UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended: June 30,
2009
¨ TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ____________ to _____________
Commission
File No. 000-23039
CHINA
PRECISION STEEL, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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14-1623047
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification
No.)
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18th
Floor, Teda Building
87 Wing Lok Street, Sheungwan, Hong
Kong
People’s
Republic of China
(Address
of principal executive offices)
852-2543-2290
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, par value $0.001 per share
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The
NASDAQ Capital
Market
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Securities
registered pursuant to Section 12(g) of the Exchange Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
Accelerated Filer o
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Accelerated
Filer o
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Non-Accelerated
Filer o (Do not check if
a smaller reporting company)
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Smaller reporting
company x
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Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No x
The
aggregate market value of the 31,013,715 shares of voting stock and non-voting
common stock held by non-affiliates of the registrant as of December 31, 2008
was $36,906,321, based upon the last sale price of the registrant’s common stock
on December 31, 2008 (the last business day of the registrant’s most recently
completed second fiscal quarter) of $1.19 per share, as reported by the NASDAQ
Stock Market, Inc.
There
were a total of 46,562,955 shares of the registrant’s common stock outstanding
as of September 21, 2009.
DOCUMENTS INCORPORATED BY
REFERENCE
None.
CHINA
PRECISION STEEL, INC.
FORM
10-K
FOR
THE FISCAL YEAR ENDED JUNE 30, 2009
TABLE
OF CONTENTS
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PART I
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Item
1.
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Business.
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3
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Item
1A.
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Risk
Factors.
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14
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Item
1B.
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Unresolved
Staff Comments.
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32
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Item
2.
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Properties.
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32
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Item
3.
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Legal
Proceedings.
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32
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Item
4.
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Submission
of Matters To a Vote of Security Holders.
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32
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PART II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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33
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Item
6.
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Selected
Financial Data.
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35
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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36
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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57
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Item
8.
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Financial
Statements and Supplementary Data.
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58
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
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58
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Item
9A.
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Controls
and Procedures.
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58
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Item
9B.
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Other
Information.
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59
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PART III
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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60
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Item
11.
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Executive
Compensation.
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64
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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70
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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72
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Item
14.
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Principal
Accounting Fees and Services.
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73
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PART IV
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Item
15.
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Exhibits,
Financial Statement Schedules.
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74
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Special
Note Regarding Forward Looking Statements
This
Annual Report on Form 10-K and the documents incorporated by reference herein
include “forward-looking statements” within the meaning of Section 27A of the
United States Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the United States Securities Exchange Act of 1934, as amended, or
the Exchange Act. Any statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical facts
and may be forward-looking. These statements are often, but not always, made
through the use of words or phrases like “anticipate,” “estimate,” “plans,”
“projects,” “continuing,” “ongoing,” “target,” “expects,” “management believes,”
“we believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we
plan,” the negative of those terms, and similar words or phrases. We base these
forward-looking statements on our expectations, assumptions, estimates and
projections about our business and the industry in which we operate as of the
date of this Form 10-K. These forward-looking statements are subject
to a number of risks and uncertainties that cannot be predicted, quantified or
controlled and that could cause actual results to differ materially from those
set forth in, contemplated by, or underlying the forward-looking
statements. Statements in this Form 10-K and in documents
incorporated herein describe factors, among others, that could contribute to or
cause these differences. Actual results may vary materially from those
anticipated, estimated, projected or expected should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
including, but not limited to, our critical accounting policies and statements
relating to, among others: plans to expand our exports outside of China; plans
to increase our production capacity and the anticipated dates that such
facilities may commence operations; our ability to obtain additional funding for
our continuing operations and to fund our expansion; our ability to meet our
financial projections for any financial year; our ability to retain our key
executives and to hire additional senior management; continued growth of the
Chinese economy and industries demanding our products; our ability to produce
and sell cold-rolled precision steel products at high margins; our ability to
secure at acceptable prices the raw materials we need to produce our products;
political changes in China that may impact our ability to produce and sell our
products in our target markets; general business conditions and competitive
factors, including pricing pressures and product development; and changes in our
relationships with customers and suppliers.
Because
the factors discussed in this Form 10-K or documents incorporated by reference
could cause actual results or outcomes to differ materially from those expressed
in any forward-looking statement made by us or on our behalf, you should not
place undue reliance on any such forward-looking statement. Further, any
forward-looking statement speaks only as of the date on which it is made, and we
undertake no obligation to update any forward-looking statement or statements to
reflect events or circumstances after the date on which such statement is made
or to reflect the occurrence of unanticipated events. New factors emerge from
time to time, and it is not possible for us to predict which will arise. In
addition, we cannot assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statement.
Except as required by law, we undertake no obligation to publicly revise our
forward-looking statements to reflect events or circumstances that arise after
the date of this Form 10-K or the date of documents incorporated by reference
herein that include forward-looking statements.
Use
of Terms
Except as
otherwise indicated by the context, all references in this annual report to (i)
the “Company,” the “Group,” “we,” “us” or “our” are to China Precision Steel,
Inc., a Delaware corporation, and its direct and indirect subsidiaries; (ii)
“PSHL” are to our subsidiary Partner Success Holdings Limited, a BVI company;
(iii) “Chengtong” are to PSHL’s subsidiary Shanghai Chengtong Precision Strip
Company Limited, a PRC company; (iv) “Tuorong” are to PSHL’s subsidiary Shanghai
Tuorong Precision Strip Company Limited, a PRC company; (v) “Blessford
International” are to PSHL’s subsidiary Blessford International Limited, a BVI
company; (vi) “Shanghai Blessford” are to Blessford International’s subsidiary
Shanghai Blessford Alloy Company Limited, a PRC company; (vii) “Securities Act”
are to the Securities Act of 1933, as amended; (viii) “Exchange Act” are to the
Securities Exchange Act of 1934, as amended; (ix) “RMB” are to Renminbi, the
legal currency of China; (x) “U.S. dollar,” “$” and “US$” are to the legal
currency of the United States; (xi) “China,” “Chinese” and “PRC” are to the
People’s Republic of China; and (xii) “BVI” are to the British Virgin
Islands.
PART
I
Overview
We are a
niche and high value-added steel processing company principally engaged in the
manufacture and sale of high precision cold-rolled steel products and in the
provision of heat treatment and cutting of medium and high carbon hot-rolled
steel strips. We use commodity steel to create a specialty premium steel
intended to yield above-average industry gross margins. Specialty precision
steel pertains to the precision of measurements and tolerances of thickness,
shape, width, surface finish and other special quality features of
highly-engineered end-use applications.
We
conduct our operations principally in China through our wholly-owned operating
subsidiaries, Chengtong and Shanghai Blessford. Most of our sales are made
domestically in China; however, during fiscal 2007, we began exporting
our cold-rolled steel products to Thailand, Nigeria and Ethiopia. We intend to
expand into additional overseas markets in the future, subject to suitable
market conditions and favorable regulatory controls.
We
produce and sell precision ultra-thin and high strength cold-rolled steel
products with thicknesses ranging from 7.5 mm to 0.03 mm. We also provide heat
treatment and cutting and slitting of cold-rolled steel strips not exceeding 7.5
mm thickness. Our process puts hot-rolled de-scaled (pickled) steel coils
through a cold-rolling mill, utilizing our patented systems and high technology
reduction processing procedures, to make steel coils and sheets in customized
thicknesses, according to customer specifications. Currently, our specialty
precision products are mainly used in the manufacture of automobile parts and
components, steel roofing, plane friction discs, appliances, food packaging
materials, saw blades, textile needles and microelectronics.
As of
June 30, 2009, we had an annual production capacity of approximately 120,000
tons. Our first rolling mill, which has an operating capacity of 60,000 to
70,000 tons depending on the thickness of the steel processed, primarily
manufactures low carbon precision cold-rolled steel products. Our
second cold-rolling mill, which has been operating since October 2006 with a
production design capacity of 100,000 tons, has achieved 60% of its design
capacity as of June 30, 2009. We have completed construction of our third cold
rolling mill and are currently in the stage of testing and commissioning. Each
mill takes approximately three to four years to reach its full operating
capacity. The second and third mills have similar capacities and will focus on
the production of high carbon, high strength cold-rolled steel products and the
production of more complex precision steel products that cannot be manufactured
in our first rolling mill. Due to reduced orders on hand, our two rolling mills
were running at approximately 70% utilization rate as of June 30,
2009.
During
the fiscal years ended June 30, 2009, 2008 and 2007, we earned net loss of
$408,338, and net income of $18,583,111 and $7,472,661,
respectively. At June 30, 2009, we had total assets of $163,409,114.
Chengtong and Shanghai Blessford currently have approximately 331 employees,
including 45 senior management and technical staff members, and operate in
20,000 square meters of production facilities in Jiading District, Shanghai, the
PRC, on four acres of leased land.
Corporate
History and Structure
We are a
Delaware company. We became a public company in May 1997 through a reverse
merger with SSI Capital Corporation. At that time, we changed our name to
OraLabs Holding Corp. and our principal business was the production and sale of
consumer products relating to oral care and lip care and the distribution of
nutritional supplements through our wholly-owned subsidiary, OraLabs, Inc. In
December 2006, we merged with PSHL, a BVI company, which owns Chengtong. In
connection with that transaction, we subsequently redeemed all of the shares of
our outstanding common stock owned by our former President, Gary Schlatter, in
exchange for all of the issued shares of OraLabs, Inc. Thereafter, we renamed
ourselves China Precision Steel, Inc. to reflect our continuing
operations.
In the
year ended June 30, 2007, we added three indirect subsidiaries to our corporate
structure. On April 9, 2007, we purchased Tuorong, a PRC company,
through PSHL’s indirectly owned PRC subsidiary, Chengtong. The sole
activity of Tuorong is the ownership of a land use right with respect to
facilities leased to Chengtong. On April 10, 2007, PSHL purchased Blessford
International, a BVI company, for nominal consideration. Blessford International
does not conduct any business, but it owns a single subsidiary, Shanghai
Blessford, that is a wholly-foreign owned enterprise chartered in
China.
The
following chart reflects our organizational structure as of the date of this
report:
Our
business is conducted principally through Chengtong and through Shanghai
Blessford in Shanghai, PRC. Both Chengtong and Shanghai Blessford are Wholly
Foreign Owned Enterprises, or WFOEs, under Chinese law.
Our corporate headquarters are located
at 18th Floor, Teda Building, 87 Wing Lok Street, Sheung Wan, Hong Kong, and our
telephone number is (011) 852-2543-2290. Although we maintain a website at
www.chinaprecisionsteelinc.com, we do not intend that information
available on our website be incorporated into this filing.
Growth
Strategy
We aim to
maintain our position as the leading supplier of high strength and ultra-thin
cold-rolled premium specialty steel products in China, while building brand
awareness and demand for our products internationally. We have identified six
factors critical to the achievement of this goal:
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Focus on
Rapidly Growing Niche Segment. We will continue to focus on niche
markets. According to publicly available information, the demand for
precision cold-rolled steel products has been growing at a rate of 20%
annually over the past five years in China. Export demand, coupled with
domestic Chinese demand for automobile parts and components, steel
roofing, plane friction discs, appliances, food packaging materials, saw
blades, textile needles and microelectronics, is expected to continue,
thereby increasing demand for high precision steel products. Moreover, new
applications of steel products are continually being developed. Our
research and development efforts are focused on advancing processing
techniques and production of high strength and ultra-thin, cold-rolled
precision steel products to enhance our product offerings and expand our
market share.
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Leverage
Our Strengths to Compete Effectively with Imports. Specialty
precision steel is a relatively new industry in China with the majority of
precision steel imported from Japan, Korea, the European Union and the
United States. As a result, the average quality and standards of China’s
high precision steel industry lags behind the international norm. We
believe that our lower cost base allows us to sell our products at an
average of 5 to 10% below our international competitors and our
manufacturing in China gives us an advantage of shorter delivery time to
users in China. We will leverage our lower operating cost base, our
state-of-the-art patented manufacturing system and process, and our
strategic relationships with our major suppliers to produce cold-rolled
steel products with quality similar to international standards at lower
cost than international
competitors.
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Focus on
High Margin Products. We will continue to manufacture products with
high sustainable margins. We increased our gross margin from 5.8% in 2004
to 10.1% in 2009. The average gross margin of our high carbon steel
products ranges between 20 and 40% while the same for our low carbon steel
products ranges between 10 and 30%. We will provide additional services
such as heat treatment and cutting and slitting to further enhance our
margins. We believe these high gross margins are sustainable despite
fluctuations in steel prices because of the specialty of the end product
which allows price increases of raw material to be substantially passed
directly to our customers.
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Expand
Manufacturing Capacity. We will increase our production capacity by
commencing construction of a third cold-rolling mill with a design
capacity of 100,000 tons, based on the current range of specifications we
produce, in calendar year 2010. This will increase our total production
capacity to a total of approximately 260,000 tons in four years from now
when all three mills are operating at full
capacity.
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Compete
Internationally. We intend to expand our exports to compete in the
international marketplace. We believe that at present we are the only
non-Japanese company able to compete in the global marketplace with low
carbon precision cold-rolled steel products in the thickness range between
0.1 to 0.2 mm used for steel roofing. In addition, we are not aware of any
other company that currently manufactures high strength high carbon
cold-rolled steel with a width of or exceeding 1400mm. These products
provide us with a unique opportunity to compete in the global
marketplace.
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Retain Key
Personnel. The Chinese market is highly competitive for experienced
and talented executives and we will strive to retain our key executives,
including our Chairman, Wo Hing Li, and the General Manager, Hai Sheng
Chen. Their experience in strategic expansions and in steel manufacturing,
respectively, is critical to our continued growth and
success.
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Overview
of the Chinese Steel Industry
The
following industry information has been obtained from various publicly available
sources. We believe it is the most current information available on this
subject, and that it is widely available and reliable.
According
to The World Steel Association, China is the largest steel producing country,
producing over one-third of the world’s steel. In 2008, China produced 500
million tons of steel, up 2.2% from 2007. The China Iron and Steel Institute
estimates that China’s steel demand for 2009 will be between 490 million tons to
520 million tons and demand will exceed 600 million tons by 2011, while global
steel demand is projected to be 1.2 billion tons and reach over 1.45 billion
tons, respectively. China has increased its
steel exports from 7 million tons in 2003 to 60.5 million tons in 2008, making
it the number one ranked steel exporter globally. However, while China is a net
exporter of crude steel, it is a net importer of higher value precision cold
rolled steel products such as those produced by the Company.
Steel
products can be categorized as low-end (long products such as pipes, tubes,
wires and rods) and high end (flat products such as hot-rolled steel or
cold-rolled steel strips). Based upon information we obtained from the China
Metallurgical Industry Planning and Research Institute, or CMI, we believe that
approximately 65% of China’s steel production are low-end long products and
approximately 35% are high-end high value cold-rolled steel strips. The Company
operates in the high-end category of this market with its niche precision steel
processing and produces and sells high precision cold-rolled steel
products.
The
Chinese government has historically provided a subsidy by means of a value added
tax, or VAT, rebate to exporters of steel products. This rebate was reduced in
April 2007 in response to international pressure on China to curb its exports.
The subsidy has been eliminated for 83 products, including hot-rolled, thin
plate, steel wire, section, bar and H-beam, despite which, a 5% tax rebate
currently applies to the high value-add cold-rolled steel products the Company
produces.
We expect
that the Chinese government will continue to impose additional controls on
domestic steel producers in order to reduce pollution and further restrict
exports. For more information on Chinese regulations, see “Regulation”
below.
Products
Cold-rolled
specialty precision steel is a relatively new industry in China. Manufacturers
of products that use specialty precision steel products have traditionally
imported precision steel products from Japan, Korea, the European Union and the
United States. We believe that generally, to date, the average quality and
standards of China’s high precision steel industry lag behind the international
norm. Nonetheless, during the last five years, we believe that we have begun to
develop and establish a nationally recognized brand in China. Despite
having exported 21,009 tons of precision cold-rolled steel products to Thailand,
Nigeria and Ethiopia during the year ended June 30, 2009, we are not yet an
internationally widely known brand for cold-rolled precision steel
products.
For the
year ended June 30, 2009, we sold 84,001 tons of high precision
steel products with over one hundred specifications. We currently produce high
strength and ultra-thin cold-rolled precision steel coils and sheets with
reduced thickness ranging from 7.5 mm to 0.03 mm. We also provide heat treatment
and cutting and slitting of steel strips not exceeding 7.5 mm thickness. Our
precision steel products and services can be categorized into four major
categories:
Categories
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Uses
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Thickness
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1.
Low carbon steel
(cold-rolled,
hard-rolled)
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Steel
roofing, food packaging, dry batteries, electronic devices, kitchen
tools
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0.03-6.0mm
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2.
High carbon steel
(cold-rolled,
hot-rolled)
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Automobile
parts and components, grinding pieces, saw blades, weaving
needles
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0.5-7.5mm
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3.
Steel processing
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Tailor
made cold rolled steel products according to customer
specifications
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0.03-7.5mm
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4.
