On October 19, 2010, we entered into a share exchange agreement, or the Share Exchange Agreement, with Chengchang HK, a Hong Kong limited company, and its shareholders, Mr. Guoqing Zhuang, Bai Cheng Investment Limited, Heng Feng Investment Limited, Kang Shi Investment Holdings Limited, River Tyne Ventures Inc., Zhao Kang Capital Resource Limited and Shiping Liu, pursuant to which we acquired 100% of the issued and outstanding capital stock of Chengchang HK in exchange for 31,059,267 shares of our common stock, par value $0.0001, which constituted 98.85% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Share Exchange Agreement. Under the Share Exchange Agreement, our former CEO and sole director Glenn A. Little also agreed to sell 100,000 shares of our common stock to the Company for $4,000. Chengchang HK is a holding company for a PRC-based operating subsidiary, Jinjiang Chengchang, which is engaged in the production of various sole products that are used to manufacture shoes. We refer to all shareholders of Chengchang HK before the closing of the Share Exchange Agreement as “Chengchang Shareholders” in this report.
Immediately following closing of the share exchange transaction, Mr. Zhuang and several other Chengchang Shareholders transferred an aggregate of 1,981,963 of the shares issued to them under the Share Exchange Agreement to other former shareholders of Chengchang HK and other persons who previously provided services to Chengchang HK and its subsidiary, pursuant to a side letter agreement, or the Side Letter, dated October 19, 2010. Taking into account this share transfer, our Chairman and CEO, Mr. Zhuang owns 24,707,353 shares of our common stock, constituting 72.74% of our issued and outstanding capital stock on a fully-diluted basis.
On October 19, 2010, we entered into a securities purchase agreement, or the Securities Purchase Agreement, with a single investor whereby we issued 2,547,500 shares of our common stock for an aggregate purchase price of $4.5 million, or $1.77 per share. Under the Securities Purchase Agreement, we agreed to register the shares of our common stock issued to the investor within 45 days after the closing of the Securities Purchase Agreement. If any shares pledged by Mr. Zhuang are transferred to the investor pursuant to the make good escrow agreement discussed below, the Company also agreed to register those shares within 45 days after such shares are issuable to the investor. In addition, we granted the investor a piggyback registration right within one year after the closing. The Securities Purchase Agreement contains customary representations and warranties about the Company’s business operations, capital structure and financial condition, among other things, and obligates the Company to fulfill certain covenants, such as the aforementioned share registration obligation.
In connection with the Securities Purchase Agreement, our Chairman and CEO Mr. Zhuang entered into a make good escrow agreement, or the Make Good Escrow Agreement, whereby Mr. Zhuang pledged to several other parties, including the investor, 7,492,154 shares of our common stock owned by him in support of the Company’s obligation to satisfy a pre-established after tax net income level. All or a portion of the shares pledged pursuant to the Make Good Escrow Agreement will be transferred to the beneficiaries of the make good arrangement if the Company does not satisfy the after tax net income threshold. The shares will be returned to Mr. Zhuang if the threshold is met. See Item 2.01 of this report below for more details.
The foregoing description of the terms of the Share Exchange Agreement, Side Letter, Securities Purchase Agreement, and Make Good Escrow Agreement is qualified in its entirety by reference to the provisions of the agreements filed as Exhibits 2.1, 10.1, 10.2, and 10.3 to this report, which are incorporated by reference herein.
ITEM 2.01
COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On October 19, 2010, we completed the acquisition of Chengchang HK pursuant to the Share Exchange Agreement described in Item 1.01 above. The acquisition was accounted for as a recapitalization effected by a share exchange, wherein Chengchang HK is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill has been recognized.
Business Overview
Through our indirect Chinese subsidiary, Jinjiang Chengchang, we engage in the business of designing, producing and selling high quality soles used to manufacture athletic and leisure shoes.
Since 1996, we have been a vertically integrated manufacturer of athletic and leisure shoes. In recent years, we shifted our strategic focus to concentrate on developing and producing specialized soles.
In our manufacturing operations, we process basic chemicals and other raw materials to make our sole products. Currently, we categorize our sole products into three primary product lines: (i) EVA, or ethylene vinyl acetate, sole products which are made from a viscous and elastic foam material containing tiny bubbles for shock absorption and cushioning abilities; (ii) RB, or synthetic rubber, sole products processed mainly from polybutadiene rubber, which is highly resistant to wear and abrasion and used mostly commonly in the production of outsoles; and (iii) EVO, or EVO outsole, products which are an outgrowth of our EVA product line that is designed to be more abrasive resistance and lighter and softer than our EVA product line.
We sell our products to footwear manufacturers that are based primarily in China. Our customers use our sole products as components in the athletic and leisure shoes that they sell to end consumers, athletic wear companies and global shoe distributors. As of June 30, 2010, we had over 30 customers which include a number of well-known companies in China’s athletic wear market, such as 361º, Exceed, Erke, Xtep and Qiaodan as well as Taiwan Ching Lu Footwear, which is an OEM footwear company that is a supplier to Adidas in Asia. An “OEM” is an “original equipment manufacturer” which typically purchases customized products or product components which are then re-branded and resold under the its own brand.
Our manufacturing facilities in China are located in Jinjiang, Fujian Province, which has a high concentration of footwear industry participants. According to estimates by the PRC government contained in the People’s Daily Online, Jinjiang-based shoe manufacturing plants produce approximately 950 million pairs of athletic shoes each year, constituting approximately 40% of China’s aggregate athletic shoe output. Most of our customers are also either headquartered or have significant operations in the greater Jinjiang area, which reduces our logistic costs and provides us with an excellent marketing channel and better in person communication with our customers.
We continually strive to leverage our product quality and operational skills and recently qualified as the sole supplier of sole products in the Jinjiang area for Taiwan Ching Lu Footwear, which is an OEM footwear company that is a supplier to Adidas in Asia. We have separate production lines for the granulation process, injection molding, foam molding and RB products.
Our revenues grew 46.1% from $17.87 million in fiscal year 2009 to $26.11 million in fiscal year 2010. Our operating income grew 71.7% from $5.5 million in fiscal year 2009 to $9.4 million in fiscal year 2010. Our net income grew 75.0% from $3.9 million in fiscal year 2009 to $6.9 million in fiscal year 2010. We believe our growth has been driven primarily by increasing demand for athletic shoes as well as our research and development efforts which have focused on creating new products and enhancing our product performance attributes and design features.
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