ITEM 1. BUSINESS.
Our Business
As a result of the consummation of a reverse merger, discussed below, we are engaged in the business of designing, manufacturing and selling logistic transport systems and medicine dispensing systems and equipment. Our principal product is a pneumatic tube logistic transport system used in hospitals and other medical facilities. We recently developed an automatic medicine dispensing and packing system, which we introduced to the market in the first quarter of 2008 for use in hospitals and medical facilities.
Our customers are primarily hospitals and medical appliance companies in the People’s Republic of China (the “PRC”). As the market for pneumatic transport systems (“PTS”) and medicine dispensing system (“SADP”) are still an emerging market, official data about the industry in general and competition in particular have not been readily available. Based on information we have collected from bids, the internet and other market intelligence, it is our estimate that among the hospitals that have adopted pneumatic transport systems and medicine dispensing system in China, we were the supplier to the largest number of hospitals in 2005, 2006, 2007, 2008 and 2009. In 2005, we sold 1,105 units PTS to 43 hospitals and medical facilities and recognized revenue of $5,047,365. In 2006, we sold 1,930 units PTS to 65 hospitals and medical facilities and recognized revenue of $8,914,139. In 2007, we sold 2,575 units PTS to 87 hospitals and medical facilities and recognized revenue of $11,865,138. In 2008, we sold 3,669 units PTS and 5 units SADP to 96 hospitals. In 2009, we sold 2,279 units PTS and 11 units SADP to 52 hospitals. We sell our products both directly, through our sales employees and direct sales office and indirectly, through twelve independent sales agents and four direct sales office. Our sales network covers Beijing, Shanghai, Guangzhou, Xi’an and 13 other provinces in the PRC.
We generate our revenues from sales in five product categories: Type A workstations, Type B workstations, Type C workstations, SADP and spare part. The PTS have the same function and price but with different product designs. Having three types of workstations enables us to provide more options and flexibility to our customers to accommodate their aesthetic taste, space restrictions and other requirements.
About Us
We are a Nevada corporation which was formed on October 18, 1971. Prior to June 6, 2007, we were a shell company. On June 6, 2007, we consummated (i) a reverse merger transaction, in which we acquired control over an operating company in the PRC and (ii) a private sale of our restricted stock, in which we received an aggregate of $6.7 million of financing. Through these transactions, we ceased to be a shell company and, through our subsidiaries, entered into the business of manufacturing and selling logistic transport systems and medicine dispensing and system in the PRC.
On June 6, 2007, the Company acquired World Through Limited, a British Virgin Islands Corporation (“WTL”) through a share exchange transaction with WTL and Rise Elite International Limited (“Rise Elite”), a company incorporated under the laws of the British Virgin Islands and the owner of 100% of the outstanding voting stock of WTL. WTL owns all of the stock of Sunway World Through Technology (Daqing) Co., Ltd. (“SWT”), a wholly foreign-owned enterprise (“WFOE”) organized under the laws of the PRC. SWT has a series of contracts with the Company’s operating company, Daqing Sunway Technology Co., Ltd. (“Daqing Sunway”), a company organized under the laws of the PRC, which gives it control over Daqing Sunway’s business, personnel and finances as if it were a wholly owned subsidiary of SWT. The transaction was structured in this way because PRC regulations require that Daqing Sunway be acquired for cash and the natural person in control of WTL was unable to raise sufficient funds to pay the full value for Daqing Sunway’s shares of assets in cash prior to the acquisition.
As contemplated by the reverse merger and approved by a majority of shareholders on June 28, 2007, the Company effected a 86.3035-for-one reverse split of its common stock that took effect on February 7, 2008.
Also on February 7, 2008, the Company changed its name from National Realty and Mortgage, Inc. to Sunway Global Inc.
On March 16, 2008, SWT acquired Beijing Sunway New-force Medical Treatment Tech Co., Ltd. (“Beijing Sunway”) as its wholly-owned subsidiary. Beijing Sunway was incorporated in Beijing, PRC on May 24, 2007. The current structure of the Company and its subsidiaries is set forth below:
*deemed a variable interest entity
The Company, through its subsidiaries and Daqing Sunway, is now in the business of designing, manufacturing and selling logistic transport systems and medicine dispensing systems and equipment.
Description of Our Products and Services
Medical Transport Systems
The Company’s principal product has been the SUNTRANS-160 pneumatic tube transport system (“PTS”) used in hospitals and medical facilities. Pneumatic tube material transport systems are used in over 140 countries throughout the world with many of the systems used in hospitals and medical facilities. Our annual PTS sales in 2004, 2005, 2006, 2007, 2008 and 2009 were 785, 1,105, 1,930, 2,575, 3,669 and 2,279 units (each unit consists of one workstation in a PTS), respectively. The average price of our PTS is approximately $153,700 (consisting of 30 workstations on average).
Our PTS transports small materials weighing up to five kilograms in capsules at high-speed through a network of tubing and transfer units that connect hundreds of working departments of a hospital, including nurse stations, operation departments, medicine dispensing centers, testing centers and disinfection stations, each designated as a user workstation. The high speed transmission of the materials in the tubing network is through pneumatic air flow powered by air compressors and the path of a capsule can be switched and redirected through transfer units. Typical applications for our PTS are the transport of items from a user workstation to another user workstation at a users’ request.
Our PTS provides two-way carrier travel between send/receive user workstations through a single interconnecting tube. It can deliver anything that fits in a capsule to a remote location - even on different floors or in other buildings - in a few seconds at speeds up to 8 meters per second on a stream of compressed air in the transmission tubes. Capsules can be transmitted up to 1,800 meters horizontally and 120 meters vertically. Each pneumatic tube transport system can have up to eight sub-systems with up to 64 send/receive workstations under control by each sub-system.
The control units for user workstations and transfer units contain self-diagnostic and troubleshooting software. When an operating error occurs, the applicable control unit will send error message to each user workstation and the system control center. When a receiving user workstation malfunctions, the system will automatically return the transmission carrier to its originating user workstation.
A PTS primarily consists of send/receive user workstations, transfer units, tubing network, capsules, air compressors, system blower and system control centers.
User Workstations
User Workstations are combined sending and receiving units that send and receive capsules carrying the items transported. Each workstation has an easy-to-use control panel equipped with a 5-inch LCD screen. It displays the real-time operating status of all workstations, capsules, transfer units and air compressors throughout a PTS and also monitors capsules in transit, indicates the sequence of transport requests and displays destinations of a transport. It has a heightened security system that can discern and prevent the entry of any foreign items that are not requested to be transported by the system. Each workstation has a voice function that announces the arrival of a capsule as well as its originating workstation. When error occurs in one user workstation, such user workstation can automatically shut down without interfering with the operation of other user workstations.
Transfer Units
Transfer units are switching devices used at branching points in a tubing system to direct and redirect the path of a capsule from one route into another route until it gets to its final destination.
Tubing network
The tubing and bends in a PTS are made from strong, lightweight, non-corroding, dent-resistant U-PVC that can withstand adverse exterior weather conditions as well as a numerous harsh conditions between buildings, through existing utilities and underground. Generally, the diameter of a straight tube is 160mm and the radius of a bend is 850 mm and the tube wall is 3.2mm thick.
System Control Centers
A system control center consists of one computer that controls the control units of all other components of the PTS connected through communication cables, and it configures the sub-systems, monitors system operations and troubleshoots system errors. It has a graphical user interface, dynamic system monitoring and administration, real-time tracking of capsules, event reporting and self-diagnostic systems and a security system to prevent unauthorized use. The system control centers can also store current and historical transport data and instructions entered into the system, which can be retrieved for research and other purposes. In the event of a system shut-down due to a blackout, the system can resume operation without losing any data or instructions and complete transport requests given prior to the shut-down when the power supply resumes.
Capsules
Capsules are the transporting “vehicle” for medical items within the hospital. A capsule is a tube-like bottle made from transparent Plexiglas with leak-resistant caps at both ends. Each capsule can carry a load weigh up to five kilograms.
Air Compressors and System Blower
Air compressors and the system blower compress and pressurize air which creates pneumatic force that moves capsules through the tubing system.
Execution and Transmission Flow of a Transport Request
A transport request is typically executed as follows: At an originating user workstation, a user places the item to be transmitted in a capsule and puts the capsule in the input basket of the originating user workstation. The user then enters a transmission request on the control panel of the workstation for the capsule to be delivered to another designated user workstation. The request will then be transmitted to the system control center. Upon receipt of the transmission request, the system control center will check whether there is any item currently in transit in the applicable route. If not, the system control center will instruct the originating user workstation to allow the capsule to enter the tube. Upon the capsule’s entry into the tube, the air compressor and system blower will be turned on. The system blower will provide vacuum to suck the capsule into the transfer unit and the transfer unit will then switch to the path leading to the destination workstation. The system blower will then provide positive pressure in the tube that will carry the capsule to its destination. Upon arrival of the capsule at the destination workstation, the destination workstation will automatically release the capsule into its output basket. At the same time, the destination workstation will make a voice announcement to alert the arrival of the capsule and the system control center records and stores all the information regarding the transport operation.
Installation
Send/receive workstations with built-in air compressors can sit on desks or tables, or mount easily in a minimum of space on walls, building columns, or any convenient flat surface, without using prime locations. Tubing may be installed indoors or outdoors and fire prevention measures can be added. Our outdoor installation utilizes antifreeze and is waterproof. Tubes can be installed through floors and walls with fireproof insulation casing.
Our PTS has three types: Type A Workstations, Type B Workstations and Type C Workstations. The three types of workstations are priced the same with similar functions. The differences between the three types lie in the mechanism of sending and receiving items as well as size and method of installation. Having three types of workstations enables us to provide more options and flexibility to our customers to accommodate their aesthetic taste, space restrictions and other requirements.
Medicine Dispensing Systems
We have developed a new medicine dispensing system (“SADP”) primarily for hospital use, which we launched commercially in the first quarter of 2008. Our SAPD is a computerized system that can automatically fill medical prescriptions for oral medications in single or multiple dosages with high efficiency. Based on the prescriptions entered into the system by pharmacists, the system automatically dispenses and packages the prescribed amount of medication with printed labels that provides a patient’s name, location in the hospital, hospital bed identification, name of medication, quantity of medication and instructions for taking the medication. The prescription information can be stored in medicine dispensing system for up to one year for future reference. Each medicine dispensing system is connected with hospital computer network and can retrieve information from the network when necessary. Our SADP is capable of dispensing and packaging up to 60 prescriptions in one minute and can fill the prescriptions and package medication for 500 patients based on three doses per day in approximately 30 minutes. Our annual SADP sales in 2008 and 2009 were 5 and 11 units, respectively. The average price of our SADP is approximately $100,000.