Steel services
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Heat
treatment of hot-rolled steel coils; cutting and slitting
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In 2006,
we made a strategic decision to switch our product mix from a concentration in
low carbon cold-rolled steel products with comparatively lower margins to a
combination of low carbon and higher end, higher margin, high-carbon cold-rolled
steel products as a result of continuous research and development and
accumulated experience. We produce our high strength and ultra-thin cold-rolled
precision steel strips using a process that utilizes our proprietary know-how
and certain patented technology. The finished products have a reduced thickness
ranging from 7.5 mm to 0.03 mm, and a width between 1000 mm to 1400 mm. We also
provide heat treatment and cutting and slitting services for high carbon
hot-rolled steel coils with thicknesses not exceeding 7.5 mm. To the best of our
knowledge, we are not aware of any other company in China that currently
manufactures high carbon high strength cold-rolled steel with a width of or
exceeding 1400 mm.
Cold-rolled
steel products are manufactured from hot-rolled de-scaled (pickled) steel coils
which are processed by cold reduction through a cold-rolling mill to customer
specified thicknesses. The process does not involve heating and the primary
feature of cold reduction is to reduce the thickness of the steel coils.
However, because the cold reduction operation induces very high strains
(work hardening) into the steel sheet, the precision steel sheet not only
becomes thinner, but also becomes much harder, less ductile and very
difficult to form. In order to make the cold-reduced steel products soft and
formable, they are annealed, or heated to high temperatures. Cold-rolled sheet
products are used in a wide variety of end applications, such as appliances
(refrigerators, washers, dryers, and other small appliances), automobiles
(exposed as well as unexposed parts), steel roofing, food packaging materials,
electric motors, microelectronics and food packaging.
Hard-rolled
steel represents steel products manufactured from cold reduction to the desired
thinness without annealing. The product is very stiff and is intended for flat
work where deformation is very minimal. This type of hard-rolled steel is most
often applied to further processing for applications such as continuous
galvanizing.
Hard-rolled
or cold-rolled steel with low carbon has a carbon content of less than 0.1%.
It is a very versatile and useful material, easily machined and worked
into complex shapes, is low in cost and has good mechanical properties.
Hard-rolled or cold-rolled steel with medium carbon has a carbon content of
0.3%. It is a typical engineered steel product. Hard-rolled or cold-rolled steel
with high carbon has a carbon content of 0.8% or more. This precision steel
product is very hard and quite brittle and is much less ductile than low carbon
steel. High carbon steel has good wear resistance and is used for railways as
well as for cutting tools. Acid wash steel is also known as acid pickling and
refers to the process of using liquid acids, for example hydrochloric acid, to
remove rust or oxides from the surface of steel. Removing rust prepares the
surface for a protective coating.
Products
with greater width have more applications and intended uses. Width is an
important differentiating factor because certain end products, such as washers
and automobiles, require materials with a certain minimum width. Although
materials with smaller width could also be used for these applications through
jointing, this increases production costs. As a result, wider products are more
flexible and cost efficient which further reduces the end user’s overall
cost.
Production
Facilities
Cold
Rolling Mills
As of
June 30, 2009, we had an annual production design capacity of approximately
120,000 tons, comprised of:
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one
1100 mm 12-high cold rolling mill, with an operating capacity of 60,000
tons, and
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one
1400 mm 12-high cold rolling mill, with an operation capacity of 100,000
tons and a 70% utilization rate at June 30,
2009.
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Construction
of a third mill, a 1450mm 4-high cold rolling mill, is currently in the testing
stage and expected to commence production in calendar year 2010. This mill will
have a design capacity of 100,000 tons, based on our current product
specifications, increasing our total production design capacity to approximately
260,000 tons in four years. The production facilities for the second and third
mills were completed in August 2006 and added approximately 10,000 square meters
of production area. These production facilities will primarily focus on high
carbon, high strength cold-rolled steel products and more complex precision
steel products that cannot be manufactured in our first rolling mill, which will
primarily dedicate to low carbon cold-rolled steel products.
Each mill
takes approximately three to four years to reach full operating capacity due to
the break-in and tuning period required for the equipment. Operating capacity,
or actual tonnage, may differ from design capacity due to modifications required
to accommodate different production processes, as well as product mix which
influences processing time. For example, the design capacity of the 1100 mm
rolling mill is 100,000 tons. However, it is now operating at its full
production capacity of 60,000 tons since it is manufacturing products with a
much reduced thickness than those contemplated by the original design. The 1400
mm rolling mill, which began production in October 2006, was operating at 60% of
its 100,000 ton design capacity at June 30, 2009 and is expected to reach its
full operating capacity in calendar year 2011.
Hydrogen
Annealing Furnace
Our
state-of-the-art annealing furnaces automatically control the complete annealing
process. The furnace uses pure hydrogen as protective gas to make the steel
surface clean and smooth with no carbon-off post-annealing. The furnace also
includes an oxygen station. In addition to the cold-rolling mills and annealing
furnaces, we also have a 1250 mm cleaning line, a 1000 mm cutting and slitting
line and a 1200 mm tension leveller.
Raw
Materials and Suppliers
We are
not dependent on any one single supplier for supply of hot-rolled coils. Several
Chinese steelmakers supply hot-rolled coils to us. Our largest supplier for the
year ended June 30, 2009 was BaoSteel Steel Products Trading Co.
Ltd..
Below is
a list of our principal suppliers during the fiscal years ended June 30, 2009,
2008 and 2007:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Principal Suppliers
|
|
$
|
|
|
% to
consumption
|
|
|
$
|
|
|
% to
consumption
|
|
|
$
|
|
|
% to
consumption
|
|
BaoSteel
Steel Products Trading Co. Ltd
|
|
|
15,805,702 |
|
|
|
21 |
|
|
|
16,439,918 |
|
|
|
30 |
|
|
|
4,633,054 |
|
|
|
14 |
|
Hangzhou
Relian Company Limited
|
|
|
- |
* |
|
|
- |
* |
|
|
11,050,813 |
|
|
|
20 |
|
|
|
8,598,117 |
|
|
|
25 |
|
Shanghai
Pinyun Steel Co., Limited
|
|
|
9,349,480 |
|
|
|
13 |
|
|
|
10,025,183 |
|
|
|
18 |
|
|
|
6,355,445 |
|
|
|
19 |
|
Shanghai
Changshuo Steel Company Ltd
|
|
|
- |
* |
|
|
- |
* |
|
|
- |
* |
|
|
- |
* |
|
|
3,408,301 |
|
|
|
10 |
|
*
Not major suppliers for the relevant years
Based
upon information obtained by us from the CMI, during our financial year ended
June 30, 2009 the price of steel generally decreased. However, the cost of
imported iron-ore increased substantially. This apparent anomaly was due to
excess supplies arising from excess capacities of the steel producers and, as a
result of the downwards pressure on the price of steel, the cost of steel rolls
have generally decreased within the relevant year. The CMI website may be viewed
in English and the website URL is www.metal.net.cn.
Although selling prices generally decreased, as of June 30, 2009, there is a
Chinese export tax of 5% on exports of certain steel products, including the
precision cold-rolled steel products that we produce. This has increased the
competitiveness of our products in the international marketplace.
The
prices of steel coils are very competitive, very volatile and dependent on
supply and demand. We have made bulk purchases in the past after taking into
account customers’ orders on hand at the time when steel supply was tight and
prices were high, in order to secure sufficient supply of raw material for
necessary production. As steel rolls have an extremely long shelf-life,
obsolescence is not a major concern. However, due to the decreases in steel
prices during the year ended June 30, 2009 and therefore selling prices of our
products, the raw materials we had built up some time ago in the high demand
season consequentially has an adverse impact on our margins.
Customers
All of
our production is based on confirmed sales orders. Generally, for new customers,
an initial deposit (approximately 30% of the aggregate contracted sales amount)
is pre-paid when the contract is signed. We have approximately 350 customers
with domestic customers primarily located in East China and overseas sales
reaching Thailand, Nigeria and Ethiopia. Our location in Shanghai with a well
developed transport network is particularly advantageous for meeting with
customers from inside and outside of China for product design discussions and
customer service. In addition, the delivery time is shorter and our products
have lower associated cost than international competitors. We intend to increase
our customer base by further expanding into North China, where the automotive
industries are concentrated, and globally.
Below is
a list of our principal customers during the fiscal years ended June 30, 2009,
2008 and 2007:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Customers
|
|
$ |
|
|
% to
sales
|
|
|
$ |
|
|
% to
sales
|
|
|
$ |
|
|
% to
sales
|
|
Salzgitter
Mannesmann International GMBH
|
|
|
14,275,799 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai
Changshuo Steel Company, Ltd
|
|
|
10,999,692 |
|
|
|
14 |
% |
|
|
18,513,819 |
|
|
|
21 |
|
|
|
5,428,110 |
|
|
|
10 |
|
Shanghai
Bayou Industrial Co. Ltd
|
|
|
— |
* |
|
|
— |
* |
|
|
10,494,752 |
|
|
|
12 |
|
|
|
— |
* |
|
|
— |
* |
Shanghai
Shengdejia Metal Co. Ltd
|
|
|
— |
* |
|
|
— |
* |
|
|
10,414,545 |
|
|
|
12 |
|
|
|
— |
* |
|
|
— |
* |
Shanghai
Ruixuefeng Metals Co., Limited
|
|
|
— |
* |
|
|
— |
* |
|
|
— |
* |
|
|
— |
* |
|
|
12,192,219 |
|
|
|
23 |
|
*
Not major customers for the relevant years
Sales
and Marketing
Our high
precision steel products are sold both to components manufactures and directly
to the end-users in various parts of China and international marketplace such as
Thailand, Nigeria and Ethiopia. Due to the nature of the industry and our
ability to process quality high end cold-rolled steel, we do very little formal
marketing. The majority of new orders come from current customers reducing
imports and new customers who contact us directly or through trading agents or
current customers.
Competition
Our
business is concentrated in the niche low carbon ultra-thin cold-rolled
precision steel and high-carbon, high strength cold-rolled steel processing and
is not in direct competition with large Chinese steelmakers such as Baosteel
Group Corporation and Magang Group. China’s large steelmakers concentrate on the
production of crude steel and hot-rolled steel from iron ore imported from
Brazil and Australia. Hot-rolled steel coils produced by these steelmakers are
then supplied as raw materials to high precision steel manufacturers, such as
us, for cold reduction processing to the desired thickness and applications.
Cold-rolled steel products are then sold to manufacturers and other customers in
industries such as automobile and food packaging.
Our
business is becoming increasingly competitive and capital intensive, and
competition comes primarily from importers. Some of our competitors have
financial resources, staff and facilities substantially greater than ours and we
may be at a competitive disadvantage compared with larger steel companies. Our
domestic competition in China’s ultra-thin cold-rolled precision steel segment
mainly comes from Qinghuangdao Longteng Precision Strip Co., Limited, or
Longteng. However, we understand that Longteng’s production capabilities are for
cold-rolled steel with widths of approximately 400 mm, whereas our cold-rolled
steel mills have a width of 1000 mm to 1400 mm (or up to 1450 mm with the
planned addition of the third cold-rolling mill). Consequently, Longteng’s
products are sold in a different market segment than ours and are not considered
to be direct competition. In the high carbon cold-rolled steel products segment,
we mainly compete with imports from Shinwha Steel Co., Ltd. in Korea. Further,
there are potential competitors who are currently constructing mills that are
expected to produce precision and specialty steel products both in China and
internationally.
Although
there is intense competition in China’s steel industry, this affects mostly
low-end or long steel products. We are currently the only supplier of high
carbon, high strength cold-rolled steel products with a thickness up to 6.0 mm
in China. We are not aware of any other Chinese manufacturer processing high
carbon cold-rolled steel products with this specification. In addition, the low
carbon precision cold-rolled steel products in the thickness range between 0.1
to 0.2 mm are traditionally dominated by Japanese manufacturers with higher
production costs. We started exporting low carbon products in this range during
fiscal 2007. We are not aware of any other manufacturer currently competing in
this specific low carbon segment in the global market that is from a
non-Japanese background.
Research
and Development
As of
June 30, 2009, we had three experienced engineers and technicians in the
Research and Development Department. The Research and Development Department
focuses on new product development, and the advancement and improvement in
quality and manufacturing technique of ultra-thin and high-strength cold-rolled
steel strip. In addition to the traditional research and development activities,
our engineers frequently interact with customers to detect changes in “patterns”
and customers’ specifications arising from constantly changing industry
needs.
Further,
we are working on research and development projects involving coiled springs for
automotive seat belts and steel for igniters in automotive air bag inflation
devices. The amount spent on research and development activities each year is
approximately 1% of our revenue for such year. We have budgeted 1% of revenues
to be spent for research and development activities for fiscal
2010.
Quality
Control
Following
the accreditation of the International Organization for Standardization, or ISO,
on October 8, 2004, we implemented the Quality Handbook in October 2004. This
Quality Handbook was prepared on the basis and standards of the ISO/TS16949
specifications, which ISO Technical Specifications are compatible with existing
American (QS-9000), German (VDA6.1), French (EAQF) and Italian (AVSQ) automotive
quality systems standards within the global automotive industry. Together with
ISO 9001:2000, ISO/TS 16949 specifies the quality system requirements for the
design, development, production, installation and servicing of automotive
related products.
Intellectual
Property
On
December 8, 2004, the State Intellectual Property Office in China granted a
ten-year patent right to the “Environment-Conscious Mill Bearing with Inner
Circulation Lubricant” to Chengtong and Shanghai Te’an-Yikai Bearing Co.,
Limited. The patented bearing is installed in our existing cold-roll mill and,
together with our internal know-how complementary to the patented bearing, we
believe we address a number of issues associated with the bearing lubrication in
cold-rolling and ensure smooth and effective operation of the cold-roll mill.
There is no direct or indirect affiliation between us and Shanghai Te’an-Yikai
Bearing Co, Limited. We and Shanghai Te’an-Yikai Bearing Co., Limited jointly
developed the environment-conscious mill bearing with inner circular
lubrication. Shanghai Te’an-Yikai Bearing Co., Limited retains the proprietary
right to the technology while we have the exclusive right to the application of
the technology.
We have
elected not to register any other patents and internally developed know-how
because of the uncertainty over the ability to enforce intellectual property
rights in China. We also protect our internally developed know-how and
production process (such as system pressure, cleanliness of the lubrication,
temperature control, appropriate allocation of oil supply and retrieving which
are vital in providing a radical solution to the difficulties associated with
lubricating rolling mills’ backing bearing) by requiring all key personnel
(production engineers and management staff members) to sign non-disclosure and
confidentiality contracts.
There can
be no assurance that third parties will not assert infringement or other claims
against us with respect to any of our existing or future products or processes.
There can be no assurance that licenses would be available if any of our
technology was successfully challenged by a third party, or if it became
desirable to use any third-party technology to enhance our products. Litigation
to protect our proprietary information or to determine the validity of any
third-party claims could result in a significant expense and divert the efforts
of our technical and management personnel, whether or not such litigation is
determined in our favor.
While we
have no knowledge that we are infringing upon the proprietary rights of any
third party, there can be no assurance that such claims will not be asserted in
the future with respect to existing or future products or processes. Any such
assertion by a third party could require us to pay royalties, to participate in
costly litigation and defend licensees in any such suit pursuant to
indemnification agreements, or to refrain from selling an alleged infringing
product.
Employees
As of
June 30, 2009, we employed a total of 331 full-time employees. The following
table sets forth the number of our employees by function.
Function
|
|
Number of Employees
|
|
Senior
Management
|
|
10
|
|
Equipment
& Maintenance
|
|
46
|
|
Production
|
|
184
|
|
Sales
and Marketing
|
|
9
|
|
Logistics
|
|
38
|
|
Quality
Control
|
|
9
|
|
Research
& Development
|
|
3
|
|
Human
Resource & Administration
|
|
26
|
|
Accounting
|
|
7
|
|
Total
|
|
331
|
|
Each
employee must enter into multiple employment contracts, including a
non-competition agreement, which are then filed with the municipal government.
All employees receive a base monthly salary. Management are entitled to a
year-end bonus up to 100% of their annual salary based upon our overall
performance results, seniority and individual performance and contribution to
the Company. Production employees are entitled to a monthly bonus calculated on
the basis of the quality of the products produced, and their respective
contribution to volume, safe production, correct use of equipment and energy
saving. Our production employees are not subject to collective
bargaining agreements.
Our
employees in China participate in a state pension plan mandated by Chinese
municipal and provincial governments. Benefits include social security, pension
benefits, and medical insurance. These benefits are paid in full by us and
equate to approximately 40% of our annual salary expenditures. We
believe that we are in material compliance with the relevant PRC
laws.
We
maintain a satisfactory working relationship with our employees, and we have not
experienced any significant labor disputes or any difficulty in recruiting staff
for our operations.
Regulation
The
Chinese legal system is based upon a civil law system of written statutes.
Unlike the common law system in the United States, prior court decisions may be
cited for reference but are not binding on subsequent cases and have limited
value as precedent. Since 1979, the PRC legislative bodies have promulgated laws
and regulations dealing with economic matters such as foreign investment,
corporate organization and governance, commerce, taxation and trade. We are
subject to numerous Chinese provincial and local laws and regulations, which may
be changed from time to time in response to economic or political conditions and
have a significant impact upon overall operations. Changes in these regulations
could require us to expend significant resources to comply with new laws or
regulations or changes to current requirements and could have a material adverse
effect on our operations and financial results.
The China
Central Government has promulgated a series of ongoing macro-control policies
which focus on the improvement of the country’s investment structure, with the
goal to secure a fast and sound development of the national economy. Excessive
investment in certain sectors is placed under stringent control while incentives
are given to other sectors.
