receive ratably such dividends, if
any,
as may be declared by our board of directors out of legally available funds;
however, the current policy of our board of directors is to retain earnings,
if
any, for operations and growth. Upon liquidation, dissolution or
winding-up, the holders of common stock are entitled to share ratably in all
assets that are legally available for distribution. The holders of
common stock have no preemptive, subscription, redemption or conversion
rights.
Market
Price and Dividends
Taiyu
is,
and has always been a privately-held company and now is a wholly-owned
subsidiary of the Company. There is not, and never has been, a public
market for the securities of Taiyu. Our common stock is currently
approved for quotation on the OTC Bulletin Board maintained by the National
Association of Securities Dealers, Inc. under the symbol PFGD.OTCBB, but there
is currently no liquid trading market.
There
are
no restrictions in our articles of incorporation or bylaws that prevent us
from
declaring dividends. We have not previously paid any cash dividends
on our common stock and do not anticipate or contemplate paying dividends on
our
common stock in the foreseeable future. We currently intend to
utilize all available funds to develop our business. We can give no
assurances that we will ever have excess funds available to pay
dividends.
Indemnification
of Directors and Officers
Under
Nevada law, a corporation may indemnify its directors, officers, employees
and
agents under certain circumstances, including indemnification of such persons
against liability under the Securities Act of 1933, as amended. In
addition, a corporation may purchase or maintain insurance on behalf of its
directors, officers, employees or agents for any liability incurred by him
in
such capacity, whether or not the corporation has the authority to indemnify
such person.
Our
By-Laws provides, among other things, that a director, officer, employee or
agent of the corporation may be indemnified against expenses (including
attorneys’ fees inclusive of any appeal), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
claim, action, suit or proceeding if he acted in good faith and in a manner
he
reasonably believed to be in or not opposed to the best of our interests, and
with respect to any criminal action or proceeding, he had no reasonable cause
to
believe that his conduct was unlawful.
The
effect of these provisions may be to eliminate the rights of us and our
stockholders (through stockholder derivative suits on behalf of us) to recover
monetary damages against a director, officer, employee or agent for breach
of
fiduciary duty.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
as
amended, may be provided for directors, officers, employees, agents or persons
controlling an issuer pursuant to the foregoing provisions, the opinion of
the
SEC is that such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is therefore unenforceable.
Anti-Takeover
Effect of Certain By-Law Provisions
Certain
provisions of our By-Laws are intended to strengthen the board of directors’
position in the event of a hostile takeover attempt. These provisions
have the following effects:
| |
·
|
they
provide that only business brought before an annual meeting by a
stockholder who complies with the procedures set forth in the By-Laws
may
be transacted at an annual meeting of stockholders;
and
|
| |
·
|
they
provide for advance notice or certain stockholder actions, such as
the
nomination of directors and stockholder
proposals.
|
Market
Information
Our
common stock is currently approved for quotation on the OTC Bulletin Board
maintained by the National Association of Securities Dealers, Inc. under the
symbol PFGD.OTCBB, but there is currently no trading market. We have
notified the OTC bulletin board of our name change and will obtain a new
symbol. As soon as practicable, and assuming we satisfy all necessary
initial listing requirements, we intend to apply to have our common stock listed
for trading on the American Stock Exchange, National Stock Exchange or The
Nasdaq Stock Market, although we cannot be certain that any of these
applications will be approved.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Signature Stock Transfer,
Inc., 2301 Ohio Drive, Suite 100, Plano, Texas 75093. Our transfer
agent's telephone number is (972) 612-4120.
Item
4.01 Changes
in Registrant's Certifying Accountant
On
April
14, 2008, we dismissed Dale Matheson Carr Hilton Labonte LLP ("DMCHL") as our
independent accountants. DMCHL had previously been engaged as the
principal accountant to audit our financial statements. The reason
for the dismissal of DMCHL is that, following the consummation of the Share
Exchange on April 14. 2008, (i) the former stockholders of Taiyu own a
significant amount of the outstanding shares of our common stock and (ii) our
primary business became the business previously conducted by
Taiyu. The independent registered public accountant of Taiyu for US
accounting purposes was the firm of Goldman Parks Kurland Mohidin-GPKM LLP
(
("GPKM"). We believe that it is in our best interest to have GPKM
continue to work with our business, and we therefore retained GPKM as our new
principal independent registered accounting firm, effective as of April 15,
2008. GPKM is located at 16133 Ventura Blvd., Suite 880, Encino, CA
91436. The decision to change accountants was approved by our board
of directors on April 14, 2008.