Each of our SADPs has the capacity to house between 240 to 500 medicine storage bins, which allows for the dispensing and packaging of between 240 and 500 different types of medication at any given time. Each medicine storage bin has a CPU which controls the precise dosage dispensed in accordance with the prescription. The interior of the medicine storage bins are specifically designed to hold different types of medications based on the specifications provided by hospitals. Our SADP also comes with a back-up medicine bin which can house up to 40 different types of medications. When a medication that is not stored in any of the storage bins is prescribed or if a non-standard dosage of a medication is prescribed (for example, one-half of a tablet may be prescribed), a pharmacist can mix and prepare the medication and place it in the back-up medicine bin for dispensing by our SADP system together with the rest of the prescribed medication.
The central control system controls of an SADP monitors the operating status of each storage bin. It also automatically recognizes and tracks the locations to which each medication was transmitted and the quantities of medication in each bin. Pharmacists can give operate the SADP with its touch screen.
Medical treatment mistakes are often caused by human errors made by medical professionals in prescribing and dispensing medicine because of lack of historical information on patients and the medication that the patients have been taking. We believe that the SADP, which retains information about patients medications can help reduce the number of such errors. In Europe and the United States, approximately 80% of hospitals already use some form of automatic drug dispensation system. However, the use of such systems has just started in the PRC.
Manufacture and Quality Control
We manufacture the main components of our products, such as tube diverters and pneumatic direction diverters, in our own facility. We outsource the manufacturing of certain other parts such as workstations. We assemble all the components and parts into finished products. In choosing our suppliers, we focus on the quality of raw material supplied. We conduct our manufacturing procedures and quality testing based on ISO 9000 or CE Quality Standard and ISO Environmental Standards. We have received ISO 9000 certification since August 2004.
We usually provide a standard 12-month product warranty to our customers. During the warranty period, we replace defective products for our customers without charge.
Our Product/Marketing Strategy
Our product/marketing strategy focuses on using our human resources and intellectual capital to design new and better hardware and software products with a variety of applications for many markets. Currently, we are focused on logistics products for the hospital and medical markets, but believe that we can expand into other markets.
Implementing our product/marketing strategy involves the following:
Expand and Strengthen Our Product Lines. Currently, we offer two main products: medical transport systems and medicine dispensing systems. We hope to leverage the existing technologies that we own and our technical expertise to expand our product offerings in developing new logistics products and new medical and hospital products.
Expand and Strengthen Our Markets for our Current Product Lines in the PRC and then outside of the PRC. Our medical transport systems and medicine dispensing systems are designed principally for hospital use. Currently, we are conducting research and development to expand the use of our products in banks, industrial companies and office buildings. We believe that our low cost structure that comes with operating in the PRC can allow us to expand into other countries and successfully compete based on our cost and price advantages.
Expand and Strengthen Our Distribution Network in the PRC and then outside of the PRC. We own the technologies used in our existing products, and therefore, our cost of sales and the prices for our products are lower than those of other companies which must pay licensing fees and royalties. As result, we have been able to capture significant market share in the PRC (approximately 50% of hospitals and medical facilities that use pneumatic tube systems). In order to leverage this strength, we will seek to build our own distribution service centers in strategic locations in the PRC.
Sales and Marketing
We sell our products directly through our sales employees and direct sales offices or indirectly through independent sales agents. As of the date of this report, we have thirteen independent sales agents and four direct sales office covering Beijing, Shanghai, Guangzhou, Chengdu, Xi’an and 13 other provinces, and 16 sales employees. Our sales agents purchase products from us and resell them at higher prices.
Materials and Suppliers
The principal supplies purchased for our business are composite panels, aluminum frames, micro processors and other IC chips, power supplies, LCD panels, fans, U-PVC tubes and equipment chassis. Except for LCD panels, which we purchase from Truly Semiconductors Limited, a Japanese manufacturer, we have at least two suppliers for each of the supplies we purchase for our business. We generally have long-term relationships with our suppliers but no written contracts with them as the materials we need are generally available in the market.
Customers
Our customers are primarily hospitals and medical appliance companies. The following table presents, for the periods indicated, our largest customers by revenue:
The payment terms of our standard sales agreement generally require a cash payment of 30% of the total purchase price within 5 days of the signing of the agreement, a cash payment of 30% of the total purchase price upon receipt of the products if there is no exterior damage to the products, and a cash payment of 40% of the total purchase price upon installation, completion of testing, and acceptance of the products. The purchase price generally does not contain shipping expenses. If a shipment is delayed in breach of a sales agreement, we are required to pay 1.0% of the total purchase price for each day delayed up to 10% of the total purchase price.
Technology and Research and Development
We have developed and own the intellectual property used in our products. Currently we hold thirteen PRC patents for our medical transport systems. In September 1999, Daqing Sunway was designated as a New-and-High-Technology Enterprise in Heilongjiang Province by the Science and Technology Commission of Heilongjiang Province.
We have 18 full-time employees engaged in research and development (“R&D”) efforts. Our R&D personnel specialize in the fields of software development, electronic engineering, machinery design and manufacture, electronic information technology, communication technology and application, automatic control technology and optoelectronic technology. Most of our R&D personnel have more than 5 years experience in their fields of specialty. We also outsource certain software development projects to third party software developers.
Currently, we are conducting R&D on products for use in banks, industrial companies and commercial use office buildings.
For the fiscal years ended December 31, 2009 and 2008, respectively, we expended approximately $203,876 and $36,138 on R&D activities.
Competition and Competitive Advantages
Pneumatic Transport System
Our main competitors in the supply of PTS are Beijing Chuansheng Weiye Science Trade Co., Ltd., Hainan Lingjing Medical Purification Project Co., Ltd., and Beijing Ruize Network Co., Ltd. While we are both a manufacturer and distributor of our medical transport systems, our competitors are distributors of imported pneumatic transport systems. Among these companies, Hainan Lingjing Medical Purification Project Co., Ltd. is a distributor of Swisslog’s pneumatic force transportation products, and Beijing Ruize Network Co., Ltd. is a distributor for Sumetzberger GMBH, an Austrian company.
As the market for pneumatic transport systems is still an emerging market in the PRC, official data about the industry in general, and competition in particular, have not been readily available. Based on the information we collected from competitive bids, the internet and other market intelligence, it is our estimate that among suppliers of pneumatic transport systems in the PRC, we were the supplier to the largest number of hospitals in the fiscal years ended December 31, 2009 and 2008 in Chinese Mainland.
The following table sets forth our estimates, based on information we have collected from bids, the internet and other market intelligence, of the relative number of hospitals and medical facilities in the PRC supplied with pneumatic transport systems by us and our major competitors in 2009 and 2008:
Medicine Dispensing Systems
We introduced our medicine dispensing systems to the market in May 2007. Currently, we face competition from Japanese manufacturers, Yuyama Manufacturing Co., Tosho Co., Inc. and Sany Co., Ltd., and a South Korean company, JV Medi Co., Ltd., whose products are imported into the PRC and sold through distributors. Since the introduction of our medical dispensing system to the market in January 2008, we have received orders to purchase eight units. We have sold and delivered 5 units and 11 units SADP in 2008 and 2009 respectively.
The following table sets forth our estimates, based on information we have collected from bids, the internet and other market intelligence, of the relative number of hospitals and medical facilities in the PRC supplied with medicine dispensing systems by us and our major competitors in 2009.
Competitive Advantages
We believe that we have the following competitive advantages over our competitors:
Cost: We have cost advantages because we source our supplies domestically and our products are manufactured domestically using technologies developed by us. Our major competitors are domestic distributors of imported products that cost more in both materials and labor and, additionally, are subject to customs duties. As a result, our PTS is generally priced lower than our competitors’ products - our PTS is priced at approximately $150,810 per unit while our cost of sales is approximately $41,422 per unit, representing a gross margin of approximately 72.53%. We estimate that similar products of our competitors are priced at approximately $210,000 per unit. Our medicine dispensing system, which we launched in 2008, is priced at $272,902 per unit while our cost of sales is approximately $107,128, representing a gross margin of approximately 60.74%. We estimate that our competitors’ prices range from $315,900 to $402,170.
Large Existing Customer Base and Customer Loyalty: As of the end of 2008, we estimate, based on information we have collected through competitive bids, internet research and other market sources, that we had an approximate 50% share in hospitals and medical facilities using pneumatic tube systems in the PRC market based on the number of hospitals and medical facilities that have adopted pneumatic tube transport systems in China, as compared to an approximate 20% for our largest competitor, Swisslog. Our large existing customer base, which includes approximately 268 hospitals as our end users, provides us an advantage in the marketing and sales of additional products and services, both because existing customers are an important source of new orders, and because we are frequently referred to new customers by our existing customers due to our cost advantage, localized technology and excellent service.
Localized and Customized Technology: We are the only provider of PTS with localized interfaces in Chinese language specifically designed based on the needs of PRC customers. Daqing Sunway’s PTS is therefore more user friendly for Chinese speaking customers. Our competitors’ products are based on English language interfaces. As the general population in the PRC is not proficient in English, purchasers of our competitors’ products are required to employ highly educated and specially trained English speaking personnel to operate their systems, which represent an additional expense adding to their already higher prices. In addition, as the technologies used in our systems are developed by us, we have the capacity and flexibility to easily and quickly adapt our products to specific customer requirements and changing market trends.
Extensive After-Sales Service Coverage: We believe that we are more accessible to our customers than our competitors because we are the only manufacturer in the PRC, as opposed to distributor, of pneumatic tube systems. As a manufacturer, we believe we are in a better position to provide pre-sale consultation and post-sale services than our competitors, all of which are distributors of imported systems. We are available to provide pre-sale consultation to help potential customers determine their specific needs and design their transportation networks using PTS, and post-sale services such as on-site diagnostic tests to identify and prevent any potential problems, and maintenance and repair services. Our competitors’ customers do not have such easy access to the manufacturers because they must rely on the distributors to provide that access indirectly. Often, parts needed for maintenance are not available in the PRC and must be ordered from overseas for replacement, with a lag time for delivery.
Intellectual Property
Patents
Our products use patented technologies developed by us. Currently, we hold thirteen PRC patents used in our products. The following is a list of the patents we hold:
No.
Certificate No.
Issuer
Name of the Patent
Registered No.