Environmental
Laws
We are
currently subject to numerous Chinese provincial and local laws and regulations
relating to the protection of the environment. These laws continue to evolve and
are becoming increasingly stringent. The ultimate impact of complying with such
laws and regulations is not always clearly known or determinable because
regulations under some of these laws have not yet been promulgated or are
undergoing revision.
The State
Environmental Protection Administration Bureau is responsible for the
supervision of environmental protection, the implementation of national
standards for environmental quality and discharge of pollutants, and supervision
of the environmental management system in China. Environmental protection
bureaus at the county level or above are responsible for environmental
protection within their jurisdictions. The laws and regulations on environmental
protection require each company to prepare environmental impact statements for a
construction project to the environmental protection bureaus at the county
level. These must be prepared prior to when the construction, expansion or
modification commences.
The
Environmental Protection Law requires production facilities that may cause
pollution or produce other toxic materials to take steps to protect the
environment and establish an environmental protection and management system. The
system includes the adoption of effective measures to prevent and control
exhaust gas, sewage, waste residues, dust and other waste materials. Entities
discharging pollutants must register with the relevant environmental protection
authorities.
Penalties
for breaching the Environmental Protection Law include a warning, payment of a
penalty calculated on the damage incurred, or payment of a fine. When an entity
has failed to adopt preventive measures or control facilities that meet the
requirements of environmental protection standards, it may be required to
suspend its production or operations and pay a fine. Material violations of
environmental laws and regulations causing property damage or casualties may
also be subject to criminal liabilities.
We
believe that our current production and operating activities are in compliance
with the environmental protection requirements. We are not subject to any
admonition, penalty, investigations or inquiries imposed by the environmental
regulators, nor are we subject to any claims or legal proceedings to which we
are named as defendant for violation of any environmental laws and regulations.
To the best of our knowledge, our cold-rolled mills produce no impermissible
emissions. Our pickling process is outsourced to a local company which is
wholly-responsible for any failure to comply with applicable law. In addition,
our production facilities in Shanghai are on land formerly used for rice
farming. We have no reason to believe that such land has been subjected to any
prior contamination.
Patent
Protection
The PRC’s
intellectual property protection regime is consistent with those of other modern
industrialized countries, although enforcement of rights may prove difficult and
complex. China has domestic laws for the protection of rights in copyrights,
patents, trademarks and trade secrets. The PRC is also a signatory to most of
the world’s major intellectual property conventions, including:
|
|
Convention
establishing the World Intellectual Property Organization (WIPO
Convention) (June 4, 1980);
|
|
|
Paris
Convention for the Protection of Industrial Property (March 19,
1985);
|
|
|
Patent
Cooperation Treaty (January 1, 1994);
and
|
|
|
The
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
(November 11, 2001).
|
Patents
are governed by the China Patent Law and its Implementing Regulations, each of
which went into effect in 1985 and have been amended subsequently. China is a
signatory to the Paris Convention for the Protection of Industrial Property, in
accordance with which any person who has duly filed an application for a patent
in one signatory country shall enjoy, for the purposes of filing in the other
countries, a right of priority during the period fixed in the convention (12
months for inventions and utility models, and 6 months for industrial
designs).
The
Patent Law covers three kinds of patents, i.e. patents for inventions, utility
models and designs. The Chinese patent system adopts the principle of first to
file. This means that, where more than one person files a patent application for
the same invention, a patent can only be granted to the person who first filed
the application. Consistent with international practice, the PRC only allows the
patenting of inventions or utility models that possess the characteristics of
novelty, inventiveness and practical applicability. For a design to be
patentable, it should not be identical with or similar to any design which,
before the date of filing, has been publicly disclosed in publications in the
country or abroad or has been publicly used in the country and should not be in
conflict with any prior right of another.
PRC law
provides that anyone wishing to exploit the patent of another must conclude a
written licensing contract with the patent holder and pay the patent holder a
fee. One rather broad exception to this, however, is that where a party
possesses the means to exploit a patent but cannot obtain a license from the
patent holder on reasonable terms and in a reasonable period of time, the PRC
State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
license. A compulsory license can also be granted where a national emergency or
any extraordinary state of affairs occurs or where the public interest so
requires. SIPO, however, has not granted any compulsory license up to now. The
patent holder may appeal such decision within three months from receiving
notification by filing a suit in the People’s Court.
PRC law
defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. A patent holder who believes his patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. A preliminary injunction may be issued by the People’s
Court upon the patentee’s or the interested parties’ request before instituting
any legal proceedings or during the proceedings. Evidence preservation and
property preservation measures are also available both before and during the
litigation. Damages in the case of patent infringement is calculated as either
the loss suffered by the patent holder arising from the infringement or the
benefit gained by the infringer from the infringement. If it is difficult to
ascertain damages in this manner, damages may be reasonably determined in an
amount in excess of the license fee under a contractual license. The infringing
party may be also fined by Administration of Patent Management in an amount of
up to three times the unlawful income earned by such infringing party. If there
is no unlawful income so earned, the infringing party may be fined in an amount
of up to RMB500,000, or approximately $62,500.
Currency
The value
of the Renminbi, the main currency used in China, fluctuates and is affected by,
among other things, changes in China’s political and economic conditions. The
conversion of Renminbi into foreign currencies such as the U.S. dollar has been
generally based on rates set by the People’s Bank of China, which are set daily
based on the previous day’s interbank foreign exchange market rates and current
exchange rates on the world financial markets. The official exchange rate had
remained stable over the past several years. However, China has adopted a
floating rate with respect to the Renminbi, with a 0.3% fluctuation and is
expected to appreciate against other currencies, including the U.S.
dollar.
In
addition, the Renminbi is not a freely convertible currency at this time. Except
for export sales revenues in United States dollars, we receive all of our local
sales revenues in Renminbi. Payments of dividends and other expenditures in
foreign currencies outside China by us will require the conversion of Renminbi
into other currencies. We are able to make payments (including dividends) in
foreign currencies upon presentation of business documents through banks in
China authorized to conduct foreign currency transactions without the prior
approval from the PRC State Administration of Foreign Exchange, or SAFE. The
Chinese government has indicated that it will consider allowing the free
conversion of Renminbi into other currencies. However, there is no assurance
that it will not impose foreign exchange controls on normal transactions in the
future.
Labor
Laws
The new
Labor Contract Law took effect January 1, 2008 and governs standard terms and
conditions for employment, including termination and lay-off rights, contract
requirements, compensation levels and consultation with labor unions, among
other topics. In addition, the law limits non-competition agreements with senior
management and other employees with knowledge of trade secrets to two years and
imposes restrictions or geographical limits
We
operate in a highly competitive environment in which there are numerous factors
which can influence our business, financial position or results of operations
and which can also cause the market value of our common stock to decline. Many
of these factors are beyond our control and therefore, are difficult to predict.
The following section sets forth what we believe to be the principal risks that
could affect us, our business or our industry, and which could result in a
material adverse impact on our financial results or cause the market price of
our common stock to fluctuate or decline.
RISKS
RELATED TO OUR BUSINESS
The
global economic crisis could further impair the demand for our products and
affecting the overall availability and cost of external financing for our
operations.
The
continuation or intensification of the global economic crisis and turmoil in the
global financial markets may adversely impact our business, the businesses of
our customers from whom we generate revenues and our potential sources of
capital financing. The global economic crisis harmed most industries and
has been particularly detrimental to the real estate, construction, automobile
and consumer product industry. Since our steel products serve as key
components in construction and building materials, automobiles and household
products, our sales and business operations are dependent on the financial
health of the these industries and could suffer if our customers
experience, or continue to experience, a downturn in their business. In
addition, the lack of availability of credit could lead to a further weakening
of the Chinese and global economies and make capital financing of our operations
more expensive for us or impossible altogether. Presently, it is unclear
whether and to what extent the economic stimulus measures and other actions
taken or contemplated by the Chinese government and other governments throughout
the world will mitigate the effects of the crisis on the industries that affect
our business. These conditions have not presently impaired our ability to
access credit markets and finance our operations. However, the impact of
the current crisis on our ability to obtain capital financing in the future, and
the cost and terms of same, is unclear. Furthermore, deteriorating
economic conditions including business layoffs, downsizing, industry slowdowns
and other similar factors that affect our customers could have further negative
consequences for the real estate, construction, automobile and consumer product
industry and result in lower sales, price reductions in our products and
declining profit margins. The economic situation also could harm our current or
future lenders or customers, causing them to fail to meet their obligations to
us. No assurances can be given that the effects of the current crisis will not
damage on our business, financial condition and results of
operations.
Steel
consumption is cyclical and worldwide overcapacity in the steel industry and the
availability of alternative products has resulted in intense competition, which
may have an adverse effect on our profitability and cash flow.
Steel
consumption is highly cyclical and generally follows general economic and
industrial conditions both worldwide and in various smaller geographic areas.
The steel industry has historically been characterized by excess world supply.
This has led to substantial price decreases during periods of economic weakness,
which have not been offset by commensurate price increases during periods of
economic strength. Substitute materials are increasingly available for many
steel products, which may further reduce demand for steel. Additional
overcapacity or the use of alternative products could have a material adverse
effect upon our results of operations.
The
risk that we could suffer unrecoverable losses on our accounts receivable may be
increased by our practice of offering extended customer credit and payment terms
to our customers, together with the current negative global economic
conditions. Any such unrecoverable losses could adversely affect our
financial results.
We
operate our business in China. Credit periods vary substantially in China across
industries, segments, types and size of companies. We operate in a
niche of the China steel industry, specifically in the manufacture and sale of
high precision cold-rolled steel products and in the provision of heat treatment
and cutting of medium and high carbon hot-rolled steel strips. Our
customers are also niche operators, including manufacturers of automobile parts
and components, steel roofing, plane friction discs, appliances, food packaging
materials, saw blades, textile needles and microelectronics. Because
of the nature of our business, our business cycle and that of our customers is
relatively long. As a result, the credit and payment terms that we
extend to our customers in the normal course of business are also relatively
long. We offer credit to our customers for periods of 60 days, 90 days, 120 days
and 180 days, with the longer credit terms generally offered to longstanding
recurring customers with good payment histories and sizable operations. Our
management determines the collectability of outstanding accounts by maintaining
quarterly communication with such customers and obtaining confirmation of their
intent and ability to fulfill their obligations to the Company. In making this
determination, our management also considers past collection experience, our
relationship with customers and the impact of current economic conditions on our
industry and market and the financial condition of the customer, to the extend
discoverable. Until June 30, 2009, we did not have a policy of
writing off or reserving a specific dollar amount or percentage of accounts
receivable based on aging of such accounts.
The
following table reflects the aging of our accounts receivable as of June 30,
2009 and 2008, after taking into consideration credit periods offered to our
customers. As of June 30, 2009, apart from one major customer who
accounted for 38% of accounts receivable which were past due over 180 days, the
remaining 62% of our accounts receivable over 180 days is spread among
approximately 27 different customers.
June 30,
2009
US$
|
|
Total
|
|
|
Current
|
|
|
1 to 30
days
|
|
|
31 to
90 days
|
|
|
91 to 180
days
|
|
|
181 to 360
days
|
|
|
over
1 year
|
|
TOTAL
|
|
|
25,970,961 |
|
|
|
14,497,258 |
|
|
|
405,769 |
|
|
|
1,639,027 |
|
|
|
7,061,774 |
|
|
|
2,168,481 |
|
|
|
198,652 |
|
%
|
|
|
100 |
|
|
|
56 |
|
|
|
2 |
|
|
|
6 |
|
|
|
27 |
|
|
|
8 |
|
|
|
1 |
|
June 30,
2008
US$
|
|
Total
|
|
|
Current
|
|
|
1 to 30
days
|
|
|
31 to
90 days
|
|
|
91 to 180
days
|
|
|
181 to 360
days
|
|
|
over
1 year
|
|
TOTAL
|
|
|
34,816,553 |
|
|
|
32,711,335 |
|
|
|
313,936 |
|
|
|
1,414,991 |
|
|
|
157,578 |
|
|
|
111,863 |
|
|
|
106,850 |
|
%
|
|
|
100 |
|
|
|
94 |
|
|
|
1 |
|
|
|
4 |
|
|
<1
|
|
|
<1
|
|
|
<1
|
|
We have
not previously determined it appropriate or necessary to write-off or
specifically reserve for any aged accounts receivable based on a determination
of uncollectability, other than a write-off of accounts receivable of $3,835,124
during the fiscal year ended June 30, 2009. This charge reflects a
write-off of accounts receivable due to a dispute between the Company and one of
our customers regarding a special stainless steel product processed by the
Company and delivered to the customer during the third and fourth quarters of
the year ended June 30, 2008. Revenues for these products were initially
recognized as services had been rendered and the goods had been delivered, and
collectability was reasonably assured as the goods were delivered in accordance
to the terms of the contract and management had no reason to believe that the
customer would object to the goods and services provided. However, in
the months following such delivery, a dispute arose during the use of such
products by the customer, which was followed by discussions between us and the
customer regarding the technical aspects of the products and the possibility of
reprocessing the products. After a few rounds of negotiation with the customer
regarding the products and payment, our management determined as of June 30,
2009, that this account receivable is uncollectible. The Company does not have
any other accounts receivable related to this product.
As of
June 30, 2009, all our customers confirmed that they were committed to
fulfilling their obligations to the Company and we were aware of no other basis
for reclassifying any such accounts as uncollectable. As a result, we
determined that an allowance for doubtful accounts of $830,127 as of June
30, 2009, was appropriate, as compared to $1,033,479 at June 30, 2008. To date,
we have collected approximately $0.9 million, or 40% of our accounts that were
over 180 days old at June 30, 2009. We believe there was no material
deterioration of the accounts receivable at June 30, 2009.
We note,
however, that we experienced delays in customer payment of accounts receivable
during the fiscal year ended June 30, 2009. Approximately 9% of our
accounts receivable as of June 30, 2009 was over 180 days past due, compared to
1% of our accounts receivable being over 180 days past due as of June 30,
2008. Our customers, for example the high-carbon cold-rolled steel
customers in the auto industry, had high inventory balances on hand at the time
due to build up during the sales boom immediately before the global crisis, and
had indicated delay in payments due to slower turnaround. These delays have
caused a much smaller decrease in the accounts receivable balance as compared to
the decrease of sales revenue in the fiscal year ended June 30, 2009. However,
the Chinese government has been implementing measures and macro-economic
policies aimed to stimulate the Chinese economy since the start of 2009, and as
one of the pillar industries under support, our customers in the auto industry
have indicated to us that they were seeing increased orders during the second
and third quarters of 2009 as a result of the stimulus packages and have
indicated to us that they were committed to settling their respective
outstanding accounts receivable. There are similar cases with our other
customers who have also expressed confirmation for settlement as they have been
seeing increased orders and collection themselves as the stimulus package is
implemented. We also note the continuation or intensification of the current
worldwide economic crisis may have negative consequences on the business
operations of our customers despite the efforts of the Chinese government and
may adversely impact their ability to meet these financial obligations to us,
resulting in unrecoverable losses on such accounts
receivable. Although we believe that our current reserves for
doubtful accounts are adequate in light of current market conditions, and we are
not aware of any specific increases in doubtful accounts, we have nevertheless
elected to prepare for the potential worsening of the global economic downturn,
and the slowdown in the steel industry in China in particular, by increasing
such reserves for 2009. To reserve for potentially uncollectible accounts
receivable, management has made a 50% provision for all accounts receivable that
are over 180 days past due and full provision for all accounts receivable over 1
year past due for the year ended June 30, 2009. The Company had $830,127 and
$1,033,479 of allowances for doubtful accounts, respectively; and provision for
bad debts of $3,831,478 and $686,955, respectively, for the year ended June 30,
2009 and 2008.
From time
to time we will review credit periods offered, along with our collection
experience and the other factors discussed above, to evaluate the adequacy of
our allowance for doubtful accounts, and to make changes to the allowance, if
necessary, including reducing such allowances if uncollectable accounts do not
actually increase and the other factors we consider in determining the
collectability of accounts do not deteriorate. However, if our actual
collection experience with our customers or other conditions change, or the
other factors that we consider indicate that it is appropriate, a further
provision for doubtful accounts may be required, which could adversely affect
our financial results.
We
provide advances to suppliers when placing purchase orders in the ordinary
course of our business. If we must write-off a material amount of
these advances for any reason, or if we are unable to obtain delivery of raw
material from suppliers to whom we have paid advances for any reason, our
financial results will be negatively impacted.
In order
to insure a steady supply of raw materials, the Company is required from time to
time to make cash advances to its suppliers when placing purchase orders, for a
guaranteed minimum delivery quantity at future times when raw materials are
required. The advance is seen as a deposit to suppliers and guarantees our
access to raw materials during periods of shortages and market volatility, and
is therefore considered an important component of our
operations. Contracted raw materials are priced at prevailing market
rates agreed by us with the suppliers prior to each delivery date and the
balance of our advances decrease when we take down contracted material at a
future date. Balances decrease at a slower rate during periods when
raw material prices are decreasing or when we take fewer deliveries from our
suppliers. During the fiscal year ended June 30, 2009, lower steel prices
coupled with reduced orders and therefore take down of contracted raw materials
from the advances paid led to a slower decrease of such balance. We had
therefore obtained a cash refund from one of our major suppliers in the amount
of $5.0 million in view of the above.