The
report of DMCHL on our financial statements for the period from August 4, 2006
(inception) through our fiscal year ended October 31, 2007 did not contain
an
adverse opinion or disclaimer of opinion, nor was it qualified or modified
as to
uncertainty, audit scope or accounting principles, except that the report was
qualified as to our ability to continue as a going concern.
From
our
inception through April 15, 2008, there were no disagreements with DMCHL on
any
matter of accounting principles or practices, financial statement disclosure,
or
auditing scope or procedure which, if not resolved to the satisfaction of DMCHL,
would have caused it to make reference to the matter in connection with its
reports.
From
our
inception through April 14, 2008, we did not consult GPKM regarding either:
(i)
the application of accounting principles to a specific completed or contemplated
transaction, or the type of audit opinion that might be rendered on our
financial statements; or (ii) any matter that was the subject of a disagreement
as described in Item 304(a)(1)(iv) of Regulation S-K.
We
have
made the contents of this Current Report on Form 8-K available to DMCHL and
requested it to furnish us a letter addressed to the SEC as to whether DMCHL
agrees or disagrees with, or wishes to clarify our expression of, our views,
or
containing any additional information. A copy of DMCHL's letter to
the SEC is included as Exhibit 16.1 to this Current Report on Form
8-K.
Item
5.01 Changes
in Control of Registrant
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report
on
Form 8-K, which disclosure is incorporated herein by reference.
Item
5.02 Departure
of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers.
Following
the Share Exchange, on April 14, 2008, Mr. Jun Wang, the Chairman and Chief
Executive Officer of Taiyu was appointed to the board of directors of the
Company effective as of the closing on April 14, 2008. Mr. Jason
Schlombs resigned as a director, effective as of the close of business on April
15, 2008. As a result, Mr. Jun Wang became our sole member of our
board of directors.
Following
the Share Exchange, Mr. Schlombs resigned as President, Chief Executive Officer,
Secretary and Treasurer of the Company and Mr. Jun Wang was appointed as
President and Chief Executive Officer, Ms. Zhijuan Guo as Chief Financial
Officer and Ms. Huajun Ai as Corporate Secretary.
The
biographies of each of the new directors and officers are set forth in the
section entitled “Directors and Executive Officers” under Item 2.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
There
are
no transactions since the beginning of our last fiscal year, or any currently
proposed transaction, in which we were or are to be a participant and the amount
involved exceeds the lesser of $120,000 or one percent of the average of our
total assets at year-end for the last three completed fiscal years, and in
which
Mr. Jun Wang, Ms. Zhijuan Guo and Ms. Huajun Ai had or will have a direct or
indirect material interest, other than the ownership of shares of our common
stock as a result of the share exchange transaction. Such beneficial
ownership is set forth in the table under the caption “Security Ownership of
Certain Beneficial Owners and Management” under Item 2.01 of this Current Report
on Form 8-K, which disclosure is incorporated herein by
reference.
Item
5.03 Amendments
to Articles of Incorporation or Bylaws, Change in Fiscal
Year
On
April
14, 2008, we changed our name from Pacific Goldrim Resources, Inc. to SmartHeat
Inc by merging our wholly owned subsidiary SmartHeat Inc., a Nevada corporation,
into Goldrim. On April 16, 2008 our board of directors adopted new by-laws,
a copy of which is attached hereto as Exhibit 3.2 and is incorporated herein
by
reference.
On
April
14, 2008, our board of directors approved a change in our fiscal year from
a
fiscal year ending October 31 to a fiscal year ending on December
31. The change in our fiscal year took effect on April 14, 2008 and,
therefore, there will be no transition period in connection with this change
of
fiscal year-end. Our 2008 fiscal year will end on December 31,
2008.
Item
5.06 Change
in Shell Company Status
On
April
14, 2008, we consummated the transactions contemplated by the Share Exchange
Agreement. As a result of the consummation of the Share Exchange
described in Items 1.01 and 2.01 of this Current Report on Form 8-K, we believe
that we are no longer a shell corporation as that term is defined in Rule 405
of
the Securities Act and Rule 12b-2 of the Exchange Act.
Item
9.01 Financial
Statements and Exhibits
(a) Financial
Statements of Businesses Acquired
. In accordance with Item 9.01(a), Taiyu's audited financial
statements for the fiscal years ended December 31, 2006 and 2007.