Application
Date
Valid
Term
State Intellectual Property Office (SIPO)
Pneumatic tube material transport facility
ZL 01 2 71975 7
12/02/2001
SIPO
Tube air flow direction converter
ZL 02 2 09902 6
1/22/2002
SIPO
One type of tube direction converter
ZL 02 2 09901 8
1/22/2002
SIPO
Pneumatic tube material transport sending and receiving box
ZL 02 2 73509 7
5/23/2002
SIPO
Pneumatic tube material transport sending and receiving box (exterior design)
ZL 02 3 52960 1
5/23/2002
SIPO
Pneumatic tube material transport air sender
ZL 02 2 73510 0
5/23/2002
SIPO
Pneumatic tube material transport sending and receiving box of parallel changing mode
ZL 03 2 60602 8
9/24/2003
SIPO
Self motivating rail car for material transport system
ZL 2004 2 0070058 5
7/28/2004
SIPO
Car rail of material transport system
ZL 2004 2 0070057 0
7/08/2004
SIPO
Pneumatic tube material transport sending and receiving box of parallel changing mode
ZL 2004 2 0063538 9
10/11/2004
SIPO
Material flow tube router
ZL 2004 2 0063537 4
10/11/2004
SIPO
One type of tube air flow direction converter
ZL 2004 2 0063535 5
10/11/2004
SIPO
One type of tube direction converter
ZL 2004 2 0063536 X
10/11/2004
The PRC Patent Law was adopted by the National People’s Congress, the parliament in the PRC, in 1984 and was subsequently amended in 1992 and 2000. The Patent Law aims to protect and encourage invention, foster application of inventions and promote the development of science and technology. To be patentable, an invention must meet three conditions: novelty, inventiveness and practical applicability. Certain items are not patentable under the Patent Law, which include scientific discoveries, rules and methods for intellectual activities; methods used to diagnose or treat diseases, animal and plant breeds or substances obtained by means of nuclear transformation. The Patent Office under the State Council is responsible for receiving, examining and approving patent applications. A patent is valid for a term of twenty years in the case of an invention and a term of ten years in the case of utility models and designs. Our patents are all utility models and subject to the ten years’ protection. Any use of patent without consent or a proper license from the patent owner constitutes an infringement of patent rights which is actionable in court in the PRC.
Registered software
We own the following software used in our products:
No.
Certificate No
Software
Issued by
Issuance date
Term
(year)
HEI DGY-2003
Daqing Sunway material transport control
software V 1.0 (Daqing Sunway material
transport imbedded software)
Heilongjiang
Software Industry
Association
4/16/2008
Trademarks
We have two trademarks registered with the Trademark Office of the State Administration for Industry and Commerce in PRC as follows:
No.
Trademark number
Issuer
Classification
Term
State Trademark Bureau
Sep.14,2007 - Sep.13, 2017
State Trademark Bureau
Dec.14 , 2003 - Dec.13, 2013
Under the PRC Trademark Law, which was adopted in 1982, and revised in 2001, registered trademarks are granted a term of ten years protection, renewable for further terms. Each renewal is limited to ten years term and the registrant must continue to use the trademark and apply for a renewal within six months prior to the expiration of the current term.
Other Intellectual Property Rights Protections in the PRC
In addition to patent, trademark and trade secret protection law in the PRC, we also rely on contractual confidentiality provisions to protect our intellectual property rights and our brand. Our R&D personnel and executive officers are subject to confidentiality agreements to keep our proprietary information confidential. In addition, they are subject to a one-year covenant not to compete following the termination of employment with our company. Further, they agree that any work product belongs to our company.
Insurance
We currently do not carry any product liability or other similar insurance, nor do we have property insurance covering our plant, manufacturing equipment and office building. While product liability lawsuits in the PRC are rare and Daqing Sunway has never experienced significant failures or accidents, there can be no assurance that Daqing Sunway would not face liability in the event of any failure or accident.
Daqing Sunway maintains social insurance for their staff and employees in accordance with relevant compulsory requirements under the PRC laws and has compulsory insurance and fixed-sum insurance for cars and other vehicles.
Employees
Presently we have 232 full-time employees and contractors, out of which 38 are management and accounting personnel, 15 are R&D personnel, 32 are marketing and sales personnel and 147 manufacturing personnel.
Government Regulation
Under certain regulations in the form of public notices issued by the PRC State Administration of Foreign Exchange, or SAFE, our shareholders who are PRC resident entities or individuals are subject to certain registration requirements due to the status of WTL as “SPCs” (as defined under the public notice issued by SAFE on October 21, 2005). These regulations would prohibit SWT distributing dividends or profits to WTL and/or SWT as “SPC”s unless the registration requirements are complied with. The registration procedures were completed and SWT obtained a SAFE certificate from SAFE’s Heilongjiang office on March 30, 2007. Our PRC counsel advised us that the SAFE certificate will allow SWT to distribute dividends and profits out of the PRC.
Medical Appliance manufacturing companies in the PRC are required to obtain Medical Appliance Manufacturing permits. Daqing Sunway holds a Medical Appliance registration certificate and Medical Appliance Manufacturing Permit issued by Heilongjiang Province Food and Drug Supervision Administration Bureau.
Pursuant to the tax laws of PRC, general enterprises are subject to income tax at an effective rate of 33%. Companies qualified as hi-technology companies are subject to certain preferential tax treatment. Daqing Sunway was approved as a domestic hi-technology company and enjoys a 15% corporate income tax rate according to National New and High Tech Development Zone Taxes Policy.
Other than the foregoing, Daqing Sunway is not subject to any other significant government regulation of its business or production, or any other government permits or approval requirements, except for the laws and regulations of general applicability for corporations formed under the laws of the PRC.
ITEM 1A.
ITEM 1A. RISK FACTORS.
An investment in our securities involves a high degree of risk. In determining whether to purchase our securities, you should carefully consider all of the material risks described below, together with the other information contained in this prospectus before making a decision to purchase our securities. You should only purchase our securities if you can afford to suffer the loss of your entire investment.
Risks Related to Our Business
We operate in an emerging industry and an unsettled market.
The automated material transport system and medication distribution industries in which we operate in the PRC are in an early stage of development. While we believe that the potential advantages of this situation, including a strong potential for growth, are significant, there are also related risks. In a rapidly-growing market, our competitors could develop new technologies or new variations of existing technologies that could gain popularity quickly. While we believe that we understand the needs and preferences of our potential customers, especially hospitals, for the kinds of systems we produce, these needs and preferences could change in ways that our competitors anticipate or adapt to more rapidly than we do. While we believe that our relatively large customer base is one of our strengths, in a rapidly growing market, our industry could gain so many new customers that the number of our existing customers could become insignificant. If any of these risks materialize, our competitive position, results of operations and financial condition could be significantly impaired.
Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.
We commenced our current line of business operations in recent years. Our limited operating history may not provide a meaningful basis on which to evaluate our business. Although our revenues have grown rapidly since inception, we cannot assure you that we will maintain our profitability or that we will not incur net losses in the future. We expect that our operating expenses will increase as we expand. Any significant failure to realize anticipated revenue growth could result in significant operating losses. We will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development, including our potential failure to:
·
raise adequate capital for expansion and operations;
·
implement our business model and strategy and adapt and modify them as needed;
·
increase awareness of our brands, protect our reputation and develop customer loyalty;
·
manage our expanding operations and service offerings, including the integration of any future acquisitions;
·
maintain adequate control of our expenses;
·
anticipate and adapt to changing conditions in the transport and distribution systems markets in which we operate as well as the impact of any changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics.
If we are not successful in addressing any or all of these risks, our business may be materially and adversely affected.
Our failure to compete effectively may adversely affect our ability to generate revenue.
We compete primarily on the basis of our price advantage, cost advantage, our technology and product features that are specifically designed for the PRC market, our extensive after-sales service coverage and such after-sales services being easily accessible to our clients. These competitive advantages are in part based on our being a local manufacturer while our competitors are generally distributors of foreign products with much higher costs and less accessible after-sales services. There can be no assurance that we will maintain these advantages in the future. Our foreign competitors may establish manufacturing capabilities in the PRC to lower their costs and improve accessibility of after-sales services. Our local competitors may gain larger market share and reduce their costs by taking advantage of economies of scale. Developments of this kind could have a material adverse effect on our business, results of operations and financial condition. Further, our business requires large amounts of working capital to fund our operations. Our competitors may have better resources and better strategies to raise capital which could also have a material adverse effect on our business, results of operations or financial condition.
We rely on sales to a single kind of customer in a single industry. Our long-term growth may be impaired if we are unable to expand our customer base beyond the hospital industry.
Nearly all of our sales are made to hospitals and medical facilities in the PRC. If the medical industry in the PRC shrinks or loses steam, our customer base and potential customers will have fewer resources for the purchase of our products, and our business, results of operations and financial condition could be adversely affected.
Although we intend to expand our business to make products that will be used by customers in other industries, there is no guarantee that we will succeed. If we are unable to expand beyond the hospital industry, our long-term growth could fall short of expectations.
If we are unable to fund our capital requirements for research and development, our growth and profitability may be adversely affected.
Pneumatic tube transport systems and medicine dispensing systems are the only two products from which we generate or expect to generate substantial revenues. Both of our product lines are designed for use in hospitals and medical facilities. Our long-term growth and profitability could depend on our ability to expand beyond the medical industry. This expansion may require us to make substantial and long-term investments in research and development to develop new products or new features for our existing products. If we are unable to fund such research and development efforts, our long-term market potential, income and financial condition could be impaired.
We do not have written contracts with our suppliers and could be hurt by a change in the market for our supplies.
We have at least two suppliers for most of the principal supplies used in the manufacture of our products, including composite panels, aluminum frames, micro processors and other IC chips, power supplies, fans, U-PVC tubes and equipment chassis. The suppliers of these supplies are PRC companies. We purchase LCD panels from one supplier only, Truly Semiconductors Limited, a Japanese manufacturer. Although we believe that our supplies are generally available in the market and that we are not at great risk of disruption to these supply chains, there can be no guarantee that the markets for these supplies will not be disrupted, for business or economic reasons relating to a particular manufacturing sector, or for economic or political reasons affecting the PRC more generally.
We are responsible for the indemnification of our officers and directors.
Our bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against costs and expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.
We may not be able to effectively protect our proprietary technology and other intellectual property, which could harm our business and competitive position.
We have 13 PRC patents on proprietary technology used in the manufacture of our products. We also have a registered software program and two registered trademarks. Our success depends in part on our ability to protect our proprietary technologies. Although we believe we are protected from intellectual property infringement both by our patents and by the complexity of our designs, which we believe makes them difficult to copy, we cannot assure you that we will be able to effectively protect our technology, or that our current or potential competitors do not have, or will not obtain or develop, similar technology.
We also rely on trade secrets, non-patented proprietary expertise and continuing technological innovation that we seek to protect, in part, by entering into confidentiality agreements with licensees, suppliers, employees and consultants. These agreements may be breached and there may not be adequate remedies in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Moreover, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors. If patents are not issued with respect to products arising from research, we may not be able to maintain the confidentiality of information relating to these products.
Implementation of PRC intellectual property-related laws has historically been problematic, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation may require significant expenditure of cash and management efforts and could harm our business, financial condition and results of operations. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, competitive position, business prospects and reputation.
We may be exposed to intellectual property infringement and other claims by third parties, which, if successful, could cause us to pay significant damage awards and incur other costs.
We use our own patented proprietary technology in manufacturing our products. However, as litigation becomes more common in China in resolving commercial disputes, we face a higher risk of being the subject of intellectual property infringement claims brought by others. The outcome of claims relating to our logistic transport systems could involve complex technical, legal and factual questions and analysis and, therefore, may be highly uncertain. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability, including damage awards, to third parties, require us to seek licenses from third parties, to pay ongoing royalties, or to redesign our products or subject us to injunctions preventing the manufacture and sale of our products. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation.