Advances
to suppliers are shown net of an allowance which represents potentially
unrecoverable cash advances at each balance sheet date. Our allowances for
advances to suppliers are subjective critical estimates that have a direct
impact on reported net earnings, and are reviewed quarterly at a minimum to
ensure the appropriateness of the allowance in light of the circumstances
present at the time of the review. Such allowances are based on an
analysis of past raw materials receipt experience and the credibility of each
supplier according to its size and background. For example, we do not generally
provide allowances against advances paid to state owned companies as we believe
that there is minimal risk of default. It is reasonably possible that
the Company’s estimate of the allowance will change, such as in the case when
the Company becomes aware of a supplier’s inability to deliver the contracted
raw materials or meet its financial obligations. At June 30, 2009 and
2008, the Company had allowances of advances to suppliers of $1,631,557 and
$2,522,837, respectively. Approximately 48% of our advance to suppliers was
greater than 180 days as of June 30, 2009, the majority, or 74% of which, is
attributable to our advances to a single supplier, a subsidiary of a state-owned
company in China. We believe that advances paid to state-owned companies are
ultimately collectible because they are backed by the full faith and credit of
the PRC government. As such, we do not provide allowances against such advances.
During the fiscal year June 30, 2009, we have also received a $5.0 million cash
refund of supplier advances of over 180 days from one of our major suppliers,
representing 23% of advances to suppliers as of June 30, 2009.
Allowances
for advances to suppliers are written off when all efforts to collect the
materials or recover the cash advances have been unsuccessful, or when it has
become known to the management that there is no intention for the suppliers to
deliver the contracted raw materials or refund the cash advances. To
date we have not written off any advances to suppliers. If any
material advances to suppliers must be written-off, or if we can not secure
delivery of raw materials that have pre-paid with such advances, then our
financial results will be negatively impacted.
Rapidly
growing demand and supply in China and other developing economies may result in
additional excess worldwide capacity and falling steel prices, which could
adversely impact our results.
Over the
last several years steel consumption in China and other developing economies
such as India has increased at a rapid pace. Steel companies have responded by
developing plans to rapidly increase steel production capability in these
countries and entered into long-term contracts with iron ore suppliers in
Australia and Brazil. Steel production, especially in China, has been expanding
rapidly and could be in excess of Chinese demand depending on continuing growth
rates. Because China is now the largest worldwide steel producer, any
significant excess in Chinese capacity could have a major impact on domestic and
international steel trade and prices.
Environmental
compliance and remediation could result in substantially increased capital
requirements and operating costs.
Our
operating subsidiaries, Chengtong and Shanghai Blessford, are subject to
numerous Chinese provincial and local laws and regulations relating to the
protection of the environment. These laws continue to evolve and are becoming
increasingly stringent. The ultimate impact of complying with such laws and
regulations is not always clearly known or determinable because regulations
under some of these laws have not yet been promulgated or are undergoing
revision. Our consolidated business and operating results could be materially
and adversely affected if our operating subsidiaries were required to increase
expenditures to comply with any new environmental regulations affecting its
operations.
We
may require additional capital in the future and we cannot assure that capital
will be available on reasonable terms, if at all, or on terms that would not
cause substantial dilution to stockholdings.
The
development of high quality specialty precision steel requires substantial
funds. Sourcing external capital funds for product development and requisite
capital expenditures are key factors that have and may in the future constrain
our growth, production capability and profitability. To achieve the next phase
of our corporate growth, increased production capacity, successful product
development and additional external capital will be necessary. There can be no
assurance that such capital will be available in sufficient amounts or on terms
acceptable to us, if at all. Any sale of a substantial number of additional
shares of common stock or securities convertible into common stock will cause
dilution to the holders of our common stock and could also cause the market
price of our common stock to decline.
We
face significant competition from competitors who have greater resources than we
do, and we may not have the resources necessary to successfully compete with
them.
We are
one of a few manufacturers of specialty precision steel products in China.
Differences in the type and nature of the specialty precision steel products in
China’s steel industry are relatively small, and, coupled with intense
competition from international and local suppliers, to a limited extent,
consumers’ demand can be price sensitive. Competitors may increase their market
share through pricing strategies that adversely impact our business. Our
business is in an industry that is becoming increasingly competitive and capital
intensive, and competition comes from manufacturers located in China as well as
from international competition. Our competitors may have financial resources,
staff and facilities substantially greater than ours and we may be at a
competitive disadvantage compared with larger companies.
We
produce a limited number of products and may not be able to respond quickly to
significant changes in the market or new market entrants.
Cold-rolled
specialty precision steel is a relatively new industry in China; Chinese
manufacturers of durable goods previously relied solely on imports from Japan,
Korea, the European Union and the United States. We believe the average quality
and standards of products of China’s high precision steel industry lags behind
the international norm. During the last four years, we have developed a
nationally recognizable brand, however, we are not yet an internationally
recognizable brand for our specialty steel products. Although we offer high
precision cold rolled steel products in over 100 specifications, there are many
other specialty precision steel products of similar nature in the market, even
though none currently compete directly with our products. If there are
significant changes in market demands and/or competitive forces, we may not be
able to change our product mix or adapt our production equipment quickly enough
to meet customers’ needs. Under such circumstances, our narrow band of precision
steel products and/or new market entrants may negatively impact our financial
performance.
Increased
imports of steel products into China could negatively affect domestic steel
prices and demand levels and reduce profitability of domestic
producers.
Based on
our understanding, China’s total production capacity of precision cold-rolled
steel coils was over two million tons as of June 30, 2009. However,
domestic production continues to be insufficient to meet demand. As a result,
China continues to import a significant portion of its steel products. Foreign
competitors may have lower labor costs, and are often owned, controlled or
subsidized by their governments, which allows their production and pricing
decisions to be influenced by political and economic policy considerations as
well as prevailing market conditions. Import levels may also be impacted by
decisions of government agencies, under trade laws. Increases in future levels
of imported steel could negatively impact future market prices and demand levels
for our precision steel products.
We
are dependent on our Chinese manufacturing operations to generate the majority
of our income and profits, and the deterioration of any current favorable local
conditions may make it difficult or prohibitive to continue to operate or expand
in China.
Our
current manufacturing operations are located in China, our administrative
offices are in Hong Kong and we have additional establishments in the British
Virgin Islands. The geographical distances between these facilities create a
number of logistical and communications challenges, including time differences
and differences in the cultures in each location, which makes communication and
effective cooperation more difficult. In addition, because of the location
of the manufacturing facilities in China, our operations in China could be
affected by, among other things:
|
|
economic
and political instability in China, including problems related to labor
unrest;
|
|
|
lack
of developed infrastructure;
|
|
|
variances
in payment cycles;
|
|
|
overlapping
taxes and multiple taxation issues;
|
|
|
employment
and severance taxes;
|
|
|
compliance
with local laws and regulatory
requirements;
|
|
|
greater
difficulty in collecting accounts receivable;
and
|
|
|
the
burdens of cost and compliance with a variety of foreign
laws.
|
Moreover,
inadequate development or maintenance of infrastructure in China, including
adequate power and water supplies, transportation, raw materials availability or
the deterioration in the general political, economic or social environment could
make it difficult, more expensive and possibly prohibitive to continue to
operate or expand our facilities in China.
Our
operations are international and we are subject to significant worldwide
political, economic, legal and other uncertainties that may make it difficult or
costly to collect amounts owed to us or to conduct operations should materials
needed from certain places be unavailable for an indefinite or extended period
of time.
We have
subsidiaries in the British Virgin Islands and China. We manufacture all of our
products in China and substantially all of the net book value of our total fixed
assets is located there. However, we sell our products to customers outside of
China as well as domestically. As a result, we have receivables from and goods
in transit to locations outside of China. Protectionist trade legislation in the
United States or other countries, such as a change in export or import
legislation, tariff or duty structures, or other trade policies, could adversely
affect our ability to sell products in these markets, or even to purchase raw
materials or equipment from foreign suppliers. Moreover, we are subject to a
variety of United States laws and regulations, changes to which may affect our
ability to transact business with certain customers or in certain product
categories.
In China,
our operating subsidiaries Chengtong and Shanghai Blessford are subject to
numerous national, provincial and local governmental regulations, all of which
can limit our ability to react to market pressures in a timely or effective way,
thus causing us to lose business or miss opportunities to expand our business.
These include, among others, regulations governing:
|
|
environmental
and waste management;
|
|
|
our
relationship with our employees, including: wage and hour requirements,
working and safety conditions, citizenship requirements, work permits and
travel restrictions;
|
|
|
property
ownership and use in connection with our leased facilities in China;
and
|
|
|
import
restrictions, currency restrictions and restrictions on the volume of
domestic sales.
|
The
end-use markets for certain of our products are highly competitive and customers
are willing to accept substitutes for our products which could reduce our
results of operations.
Buyers of
certain cold-rolled steel products are in highly competitive markets.
Cold-rolled precision steel competes with other materials, such as aluminum,
plastics, composite materials and glass, among others, for industrial and
commercial applications. Customers have demonstrated a willingness to substitute
other materials for cold-rolled steel. The willingness of our customers to
accept substitutes for cold-rolled steel products could have a material adverse
effect on our financial results.
We may not be
able to pass on to customers the increases in the costs of our raw materials,
particularly crude steel.
We
require substantial amounts of raw materials in our business, consisting
principally of steel slabs and strip steel. Any substantial increases in the
cost of crude steel could adversely affect our financial condition and results
of operations. The availability and price of crude steel depends on a number of
factors outside our control, including general economic conditions, domestic and
international supply and tariffs. Increased domestic and worldwide demand for
crude steel has had and will continue to have the effect of increasing the
prices that we pay for these raw materials, thereby increasing our cost of goods
sold. Generally, there is a potential time lag between changes in prices under
our purchase contracts and the point when we can implement a corresponding
change under our sales contracts with our customers. As a result, we can be
exposed to fluctuations in the price of raw materials, since, during the time
lag period, we may have to temporarily bear the additional cost of the change
under our purchase contracts, which could have a material adverse effect on our
profitability. If raw material prices were to increase significantly without a
commensurate increase in the market value of our products, our financial
condition and results of operations would be adversely affected.
Although
we are dependent on a steady flow of raw materials for our operations, we do not
have in place long-term supply agreements for all of our material
requirements.
Although
a substantial portion of our raw material requirements is met by BaoSteel Steel
Products Trading Co., Ltd. for the year ended June 30, 2009, we are not
dependent on any one single supplier for supply of hot-rolled coils as these
coils are generally available in the market. However, we do not currently have
long-term supply contracts with any particular supplier, including BaoSteel
Steel Products Trading Co., Ltd., to assure a continued supply of the raw
materials we need in our operations. While we maintain good relationships with
these suppliers, the supply of raw materials may nevertheless be interrupted on
account of events outside our control, which will negatively impact our
operations.
We
have substantial indebtedness with floating interest rates and the cost of our
borrowings may increase.
We are
subject to interest rate risk on our non-derivative financial instruments. We do
not hedge our interest rate risk. At June 30, 2009, our total bank debt
outstanding was $22,489,031, all of which was interest-bearing. Substantially
all of the bank debt was floating-rate debt with interest rates which vary with
changes in the standard rate set by the People’s Bank of China for RMB loans and
SIBOR for USD loan. A change in the interest rate or yield of fixed rate debt
will only impact the fair value of such debt, while a change in the interest
rate of floating rate, or variable rate, debt will impact interest expense as
well as the amount of cash required to service such debt. To the extent interest
rates increase, we will be liable for higher interest payments to its lenders.
We anticipate that annual interest on loans for the fiscal year ending June 30,
2010, will be approximately $1.2 million. The impact of a 1% increase in
interest rates will increase interest expense by approximately $225,000. As our
short-term loans mature in July 2010, we will be required to either repay or
refinance these loans. An increase in short-term interest rates at the time that
we seek to refinance short-term borrowings may increase the cost of borrowings,
which may adversely affect our earnings and cash available for distribution to
our stockholders.
At June
30, 2009, the aggregate fair value of our financial instruments with exposure to
interest rate risk was approximately $22.5 million. The potential change in fair
value for these financial instruments from an adverse 10% change in quoted
interest rates across all maturities, often referred to as a parallel shift in
the yield curve, would be approximately $2.5 million at June 30,
2009.
The
loss of any key executive or our failure to attract and retain key personnel
could adversely affect our future performance, strategic plans and other
objectives.
The loss
or failure to attract and retain key personnel could significantly impede our
future performance, including product development, strategic plans, marketing
and other objectives. Our success depends to a substantial extent not only on
the ability and experience of our senior management, but particularly upon our
Chairman, Wo Hing Li; the General Manager of Chengtong, Hai Sheng Chen; and
Chief Financial Officer, Leada Tak Tai Li. We do not currently have in place key
man life insurance on Wo Hing Li, Hai Sheng Chen or Leada Tak Tai Li. To the
extent that the services of these officers and directors would be unavailable to
us, we would be required to recruit other persons to perform the duties
performed by Wo Hing Li, Hai Sheng Chen and Leada Tak Tai Li. We may be unable
to employ other qualified persons with the appropriate background and expertise
to replace these officers and directors on terms suitable to us.
We
may not be able to retain, recruit and train adequate management and production
personnel. We rely heavily on those personnel to help develop and execute our
business plans and strategies, and if we lose such personnel, it would reduce
our ability to operate effectively.
Our
continued operations are dependent upon our ability to identify and recruit
adequate management and production personnel in China. We require trained
graduates of varying levels and experience and a flexible work force of
semi-skilled operators. Many of our current employees come from the more remote
regions of China as they are attracted by the wage differential and prospects
afforded by Shanghai and our operations. With the economic growth currently
being experienced in China, competition for qualified personnel is substantial,
and there can be no guarantee that a favorable employment climate will continue
and that wage rates we must offer to attract qualified personnel will enable us
to remain competitive internationally. The inability to attract such personnel
or the increased cost of doing so could reduce our competitive advantage
relative to other precision steel producers, reducing or eliminating our growth
in revenues and profits.
We
may not be able to protect adequately our intellectual property from
infringement or unauthorized use by third parties.
Except
for a patent on the Environment-Conscious Mill Bearing with Inner Circular
Lubrication, we have no patents or licenses that protect our intellectual
property. Unauthorized parties may attempt to copy aspects of our processes and
know-how or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our processes and know-how is difficult. Our
experienced key engineers and management staff are extensively involved in
all facets of research, design, craftwork, styling and development of the
specialty precision products. Potential risks on the divulgence of skills and
the development of new products increase should these employees resign, as we
rely heavily on them. We have elected to protect internally developed know-how
and production processes (such as system pressure, cleanliness of the
lubrication, temperature control, appropriate allocation of oil supply and
retrieving, which are vital in providing a radical solution to the difficulties
associated with lubricating rolling mills’ backing bearing) by requiring all key
personnel (production engineers and management staff) to sign non-disclosure and
confidentiality contracts. However, this means of protecting our proprietary
rights may not be adequate. In addition, the laws of some foreign countries do
not protect our proprietary rights as extensively as do U.S. laws. Our failure
to protect adequately our proprietary rights may allow third parties to
duplicate our products, production processes or develop functionally equivalent
or superior technology. In addition, our competitors may independently develop
similar technologies or design around our proprietary intellectual
property.
We
are subject to risks associated with changing technology and manufacturing
techniques, which could place us at a competitive disadvantage.
The
successful implementation of our business strategy requires us to continuously
evolve our existing products and services and introduce new products and
services to meet customers’ needs. Our designs and products are characterized by
stringent performance and specification requirements that mandate a high degree
of manufacturing and engineering expertise. We believe that our customers
rigorously evaluate our services and products on the basis of a number of
factors, including, but not limited to:
|
|
technical
expertise and development
capability;
|
|
|
reliability
and timeliness of delivery;
|
|
|
product
design capability;
|
Our
success depends on our ability to continue to meet our customers’ changing
requirements and specifications with respect to these and other criteria. There
can be no assurance that we will be able to address technological advances or
introduce new designs or products that may be necessary to remain competitive
within the precision steel industry.
We
depend upon our largest customers for a significant portion of our sales
revenue, and we cannot be certain that sales to these customers will continue.
If sales to these customers do not continue, then our sales may decline and our
business may be negatively impacted.
We
currently supply high precision steel products to five major customers in the
Chinese domestic market. For the years ended June 30, 2009 and 2008, sales
revenues generated from the top five major customers amounted to 50% and 62% of
total sales revenues, respectively; sales to the largest single customer
for the same years amounted to 19% and 21% of total sales revenues,
respectively. We do not enter into long-term contracts with our customers and
therefore cannot be certain that sales to these customers will continue. The
loss of any of our largest customers would likely have a material negative
impact on our sales revenues and business.
Defects
in our products could impair our ability to sell products or could result in
litigation and other significant costs.
Detection
of any significant defects in our precision steel products may result in, among
other things, delay in time-to-market, loss of market acceptance and sales of
its products, diversion of development resources, injury to our reputation,
litigation or fines, or increased costs to correct such defects. Defects could
harm our reputation, which could result in significant costs and could impair
our ability to sell our products. The costs we may incur in correcting any
product defects may be substantial and could decrease our profit
margins.
Failure to
optimize our manufacturing potential and cost structure could materially
increase our overhead, causing a decline in our margins and profitability.