The
unaudited financial statements of Taiyu for the three-month interim periods
ended March 31, 2008, and 2007 will be filed in a Current Report on Form 8-K/A
within the next 45 days.
(b) Pro
Forma Financial Information. In
accordance with Item 9.01(b), our pro forma financial statements are filed
in
this Current Report on Form 8-K as Exhibit 99.2.
The
unaudited pro forma combined balance sheet presents the accounts of the Company
and Taiyu as if the acquisition of Taiyu by the Company occurred on December
31,
2007. The unaudited pro forma consolidated statements of operations
present the accounts of the Company and Taiyu for the year ended December 31,
2007 as if the acquisition occurred on January 1, 2007 for income statement
purpose.
Reclassifications
have been made to historical financial statements to conform to our historical
financial statement presentation.
The
unaudited pro forma combined financial statements should be read in conjunction
with "Management's Discussion and Analysis of Plan of Operations" under Item
2.01 of this Current Report on Form 8-K, which disclosure is incorporated herein
by reference, and the historical consolidated financial statements and
accompanying notes of Taiyu. The unaudited pro forma combined
financial statements are not intended to represent or be indicative of our
results of operations or financial condition that would have been reported
had
the share exchange transaction been completed as of the dates presented, and
should not be taken as representative of the future results of operations or
financial condition of the Registrant.
(d) Exhibits
. The exhibits listed in the following Exhibit Index are filed as
part of this Current Report on Form 8-K.
|
Exhibit
Number
|
Description
|
|
|
|
|
2.1
|
Share
Exchange Agreement and Plan of Reorganization by and among SmartHeat
Inc.
("SmartHeat"), Shenyang Taiyu Electronic & Machinery Co., Ltd.
("Taiyu") and all of the shareholders of Taiyu (the "Taiyu Shareholders")
dated April 14, 2008*
|
|
|
|
|
2.2
|
Articles
of Exchange between Taiyu and SmartHeat, dated April 14,
2008*
|
|
|
|
|
2.3
|
Articles
of Merger between Pacific Goldrim Resources, Inc. and SmartHeat,
dated
April 14, 2008*
|
|
|
|
|
3.1
|
Certificate
of Incorporation (Incorporated herein by reference to Exhibit 3.2
to the
Company's Form SB-2 filed on December 22, 2006)
|
|
|
|
|
3.2
|
By-Laws
adopted April 15, 2008*
|
|
|
|
|
4.1
|
Specimen
Stock Certificate.*
|
|
|
|
|
10.1
|
English
Translation of Employment Agreement between Taiyu and Jun Wang, dated
January 1, 2008*
|
|
|
|
|
10.2
|
English
Translation of Employment Agreement between Taiyu and Zhijuan Guo,
dated
January 1, 2008*
|
|
|
|
|
10.3
|
Certificate
of Appointment by Sondex A/S of Taiyu as Authorized Dealer in China,
dated
March 2006 and letter naming Taiyu as Dealer of North China,
dated May 5, 2006*
|
|
|
|
|
10.4
|
Form
of Purchase Order for with Sondex A/S*
|
|
|
|
|
10.5
|
English
Translation of Sales Contract between Taiyu and Dalkia (Jiamusi)
Urban
Heating Company Ltd, dated June 18, 2007*
|
|
|
|
|
10.6
|
Form
of Purchase Order*
|
|
|
|
|
10.7
|
English
Translation of Loan Agreement with Citibank (China) Co., Ltd., dated
June
25, 2007*
|
|
|
|
|
10.8
|
English
Translation of Loan Agreement with China CITIC Bank, dated April
17,
2007*
|
|
|
|
|
10.9
|
Resignation
Letter from Jason Schlombs, dated April 15, 2008*
|
|
|
|
|
10.10
|
Agreement
of Conveyance, Transfer and Assignment of Assets and Assumption of
Obligations between SmartHeat and Goldrim Holding, Inc., dated April
14,
2008*
|
|
10.11
|
Stock
Purchase Agreement between Jason Schlombs and SmartHeat, dated April
14,
2008*
|
|
|
|
|
16.1
|
Letter
from Dale Matheson Carr Hilton Labonte LLP, dated April 18,
2008*
|
|
|
|
|
99.1
|
Combined
balance sheets of Taiyu for the year ended December 31, 2007 and
the three
months ended December 31, 2007 (unaudited) and the combined statements
of
income and other comprehensive income, stockholders' equity and cash
flows
for the years ended December 31, 2007 and 2006*
|
|
|
|
|
99.2
|
Unaudited
pro forma combined financial statements of Taiyu*
|
| |
|
|
99.3
|
Unaudited
combined balance sheets of Taiyu for the quarter ended March 31,
2008 and
the three months ended December 31, 2007 and the combined statements
of
income and other comprehensive income, and cash flows for the quarters
ended March 31, 2008 and 2007
|
| |
|
|
*
|
filed
as an Exhibit to the Current Report on Form 8-K filed on April 18,
2008
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
|
SmartHeat
Inc.