Potential environmental liability could have a material adverse effect on our operations and financial condition.
To the knowledge of our management team, the manufacture of our products does not require us to comply with PRC environmental laws other than PRC environmental laws of general applicability. It has not been alleged that we have violated any current environmental regulations by PRC government officials; however, there can be no assurance that the Chinese government will not amend its current environmental protection laws and regulations. Our business and operating results could be materially and adversely affected if we were to increase expenditures in order to comply with environmental regulations affecting our operations.
We may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire such personnel in the future, our ability to improve our products and implement our business objectives could be adversely affected.
Our future success depends heavily upon the continuing services of the members of our senior management team, in particular our President and Chief Executive Officer, Mr. Liu Bo; our Chief Financial Officer, Mr. Samuel Sheng; and our Chief Operating Officer and Secretary, Mr. Sun Weishan. If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and senior technology personnel is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or senior technology personnel, or attract and retain high-quality senior executives or senior technology personnel in the future. Such failure could materially and adversely affect our future growth and financial condition.
We do not presently maintain product liability insurance, and our property equipment insurance does not cover their full value, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.
We currently do not carry any product liability or other similar insurance. While product liability lawsuits in the PRC are rare and we have never experienced significant failures of our products, we cannot assure you that we would not face liability in the event of the failure of any of our products. We do not carry any property insurance to cover our real property or manufacturing equipment, nor do we have other insurance such as business liability or disruption insurance coverage for our operations in the PRC.
Risks Related to Doing Business in the PRC
Adverse changes in political and economic policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.
Our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
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the amount of government involvement;
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the level of development;
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the growth rate;
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the control of foreign exchange; and
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the allocation of resources.
While the Chinese economy has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us, as well as its ability to control prices, including the price of coal, which is a principal raw material for our business.
The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. Further, there is no private ownership of land in China. Rather, land is owned by the government and the government issues land use rights. Although the land use rights are transferable, it is necessary to obtain government approval for a transfer. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Any adverse change in the economic conditions or government policies, policy interpretations, imposition of confiscatory taxation, restrictions on currency conversion, exports, devaluations of currency, the nationalization or other expropriation of private enterprises in China could have a material adverse effect on the overall economic growth and the level of investments and expenditures in China, which in turn could lead to a reduction in demand for our products in both the Chinese and international markets.
The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on our business.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We and any future subsidiaries are considered foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. Additionally, if the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
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levying fines;
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revoking our business and other licenses;
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requiring that we restructure our ownership or operations; and
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to the extent that we use the Internet for marketing and providing information on our products and services, requiring that we discontinue any portion or all of our Internet related business.
A slowdown or other adverse developments in the PRC economy may materially and adversely affect our customers, demand for our services and our business.
All of our operations are conducted in the PRC and all of our revenues are generated from sales in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for our products and materially and adversely affect our business.
Inflation in the PRC could negatively affect our profitability and growth.
While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such an austerity policy can lead to a slowing of economic growth. In October 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. Repeated rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products.
SWT is subject to restrictions on paying dividends and making other payments to us.
We are a holding company incorporated in the State of Nevada and do not have any assets or conduct any business operations other than our investments in our subsidiaries. As a result of our holding company structure, we rely primarily on dividends payments from our subsidiary in China. However, PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. Our subsidiary and affiliated entity in China are also required to set aside a portion of their after-tax profits according to PRC accounting standards and regulations to fund certain reserve funds. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. See “Governmental control of currency conversion may affect the value of your investment.” Furthermore, if our subsidiary or affiliated entity in China incurs debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we are unable to receive all of the revenues from our operations through contractual or dividend arrangements, we may be unable to pay dividends on our common stock even if we wish to pay dividends.
If certain tax exemptions within the PRC regarding withholding taxes are removed, we may be required to deduct corporate withholding taxes from any dividends we may pay in the future.
Under the PRC’s current tax laws, regulations and rulings, companies are exempt from paying withholding taxes with respect dividends paid to stockholders outside of the PRC. However, if the foregoing exemption is removed, we may be required to deduct certain amounts from any dividends we pay to our stockholders.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends or otherwise satisfy foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
The fluctuation of the Renminbi may materially and adversely affect your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. As we rely entirely on revenues earned in the PRC, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.
On July 21, 2005, the PRC government changed its decade-old policy pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 21.12% appreciation of the Renminbi against the U.S. dollar as of February 24, 2010, based on the exchange rate of the base period at $1 = 8.27 Yuan on July 21, 2005. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar.
Price controls may affect both our revenues and net income.
The laws of the PRC provide for the government to fix and adjust prices. To the extent that we are subject to price control, our revenue, gross profit, gross margin and net income will be affected since the revenue we derive from our sales will be limited and, unless there is also price control on the products that we purchase from our suppliers, we may face no limitation on our costs. Further, if price controls affect both our revenue and our costs, our ability to be profitable and the extent of our profitability will be effectively subject to determination by the applicable regulatory authorities in the PRC.
Our operations may not develop in the same way or at the same rate as might be expected if the PRC economy were similar to the market-oriented economies of OECD member countries.
The economy of the PRC has historically been a nationalistic, “planned economy,” meaning it functions and produces according to governmental plans and pre-set targets or quotas. In certain aspects, the PRC’s economy has been making a transition to a more market-oriented economy, although the government imposes price controls on certain products and in certain industries. However, we cannot predict the future direction of these economic reforms or the effects these measures may have. The economy of the PRC also differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development (the “OECD”), an international group of member countries sharing a commitment to democratic government and market economy. For instance:
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the level of state-owned enterprises in the PRC, as well as the level of governmental control over the allocation of resources is greater than in most of the countries belonging to the OECD;
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the level of capital reinvestment is lower in the PRC than in other countries that are members of the OECD;
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the government of the PRC has a greater involvement in general in the economy and the economic structure of industries within the PRC than other countries belonging to the OECD;
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the government of the PRC imposes price controls on certain products and our products may become subject to additional price controls; and
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the PRC has various impediments in place that make it difficult for foreign firms to obtain local currency, as opposed to other countries belonging to the OECD where exchange of currencies is generally free from restriction.
As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the economy of the PRC were similar to those of the OECD member countries.
If we are not able to protect our intellectual property rights, our business may be impaired.
Our intellectual property relates to our know-how in developing our products. The protection of intellectual property rights in the PRC is weak, and we cannot give any assurance that we will be able to protect our intellectual property rights. To the extent that our business is dependent upon intellectual property, our ability to generate revenue from these products, would be severely impaired if we are not able to protect our rights in these products.
Any recurrence of avian flu, severe acute respiratory syndrome, or SARS, or another widespread public health problem, could adversely affect our operations.
A renewed outbreak of avian flu, SARS, or another widespread public health problem in the PRC, where all of our revenue is derived, could have an adverse effect on our operations. Our operations may be adversely impacted by a number of health-related factors, including the following:
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quarantines or closures of some of our offices which would severely disrupt our operations,
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the sickness or death of our key officers and employees, and
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a general slowdown in the economy of the PRC
Because our principal assets are located outside of the United States and nearly all of our directors and all our officers reside outside of the United States, it may be difficult for you to enforce your rights based on U.S. Federal Securities Laws against us and our officers and some directors in the U.S. or to enforce U.S. Court Judgment against us or them in the PRC.
All of our directors and officers reside outside of the United States. In addition, Daqing Sunway, which functions as our operating subsidiary, is located in the PRC and substantially all of its assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the U.S. Federal securities laws or otherwise.
We may have limited legal recourse under PRC law if disputes arise under contracts with third parties.
Almost all of our agreements with our employees and third parties, including our supplier and customers, are governed by the laws of the PRC. The legal system in the PRC is a civil law system based on written statutes. Unlike common law systems, such as we have in the United States, it is a system in which decided legal cases have little precedential value. The government of the PRC has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the PRC, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance or to seek an injunction under Chinese law are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
Because we may not be able to obtain business insurance in the PRC, we may not be protected from risks that are customarily covered by insurance in the United States.
Business insurance is not readily available in the PRC. To the extent that we suffer a loss of a type which would normally be covered by insurance in the United States, such as product liability and general liability insurance, we would incur significant expenses in both defending any action and in paying any claims that result from a settlement or judgment. Since our products are used for the transportation and storage of CNG and chemicals, any damage caused by the failure or alleged failure of our products could result in substantial damages, and if the nature or amount of any uninsured loss is significant, we may be unable to continue in business
Because our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices Act, 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. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance, however, 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.
Any deterioration of political relations between the United States and the PRC could impair our operations.
The relationship between the United States and the PRC is subject to sudden fluctuation and periodic tension. Changes in political conditions in the PRC and changes in the state of PRC-U.S. relations are difficult to predict and could adversely affect our operations. Such a change could lead to a decline in our profitability. Any weakening of relations between the United States and the PRC could have a material adverse effect on our operations, particularly in our efforts to raise capital to expand our business activities.
Our operations and assets in the PRC are subject to significant political and economic uncertainties.
Government policies are subject to rapid change and the government of the PRC may adopt policies which have the effect of hindering private economic activity and greater economic decentralization. There is no assurance that the government of the PRC will not significantly alter its policies from time to time without notice in a manner with reduces or eliminates any benefits from its present policies of economic reform. In addition, a substantial portion of productive assets in the PRC remains government-owned. For instance, all lands are state owned and leased to business entities or individuals through governmental granting of state-owned land use rights. The granting process is typically based on government policies at the time of granting, which could be lengthy and complex. This process may adversely affect our operations. The government of the PRC also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental policies and measures. In addition, changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency, the nationalization or other expropriation of private enterprises, as well as adverse changes in the political, economic or social conditions in the PRC, could have a material adverse effect on our business, results of operations and financial condition.
We may have difficulty establishing adequate management, legal and financial controls in the PRC.
The PRC historically has not adopted a Western style of management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
Risks Related to Our Common Stock
Our officers, directors and affiliates control us through their positions and stock ownership and their interests may differ from other stockholders.
Our officers, directors and affiliates beneficially own approximately 53% of our common stock. Liu Bo, our Chairman and Chief Executive Officer, beneficially owns approximately 48% of our common stock, and Liang Deli, a Director of the Company, beneficially owns approximately 5% of our common stock. As a result, Mr. Liu and Mr. Liang are able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporation transactions including business combinations. Yet Mr. Liu and Mr. Liang’s interests may differ from other stockholders.
We are not likely to pay cash dividends in the foreseeable future.
We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. 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 subsidiary. In addition, our operating subsidiary, from time to time, may be subject to restrictions on its ability to make distributions to us, including as a result of restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.
There is currently a limited trading market for our common stock.
Our common stock is quoted on the over-the-counter Bulletin Board. However, our bid and asked quotations have not regularly appeared on the OTC Bulletin Board for any consistent period of time. There is no established trading market for our common stock and our common stock may never be included for trading on any stock exchange or through any other quotation system (including, without limitation, the NASDAQ Stock Market). In the absence of an active trading market, you may have difficulty buying and selling or obtaining market quotations; the market visibility for our stock may be limited, and the lack of visibility for our common stock may have a depressive effect on the market price for our common stock.