We strive
to utilize the manufacturing capacity of our facilities fully but may not do so
on a consistent basis. Our factory utilization is dependent on our success in,
among other things:
|
|
accurately
forecasting demand;
|
|
|
timing
volume sales to our customers;
|
|
|
balancing
our productive resources with product mix;
and
|
|
|
planning
manufacturing services for new or other products that we intend to
produce.
|
Demand
for contract manufacturing of these products may not be as high as we expect,
and we may fail to realize the expected benefit from our investment in our
manufacturing facilities. Our profitability and operating results are also
dependent upon a variety of other factors, including, but not limited
to:
|
|
utilization
rates of manufacturing lines;
|
|
|
downtime
due to product changeover;
|
|
|
impurities
in raw materials causing shutdowns;
and
|
|
|
maintenance
of contaminant-free operations.
|
Failure
to optimize our manufacturing potential and cost structure could materially and
adversely affect our business and operating results.
Moreover,
our cost structure is subject to fluctuations from inflationary pressures in
China and other geographic regions where we conduct business. China is currently
experiencing dramatic growth in its economy. This growth may lead to continued
pressure on wages and salaries that may exceed our budget and adversely affect
our operating results.
Our
production facilities are subject to risks of power shortages which may
adversely affect our ability to meet our customers’ needs and reduce our
revenues.
Many
cities and provinces in China have suffered serious power shortages since the
second quarter of 2004. Many of the regional grids do not have sufficient power
generating capacity to fully satisfy the increased demand for electricity driven
by continual economic growth and persistent hot weather. Local governments have
occasionally required local factories to temporarily shut down their operations
or reduce their daily operational hours in order to reduce local power
consumption levels. To date, our operations have not been affected by those
administrative measures. However, there is a risk that our operations may be
affected by those administrative measures in the future, thereby causing
material production disruption and delay in delivery schedule. In such event,
our business, results of operation and financial conditions could be materially
adversely affected. We do not have any back-up power generation system. Although
we have not experienced any power outages in the past, we may be adversely
affected by power outages in the future.
Unexpected
equipment failures may lead to production curtailments or
shutdowns.
Interruptions
in our production capabilities will adversely affect our production costs,
products available for sales and earnings for the affected period. In addition
to equipment failures, our facilities are also subject to the risk of
catastrophic loss due to unanticipated events such as fires, explosions or
violent weather conditions. Our manufacturing processes are dependent upon
critical pieces of equipment, such as our various cold-rolling mills, as well as
electrical equipment, such as transformers, and this equipment may, on occasion,
be out of service as a result of unanticipated failures. We have experienced and
may in the future experience material plant shutdowns or periods of reduced
production as a result of such equipment failures.
Our
insurance may not be adequate if our production facilities were destroyed or
significantly damaged as a result of fire or some other natural
disaster.
All of
our products are currently manufactured at our existing facilities located in
the Jiading District in Shanghai, China. Fire fighting and disaster relief or
assistance in China may not be as developed as in Western countries. While we
maintain property damage insurance aggregating approximately $53.7 million
covering our inventories, equipment, plant and buildings and another $35.1
million insurance against equipment damage, we do not maintain business
interruption insurance. Material damage to, or the loss of, our production
facilities due to fire, severe weather, flood or other act of God or cause, even
if insured, could have a material adverse effect on our financial condition,
results of operations, business and prospects.
Our
holding company structure may limit the payment of dividends.
We have
no direct business operations, other than our ownership of our subsidiaries.
While we have no current intention of paying dividends, should we decide
in the future to do so, as a holding company, our ability to pay dividends and
meet other obligations depends upon the receipt of dividends or other payments
from our operating subsidiaries and other holdings and investments. In
addition, our operating subsidiaries, from time to time, may be subject to
restrictions on their ability to make distributions to us, including as a result
of restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory
restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars
may reduce the amount received by U.S. stockholders upon conversion of the
dividend payment into U.S. dollars.
Chinese
regulations currently permit the payment of dividends only out of accumulated
profits as determined in accordance with Chinese accounting standards and
regulations. Our subsidiaries in China are also required to set aside a
portion of their after tax profits according to Chinese accounting standards and
regulations to fund certain reserve funds. Currently, our subsidiaries in
China are the only sources of revenues or investment holdings for the payment of
dividends. If they do not accumulate sufficient profits under Chinese
accounting standards and regulations to first fund certain reserve funds as
required by Chinese accounting standards, we will be unable to pay any
dividends.
Failure
to comply with the U.S. Foreign Corrupt Practices Act could subject us to
penalties and other adverse consequences.
We are
subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. In addition, we are required to maintain records that accurately and
fairly represent our transactions and have an adequate system of internal
accounting controls. Foreign companies, including some that may compete with us,
are not subject to these prohibitions, and therefore may have a competitive
advantage over us. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in the PRC, and our executive
officers and employees have not been subject to the FCPA prior to our reverse
merger in December 2006. We can make no assurance that our employees or other
agents will not engage in such conduct for which we might be held responsible.
If our employees or other agents are found to have engaged in such practices, we
could suffer severe penalties and other consequences that may have a material
adverse effect on our business, financial condition and results of
operations.
We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC
adopted rules requiring public companies to include a report of management on
the company’s internal controls over financial reporting in their annual
reports, including Form 10-K. In addition, an independent registered
public accounting firm must also attest to and report on the operating
effectiveness of the company’s internal controls. We can provide no
assurance that we will comply with all of the requirements imposed thereby.
There can be no positive assurance that we will receive a positive
attestation from our independent auditors. In the event we identify
significant deficiencies or material weaknesses in our internal controls that we
cannot remediate in a timely manner or we are unable to receive a positive
attestation from our independent auditors with respect to our internal controls,
investors and others may lose confidence in the reliability of our financial
statements.
We
may incur significant costs to ensure compliance with U.S. corporate governance
and accounting requirements.
We may
incur significant costs associated with our public company reporting
requirements, costs associated with applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the SEC and requirements in connection with the
listing of our common stock on The NASDAQ Capital Market. We expect all of these
applicable rules and regulations to increase our legal and financial compliance
costs and to make some activities more time-consuming and costly. We also expect
that these applicable rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability insurance and we may
be required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As a result, it may be more
difficult for us to attract and retain qualified individuals to serve on our
board of directors or as executive officers.
Our
officers and directors have limited experience with the regulatory requirements
for U.S. public companies, which could impair our ability to satisfy public
company filing requirements and could increase our securities compliance
costs.
All of
our officers and most of our directors do not have any prior experience as
officers and directors of a U.S. publicly traded company, or in complying with
the regulatory requirements applicable to a U.S. public company. As a result, we
could have difficulty satisfying the regulatory requirements applicable to U.S.
public companies, which could adversely affect the market for our common stock.
At present, we rely upon outside experts to advise us on matters relating to
financial accounting and public company reporting. While we believe that it will
be possible to satisfy our public company reporting requirements through the use
of third party experts, our general and administrative costs will remain higher
until we have developed or acquired internal expertise in these
matters
RISKS
RELATED TO DOING BUSINESS IN CHINA
Adverse
changes in political and economic policies of the PRC government could impede
the overall economic growth of China, which could reduce the demand for our
products and damage our business.
We
conduct substantially all of our operations and generate most of our revenue in
China. Accordingly, our business, financial condition, results of
operations and prospects are affected significantly by economic, political and
legal developments in China. The PRC economy differs from the economies of
most developed countries in many respects, including:
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a
higher level of government
involvement;
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a
early stage of development of the market-oriented sector of the
economy;
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a
higher level of control over foreign exchange;
and
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the
allocation of resources.
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As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us.
Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the
allocation of resources, controlling the payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.
Any
adverse change in economic conditions or government policies in China could have
a material adverse effect on the overall economic growth in China, which in turn
could lead to a reduction in demand for our services and consequently have a
material adverse effect on our business and prospects.
Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
We
conduct substantially all of our business through our operating subsidiaries in
the PRC. Our operating subsidiaries are generally subject to laws and
regulations applicable to foreign investments in China and, in particular, laws
applicable to foreign-invested enterprises. The PRC legal system is based on
written statutes, and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, a series of new PRC laws and regulations
have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In addition,
all of our executive officers and all of our directors are residents of China
and not of the United States, and substantially all the assets of these persons
are located outside the United States. As a result, it could be difficult
for investors to affect service of process in the United States or to enforce a
judgment obtained in the United States against our Chinese operations and
subsidiaries.
If
we are found to have failed to comply with applicable laws, we may incur
additional expenditures or be subject to significant fines and
penalties.
Our
operations are subject to PRC laws and regulations applicable to us. However,
many PRC laws and regulations are uncertain in their scope, and the
implementation of such laws and regulations in different localities could have
significant differences. In certain instances, local implementation rules and/or
the actual implementation are not necessarily consistent with the regulations at
the national level. Although we strive to comply with all the applicable PRC
laws and regulations, we cannot assure you that the relevant PRC government
authorities will not later determine that we have not been in compliance with
certain laws or regulations. Our failure to comply with the
applicable laws and regulations in China could subject us to administrative
penalties and injunctive relief, as well as civil remedies, including fines,
injunctions and recalls of our products. It is possible that changes to such
laws or more rigorous enforcement of such laws or with respect to our current or
past practices could have a material adverse effect on our business, operating
results and financial condition. Further, additional environmental or safety
issues relating to matters that are not currently known to management may result
in unanticipated liabilities and expenditures.
The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.
The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its
laws and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with
all applicable legal and regulatory requirements. However, the central or
local governments of the jurisdictions in which we operate may impose new,
stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Restrictions
on currency exchange may limit our ability to receive and use our sales revenue
effectively.
Most of
our sales revenue and expenses are denominated in RMB. Under PRC law, the RMB is
currently convertible under the “current account,” which includes dividends and
trade and service-related foreign exchange transactions, but not under the
“capital account,” which includes foreign direct investment and loans.
Currently, our PRC operating subsidiaries may purchase foreign currencies for
settlement of current account transactions, including payments of dividends to
us, without the approval of the State Administration of Foreign Exchange, or
SAFE, by complying with certain procedural requirements. However, the relevant
PRC government authorities may limit or eliminate our ability to purchase
foreign currencies in the future. Since a significant amount of our future
revenue will be denominated in RMB, any existing and future restrictions on
currency exchange may limit our ability to utilize revenue generated in RMB to
fund our business activities outside China that are denominated in foreign
currencies.
Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including SAFE.
In particular, if our PRC operating subsidiaries borrow foreign currency through
loans from us or other foreign lenders, these loans must be registered with
SAFE, and if we finance the subsidiaries by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities, including the Ministry of Commerce or their respective
local counterparts. These limitations could affect their ability to obtain
foreign exchange through debt or equity financing.
Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.
The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Because substantially all of our earnings
and cash assets are denominated in RMB, fluctuations in the exchange rate
between the U.S. dollar and the RMB will affect the relative purchasing power of
these proceeds, our balance sheet and our earnings per share in U.S. dollars. In
addition, appreciation or depreciation in the value of the RMB relative to the
U.S. dollar would affect our financial results reported in U.S. dollar terms
without giving effect to any underlying change in our business or results of
operations. Fluctuations in the exchange rate will also affect the relative
value of any dividend we issue that will be exchanged into U.S. dollars as well
as earnings from, and the value of, any U.S. dollar-denominated investments we
make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the
People’s Bank of China regularly intervenes in the foreign exchange market to
prevent significant short-term fluctuations in the exchange rate, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar in the
medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen
intervention in the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
Currently,
some of our raw materials and major equipment are imported. In the event
that the U.S. dollars appreciate against RMB, our costs will increase. If
we cannot pass the resulting cost increases on to our customers, our
profitability and operating results will suffer. In addition, since our
sales to international customers are growing rapidly, we are increasingly
subject to the risk of foreign currency depreciation.
Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.
Substantially
all of our revenues are earned by our PRC subsidiaries. However, PRC regulations
restrict the ability of our PRC subsidiaries to make dividends and other
payments to their offshore parent company. PRC legal restrictions permit
payments of dividend by our PRC subsidiaries only out of their accumulated
after-tax profits, if any, determined in accordance with PRC accounting
standards and regulations. Each of our PRC subsidiaries is also required under
PRC laws and regulations to allocate at least 10% of our annual after-tax
profits determined in accordance with PRC GAAP to a statutory general reserve
fund until the amounts in said fund reaches 50% of our registered capital.
Allocations to these statutory reserve funds can only be used for specific
purposes and are not transferable to us in the form of loans, advances or cash
dividends. Any limitations on the ability of our PRC subsidiaries to transfer
funds to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay
dividends and otherwise fund and conduct our business.
Under
the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC shareholders.
On March
16, 2007, the National People’s Congress of China passed a new Enterprise Income
Tax Law, or the New EIT Law, and on December 6, 2007, the State Council of China
passed the Implementing Rules for the New EIT Law, or the Implementing Rules,
which took effect on January 1, 2008. Under the New EIT Law, an enterprise
established outside of China with “de facto management bodies” within China is
considered a “resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese enterprise for enterprise income tax
purposes. The Implementing Rules define de facto management as
“substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the
enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation with respect to
non-Chinese enterprise or group controlled offshore
entities. Pursuant to the Notice, an enterprise incorporated in an
offshore jurisdiction and controlled by a Chinese enterprise or group will be
classified as a “non-domestically incorporated resident enterprise” if (i) its
senior management in charge of daily operation reside or perform their duties
mainly in China; (ii) its financial or personnel decisions are made or approved
by bodies or persons in China; (iii) its substantial properties, accounting
books, corporate chops, board and shareholder minutes are kept in China; and
(iv) ½ directors with voting rights or senior management often resident in
China. Such resident enterprise would be subject to an enterprise
income tax rate of 25% on its worldwide income and must pay a withholding tax at
a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is
applicable to an offshore enterprise incorporated by a Chinese natural
person. Nor are detailed measures on imposition of tax from
non-domestically incorporated resident enterprises are
available. Therefore, it is unclear how tax authorities will determine tax
residency based on the facts of each case.
However,
as our case substantially meets the foregoing criteria, there is a likelihood
that we are deemed to be a resident enterprise by Chinese tax
authorities. If the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise
income tax reporting obligations. In our case, this would mean that income such
as interest on financing proceeds and non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the New
EIT Law and its Implementing Rules dividends paid to us from our PRC
subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such
dividends will not be subject to a 10% withholding tax, as the PRC foreign
exchange control authorities, which enforce the withholding tax, have not yet
issued guidance with respect to the processing of outbound remittances to
entities that are treated as resident enterprises for PRC enterprise income tax
purposes. Finally, it is possible that future guidance issued with
respect to the new “resident enterprise” classification could result in a
situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC shareholders and with respect to gains derived by our non-PRC
shareholders from transferring our shares. We are actively monitoring
the possibility of “resident enterprise” treatment and are evaluating
appropriate organizational changes to avoid this treatment, to the extent
possible.
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
The
M&A Rule establishes more complex procedures for some acquisitions of
Chinese companies by foreign investors, which could make it more difficult for
us to pursue growth through acquisitions in China.
On August
8, 2006, six PRC regulatory agencies, including the China Securities Regulatory
Commission, promulgated the Provisions Regarding Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, or the M&A Rule, which became
effective on September 8, 2006. The M&A Rule establishes procedures and
requirements that could make some acquisitions of Chinese companies by foreign
investors more time-consuming and complex, including requirements in some
instances that the PRC Ministry of Commerce be notified in advance of any
change-of-control transaction and in some situations, require approval of the
PRC Ministry of Commerce when a foreign investor takes control of a Chinese
domestic enterprise. In the future, we may grow our business in part by
acquiring complementary businesses, although we do not have any plans to do so
at this time. The M&A Rule also requires PRC Ministry of Commerce anti-trust
review of any change-of-control transactions involving certain types of foreign
acquirers. Complying with the requirements of the M&A Rule to complete such
transactions could be time-consuming, and any required approval processes,
including obtaining approval from the PRC Ministry of Commerce, may delay or
inhibit our ability to complete such transactions, which could affect our
ability to expand our business or maintain our market share.
You
may have difficulty enforcing judgments against us.
We are a
Delaware holding company and most of our assets are located outside of the
United States. Most of our current operations are conducted in the PRC. In
addition, most of our directors and officers are nationals and residents of
countries other than the United States. A substantial portion of the assets of
these persons is located outside the United States. As a result, it may be
difficult for you to effect service of process within the United States upon
these persons. It may also be difficult for you to enforce in U.S. courts
judgments on the civil liability provisions of the U.S. federal securities laws
against us and our officers and directors, most of whom are not residents in the
United States and the substantial majority of whose assets are located outside
of the United States. In addition, there is uncertainty as to whether the courts
of the PRC would recognize or enforce judgments of U.S. courts. Courts in China
may recognize and enforce foreign judgments in accordance with the requirements
of the PRC Civil Procedures Law based on treaties between China and the country
where the judgment is made or on reciprocity between jurisdictions. China does
not have any treaties or other arrangements that provide for the reciprocal
recognition and enforcement of foreign judgments with the United States. In
addition, according to the PRC Civil Procedures Law, courts in the PRC will not
enforce a foreign judgment against us or our directors and officers if they
decide that the judgment violates basic principles of PRC law or national
sovereignty, security or the public interest. So, it is uncertain whether a PRC
court would enforce a judgment rendered by a court in the United
States.
RISKS
RELATED TO THE MARKET FOR OUR STOCK GENERALLY
The
market price for shares of our common stock could be volatile and could
decline.