|
|
|
|
/s/ Jun Wang
|
|
Date:
July 17, 2008
|
By:
|
Jun
Wang
|
|
|
|
Name:
Jun Wang
|
|
|
|
Title: Chairman
& CEO
|
INDEX
TO EXHIBITS
|
Exhibit
Number
|
Description
|
|
|
|
|
2.1
|
Share
Exchange Agreement and Plan of Reorganization by and among SmartHeat
Inc.
("SmartHeat"), Shenyang Taiyu Electronic & Machinery Co., Ltd.
("Taiyu") and all of the shareholders of Taiyu (the "Taiyu Shareholders")
dated April 14, 2008*
|
|
|
|
|
2.2
|
Articles
of Exchange between Taiyu and SmartHeat, dated April 14,
2008*
|
|
|
|
|
2.3
|
Articles
of Merger between Pacific Goldrim Resources, Inc. and SmartHeat,
dated
April 14, 2008*
|
|
|
|
|
3.1
|
Certificate
of Incorporation (Incorporated herein by reference to Exhibit 3.2
to the
Company's Form SB-2 filed on December 22, 2006)
|
|
|
|
|
3.2
|
By-Laws
adopted April 15, 2008*
|
|
|
|
|
4.1
|
Specimen
Stock Certificate.*
|
|
|
|
|
10.1
|
English
Translation of Employment Agreement between Taiyu and Jun Wang, dated
January 1, 2008*
|
|
|
|
|
10.2
|
English
Translation of Employment Agreement between Taiyu and Zhijuan Guo,
dated
January 1, 2008*
|
|
|
|
|
10.3
|
Certificate
of Appointment by Sondex A/S of Taiyu as Authorized Dealer in China,
dated
March 2006 and letter naming Taiyu as Dealer of North China,
dated May 5, 2006*
|
|
|
|
|
10.4
|
Form
of Purchase Order for with Sondex A/S*
|
|
|
|
|
10.5
|
English
Translation of Sales Contract between Taiyu and Dalkia (Jiamusi)
Urban
Heating Company Ltd, dated June 18, 2007*
|
|
|
|
|
10.6
|
Form
of Purchase Order*
|
|
|
|
|
10.7
|
English
Translation of Loan Agreement with Citibank (China) Co., Ltd., dated
June
25, 2007*
|
|
|
|
|
10.8
|
English
Translation of Loan Agreement with China CITIC Bank, dated April
17,
2007*
|
|
|
|
|
10.9
|
Resignation
Letter from Jason Schlombs, dated April 15, 2008*
|
|
|
|
|
10.10
|
Agreement
of Conveyance, Transfer and Assignment of Assets and Assumption of
Obligations between SmartHeat and Goldrim Holding, Inc., dated April
14,
2008*
|
|
10.11
|
Stock
Purchase Agreement between Jason Schlombs and SmartHeat, dated April
14,
2008*
|
|
|
|
|
16.1
|
Letter
from Dale Matheson Carr Hilton Labonte LLP, dated April 18,
2008*
|
|
|
|
|
99.1
|
Combined
balance sheets of Taiyu for the year ended December 31, 2007 and
the three
months ended December 31, 2007 (unaudited) and the combined statements
of
income and other comprehensive income, stockholders' equity and cash
flows
for the years ended December 31, 2007 and 2006*
|
|
|
|
|
99.2
|
Unaudited
pro forma combined financial statements of Taiyu*
|
| |
|
|
99.3
|
Unaudited
combined balance sheets of Taiyu for the quarter ended March 31,
2008 and
the three months ended December 31, 2007 and the combined statements
of
income and other comprehensive income, and cash flows for the quarters
ended March 31, 2008 and 2007
|
| |
|
|
*
|
filed
as an Exhibit to the Current Report on Form 8-K filed on April 18,
2008
|