The price of our common stock may fluctuate dramatically.
There is a limited market for our common stock and we cannot give any assurance that there will ever be an active market for our common stock. If a market for our common stock develops, there is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control:
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variations in our quarterly operating results;
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announcements that our revenue or income are below analysts’ expectations;
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general economic slowdowns;
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matters affecting the economy of the PRC and the relationship between the United States and the PRC;
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changes in market valuations of both similar companies and companies whose business is primarily or exclusively in the PRC;
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sales of large blocks of our common stock;
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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
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fluctuations in stock market prices and volumes, which are particularly common among highly volatile securities of internationally-based companies.
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concern by potential investors that the large number of shares of common stock which may be sold pursuant to this prospectus may have a downward effect upon the market price of the stock.
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the effect of sales pursuant to this prospectus on the trading volume of our common stock.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results and stockholders could lose confidence in our financial reporting.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires increased control over financial reporting requirements, including annual management assessments of the effectiveness of such internal controls and a report by our independent certified public accounting firm addressing these assessments. Failure to achieve and maintain an effective internal control environment, regardless of whether we are required to maintain such controls, could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.
Our Common Stock is subject to “Penny Stock” Rules of the Securities and Exchange Commission, which makes transactions in our stock more difficult.
The Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
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that a broker or dealer approve a person’s account for transactions in penny stocks; and
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the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
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sets forth the basis on which the broker or dealer made the suitability determination; and
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
The application of these rules may affect the ability of broker-dealers to sell our common stock and may affect your ability to sell any common stock you may own
As an issuer of “penny stock” the protection provided by the federal securities laws relating to forward looking statements does not apply to us.
Although the federal securities law provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit of this safe harbor protection in the event of any based upon an claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.
Our common stock is illiquid and subject to price volatility unrelated to our operations.
The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
Available Information
Our electronic filings with the United States Securities and Exchange Commission (including our Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports) are available free of charge on the Securities and Exchange Commission’s website at http://www.sec.gov.
ITEM 2.
ITEM 2. PROPERTIES.
The Company’s manufacturing facilities are housed in a two-story building occupying 26,522 square meters of land located in Daqing Municipal Hi-Tech Development Zone, Zone Three, Daqing, Helongjiang Province, PRC. Our office building is located in Saertu Daqing Software Development Zone, Daqing, Helongjiang Province, PRC.
Under the PRC law, most land is owned by the government, which grants a “land use right” to an individual or entity after a purchase price for such “land use right” is paid to the government. The “land use right” allows the holder the right to use the land for a specified long-term period of time and enjoys all the ownership rights incident to the land. Daqing Sunway holds the land use right for one parcel of land that was used in its business and which will be used in SWT’s business pursuant to the leases entered into in connection with the Restructuring Agreements.
Land Use Right
Set forth below is the detailed information regarding the land use right registered under the name of Daqing Sunway:
Registered owner
of land use right
Location & certificate of land use right
Usage
(Approximate)
square meters
Date of Issuance
or Grant
Expiration
Date
Daqing Sunway
Daqing Municipal Hi-Tech Development Zone, Zone
Three, Daqing, Helongjiang Provice, PRC
Daqing Municipality Guo Yong (2005) No. 021843
Industrial use
26,522
September 16, 2005
June 13, 2052
Qingdao Liheng
Qingdao Hi-Tech Industry Development Zone, Qingdao, Shandong in the People’s Republic of China
Huangdao Municipality Gou Yong (2006) N. 197
Industrial use
9,082
November 3, 2006
July 24, 2053
Lease
Pursuant to a lease agreement, the Company is leasing from Daqing Chuangye Square Co., Ltd. a building with a total of 2,342.87 square meters for use in its operation for a term of three years starting from May 18, 2008 with an annual rent of approximately $29,383.
Pursuant to a lease agreement, Beijing Sunway is leasing from Beijing Jiahai Property Management Co., Ltd. a building with a total of 409.96 square meters for use in its operation for a term of two years starting from August 29, 2010 with an annual rent of approximately $75,585.
Pursuant to a lease agreement, Beijing Sunway is leasing from Chen Tonghang a building with a total of 102 square meters for use in its operation for a term of one year starting from November 18, 2009 with an annual rent of approximately $5,973.
Pursuant to a lease agreement, Beijing Sunway is leasing from Luo Haibing a building with a total of 83 square meters for use in its operation for a term of one year starting from September 12, 2009 with an annual rent of approximately $2,300.
Building Properties
The Company also owns two building properties as follows:
Owner
Location
Usage
Approximate
square meters
Certificate of Ownership or
Right to Use
Daqing Sunway
North Section of Longfeng District, West Wing of Building No. 15, 1st Floor, Daqing, Helongjiang Province, PRC
Real property for use by joint stock company limited enterprise
3,050
Qing Real Property Right Certificate No. No. 00014093 (Original Certificate No. 0230404)
Daqing Sunway
Building No. 3, Saertu Software Development Zone, Daqing, Helongjiang Province, PRC
Real property for use by joint stock company limited enterprise
5,066.96
Qing Real Property Right Certificate Longfeng District No.NA216750
Effective on November 30, 2005, Daqing Sunway granted a lien on the land use right and property located at the West Wing of Building No. 15 to Daqing Industrial and Commercial Mortgage Company for a debt of Daqing Sunway in the amount of 3,000,000 RMB owed to it. The lien expired on November 30, 2009. The property located in the North Section of Longfeng District, West Wing of Building No. 15, 1st Floor, is not currently used in Daqing Sunway’s business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
To our knowledge, there is no material litigation pending or threatened against us.
ITEM 4.
ITEM 4. (REMOVED AND RESERVED).
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
The Company’s common stock is quoted on the OTC Bulletin Board under the symbol “SUWG.OB.” The following table sets forth, for the calendar periods indicated the range of the high and low last reported bid and ask prices of the Company’s common stock from January 1, 2008 through December 31, 2009, as reported by the OTC Bulletin Board. The quotations represent inter-dealer prices without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. The quotations may be rounded for presentation.
On December 31, 2009, the last price of the Company’s common stock as reported on the OTC Bulletin Board was $3.00* per share.
As of March 24, 2010, the Company had approximately 652 shareholders of record. Certain of the shares of common stock are held in “street” name and may be held by numerous beneficial owners.
*The above-quoted stock prices have been adjusted to reflect the 86.3035-for-one reverse split that was approved by a majority of shareholders on June 28, 2007 and took effect on February 7, 2008.
Dividends
The Company’s board of directors has not declared a dividend on our common stock during the last two fiscal years and we do not anticipate the payments of dividends in the near future as we intend to reinvest our profits to grow operations. We rely on dividends from Daqing Sunway for our funds and PRC regulations may limit the amount of funds distributed to us from Daqing Sunway, which will affect our ability to declare any dividends.
Equity Compensation Plan Information
As of the date of this report, the Company neither has any securities authorized for issuance under any equity compensation plans nor does it have any equity compensation plans.
Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers
None.
ITEM 6.
ITEM 6. SELECT FINANCIAL DATA.
Not Applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes of Sunway Global Inc., appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements.
Sunway Global Inc. primarily functions as a holding company for entities that, through contractual relationships, control the business of Daqing Sunway, a company organized under the laws of the PRC that designs, manufactures and sells logistic transport systems and medicine dispensing systems and equipment that are principally used by hospitals and other medical facilities in the PRC. Because Daqing Sunway’s operations are the only significant operations of the Company and its affiliates, this discussion and analysis focuses on the business results of Daqing Sunway, comparing its results in the fiscal years ended December 31, 2009 and 2008.
Results of Operations
In the fiscal year ended December 31, 2009, the company’s net sales, gross profit, operating income and net income decreased quickly as compared with the same period in the fiscal year ended December 31, 2008, but operating expenses increased quickly during these periods. These decreases are due in large part to (i) affected by the financial crisis, (ii) affected by equivocal reform of the medical institutions in the PRC, bring about hopital’s investment declines, and (iii) one of sales manager quit to set up its own company.
The following table summarizes the results of our operations during the fiscal years ended December 31, 2009 and 2008, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the fiscal years ended December 31, 2009 and 2008.
Net revenue
Net revenue for the fiscal year ended December 31, 2009, which resulted primarily from sales of PTS, SADP and spare parts, was $13,063,122, a decrease of 34.18% as compared with the net revenue of $19,845,882 in the same period ended December 31, 2008. In the fiscal year ended December 31, 2009, we sold 2,279 workstations and 11 units SADP, representing a decrease in workstation sales of 37.88% as compared with 3,669 workstations sold in the same period ended on December 31, 2008. The decrease in workstation sales was primarily due to (i) a decline in hospital-related investment due to governmental reforms requiring pharmacies to be operated outside of and separate from hospitals in the PRC; and (ii) the departure of one of our sales managers, who left to set up his own company. During the same time, we sold 11 units SADP, an increase of 120% as compared with 5 units SADP for the fiscal year ended December 31, 2008. The increase in SADP sales was due primarily to our distinct advantage of price and service as compared with foreign competitors.
The following table presents information about our revenue for the periods indicated:
Gross Profit
Gross profit decreased 40.59% to $8,442,871 for the fiscal year ended December 31, 2009, as compared to $14,211,739 for the fiscal year ended December 31, 2008. Our gross profit margin dropped 6.98% from 71.61% as of the fiscal year ended December 31, 2008 to 64.63% as of the same period of 2009, mainly due to a decrease in product volume, which caused the rising of average fixed cost per unit, and a decrease in the sales price of SADP units.
The table below presents information about our gross profit for the periods indicated:
Income from Operations
Operating income decreased 58.67% to $4,430,158 for the fiscal year ended December 31, 2009, as compared with $10,718,662 for the fiscal year ended December 31, 2008. Our operating margin dropped 20.10%, from 54.01% as of the fiscal year ended December 31, 2008, to 33.91% as of the same period of 2009. The decrease was primarily due to a dropp in sales and increase in operation expenses.
Cost of Net Revenue
Cost of net revenue decreased to $4,620,251 for the fiscal year ended December 31, 2009, representing a decrease of 18% as compared with $5,634,143 for the same period of 2008. This decrease is primarily due to a decrease in sales and product volume, which caused the rise of average fixed cost per unit.
The following table presents information about our cost of sales for the periods indicated:
Operating Expenses
Operating expenses were $4,012,713 for the fiscal year ended December 31, 2009, an increase of 14.88% as compared to $3,493,077 for the same period of 2008. This increase was due primarily to two reasons:(i) selling expenses increased $648,783 or 152.64% to $1,073,833 for the fiscal year ended December 31, 2009 from $425,050 for the same period of 2008; and (ii) general and administrative expenses decreased $129,147 or 4.21% to $2,938,880 for the fiscal years ended December 31, 2009 from $3,068,027 for the same period of 2008. During the period, we have already added sales force caused increase quickly in selling expenses and salary and benefits for salesman.