Our
common stock is listed on The NASDAQ Capital Market under the symbol “CPSL.” The
market price for the shares of our common stock may fluctuate in response to a
number of factors, many of which are beyond our control. In some cases, these
fluctuations may be unrelated to our operating performance. Many companies with
Chinese operations have experienced dramatic volatility in the market prices of
their common stock. We believe that a number of factors, both within and outside
of our control, could cause the price of our common stock to fluctuate, perhaps
substantially. Factors such as the following could have a significant adverse
impact on the market price of our common stock:
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our
ability to obtain additional financing and, if available, the terms and
conditions of the financing;
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our
financial position and results of
operations;
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period-to-period
fluctuations in our operating
results;
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changes
in estimates of our performance by any securities
analysts;
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substantial
sales of our common stock pursuant to Rule 144 or
otherwise;
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new
regulatory requirements and changes in the existing regulatory
environment;
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the
issuance of new equity securities in a future
offering;
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changes
in interest rates; and
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general
economic, monetary and other national conditions, particularly in the U.S.
and China.
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The
trading market in our common stock is limited and illiquid and may cause
volatility in the market price.
As of
June 30, 2009, 67%, or 31,013,715 shares, of our issued and outstanding common
stock were owned by non-affiliates, and 31,098,819 of our issued and
outstanding common stock were
unrestricted and free to trade. The market price for our common stock is subject
to volatility and holders of common stock may be unable to resell their shares
at or near their original purchase price or at any price. In the absence of an
active trading market:
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investors
may have difficulty buying and
selling;
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market
visibility for our common stock may be limited;
and
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a
lack of visibility for our common stock may have a depressive effect on
the market for our common stock.
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One
stockholder, who is our Chief Executive Officer, exercises significant control
over matters requiring shareholder approval.
Wo Hing
Li, our Chief Executive Officer, had voting power as of June 30, 2009 equal to
approximately 33% of our voting securities. As a result, Wo Hing Li, through
such stock ownership, exercises significant control over all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership in Wo Hing
Li may also have the effect of delaying or preventing a change in control or
other transactions that may otherwise be viewed as beneficial by
shareholders other than Wo Hing Li.
We
may be required to raise additional financing by issuing new securities with
terms or rights superior to those of our shares of common stock, which could
adversely affect the market price of our shares of common stock.
We may
require additional financing to fund future operations, develop and exploit
existing and new products and to expand into new markets. We may not be able to
obtain financing on favorable terms, if at all. If we raise additional funds by
issuing equity securities, the percentage ownership of our current shareholders
will be reduced, and the holders of the new equity securities may have rights
superior to those of the holders of shares of common stock, which could
adversely affect the market price and the voting power of shares of our common
stock. If we raise additional funds by issuing debt securities, the holders of
these debt securities would similarly have some rights senior to those of the
holders of shares of common stock, and the terms of these debt securities could
impose restrictions on operations and create a significant interest expense for
us.
We
do not intend to pay dividends for the foreseeable future.
For the
foreseeable future, we intend to retain any earnings to finance the development
and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Accordingly, investors must be prepared to rely
on sales of their common stock after price appreciation to earn an investment
return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will
be made at the discretion of our board of directors and will depend on our
results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.
ITEM
1B.
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UNRESOLVED
STAFF COMMENTS.
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Not
Applicable.
All land
in China is owned by the State. Individuals and companies are permitted to
acquire rights to use land or land use rights for specific purposes. In the case
of land used for industrial purposes, the land use rights are granted for a
period of 50 years. This period may be renewed at the expiration of the
initial and any subsequent terms. Granted land use rights are transferable and
may be used as security for borrowings and other obligations.
We
currently have land use rights to approximately 48.38 acres consisting
of manufacturing facilities, warehouse and office buildings in Shanghai, China.
The chart below lists all facilities owned by us.
Location
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Type of Facility
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Size of Land (acre)
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Jiading
District, Shanghai
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Manufacturing
facilities, warehouse and office buildings
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21.34
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Jiading
District, Shanghai
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Manufacturing
facilities
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27.04
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In
October 2004, Tuorong agreed to purchase a land use right from the Shanghai
Labor and Economic Development Council with respect to a 20-acre parcel for a
lease period of 50 years at a cost of $472,441. Additionally in November 2005,
Chengtong agreed to purchase a land use right from the Shanghai Xuhang
Industrial Development Co., Ltd. with respect to a 27.04-acre parcel for a lease
period of 50 years at a cost of $497,795. In November 2006, Chengtong entered
into an agreement with the Shanghai Labor and Economic Development Council which
supersedes the aforementioned Tuorong agreement to purchase a total of
21.34-acre parcel for a lease period of 50 years at an aggregate amount of
$672,126. In December 2006, Tuorong entered into a Compensation Agreement with
the Shanghai Jiading Housing, Land and Resource Management Bureau to pay an
aggregate amount of $637,294 in connection to the two aforementioned
parcels.
ITEM
3.
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LEGAL
PROCEEDINGS.
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From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is
subject to inherent uncertainties and an adverse result in these or other
matters may arise from time to time that may harm our business. We
are currently not aware of any such legal proceedings or claims that we believe
will have a material adverse affect on our business, financial condition or
operating results.
ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
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On June
16, 2009, we held an annual meeting at which a majority of our stockholders
elected six directors and approved the ratification of Moore Stephens, Certified
Public Accounts as our independent accountants for fiscal year
2009.
The
following table sets forth the matters voted upon at the annual meeting and the
results of the voting on each matter voted upon:
Matter Voted Upon
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Votes For
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Withheld
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Votes
Against
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Abstentions
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Broker
Non-Votes
|
Election
of Wo Hing Li to Board of Directors
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23,727,537
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-
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49,939
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-
|
|
-
|
Election
of Tung Kuen Tsui to Board of Directors
|
|
24,067,151
|
|
-
|
|
110,325
|
|
-
|
|
-
|
Election
of David Peter Wong to Board of Directors
|
|
24,065,085
|
|
-
|
|
112,391
|
|
-
|
|
-
|
Election
of Che Kin Lui to Board of Directors
|
|
24,063,082
|
|
-
|
|
114,394
|
|
-
|
|
-
|
Election
of Hai Sheng Chen to Board of Directors
|
|
23,723,122
|
|
-
|
|
454,354
|
|
-
|
|
-
|
Election
of Daniel Carlson to Board of Directors
|
|
23,731,295
|
|
-
|
|
446,181
|
|
-
|
|
-
|
Approval
of Moore Stephens, Certified Public Accounts as the Company’s independent
accountants for fiscal year 2009
|
|
24,112,726
|
|
-
|
|
44,538
|
|
-
|
|
-
|
Each of
the above matters was approved by the stockholders at the annual
meeting.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
|
Market
Information
Our
Common Stock has been trading on the NASDAQ Capital Market under the symbol
“CPSL” since December 29, 2006 and was previously trading on that market under
the symbol “OLAB.” The CUSIP number for our common stock is
16941J106.
The
following table sets forth, for the periods indicated, the available high and
low closing prices for our common stock. Prices reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not represent actual
transactions.
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended June 30, 2009
|
|
|
|
|
|
|
1st
Quarter
|
|
$ |
5.49 |
|
|
$ |
0.86 |
|
2nd
Quarter
|
|
$ |
3.14 |
|
|
$ |
0.95 |
|
3rd
Quarter
|
|
$ |
1.80 |
|
|
$ |
0.86 |
|
4th
Quarter
|
|
$ |
3.24 |
|
|
$ |
1.20 |
|
Fiscal
Year Ended June 30, 2008
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$ |
12.65 |
|
|
$ |
2.81 |
|
2nd
Quarter
|
|
$ |
11.45 |
|
|
$ |
4.20 |
|
3rd
Quarter
|
|
$ |
6.22 |
|
|
$ |
3.30 |
|
4th
Quarter
|
|
$ |
8.48 |
|
|
$ |
3.50 |
|
(1) The
above tables set forth the range of high and low closing prices per share of our
common stock as reported by www.quotemedia.com
for the periods indicated.
Approximate
Number of Holders of Our Common Stock
As of
June 30, 2009, there were approximately 863 stockholders of record of our common
stock. The number of record holders does not include persons who held our common
stock in nominee or “street name” accounts through brokers.
Dividends
We have
never declared or paid a cash dividend. Any future decisions
regarding dividends will be made by our board of directors. We currently
intend to retain and use any future earnings for the development and expansion
of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has complete discretion on
whether to pay dividends, subject to the approval of our stockholders.
Even if our board of directors decides to pay dividends, the form,
frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem
relevant.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
information required by the item relating to “Securities Authorized for Issuance
Under Equity Compensation Plans” is set forth under that heading in Item 12,
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters” and is incorporated herein by reference.
Stock
Performance Graph
The
following graph provides a comparison of the cumulative total return on our
common stock for the period beginning at the market close on June 30, 2004,
through and including June 30, 2009, with the cumulative total return for (i)
the Nasdaq Stock Market (U.S. Companies) Index (the “Nasdaq Index”) and (ii) a
peer group selected by us that consists of companies with a similar
line-of-business and in the same industry. These companies are Steel Dynamics,
Tarpon Industries, Arcelor Mittel, Nucor Corp., and Olympic Steel (the “Peer
Index”). Total return values were calculated based on cumulative total return
assuming the investment, on June 30, 2004, of $100 in each of our Common Stock,
the NASDAQ Index and the Peer Index and are based on share prices plus any
dividends paid in cash, with the dividends reinvested on the date they were
paid. The calculations exclude trading commissions and taxes. Cumulative total
returns for the period beginning at the market close on June 30, 2004, through
and including December 28, 2006, relate to our prior operations under our former
name of OraLabs Holding Corp. We do not believe that such historical information
prior to December 28, 2006 is relevant to our continuing operations and is not
necessarily indicative of the results to be expected for any future period. On
December 29, 2006, our Common Stock began trading under the symbol
“CPSL”.
The
information contained in this Item 5 of this Annual Report on Form 10-K under
“Stock Performance Graph” is not deemed to be “soliciting material” or to be
“filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act
or to the liabilities of Section 18 of the Exchange Act, and will not be deemed
to be incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent we specifically incorporate it by reference
into such a filing.
Recent
Sales of Unregistered Securities
We have
not sold any equity securities during the fiscal year ended June 30, 2009 that
were not previously disclosed in a quarterly report on Form 10-Q or a current
report on Form 8-K that was filed during the 2009 fiscal year.
Purchases
of Equity Securities
No
repurchases of our common stock were made during the fourth quarter of our
fiscal year ended June 30, 2009.
ITEM
6.
|
SELECTED
FINANCIAL DATA.
|
Selected
consolidated financial data are set forth below as of June 30, 2009 and for the
years ended June 30, 2009, 2008, 2007, 2006 and 2005 and should be read in
conjunction with our audited consolidated financial statements and related notes
thereto, and with Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” In conjunction with the
consummation of the Stock Exchange Agreement on December 28, 2006, we changed
our fiscal year from December 31 to June 30. The historical data presented below
and in our historical consolidated financial statement is not necessarily
indicative of the results to be expected for any future period.
The scope
of our continuing business is substantially different from that conducted by us
prior to January 1, 2007. You should not view our historical consolidated
financial statements or the financial data derived therefrom as predictive of
our future financial position or results of operations.
|
|
Fiscal Year Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statement
of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
revenues
|
|
|
76,281 |
|
|
|
87,739 |
|
|
|
53,960 |
|
|
|
34,881 |
|
|
|
53,145 |
|
Cost
of goods sold
|
|
|
68,549 |
|
|
|
65,242 |
|
|
|
38,926 |
|
|
|
24,892 |
|
|
|
45,562 |
|
Gross
profit
|
|
|
7,732 |
|
|
|
22,497 |
|
|
|
15,034 |
|
|
|
9,989 |
|
|
|
7,583 |
|
Net
(loss)/income before discontinued operations
|
|
|
(408 |
) |
|
|
18,583 |
|
|
|
7,473 |
|
|
|
7,514 |
|
|
|
6,366 |
|
Net
income/(loss) from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
831 |
|
|
|
900 |
|
|
|
(341 |
) |
Net
(loss)/income
|
|
|
(408 |
) |
|
|
18,583 |
|
|
|
8,304 |
|
|
|
8,415 |
|
|
|
6,026 |
|
(Loss)/earnings
per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.01 |
) |
|
|
0.43 |
|
|
|
0.26 |
|
|
|
0.31 |
|
|
|
0.26 |
|
Diluted
|
|
|
(0.01 |
) |
|
|
0.43 |
|
|
|
0.26 |
|
|
|
0.31 |
|
|
|
0.26 |
|
Income/(loss)
per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
- |
|
|
|
- |
|
|
|
0.03 |
|
|
|
0.04 |
|
|
|
(0.01 |
) |
Diluted
|
|
|
- |
|
|
|
- |
|
|
|
0.03 |
|
|
|
0.04 |
|
|
|
(0.01 |
) |
Net
(loss)/income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.01 |
) |
|
|
0.43 |
|
|
|
0.29 |
|
|
|
0.35 |
|
|
|
0.25 |
|
Diluted
|
|
|
(0.01 |
) |
|
|
0.43 |
|
|
|
0.29 |
|
|
|
0.35 |
|
|
|
0.25 |
|
Shares
used in per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,561,229 |
|
|
|
43,044,420 |
|
|
|
28,438,313 |
|
|
|
24,283,725 |
|
|
|
24,283,725 |
|
Diluted
|
|
|
46,561,229 |
|
|
|
43,256,434 |
|
|
|
28,759,553 |
|
|
|
24,283,725 |
|
|
|
24,283,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data (at year end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
84,032 |
|
|
|
108,134 |
|
|
|
41,339 |
|
|
|
23,154 |
|
|
|
13,028 |
|
Total
assets
|
|
|
163,409 |
|
|
|
165,535 |
|
|
|
82,158 |
|
|
|
45,571 |
|
|
|
25,489 |
|
Working
Capital
|
|
|
41,226 |
|
|
|
62,905 |
|
|
|
14,574 |
|
|
|
(7,584 |
) |
|
|
(1,326 |
) |
Long-term
debt
|
|
|
- |
|
|
|
- |
|
|
|
6,878 |
|
|
|
3,152 |
|
|
|
7,713 |
|
Total
Stockholder’s equity
|
|
|
120,603 |
|
|
|
120,306 |
|
|
|
51,105 |
|
|
|
11,681 |
|
|
|
3,421 |
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The
following management’s discussion and analysis should be read in conjunction
with our financial statements and the notes thereto and the other financial
information appearing elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
information. See “Special Note Regarding Forward Looking Statements” above for
certain information concerning those forward looking statements. Our financial
statements are prepared in U.S. dollars and in accordance with U.S.
GAAP.
Introduction
Management’s
discussion and analysis of financial condition and results of operations is
intended to help provide an understanding of China Precision Steel, Inc. and our
subsidiaries’ (together, the “Group”) financial condition, changes in financial
condition and results of operations. This discussion is organized as
follows.
|
|
Overview of
the Company’s Business - This section provides a general
description of the Group’s business, as well as recent developments that
have either occurred during the fiscal year ended June 30, 2009 and are
important in understanding the results of operations and financial
condition or disclose known trends.
|
|
|
Results of
Operations - This section provides an analysis of our results of
operations for the fiscal year ended June 30, 2009. This discussion
includes a brief description of significant transactions and events that
have an impact on the comparability of the results being
analyzed.
|
|
|
Liquidity
and Capital Resources - This section provides an analysis of the
Group’s cash flows for the fiscal year ended June 30, 2009. Included in
this section is a discussion of the Group’s outstanding debt and the
financial capacity available to fund the Group’s future commitments and
obligations.
|
Overview
of Our Business
We are a
niche and high value-added steel processing company principally engaged in the
manufacture and sale of high precision cold-rolled steel products, in the
provision of heat treatment and in the cutting and slitting of medium and
high-carbon hot-rolled steel strips. We use commodity steel to create a high
value-added specialty premium steel. Specialty precision steel pertains to the
precision of measurements and tolerances of thickness, shape, width, surface
finish and other special quality features of highly-engineered end-use
applications.
We
produce and sell precision ultra-thin and high strength cold-rolled steel
products ranging from 7.5 mm to 0.03 mm. We also provide heat treatment and
cutting and slitting of medium and high-carbon hot-rolled steel strips not
exceeding 7.5 mm thickness. Our process puts hot-rolled de-scaled (pickled)
steel coils through a cold-rolling mill, utilizing our patented systems and high
technology reduction processing procedures, to make steel coils and sheets in
customized thicknesses according to customer specifications. Currently, our
specialty precision products are mainly used in the manufacture of automobile
parts and components, steel roofing, plane friction discs, appliances, food
packaging materials, saw blades, textile needles, and
microelectronics.
We
conduct our operations principally in the PRC through our wholly-owned operating
subsidiaries, Chengtong and Shanghai Blessford, which are wholly owned
subsidiaries of our direct subsidiary, PSHL. Our products are sold domestically
in China as well as in overseas markets such as Thailand, Nigeria and Ethiopia.
We intend to further expand into additional overseas markets in the future,
subject to suitable market conditions and favorable regulatory
controls.
Fiscal
2009 Financial Performance Highlights
During
the 2009 fiscal year, we saw slower demand and lower steel prices compared to
last year as a result of the impact of the persisting global crisis. There were
decreases in order and sales volume over the year as we are faced with multiple
challenges due to the global economic downturn. We have seen weaker demands and
reduced orders from existing customers, especially in the high-carbon
cold-rolled steel segment, which are mainly used in auto components
manufacturing, due to excess capacity and high inventory levels in the industry.
Excess capacity, low industrial concentration and a lack of access to natural
resources have long plagued China’s steel sector, and these problems have been
exacerbated by the impact of the global financial and economic
crisis. Our two cold-rolling mills are now operating at approximately
70% utilization rate due to reduced orders on hand.
During
the fiscal year ended June 30, 2009, we sold a total of 84,001 tons of products,
a decrease of 5,121 tons from 89,122 tons a year ago, due to slower demand and
reduced orders on hand. We believe that such decrease was mainly caused by
decreases in product orders from auto components manufacturers and from the
Chinese auto industry that experienced weak demand and excess capacity during
the year ended June 30, 2009. Lower sales and high raw material costs have led
to a gross profit of $7,732,195 and a net loss of $408,338 for the fiscal year
ended June 30, 2009.
The
RMB400 billion economic stimulus package formulated jointly by the Chinese
government’s National Development and Reform Commission and the Ministry of
Industry and Information Technology in November 2008 is now planned to focus
mainly on nine pillar industries, which include steel, automobiles,
shipbuilding, petrochemicals, light industry, textiles, non-ferrous metals,
machinery, and information technology, all with serious production surpluses in
the whole industrial system. Automobiles and steel sectors have been given
priority and are the two main industries out of the nine pillars for which the
government is expected to announce specific support packages and further
details. On January 14, 2009, China’s State Council approved a “rejuvenation
plan” to support the steel industry, with the immediate aim to deal with the
effects of the global financial and economic crisis and to also ease the
industry’s long-term structural problems. The steel industry plan includes
eliminating obsolete capacity, speeding up innovation, promoting alliances and
mergers and cutting export tariffs. The government will also subsidize loans of
about RMB15 billion to encourage technological upgrading and product
rationalization to better meet demand.
Although
the series of measures adopted by the Chinese government to promote economic
growth have achieved some results, it is currently unclear whether and to what
extent the economic stimulus measures and other actions taken or contemplated by
the Chinese government and other governments throughout the world will mitigate
the effects of the crisis on the industries that affect our business. We expect
to continue to experience volatilities in demands in both domestic and
international markets in the foreseeable future. Furthermore, deteriorating
economic conditions, including business layoffs, downsizing, industry slowdowns
and other similar factors that affect our customers could have further negative
consequences on our business operations. For the foreseeable future,
we expect a continuation of weak demand and volatility in both domestic and
international markets across all product segments, and significantly adverse
impacts on our gross margin due to a decrease in sales of our high margin high
carbon cold rolled steel used mainly in auto components
manufacturing. However, due to the nature of our niche segment and
high-end products, we have been able to keep quality customers and negotiate new
contracts with a total of 123 new customers during the year. Management
continues to be in talks with potential customers whose past orders we had been
unable to fill due to full capacity. If these talks are successful,
we could see additional sales from a broadened customer base which would further
mitigate the impact of the current global slowdown on our business and results
of operations. Total company backlog as of June 30, 2009 was $9,278,675.
We also
continue to take appropriate actions to perform business and credit reviews of
customers and suppliers and reduce exposure by avoiding entry into contracts
with countries or customers with high credit risks. We strive to optimize our
product mix, prioritize higher margin products, and strengthen collection of
accounts receivable in the existing business environment with the goal to
maintain overall healthy sales volume, margins and cash positions. We believe
that there are high barriers to entry in the Chinese domestic precision
cold-rolled steel industry because of the level of technology expertise required
for operation. Although we continue to face volatilities in demand and overall
steel industry, the medium to long term prospects remain highly optimistic and
we believe that our unique capabilities and know-how give us a competitive
advantage to grow sales and build a globally recognized brand as we continue to
carry out R&D and expand to new segments, customers and
markets.
The
following are some financial highlights for the 2009 fiscal year:
|
|
Revenues:
Our revenues were approximately $76.3 million for the 2009 fiscal year, a
decrease of 13.1% from last year.
|
|
|
Gross
Margin: Gross margin was 10.1% for the 2009 fiscal year, as
compared to 25.6% in 2008.
|
|
|
Income/(loss)
from operations before tax: Loss from operations before tax was
approximately $0.4 million for the 2009 fiscal year, as compared to income
from operations before tax of $19.2 million last
year.
|
|
|
Net
Income/(loss): Net loss was approximately $0.4 million for the 2009
fiscal year, a decrease of 102.2% from a net income of approximately $18.6
million last year.
|
|
|
Fully
diluted Income/(loss) per share: Fully diluted loss per share was
$0.01 for the 2009 fiscal year compared to a fully diluted earnings per
share of $0.43 last year.
|
Taxation
United
States
China
Precision Steel, Inc. is incorporated in the State of Delaware and is subject
the tax laws of United States at a tax rate of 34%. No provision for income
taxes in the United States has been made as China Precision Steel, Inc. incurred
no taxable income for federal tax purposes. In addition, no deferred tax on
undistributed earnings of its non-U.S. subsidiaries was provided, as it is our
current policy to reinvest these earnings in non-U.S. operations.
British
Virgin Islands
PSHL and
Blessford International were incorporated in the BVI, and, under the current
laws of the BVI, are not subject to income taxes.
PRC
On March
16, 2007, the National People’s Congress of China passed The Enterprise Income
Tax Law, or the New EIT Law,, and on December 6, 2007, the State Council of
China passed the Implementing Rules for the EIT Law, or the Implementing Rules,
which took effect on January 1, 2008. The New EIT Law and Implementing Rules
impose a unified enterprise income tax, or EIT, of 25% on all domestic-invested
enterprises and foreign invested entities, or FIEs, unless they qualify under
certain limited exceptions. Therefore, nearly all FIEs are subject to the new
tax rate alongside other domestic businesses rather than benefiting from the old
FIE tax laws, and its associated preferential tax treatments, beginning January
1, 2008.
The New
EIT Law gives the FIEs established before March 16, 2007, or Old FIEs, a
five-year grandfather period during which they can continue to enjoy their
existing preferential tax treatment. During this five-year grandfather period,
the Old FIEs which enjoyed tax rates lower than 25% under the original tax law
shall gradually increase their enterprise income tax rate by 2% per year until
the tax rate reaches 25%. In addition, the Old FIEs that are eligible for
the “two-year exemption and three-year half reduction” or “five-year exemption
and five-year half-reduction” under the original tax law, are allowed to remain
to enjoy their preference until these holidays expire.
Chengtong
has been entitled to preferential tax advantages in China, including full tax
exemption on the enterprise income tax that was generated in the first two years
after the recoveries of previous losses and a one-half reduction in the
prevailing enterprise income tax rate for the next 3 years. The full tax
exemption for the enterprise income tax expired on December 31, 2005 and the
right to a one-half reduction on the enterprise income tax expired on December
31, 2008. Chengtong is therefore subject to the 25% income tax rate
from January 1, 2009.
Shanghai
Blessford has also been entitled to preferential tax advantages in China,
including full tax exemption on the enterprise income tax that was generated in
the first two years after the recoveries of previous losses and a one-half
reduction in the prevailing enterprise income tax rate for the next 3 years. The
full tax exemption for the enterprise income tax will expire on December 31,
2009 and the right to a one-half reduction on the enterprise income tax will
expire on December 31, 2012. Shanghai Blessford will therefore be
subject to 12.5% or one-half of the prevailing tax rate from December 31, 2009
until December 31, 2012.
Substantially
all of our income may be derived from dividends we receive from our PRC
operating subsidiaries described above. The New EIT Law and its
Implementing Rules generally provide that a 10% withholding tax applies to
China-sourced income derived by non-resident enterprises for PRC enterprise
income tax purposes. We expect that such 10% withholding tax will
apply to dividends paid to us by our PRC subsidiaries, but this treatment will
depend on our status as a non-resident enterprise. For detailed
discussion of PRC tax issues related to resident enterprise status, see “Risk
Factors — Risks Related to Doing Business in China — Under the New EIT Law, we
may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC shareholders.”
Results
of Operations
The
following table sets forth key components of our results of operations for the
years ended June 30, 2009, 2008 and 2007 and as a percentage of
revenues.
(All
amounts in U.S. dollars)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
% of
Revenues
|
|
|
Amount
|
|
|
% of
Revenues
|
|
|
Amount
|
|
|
% of
Revenues
|
|
Revenues
|
|
|
76,281,621 |
|
|
|
100.0 |
% |
|
|
87,739,326 |
|
|
|
100.0 |
% |
|
|
53,960,243 |
|
|
|
100.0 |
% |
Cost
of sales (including depreciation and amortization)
|
|
$ |
68,549,426 |
|
|
|
89.9 |
% |
|
$ |
65,241,825 |
|
|
|
74.4 |
% |
|
$ |
38,925,987 |
|
|
|
72.1 |
% |
Gross
profit
|
|
|
7,732,195 |
|
|
|
10.1 |
% |
|
|
22,497,501 |
|
|
|
25.6 |
% |
|
|
15,034,256 |
|
|
|
27.9 |
% |
Selling
and marketing
|
|
|
1,679,283 |
|
|
|
2.2 |
% |
|
|
608,060 |
|
|
|
0.7 |
% |
|
|
245,695 |
|
|
|
0.5 |
% |
Administrative
expenses
|
|
|
2,238,088 |
|
|
|
2.9 |
% |
|
|
2,758,536 |
|
|
|
3.1 |
% |
|
|
1,863,994 |
|
|
|
3.5 |
% |
Allowance
for bad and doubtful debts
|
|
|
3,831,478 |
|
|
|
5.0 |
% |
|
|
686,955 |
|
|
|
0.8 |
% |
|
|
3,775,645 |
|
|
|
7.0 |
% |
Depreciation
and amortization
|
|
|
196,793 |
|
|
|
0.3 |
% |
|
|
64,253 |
|
|
|
0.1 |
% |
|
|
44,375 |
|
|
|
0.1 |
% |
(Loss)/Income
from continuing operations
|
|
|
(213,447 |
) |
|
|
(0.3 |
)% |
|
|
18,379,697 |
|
|
|
20.9 |
% |
|
|
9,104,547 |
|
|
|
16.9 |
% |
Other
income
|
|
|
1,397,258 |
|
|
|
1.8 |
% |
|
|
2,006,777 |
|
|
|
2.3 |
% |
|
|
103,388 |
|
|
|
0.2 |
% |
Interest
and finance costs
|
|
|
(1,228,665 |
) |
|
|
(1.6 |
)
% |
|
|
(1,231,040 |
) |
|
|
(1.4 |
)% |
|
|
(312,222 |
) |
|
|
(0.6 |
)% |
Income/(loss)
from continuing operations before income taxes
|
|
|
(44,854 |
) |
|
|
(0.1 |
)% |
|
|
19,155,434 |
|
|
|
21.8 |
% |
|
|
8,894,351 |
|
|
|
16.5 |
% |
Income
taxes
|
|
|
(363,484 |
) |
|
|
0.5 |
% |
|
|
572,323 |
|
|
|
0.7 |
% |
|
|
1,421,690 |
|
|
|
2.6 |
% |
Net
income/(loss) before discontinued operations
|
|
|
(408,338 |
) |
|
|
(0.5 |
)% |
|
|
18,583,111 |
|
|
|
21.2 |
% |
|
|
7,472,661 |
|
|
|
13.9 |
% |
Net
income from discontinued operations
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
831,448 |
|
|
|
1.5 |
% |
Net
(loss)/income
|
|
$ |
(408,338 |
) |
|
$ |
(0.5 |
)% |
|
$ |
18,583,111 |
|
|
$ |
21.2 |
% |
|
$ |
(8,304,109 |
) |
|
$ |
15.4 |
% |
Basic
earnings/(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.01 |
) |
|
|
|
|
|
$ |
0.43 |
|
|
|
|
|
|
$ |
0.26 |
|
|
|
|
|
From
discontinued operations
|
|
$ |
0.00 |
|
|
|
|
|
|
$ |
0.00 |
|
|
|
|
|
|
$ |
0.03 |
|
|
|
|
|
Total
|
|
$ |
(0.01 |
) |
|
|
|
|
|
$ |
0.43 |
|
|
|
|
|
|
$ |
0.29 |
|
|
|
|
|
Diluted
earnings/(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.01 |
) |
|
|
|
|
|
$ |
0.43 |
|
|
|
|
|
|
$ |
0.26 |
|
|
|
|
|
From
discontinued operations
|
|
$ |
0.00 |
|
|
|
|
|
|
$ |
0.00 |
|
|
|
|
|
|
$ |
0.03 |
|
|
|
|
|
Total
|
|
$ |
(0.01 |
) |
|
|
|
|
|
$ |
0.43 |
|
|
|
|
|
|
$ |
0.29 |
|
|
|
|
|
Fiscal Year Ended June 30,
2009 Compared to Fiscal Year Ended June 30, 2008
Sales Revenues.
Sales volume decreased by 5,121 tons, or 5.7%, year-on-year to 84,001
tons for the year ended June 30, 2009 from 89,122 tons for the year ended June
30, 2008 and, as a result, sales revenues decreased by $11,457,705, or 13.1%,
year-on-year to $76,281,621 for the year ended June 30, 2009 from $87,739,326
for the year ended June 30, 2008. The decrease in sales revenues is mainly
attributable to a decrease in demand for high-carbon cold-rolled products used
in automobile components production due to the slowdown of the automobile
industry, as well as lower average sale prices during the year ended June 30,
2009.
Sales by Product
Line
A
break-down of our sales by product line for the years ended June 30, 2009 and
2008 is as follows:
|
|
2009
|
|
|
2008
|
|
|
Year-on-Year
|
|
Product
Category
|
|
Quantity
(tons)
|
|
|
$
Amount
|
|
|
%
of
Sales
|
|
|
Quantity
(tons)
|
|
|
$
Amount
|
|
|
%
of
Sales
|
|
|
Qty.
Variance
|
|
Low
carbon hard rolled
|
|
|
21,009 |
|
|
|
21,051,186 |
|
|
|
28 |
|
|
|
18,612 |
|
|
|
15,959,415 |
|
|
|
18 |
|
|
|
2,397 |
|
Low
carbon cold-rolled
|
|
|
38,526 |
|
|
|
29,774,589 |
|
|
|
39 |
|
|
|
35,163 |
|
|
|
27,497,894 |
|
|
|
32 |
|
|
|
3,363 |
|
High-carbon
hot-rolled
|
|
|
5,499 |
|
|
|
5,487,958 |
|
|
|
7 |
|
|
|
6,790 |
|
|
|
6,291,036 |
|
|
|
7 |
|
|
|
(1,291 |
|
High-carbon
cold-rolled
|
|
|
7,755 |
|
|
|
11,305,674 |
|
|
|
15 |
|
|
|
17,754 |
|
|
|
29,029,418 |
|
|
|
33 |
|
|
|
(9,999 |
|
Subcontracting
income
|
|
|
11,212 |
|
|
|
6,392,815 |
|
|
|
8 |
|
|
|
10,803 |
|
|
|
6,425,008 |
|
|
|
7 |
|
|
|
409 |
|
Sales
of scrap metal
|
|
|
- |
|
|
|
2,269,399 |
|
|
|
3 |
|
|
|
- |
|
|
|
2,536,555 |
|
|
|
3 |
|
|
|
- |
|
Total
|
|
|
84,001 |
|
|
|
76,281,621 |
|
|
|
100 |
|
|
|
89,122 |
|
|
|
87,739,326 |
|
|
|
100 |
|
|
|
(5,121 |
|
There
were different trends of demand across various product categories during the
year ended June 30, 2009. High-carbon cold-rolled steel products only accounted
for 15% of the current sales mix at an average selling price of $1,458 per ton
for the year ended June 30, 2009, compared to 33 % of the sales mix at an
average selling price per ton of $1,635 for the year ended June 30, 2008. This
was a result of the slow down of the automobile industry as a large quantity of
the products in this category is sold to automobile components manufacturers.
Low-carbon cold-rolled steel products accounted for 39% of the current sales mix
at an average selling price of $773 per ton for the year ended June 30, 2009,
compared to 32% of the sales mix at an average selling price per ton of $782 for
the year ended June 30, 2008. Low-carbon hard-rolled steel products accounted
for 28% of the current sales mix at an average selling price of $1,002 per ton
for the year ended June 30, 2009, compared to 18% of the sales mix at an average
selling price per ton of $857 for the year ended June 30,
2008. Subcontracting income revenues decreased slightly to
$6,392,815, or 8%, of the sales mix for the year ended June 30, 2009 as compared
to $6,425,008, or 7%, of the sales mix during the year ended June 20,
2008.
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
Average
Selling Prices
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
Low-carbon
hard rolled
|
|
|
1,002 |
|
|
|
857 |
|
|
|
145 |
|
|
|
17 |
|
Low-carbon
cold-rolled
|
|
|
773 |
|
|
|
782 |
|
|
|
(9 |
) |
|
|
(1 |
) |
High-carbon
hot-rolled
|
|
|
998 |
|
|
|
927 |
|
|
|
71 |
|
|
|
8 |
|
High-carbon
cold-rolled
|
|
|
1,458 |
|
|
|
1,635 |
|
|
|
(177 |
) |
|
|
(11 |
) |
Subcontracting
income
|
|
|
570 |
|
|
|
595 |
|
|
|
(25 |
|
|
|
(4 |
|
The
average selling price per ton decreased to $908 for the year ended June 30,
2009, compared to the corresponding year in 2008 of $984, representing
a decrease of $76, or 7.8%, year-on-year. This decrease was mainly due to
decreases in steel prices and therefore selling prices due to volatilities in
the industry, as well as a decrease in percentage of high-carbon cold rolled
steel products during the year. High-carbon cold-rolled steel
products have the highest selling prices among all product categories, and only
accounted for 15% of the current sales mix, compared to 33% of the sales mix
year-on-year. There was also been a decrease in the average selling
price of high-carbon cold-rolled steel products to $1,458 per ton for the year
ended June 30, 2009, from $1,635 for the year ended June 30, 2008.