The following table presents information about our operating expenses for the periods indicated:
Changes in fair value of warrants
Changes in fair value of warrants were $29,093,546 for the fiscal year ended December 31, 2009,this is a non-cash income, which resulted from the change in fair value of warrants issued to investors in conjunction with the Company’s issuance of warrants in June of 2007 pursuant to provisions of FAB ASC Topic 815, “Derivative and Hedging” (ASC 815). The accounting treatment of the warrants resulted from a provision providing anti-dilution protection to the warrant holders. On March 18, 2010, the Company entered into a Security Exchange Agreement intending to exchange all warrants into common stock. As a result of the agreements, the closing date, the Company will issue 2,000,000 shares of common stock in exchange for the retirement of all of the outstanding warrants owned by Vision Opportunity Master Fund Ltd. and its affiliates. The closing is conditioned upon a closing of a financing with minimum proceeds of $10 million to the company.
Impairment on investment
Impairment on investment was $4,831,386 for the fiscal year ended December 31, 2009. Originally, it was showed on goodwill in the first quarter of 2009, it represents the excess of the cost of an acquisition over the fair value of the net acquired identifiable assets at the date of acquisition. In the first quarter of 2010, after performing extended analysis into the definition of a business as set forth in the paragraph 805-10-20 of the FASB Accounting Standards Codification, we recognized the acquisitions based on the fair value of net assets obtained.For the amount over the fair value of the net assets obtained, we wrote them off as expenses at the time of acquisition.
Net Income
Net income was $27,978,900 for the fiscal year ended December 31, 2009, increases of 208.86% from $9,058,769 for the same period of 2008. in 2009 our net income were impacted by a non-cash income of $24,262,160 unrelated to the Company’s operations, mainly consisting of changes in fair value of warrants and impairment on investment were 29,093,546 and (4,831,386) respectively. Excluding this $24,262,160 non-cash income, the Company’s net income from operations for the fiscal year ended December 31, 2009 would have been $3,716,740, representing a year over year net income fall of 58.97%.
Earnings Per Share
Basic and diluted earnings per share for the fiscal year ended December 31, 2009 was $1.51 and $0.92 compared to $0.60 and $0.31 for the same period of 2008. The weighted average number of shares outstanding to calculate basic EPS was 18,499,736 and 15,127,645 for the fiscal years ended December 31, 2009 2008, respectively. The weighted average number of shares outstanding to calculate diluted EPS was 30,445,696 and 28,870,595 for the fiscal years ended December 31, 2009 and 2008, respectively.
Cash and Cash Equivalents
Cash and cash equivalents decreased to $4,717,240 as of December 31, 2009, as compared to $15,189,941 as of December 31, 2008. This increase was mainly due to an increase in investing activities and overall decrease in sales.
Trade Receivables, net
Trade receivables, net increased 19.75% to $3,537,395 as of December 31, 2009, compared with $2,953,919 as of December 31, 2008. This increase in trade receivables was primarily attributable to a change in our sales policy. In the fiscal year ended December 31, 2009, we changed our trade receivables policy to require that the remaining 5 percent of the amount due under the purchase contract is received within one year after the acceptance test completed. Previously, we requiredreceipt of the remaining 5 percent immediately after the acceptance test completed.
Inventory
Inventory consists of raw materials, works in process and finished goods. As of December 31, 2009, the recorded value of our inventory has a decreased 0.15% to $589,871 from $590,738 as of December 31, 2008. This decrease is mainly due to increase in finished goods from $218,448 as of December 31, 2008 to $241,831 as of December 31, 2009, an increase of 10.70%. In raw materials increased from $183,435 as of December 31, 2008 to $321,888 as of December 31, 2009, an increase of 75.48%. In work in progress decrease from $188,855 as of December 31, 2008 to $26,152 as of December 31, 2009, a decrease of 86.15%. The increase in raw material was primarily attributable to attributable to an expected increase in sales volume based upon market research and several confirmed purchase agreements for our products.
The following table presents information about our inventory for the periods indicated:
Accounts payable
Accounts payable amounted to $271,139 as of December 31, 2009, an increase of 352.56% from $59,912 as of December 31, 2008. The increase is mainly due to an increase in the purchase volume of raw materials.
Liquidity and Capital Resources
We have historically financed our operations and capital expenditures principally through private placements of debt and equity offerings, and cash provided by operations.
The following table presents information about our cash flow for the periods indicated:
Operating Activities
For the fiscal year ended December 31, 2009, net cash provided by operating activities was $6,094,443. This is primarily attributable to our net income of $27,978,900, adjusted by an add-back of non-cash expenses/(loss) mainly consisting of depreciation, amortization, loss on disposal of fixed assets, provision for doubtful debts, impairment on the purchase of our Qingdao factory and Gain on fair value of warrants of $1,114,264, $1,103,231, $10,038, $9,549, $4,831,386 and $(29,093,546), respectively, offset by a $140,621 increase in working capital. Specifically, the working capital increase was primarily due to i) a $585,369 net trade receivables increase driven by our change in sales policy; ii) a $2,334 decrease in inventories, principally increased in work in process, in the fourth quarter of 2009; iii) a $213,599 increase in advance to suppliers, due to the increase in raw material purchases; iv) a $690,141 decrease in prepayments , travel advances to shareholders, other receivables, tender deposits and advances to employees, consisting primarily of prepayments for raw materials supplies in advance of shipment, working capital of salesmen and payments of deposits for client; partially offset by a $247,114 increase in accounts payable, tax payable, amount due from a director, customers deposits, accrued liabilities and other payables.
Investing Activities
For the fiscal year ended December 31, 2009, net cash used in investing activities was $16,719,847. This was primarily attributable to i) a $3,905,935 capital expenditure for purchase of new plant and equipment; ii) a $8,592,797 capital expenditure for purchase of new intangibles assets; iii) a $4,316,306 capital expenditure for purchase technology-based designs, and iv) a $95,191 in restricted cash.
As of December 31, 2009, we had cash and cash equivalents of $4,717,240, down $10,472,701 from $15,189,941 at December 31, 2008.
In future periods, we believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our revolving credit facility, will be sufficient to meet our presently anticipated future cash needs for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue.
Obligations under Material Contracts
We do not have any material contractual obligations as of December 31, 2009.
Critical Accounting Policies
Management’s discussion and analysis of its financial condition and results of operations is based upon Sunway’s consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Sunway’s financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Sunway believes that the following reflect the more critical accounting policies that currently affect Sunway’s financial condition and results of operations.
Impairment of long-lived assets. We account for impairment of property, plant and equipment and amortizable intangible assets in accordance with FASB ASC 360. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. During the reporting years, there was no impairment loss incurred. Competitive pricing pressure and changes in interest rates, could materially and adversely affect our estimates of future net cash flows to be generated by our long-lived assets.
Inventories. Inventories consist of finished goods and raw materials, and stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required. Changes in sales volumes due to unexpected economic or competitive conditions are among the factors that could materially affect the adequacy of such write down.
Trade receivables. Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. During the reporting years, there were no bad debts.
Outstanding accounts balances are reviewed individually for collectability. The Company does not charge any interest income on trade receivables. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection.
Revenue recognition. Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller’s price to the buyer is fixed or determinable, and
- Collection is reasonably assured.
Contract revenues are recognized when the manufacturing and installation of the medical equipments is completed. Generally, the company receives total contract sum from clients in 3 installments. Deposit of 30% is received from client when the contract is signed. Second payment of 30% is received when the project commenced. The final sum of the remaining portion is received after the construction is completed within 4 months.
Expected warranty liabilities. The Company warrants its products against defects in design, materials, and workmanship generally for one year. A provision for estimated future costs relating to warranty expense are recorded when products are shipped, and the provision is based upon our own historical claim experience.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of December 31, 2009.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SUNWAY GLOBAL INC.
ALBERT WONG & CO.
CERTIFIED PUBLIC ACCOUNTANTS
7th Floor, Nan Dao Commercial Building
359-361 Queen’s Road Central
Hong Kong
Tel : 2851 7954
Fax: 2545 4086
ALBERT WONG
B.Soc., Sc., ACA., LL.B.,
CPA(Practising)
To: The Board of Directors and Stockholders of
Sunway Global Inc. (“the Company”)
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Sunway Global Inc. and subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 included in the Company’s Item 9A
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
During the course of internal evaluation, our accounting staff found the following misstatements in our previously reported financial statements for the fiscal year ended December 31, 2008 and fiscal quarters ended December 31, 2009 that required correction, relating to changes in fair value of warrants and impairment on investment:
1.
Changes in fair value of warrants is a non-cash income, which resulted from the change in fair values of warrants issued to investors in conjunction with the Company’s issuance of warrants in June of 2007 pursuant to provisions of FAB ASC Topic 815, “Derivative and Hedging”(ASC 815). The accounting treatment of the warrants resulted from a provision providing anti-dilution protection to the warrant holders. On March 18, 2010, the Company entered into an agreement with Vision Opportunity Master Fund, Ltd. to exchange the Series A, B, C and D warrants into 2,000,000 shares of common stock of the company (the “Warrant Exchange”). The closing of the Warrant Exchange is conditional upon a closing of a financing with minimum proceeds of $10 million to the Company. On April 5, 2010, the Company entered into a Security Escrow Agreement as an inducement to the holders of warrants to enter into the Security Exchange Agreement, the principal shareholders of the Company have agreed to place an amount of common stock equal to one million shares into escrow for the benefit of the holders in the event the Company fails to achieve certain milestones by December 31, 2010.
2.
Originally, Impairment on investment was listed on goodwill in the first quarter of 2009 and represented the excess of the cost of an acquisition over the fair value of the net acquired identifiable assets at the date of acquisition. In the first quarter of 2010, after extensive analysis into the definition of a business as set forth in the paragraph 805-10-20 of the FASB Accounting Standards Codification, we recognized the acquisitions based on the fair value of net assets obtained. For the amount over the fair value of the net assets obtained, we have written them off as expenses at the time of acquisition.
Based upon their evaluation as of the end of the period covered by this annual report, the Company’s chief executive officer and chief financial officer concluded that, in spite of the significant deficiencies in internal control over financial reporting described below, the Company’s disclosure controls and procedures are effective as of December 31, 2009.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
We engaged PricewaterhouseCoopers (“PwC”) to assist the Company in improving the internal control system based on COSO internal control framework. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2009, Management identified significant deficiencies related to the following:
1. Accounting and Finance Personnel Weaknesses - US GAAP expertise - The current staff in the accounting department is relatively new and inexperienced, and needs substantial training so as to meet with the higher demands of being a U.S. public company. The accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the skills of subsidiary financial statements consolidation, are inadequate and were inadequately supervised. The lack of sufficient and adequately trained accounting and finance personnel resulted in an ineffective segregation of duties relative to key financial reporting functions.