Sales Breakdown by Major
Customer
|
|
2009
|
|
|
2008
|
|
Customers
|
|
$
|
|
|
%
of Sales
|
|
|
$
|
|
|
%
of Sales
|
|
Salzgitter
Mannesmann International GMBH
|
|
|
14,275,799 |
|
|
|
19 |
|
|
|
* |
|
|
|
* |
|
Shanghai
Changshuo Stainless Steel Co., Ltd.
|
|
|
10,999,692 |
|
|
|
14 |
|
|
|
18,513,819 |
|
|
|
21 |
|
Shanghai
Shengdejia Metal Co., Ltd
|
|
|
4,827,675 |
|
|
|
6 |
|
|
|
10,414,545 |
|
|
|
12 |
|
Zhangjiagang
Gangxing Innovative Construction Material Co., Ltd.
|
|
|
4,413,512 |
|
|
|
6 |
|
|
|
* |
|
|
|
* |
|
Unimax
and Far Corporation
|
|
|
3,777,196 |
|
|
|
5 |
|
|
|
7,695,294 |
|
|
|
9 |
|
Shanghai
Bayou Industrial Co., Ltd.
|
|
|
* |
|
|
|
* |
|
|
|
10,494,752 |
|
|
|
12 |
|
Baosteel
Steel Products Trading Co., Ltd.
|
|
|
* |
|
|
|
* |
|
|
|
6,758,976 |
|
|
|
8 |
|
|
|
|
38,293,874 |
|
|
|
50 |
|
|
|
53,877,386 |
|
|
|
62 |
|
Others
|
|
|
37,987,747 |
|
|
|
50 |
|
|
|
33,861,940 |
|
|
|
38 |
|
Total
|
|
|
76,281,621 |
|
|
|
100 |
|
|
|
87,739,326 |
|
|
|
100 |
|
*
Not major customers for the relevant years
Sales
revenues generated from our top five major customers as a percentage of total
sales decreased to 50% for the year ended June 30, 2009, compared to 62% for the
year ended June 30, 2008. Sales to two new major customers, Salzgitter
Mannesmann International GMBH and Shanghai Changshuo Stainless Steel Co., Ltd.,
for the year accounted for 33% of our sales revenues. The change in customer mix
reflects management’s continuous efforts in expanding our customer base and
geographical coverage during the course of the year.
Cost of Goods
Sold. Cost
of sales increased by $3,307,601, or 5.1%, year-on-year to $68,549,426 for the
year ended June 30, 2009, from $65,241,825 for the year ended June 30, 2008.
Cost of sales represented 89.9% of sales revenues for the year ended June 30,
2009 compared to 74.4% for the year ended June 30, 2008. Average cost of
production per ton increased to $816 for the year ended June 30, 2009, compared
to an average cost of production per ton of $732 for the year ended June 30,
2008, representing an increase of $84 per ton, or 11.5%,
year-on-year.
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Raw materials
|
|
|
57,401,094 |
|
|
|
57,019,804 |
|
|
|
381,290 |
|
|
|
1 |
|
-
Direct labor
|
|
|
1,205,070 |
|
|
|
946,770 |
|
|
|
258,300 |
|
|
|
27 |
|
-
Manufacturing overhead
|
|
|
9,943,262 |
|
|
|
7,275,251 |
|
|
|
2,668,011 |
|
|
|
37 |
|
|
|
|
68,549,426 |
|
|
|
65,241,825 |
|
|
|
3,307,601 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
per unit sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
units sold (tons)
|
|
|
84,001 |
|
|
|
89,122 |
|
|
|
(5,121 |
) |
|
|
(6 |
) |
Average
cost per unit sold ($/ton)
|
|
|
816 |
|
|
|
732 |
|
|
|
84 |
|
|
|
11 |
|
The
increase in cost of sales is represented by the combined effect of:
|
|
an
increase in cost of raw materials per unit sold of $43, or 6.7%, from $640
for the year ended June 30, 2008 compared to $683 for the year
ended June 30, 2009;
|
|
|
an
increase in direct labor per unit sold of $3, or 27.3%, from $11 for the
year ended June 30, 2008 compared to $14 for the year ended June 30, 2009;
|
|
|
an
increase in factory overhead per unit sold of $36, or 43.9%, from $82 for
the year ended June 30, 2008 compared to $118 for the year ended June 30,
2009.
|
The cost
of raw materials consumed increased by $381,290, or 0.7%, year-on-year, to
$57,401,094 for the year ended June 30, 2009 from $57,019,804 for the year ended
June 30, 2008. This increase was mainly due to increases in raw material prices
year-on-year, offset by decrease in total units sold.
Direct
labor costs increased by $258,300, or 27.3%, year-on-year, to $1,205,070 for the
year ended June 30, 2009, from $946,770 for the year ended June 30, 2008. The
increase was due to increases in wages during the year following the lifting of
the minimum monthly wage in Shanghai, as well as increases in related pension
costs resulting from the additional base wages.
Manufacturing
overhead costs increased by $2,668,011, or 36.7%, year-on-year, to $9,943,262
for the year ended June 30, 2009, from $7,275,251 for the year ended June 30,
2008. The increase was mainly attributable to the combined effect of an increase
in depreciation of $1,529,348, or 75.8%, year-on-year to $3,547,453 for the year
ended June 30, 2009, from $2,018,105 for the year ended June 30, 2008, an
increase in utilities of $538,415, or 21.8%, year-on-year to $3,005,366 for the
year ended June 30, 2009, from $2,466,951 for the year ended June 30, 2008 due
to increased consumption of natural gas associated with the production of 2,397
additional tons of low carbon hard rolled steel year-on-year, and an increase in
low consumables by $967,693, or 52.3%, year-on-year to $2,816,436 for the year
ended June 30, 2009, from $1,848,743 for the year ended June 30,
2008.
Gross
Profit. Gross profit in
absolute terms decreased by $14,765,306, or 65.6%, year-on-year, to $7,732,195
for the year ended June 30, 2009, from $22,497,501 for the year ended June 30,
2008, while gross profit margin decreased to 10.1% for the year ended June 30,
2009, from 25.6% for the year ended June 30, 2008. The decrease in gross profit
is mainly attributable to a 13.1% year-on-year decrease in sales revenues, as
well as a 5.1% year-on-year increase in cost of goods sold. The decrease in
gross profit margin principally resulted from the higher cost per ton sold of
raw materials as we are taking down raw materials from inventories we purchased
some time ago at higher prices during restricted supplies, as well as a decrease
in average selling prices due to the decrease in steel prices during the 2009
fiscal year.
Selling
Expenses. Selling expenses increased by $1,071,223, or 176.2%,
year-on-year, to $1,679,283 for the year ended June 30, 2009 compared to the
corresponding year in 2008 of $608,060. The increase was mainly attributable to
increases in sales commission paid to export agents based on increased tonnage
exported during the year, and transportation and custom clearing charges in
relation to such export sales year-on-year. Our export precision products, the
low carbon hard-rolled steel, accounted for $21,051,186, or 28%, of the sales
mix for the year ended June 30, 2009, compared to $15,959,415, or 18% of sales
during the year ended June 30, 2008.
Administrative
Expenses. Administrative expenses
decreased by $520,448, or 18.9%, year-on-year, to $2,238,088 for the year ended
June 30, 2009 compared to $2,758,536 for the year ended June 30, 2008. This
decrease was chiefly associated with lower SEC compliance costs and professional
fees as there was no financing activity during the year ended June 30, 2009 and
lower legal and advisory fees as we become more familiar with the rules and
regulations as a listed company.
Provision for bad
debt. Provision for bad debt increased by $3,144,523, or 457.7%,
year-on-year, because of bad debt expense in the amount of $3,831,478 recognized
during the year. This charge reflects a provision for doubtful accounts due to a
dispute between the Company and one of our customers regarding a special
stainless steel product processed by the Company and delivered to the customer
during the third and fourth quarters of the year ended June 30, 2008. Revenues
for these products were initially recognized as services had been rendered and
goods had been delivered in accordance to the terms of the contract,
collectability was reasonably assured and management had no reason to believe
that the customer would object to the goods and services
provided. However, in the months following such delivery, a dispute
arose during the use of such products by the customer, which was followed by
discussions between the Company and the customer regarding the technical aspects
of the products and the possibility of reprocessing. After a few rounds of
negotiation with the customer regarding the products and payment, our management
determined that this accounts receivable was uncollectible. The Company does not
have any other accounts receivable related to this product.
Income from
Operations. Income from operations before income tax decreased by
$18,593,144, or 101.2%, year-on-year to a loss of $213,447 for the year ended
June 30, 2009 from income of $18,379,697 for the year ended June 30, 2008, as a
result of the factors discussed above.
Other
revenues. Our other income decreased $609,519, or 30.4%, to
$1,397,258 for the year ended June 30, 2009 from $2,006,777 for the year ended
June 30, 2008. As a percentage of revenues, other income decreased to
1.8% for the year ended June 30, 2009 from 2.3% for the year ended June 30,
2008. Such percentage decrease in other income was primarily due to lower cash
balances and decrease in interest rate year-on-year.
Interest
Expense. Total interest expense decreased $2,375, or 0.2%, to
$1,228,665 for the year ended June 30, 2009, from $1,231,040 for the year ended
June 30, 2008 due to an increase in loan balances offset by a lower weighted
average interest rate year-on-year.
Income
Tax. For the year ended June 30, 2009, we recognized income tax expense
of $363,484, compared to an income tax expense of $572,323 for the year ended
June 30, 2008. Other than a lower income from operations year-on-year, the
income tax expense for the year ended June 30, 2008 reflects a reversal of
deferred tax liabilities in the amount of $1,064,028 which had substantially
decreased the total income tax expense for the year.
Net
Income(loss). Net income decreased by $18,991,449, or 102.2%,
year-on-year, to a net loss of $408,338 for the year ended June 30, 2009 from
net income of $18,583,111 for the year ended June 30, 2008. The decrease in net
income is attributable to a combination of factors discussed above, including a
decrease in tons of goods sold due to weakened demand amid the current global
economic downturn, which in turn led to a decrease in sales revenue, and lower
average selling prices year-on-year. The decrease in net income is
also attributable to a decrease in gross margin, largely due to higher raw
material costs and the recognition of a $3,831,478 bad debt expense for the year
ended June 30, 2009.
Fiscal Year Ended June 30,
2008 Compared to Fiscal Year Ended June 30, 2007
Sales
Revenues. Sales
volume increased by 22,101 tons, or 33%, year-on-year to 89,122 tons for the
year ended June 30, 2008 from 67,021 tons for the year ended June 30, 2007 and,
as a result, sales revenues increased by $33,779,083, or 62.6%, year-on-year to
$87,739,326 for the year ended June 30, 2008 from $53,960,243 for the year ended
June 30, 2007. We believe that the increases in sales and sales revenues are a
direct result of increases in our capacity and the building of our brand both in
China and overseas among users of cold-rolled precision steel
products.
Average
cost per unit sold increased to $732 for the year ended June 30, 2008,
compared to an average cost per unit sold of $581 for the year ended
June 30, 2007, representing an increase of $151 per ton, or 26%,
year-on-year. The increase in average cost per unit sold is mainly attributable
to the increase in raw material prices.
Sales by Product Line. A
break-down of our sales by product line for the years ended June 30, 2008 and
2007 is as follows:
|
|
2008
|
|
|
2007
|
|
|
Year-on-Year
|
|
Product
Category
|
|
Quantity
(tons)
|
|
|
$
Amount
|
|
|
%
of
Sales
|
|
|
Quantity
(tons)
|
|
|
$
Amount
|
|
|
%
of
Sales
|
|
|
Qty.
Variance
|
|
Low
carbon cold-rolled
|
|
|
35,163 |
|
|
|
27,497,894 |
|
|
|
32 |
|
|
|
37,066 |
|
|
|
22,072,438 |
|
|
|
41 |
|
|
|
(1,903 |
) |
Low
carbon acid wash
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14 |
|
|
|
5,732 |
|
|
|
- |
|
|
|
(14 |
) |
Low
carbon hard rolled
|
|
|
18,612 |
|
|
|
15,959,415 |
|
|
|
18 |
|
|
|
1,149 |
|
|
|
782,835 |
|
|
|
1 |
|
|
|
17,463 |
|
High-carbon
cold-rolled
|
|
|
17,754 |
|
|
|
29,029,418 |
|
|
|
33 |
|
|
|
5,287 |
|
|
|
5,529,717 |
|
|
|
10 |
|
|
|
12,467 |
|
High-carbon
hot-rolled
|
|
|
6,790 |
|
|
|
6,291,036 |
|
|
|
7 |
|
|
|
11,918 |
|
|
|
9,176,414 |
|
|
|
17 |
|
|
|
(5,128 |
|
High
end cold-rolled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
865 |
|
|
|
14,618,831 |
|
|
|
27 |
|
|
|
(865 |
) |
Sales
of Scrap Metal
|
|
|
- |
|
|
|
2,536,555 |
|
|
|
3 |
|
|
|
- |
|
|
|
851,742 |
|
|
|
2 |
|
|
|
- |
|
Subcontracting
income
|
|
|
10,803 |
|
|
|
6,425,008 |
|
|
|
7 |
|
|
|
10,722 |
|
|
|
922,534 |
|
|
|
2 |
|
|
|
81 |
|
Total
|
|
|
89,122 |
|
|
|
87,739,326 |
|
|
|
100 |
|
|
|
67,021 |
|
|
|
53,960,243 |
|
|
|
100 |
|
|
|
22,101 |
|
There
were various changes in the break-down of sales among our product categories
over the year ended June 30, 2008 as we have been ramping up the capacity of the
second mill since October 2006 and are in the process of developing new products
and new markets. High-carbon cold-rolled steel products accounted for 33% of the
sales mix at an average selling price of $1,635 per ton for the year ended June
30, 2008 compared to 10% of the sales mix at an average selling price per ton of
$1,046 for the year ended June 30, 2007, as we continued to see our customers of
the high-carbon hot-rolled products switch to the high-carbon cold-rolled
products. The low-carbon cold-rolled steel products accounted for 32% of the
sales mix at an average selling price of $782 per ton for the year ended
June 30, 2008 compared to 41% of the sales mix at an average selling
price per ton of $595 for the year ended June 30, 2007. This is a result of
increased production of the low carbon hard rolled steel category, which is our
exported precision steel product, from 1% of sales during the year ended
June 30, 2007 accounting for $782,835, to 18% of the sales mix, accounting
for $15,959,415, at an average selling price of $857 per ton for the year ended
June 30, 2008.
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
Average
Selling Prices
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
Low-carbon
cold-rolled
|
|
|
782 |
|
|
|
595 |
|
|
|
187 |
|
|
|
31 |
|
Low-carbon
acid wash
|
|
|
- |
|
|
|
409 |
|
|
|
(409 |
) |
|
|
(100 |
) |
Low-carbon
hard rolled
|
|
|
857 |
|
|
|
681 |
|
|
|
176 |
|
|
|
26 |
|
High-carbon
cold-rolled
|
|
|
1,635 |
|
|
|
1,046 |
|
|
|
589 |
|
|
|
56 |
|
High-carbon
hot-rolled
|
|
|
927 |
|
|
|
770 |
|
|
|
157 |
|
|
|
20 |
|
High-end
cold-rolled
|
|
|
- |
|
|
|
16,900 |
|
|
|
(16,900 |
) |
|
|
(100 |
) |
Subcontracting
income
|
|
|
595 |
|
|
|
86 |
|
|
|
509 |
|
|
>
100
|
|
The
average selling price per ton generated increased to $984 for the year ended
June 30, 2008 compared to the corresponding year in 2007 of $805, representing
an increase of $179, or 22.3%, year-on-year. This increase was due to both
changes in our sales mix during the year to focus on high quality high margin
products and rising raw material prices.
Sales
Breakdown by Major Customer
|
|
2008
|
|
|
2007
|
|
Customers
|
|
$
|
|
|
%
of Sales
|
|
|
$
|
|
|
%
of Sales
|
|
Shanghai
Changshuo Stainless Steel Co., Ltd.
|
|
|
18,513,819 |
|
|
|
21 |
|
|
|
5,428,110 |
|
|
|
10 |
|
Shanghai
Bayou Industrial Co., Ltd.
|
|
|
10,494,752 |
|
|
|
12 |
|
|
|
- |
* |
|
|
- |
* |
Shanghai
Shengdejia Metal Co. Ltd
|
|
|
10,414,545 |
|
|
|
12 |
|
|
|
- |
* |
|
|
- |
* |
Unimax
and Far Corporation
|
|
|
7,695,294 |
|
|
|
9 |
|
|
|
- |
* |
|
|
- |
* |
Baosteel
Steel Products Trading Co., Ltd.
|
|
|
6,758,976 |
|
|
|
8 |
|
|
|
- |
* |
|
|
- |
* |
Shanghai
Ruixuefeng Metals Co. Ltd
|
|
|
- |
* |
|