2. Lack of internal audit function - The Company lacks qualified resources to perform the internal audit functions properly. In addition, the scope and effectiveness of the internal audit function are yet to be developed.
The matters described above were the direct result of a lack of resources and accounting personnel. We have taken measures and plan to continue to take measures to remediate these deficiencies as soon as practicable. We have implemented the following measures to remediate the deficiencies:
1. Hiring additional accounting and operations personnel, as needed, and reorganizing the accounting and finance department to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex, non-routine transactions are directly involved in the review and accounting evaluation of our complex, non-routine transactions.
2. Requiring senior accounting personnel and the principal accounting officer to review complex, non-routine transactions to evaluate and approve the accounting treatment for such transactions.
3. Interviewing prospective new Directors for our Board, including a member who is appropriately credentialed as a financial expert with a goal to establish both an Audit and Compensation committee as well as sufficient independent Directors.
We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.
Management believes that these deficiencies do not amount to a material weakness, and it has concluded that our internal controls over financial reporting were effective as of December 31, 2009.
A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.
Our management is not aware of any material weaknesses in our internal control over financial reporting, and nothing has come to the attention of management that causes them to believe that any material inaccuracies or errors exist in our financial statements as of December 31, 2009. The reportable conditions and other areas of our internal control over financial reporting identified by us as needing improvement have not resulted in a material restatement of our financial statements. Nor are we aware of any instance where such reportable conditions or other identified areas of weakness have resulted in a material misstatement of omission in any report we have filed with or submitted to the Commission. Accordingly, we believe that our financial controls were effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
Other than as disclosed above, no changes in the Company’s internal control over financial reporting have come to management’s attention during the Company’s last fiscal quarter that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting. After hiring PwC to enhance the internal control system, the internal control over financial reporting is also included in this process. No final report has been received yet. Should PWC make anyone proposals to enhance the Company’s internal control over financial reporting such proposals will carefully be considered by the Company, and we will disclose the changes that we may execute to improve our internal control system.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Set forth below is certain information regarding our directors and executive officers. Our Board of Directors is comprised of two directors. There are no family relationships between any of our directors or executive officers. Each of our directors is elected to serve until the next annual meeting of our shareholders and until his successor is elected and qualified or until such director’s earlier death, removal or termination.
The following table sets forth certain information with respect to our directors and executive officers.
Directors and Executive Officers
Position/Title
Age
Liu Bo
President, Chief Executive Officer and Director
Samuel Sheng
Chief Financial Officer
Sun Weishan
Chief Operating Officer and Secretary
Liang Deli
Director
There are no family relationships among our directors or executive officers.
Our directors hold office until the next annual meeting of our shareholders, and until their successors have been qualified after being elected or appointed. Our officers serve at the discretion of our Board of Directors.
Set forth below is biographical information about our current directors and executive officers:
Liu Bo, our President and Chief Executive Officer and a director, has been Chairman of the Board, CEO and a director of Daqing Sunway since March 1993. Sunway is an affiliate of Rise Elite and WTL. Mr. Liu has a Bachelors degree in the field of Automatic Systems Engineering from Qiqihaer University in Heilongjiang Province, China in 1986.
Liang Deli became a director upon the resignation of Richard Astrom in June 2007. He has been Vice President of Sunway since August 1997, and is under contract to serve in that position until 2017. Mr. Liang’s area of focus is Sunway’s technology and market operations. Mr. Liang received a Bachelor degree in the field of Automatic Systems Design and Control from Shenyang Industry University in Liaoning Province, China in 1983.
Samuel Sheng has been Chief Financial Officer since November 2007. Mr. Sheng has held numerous management positions requiring expertise in financial and accounting matters. From 2004 until his appointment with the Company, he served as the Chief Financial Officer of American Lorain Corp, and from 2002 through 2004 he served as President and Chief Financial Officer of Linyi Jiangxing Steel Ltd.
Sun Weishan has been Secretary and Chief Operating Officer since December 2007. Prior to joining the Company, from April 2001 to December 2006 Mr. Sun served as Executive Director, Vice President, Assistant General Manager, and Secretary of the Board of Directors for Daqing Sunway. Mr. Sun graduated from Yenshan University and Daqing Petroleum Institute with degrees in mechanical engineering and chemical engineering, respectively.
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:
·
Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
·
Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
·
Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
·
Been found by a court of competent jurisdiction (in a civil action), the SEC, the Commodities Futures Trading Commission, or any self-regulatory organization or equivalent exchange, association, entity or organization that has disciplinary authority over the Company or the executive officer/director to have violated a federal or state securities or commodities law, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity, and the judgment or administrative order has not been reversed, suspended or vacated.
Board of Directors
Our Directors are elected by the vote of a plurality in interest of the holders of our voting stock and hold office for a term of one year and until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board individually or collectively consent in writing to the action.
The board held six meetings during the fiscal year of 2009. These meetings include meetings that were held by means of a conference telephone call, but do not include actions taken by unanimous written consent.
Each director attended at least 75% of the total number of meetings of the board during the year. Our non-management directors did not meet in executive session during 2009.
Director Experience
The Board believes that each of the Company’s directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of the Company’s shareholders. When evaluating candidates for election to the Board, the Board seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, and leadership skills. The Board has also considered the fact that all of our directors have worked for, or served on the boards of directors of, a variety of companies in a range of industries. The Board believes that through their varying backgrounds, the Company’s directors bring a wealth of experiences, new ideas and solutions to the Board. Specifically, the Board has noted that our directors have the following skills and qualifications that, among others, have made them particularly suited to serve as a director of Sunway Global:
·
Mr. Liu Bo is 45 years old, bachelor degree, senior engineer, main founder of the Sunway Company. Current position is chairman & CEO of Sunway global Inc. He was nominated as Excellent Young Entrepreneur in Heilongjiang province, Labor Model in Heilongjiang Province, Private Science and Technology Entrepreneur in the Northeast, and was awarded National Labor Award in 2001. He has been working in automatic control area for a long time, and was in charge of the development work for many new products since the company’s establishment. From 1998 to 2000, he was in charge of the development of power control industrial controlling unit software. The software was tested by Electronic and Information Bureau of Heilongjiang Province in 1999 and was proved to reach domestic advanced level and with some functions reaching globally advanced level. It was named as National Major New Product in 2000, awarded First Award of Information Technology in the province in 2001 and Third Award of Science and Technology of Heilongjiang Province. He was also in charge of the development of the first Pneumatic Tube Material Transport System in the country in 2001 and 2002, marking a new breakthrough of such products in China. In 1996, he took over Industrial Computer System Application project under national Ninth Five-Year plan in the company, and was also responsible for Real-Time Database and Monitoring System under the Tenth Five-Year 863 plan in 2002. He has excellent leadership and strategic insight and good understanding of the industry.
·
Mr. Liang Deli is 48 years old, bachelor degree, and senior engineer. He joined Sunway in 1997. Led R&D team to National New Product Award. Graduated with MBA from Tsinghua University. Spent two years training in Japan and Singapore.
Audit Committee Financial Expert
Our board of directors currently acts as our audit committee. Because we only recently consummated the Reverse Merger and appointed the current members of our board of directors, our board of directors has not yet determined whether we have a member who qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K, and is “independent” based on the definition of independence in the listing standards of the National Association of Securities Dealers. Our board of directors is in the process of searching for a suitable candidate for this position.
Audit Committee
We have not yet appointed an audit committee, and our board of directors currently acts as our audit committee. At the present time, we believe that the members of board of directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. Our company, however, recognizes the importance of good corporate governance and intends to appoint an audit committee comprised entirely of independent directors, including at least one financial expert, during our 2010 fiscal year.
Code of Ethics
We have not adopted a code of ethics to apply to our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions because, until recently, we have not been an operating company. We expect to prepare a Code of Ethics in the near future.
Board Leadership and Risk Oversight
Our Chief Executive Officer also serves as Chairman of the Board. We have two other directors, one of whom is independent. The Board believes that the Company’s Chief Executive Officer is best situated to serve as Chairman of the Board because he is the director most familiar with our business and industry and the director most capable of identifying strategic priorities and executing our business strategy. In addition, having one person serve as both Chairman and Chief Executive Officer eliminates potential for confusion and provides clear leadership for the Company, with a single person setting the tone and managing our operations. The Board oversees specific risks, including, but not limited to:
·
appointing, retaining and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting;
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approving all auditing and non-auditing services permitted to be performed by the independent auditors;
·
reviewing annually the independence and quality control procedures of the independent auditors;
·
reviewing, approving, and overseeing risks arising from proposed related party transactions;
·
discussing the annual audited financial statements with the management;
·
meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management; and
·
monitoring the risks associated with management resources, structure, succession planning, development and selection processes, including evaluating the effect the compensation structure may have on risk decisions.
Nominating Procedures
During 2009 there were no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
Section 16 Beneficial Ownership Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of the Company’s common stock, to file initial reports of ownership and reports of changes in ownership of our common stock with the SEC.
Based solely on the reports received by the Company and on written representations from certain reporting persons, we believe that the directors, executive officers and persons who beneficially own more than 10% of the Company’s common stock during the fiscal year ended December 31, 2009 have been in compliance with Section 16(a).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the total compensation that we have paid or that has accrued on behalf of our Chief Executive Officer and other executive officers during the years ended December 31, 2009 and 2008.
Summary Compensation Table
The following is a summary of the compensation paid by us to the individuals who have served as our CEO and any executive officers who have received compensation in excess of $100,000 for the two years ended December 31, 2009 and 2008.
Outstanding Equity Awards at Fiscal Year-End
As of our fiscal years ended December 31, 2009 and 2008, we did not have any stock option plan or stock incentive plan and there were no outstanding equity awards as of our fiscal years ended December 31, 2009 and 2008. No equity awards were granted during the year ended December 31, 2009.
Employment Contracts and Termination of Employment and Change-In-Control Arrangements
We have the following employment contracts with the named executive officers:
Sun Weishan has an employment agreement with the Company. Pursuant to this employment agreement, Mr. Sun shall receive an annual base salary of $40,540 (RMB300,000) and may also receive a year-end performance bonus to be determined by the Board. Mr. Sun’s initial term as Secretary terminates December 30, 2010. If the Mr. Sun and the Company have not agreed to new employment terms within a month of expiration of the term, Mr. Sun’s terms of employment will be extended, and Mr. Sun will continue to serve as Secretary under the original terms of the employment agreement for up to three years thereafter.
Samuel Sheng has an employment agreement with the Company for a renewable three-year term beginning December 1, 2007. Pursuant to this employment agreement, Mr. Sheng shall receive an annual base salary of approximately $40,540 (RMB300,000), subject to a year-end bonus to be determined by the Board of Directors.
Director Compensation
Other than as disclosed in the Summary Compensation Table above, Liang Deli received $70,278 for his services as a member of the Board of Directors for an initial term expiring on June 30, 2012. Our directors are also reimbursed for reasonable travel and other expenses incurred in connection with attending meetings of the board and its committees, if any.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table lists stock ownership of our common stock as of March 24, 2010. The information includes beneficial ownership by (i) holders of more than 5% of our common stock, (ii) each of our current directors and executive officers and (iii) all of our directors and executive officers as a group.
The information is determined in accordance with Rule 13d-3 promulgated under the Exchange Act based upon information furnished by the persons listed or contained in filings made by them with the Commission. Except as noted below, to our knowledge, each person named in the table has sole voting and investment power with respect to all shares of our common stock been beneficially owned by them.
Amount and Nature of Beneficial Ownership
(1) Applicable percentage ownership is based on 18,499,736 shares of common stock outstanding as of March 24, 2010, together with securities exercisable or convertible into shares of common stock within 60 days of March 24, 2010 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of March 24, 2010 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) Liu Bo and Liang Deli are shareholders of Rise Elite, holding 70.39% and 7.66% ownership interest in Rise Elite, respectively. Neither Mr. Liu or Mr. Liang hold any shares in their own right. Mr. Liu, the majority shareholder and sole officer and director of Rise Elite, has voting and dispositive control over the shares of common stock held by Rise Elite. and therefore may be deemed to beneficial own all of the common shares of Sunway Global held by Rise Elite.
Mr. Liang is a shareholder of Rise Elite, however Mr. Liang does not hold voting or dispositive control over the common stock of Sunway Global held by Rise Elite and as such disclaims beneficial ownership except to the extent of his pecuniary interest in these shares.
(3) Vision Capital Advisors, LLC (“Vision Capital Advisors”) serves as investment manager to Vision Opportunity Master Fund, Ltd. and Vision Capital Advantage Fund. L.P. (collectively, the “Funds”). Adam Benowitz, Managing Member of Vision Capital Advisors and Director of each of the Funds, holds the power to vote and dispose of the subject shares.
In addition to those holdings disclosed in the table above, Vision Opportunity Master Fund, Ltd. and Vision Capital Advantage Fund, L.P. (collectively, “Vision”) owned warrants A, B, C and D to purchase up to 13,765,846 shares of common stock and 4,962,963 shares of Series B Convertible Preferred Stock, each share of which is convertible into 30 shares of common stock. However, Vision is contractually prohibited from exercising these warrants and converting the Series B Convertible Preferred Stock if the number of shares of our common stock to be issued pursuant to such exercise would cause Vision to hold in excess of 9.9% of our then issued and outstanding shares of common stock. Vision is permitted to waive such restrictions on exercise and conversion upon providing us sixty-one (61) days notice.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Transactions
Except as in the transactions set forth below, there have been no material transactions during the past two years between us and any officer, director or any shareholder owning greater than 5% of our outstanding shares, or any of their immediate family members:
As of the beginning of fiscal year 2008, $585,678 was due from Beijing Sunway New-Force Medical Treatment Tech Co., Ltd. (“Beijing Sunway”), a related company in which Liang Deli, a director of Sunway Global, held a 44% equity interest prior to March 2008. All of this loan was paid off in March 2008.
As of the beginning of fiscal year 2008 and as of December 31, 2008, a nominal amount of $830, was due from Rise Elite, a related company owned by Liu Bo, our chief executive officer and chairman of the board of directors, and Liang Deli, a director.
As of the beginning of fiscal year 2008, $1,028,474 was due from Liu Bo for the proposed development of representative offices in Beijing, Hang Zhou, Xi’an & Shanghai. This loan was paid off in June 2008 and as of December 31, 2008, no amounts were outstanding.
On March 16, 2008, SWT acquired Beijing Sunway as its wholly-owned subsidiary. SWT acquired all of the outstanding shares of Beijing Sunway from the three owners of Beijing Sunway, Liang Deli, Sun Xitao, and Yao Liyan, for the purchase price of RMB1,000,000 (approximately US$145,000). Mr. Liang also serves as a director of the Company.
Beijing Sunway was incorporated in Beijing, PRC on May 24, 2007, and is primarily engaged in the sale of medical equipment manufactured by Sunway. It was incorporated with the proceeds of a loan from the Company in the amount of RMB3, 992,229 borrowed by Mr. Liang, Mr. Sun, and Ms. Yao, in the first quarter of 2008. The loan was unsecured, interest free and repayable on demand, and was held by Mr. Liang, Mr. Sun and Ms. Yao on Beijing Sunway’s behalf for the purpose of proposed developments of representative offices for the Company in various locations in China so as to provide for a better working capital arrangement for the Company. As of March 26, 2008, the loan has been repaid.
Director Independence
The Company currently has two directors, Liu Bo and Liang Deli. Neither director qualifies as an “independent” director as that term is defined under the National Association of Securities Dealers Automated Quotation system. Our company, however, recognizes the importance of good corporate governance and intends to appoint an audit committee comprised entirely of independent directors, including at least one financial expert, during our 2010 fiscal year.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees. The aggregate fees incurred by the Company’s independent registered public accounting firms, for professional services rendered for the audit of our annual financial statements for the years ended December 31, 2009 and December 31, 2008, and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q and other SEC filings during those fiscal years were approximately $76,000 and $50,000, respectively.
Audit-Related Fees. The aggregate fees incurred by the Company’s independent registered public accounting firms were $3,600 and $3,097, respectively, for audit-related services during the years ended December 31, 2009 and December 31, 2008.
Tax Fees. The Company did not incur any tax fees from its independent registered public accounting firms for services rendered to the Company for the fiscal years ended December 31, 2009 and December 31, 2008.
All Other Fees. The Company did not incur any other fees from its independent registered public accounting firms for services rendered to the Company, other than the services covered in “Audit Fees” for the fiscal years ended December 31, 2009 and December 31, 2008.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Exhibits:
Exhibit No.
Description of Exhibit
3.1
Articles of Incorporation, as amended and corrected. (1)
3.2
Bylaws. (2)
3.3
Specimen of Common Stock certificate. (1)
3.4
Certificate of Designations authorizing the Series A Convertible Preferred Stock, as amended and corrected. (1)
3.5
Certificate of Designations authorizing the Series B Convertible Preferred Stock, as amended and corrected. (1)
4.1
Series B Stock Purchase Agreement, dated as of June 5, 2007, by and among the Company, Vision Opportunity Master Fund, Ltd. and each of the other investors party thereto. (1)
4.2
Registration Rights Agreement, dated as of June 5, 2007, by and between the Company and Vision Opportunity Master Fund, Ltd. (1)
4.3
Lock-Up Agreement, dated as of June 5, 2007, by and among the Company and Rise Elite. (1)
4.4
Form of Series A Warrant. (1)
4.5
Form of Series B Warrant. (1)
4.6
Form of Series C Warrant. (1)
4.7
Form of Series D Warrant. (1)
4.8
Form of Series J Warrant. (1)
4.9
Form of Series E Warrant issued to Kuhns Brothers. (1)
10.1
Share Exchange Agreement, dated as of June 5, 2007, by and between the Company, Rise Elite and World Through Limited. (1)
10.2
Securities Purchase Agreement, dated as of June 5, 2007, by and between the Company, Rise Elite, Vision Opportunity Master Fund, Richard Astrom, Christopher Astrom, and certain other parties signatory thereto. (1)
10.3
Form of Escrow Agreement, dated June 5, 2007, by and between the Company, Rise Elite, Vision and Loeb and Loeb LLP. (3)
10.4
Engagement Letter Agreement, dated September 1, 2006, by and between Sunway and Kuhns Brothers, Inc. (1)
10.5
Form of Securities Escrow Agreement, dated June 5, 2007, by and between the Company, Vision Opportunity Master Fund, Ltd., Rise Elite and Loeb and Loeb LLP. (1)
10.6
Form of Consignment Agreement, dated as of June 5, 2007, between Rise Elite and the Shareholders of Sunway. (3)
10.7
Form of Consignment Transfer Agreement, dated as of June 5, 2007, between Rise Elite and WTL. (3)
10.8
Exclusive Purchase Option Agreement, dated as of June 5, 2007, between shareholders of Sunway and WTL. (3)
10.9
Intellectual Property Transfer Agreement, dated as of June 5, 2007, between Sunway and SWT. (3)
10.10
Intellectual Property Licensing Agreement, dated as of June 5, 2007, between Sunway and SWT. (3)
10.11
Consigned Management Agreement, dated as of June 5, 2007, between SWT, Sunway, and the shareholders of Sunway. (3)
10.12
Loan Agreement, dated as of June 5, 2007, between Sunway and SWT. (3)
10.13
Equipment Lease Agreement, dated as of June 5, 2007, between Sunway and SWT. (3)
10.14
10.15
Amendment to Registration Rights Agreement dated July 24, 2007 by and between the Company, Vision Opportunity Master Fund, Ltd., and Columbia China Capital Group, Inc. (4)
Amendment to Registration Rights Agreement dated June 19, 2008 by and between the Company and Vision Opportunity Master Fund, Ltd. (4)
10.16
Capital Transfer Agreement, dated March 16, 2008, by and among SWT, Liang DeLi, Sun Xitao, and Yao Liyan. (5)
10.17
Share and Asset Transfer Agreement, dated August 31, 2008, by and between Liheng Enterprise Company Limited and SWT. (6)
10.18
Lease Agreement, by and between Beijing Jiahai Realty Development Co., Ltd., Beijing Jiahai Property Management Co., Ltd., and Beijing Sunway New-force Medical Treatment Tech Co., Ltd. (6)
10.19
Lease Agreement, dated March 18, 2008, by and between Daqing Sunway and Daqing Zhuangye Guangchang Co., Ltd. (6)
21.1
List of Subsidiaries. (6)
31.1
Certification by Chief Executive Officer pursuant to Sarbanes Oxley Act of 2002 Section 302.
31.2
Certification by Chief Financial Officer pursuant to Sarbanes Oxley Act of 2002 Section 302.
32.1
Certification by Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002 Section 906.
32.2
Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 Section 906.
(1) Incorporated by reference to the exhibit of the same number to our report on form 8-K filed with the SEC on June 12, 2007.
(2) Incorporated by reference to the exhibit of the same number to our report on form 8-K/A filed with the SEC on June 20, 2007.
(3) Incorporated by reference to the exhibit of the same number to our report on form 8-K/A filed with the SEC on June 27, 2007.
(4) Incorporated by reference to the exhibit of the same number to our registration statement on form S-1 filed with the SEC on September 23, 2008.
(5) Incorporated by reference to the exhibit to our quarterly report for the period ended March 31, 2008 on Form 10-Q/A filed with the SEC on March 6, 2009.
(6) Incorporated by reference to the exhibit to our annual report for the period ended December 31, 2008 on Form 10-K filed with the SEC on March 30, 2009.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Liu Bo
Chief Executive Officer and
April 14, 2010
Liu Bo
Chairman of the Board of Directors
/s/ Samuel Sheng
Chief Financial Officer (principal financial
April 14, 2010
Samuel Sheng
and accounting officer)
/s/ Liang Deli
Director
April 14, 2010
Liang Deli