10-Q/A 1 form10qa.htm FORM 10-Q/A Silvan Industries, Inc.: Form 10-Q/A - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
(Amendment No. 1)

(Mark One)

[ X ]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2011

[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________to _____________

Commission File No. 000-52843

SILVAN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Nevada 20-5408832
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)  

Jun Yue Hua Ting, Building A
3rd Floor, Unit -1
#58 Xin Hua Road
Guiyang, Guizhou 550002
People’s Republic of China
(Address of principal executive offices)

(+86) 851-552-0951
(Registrant’s telephone number, including area code)

CHINA FORESTRY INDUSTRY GROUP, INC.
               _________________________________________________________________
      (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]   No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]   No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]                                                                                                       Accelerated filer [  ]  
Non-accelerated filer [  ]
 (Do not check if a smaller reporting company) 		Smaller reporting company [X]    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]   No [ X ]

The number of shares outstanding of each of the issuer’s classes of common stock, as of November 17, 2011 is as follows:

Class of Securities Shares Outstanding
Common Stock, $0.001 par value 30,000,000

 

 

 

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (this "Amendment") hereby amends our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2011, previously filed with the Securities and Exchange Commission (the "Commission’) on November 21, 2011 (the "Original Filing"). This Amendment is being filed in response to comments by the staff of Commission in connection with its review of the Original Filing.

This Amendment does not reflect events occurring after the filing of the Original Filing or modify or update those disclosures, including the exhibits to the Original Filing affected by subsequent events.

In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), this Amendment contains new certifications pursuant to Rules 13a-14 and 15d-14 under the Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

i


 PART I    
 FINANCIAL INFORMATION    

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2010, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except where the context otherwise requires and for the purposes of this report only:

  • the “Company,” “we,” “us,” and “our” refer to the combined business of Silvan Industries and its subsidiaries, Bingwu Forestry, Aosen Forestry, Silvan Flooring and Guiyang Silvan Touch;

  • “Silvan Industries” refers to Silvan Industries, Inc., a Nevada corporation (formerly China Forestry Industry Group, Inc.);

  • “Bingwu Forestry” refers to China Bingwu Forestry Group Limited, a Hong Kong company;

  • “Aosen Forestry” refers to Qian Xi Nan Aosen Forestry Company, Limited, a PRC company;

  • “Silvan Flooring” refers to Qian Xi Nan Silvan Flooring Company, Limited, a PRC company;

  • “Guiyang Silvan Touch” refers to Guiyang Silvan Touch Flooring Co., Limited, a PRC company;

  • “Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China;

  • “PRC” and “China” refer to the People’s Republic of China;

  • “SEC” refers to the Securities and Exchange Commission;

  • “Exchange Act” refers the Securities Exchange Act of 1934, as amended;

  • “Securities Act” refers to the Securities Act of 1933, as amended;

  • “Renminbi” and “RMB” refer to the legal currency of China; and

  • “U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States.

1

Overview of Our Business

We produce and sell floor materials and related products to residential and commercial customers in China. Our product lines include laminate flooring and fiber floor boards that are manufactured in a variety of colors, dimensions and designs.

The primary raw material used in our products is wood, which we currently procure from third party suppliers. We expect that commencing in late 2012, we will be able to procure approximately 20% of our wood from a 2,250 hectares (approximately, 22.5 km2) of fir forest in Guizhou Province.

Our manufacturing facility in Qianxinan, Guizhou Province has an annual production capacity of six million square meters of laminate flooring and 75,000 cubic meters of industrial fiber boards. We are constructing two new manufacturing facilities next to our current facility to expand our laminate flooring production line and industrial fiber board production line. We expect that this expansion will increase our overall capacity to 200,000 cubic meters of fiber boards and 12 million square meters of laminate floor.

We market and sell our products through five branch offices and 504 contracted flooring specialty retail stores, concentrated mostly in southwestern China. We also sell some of our products through eight retail stores which we refer to as “flagship” stores because they are generally larger and better equipped with samples, promotional material and product inventory, as compared to regular retail stores, and as a result, they better promote our image and the quality of our products. We are also seeking commercial arrangements for the sale of our products through home supply stores, such as our recent agreement to sell our products at Red Star Macalline Furniture Mall’s Guiyang store. Red Star Macalline Furniture Mall is a large home products supply store chain in China, similar to Home Depot and Lowe’s in the U.S., with over 30 malls and stores across China. We believe that home supply stores are an important channel for the sale of building/home renovation materials and we plan to increase our efforts to work with more home supply stores in the future.

In March 2011, we established Guiyang Silvan Touch in order to expand our sales channels. Guiyang Silvan Touch’s principal activity is the wholesaling of wood flooring, furniture and decorations.

Recent Developments

  • On October 3, 2011, we filed a Certificate of Amendment to our Articles of Incorporation with the Nevada Secretary of State to change the name of the Company from “China Forestry Industry Group, Inc.” to “Silvan Industries, Inc.” Please see our current report on Form 8-K filed with the SEC on October 6, 2011 for more information.

  • On May 17, 2010, our Chairman and CEO, Mr. Yulu Bai, entered into an option agreement with Ms. Ren Ping Tu, his wife, pursuant to which Mr. Bai was granted an option to acquire all of the 20,500,000 shares of the Company’s common stock currently owned by Ms. Tu for an exercise price of $2,500,000. On September 6, 2011, Mr. Bai exercised the option to acquire all 20,500,000 shares of the Company’s common stock. After Mr. Bai exercised this option, he directly owns 68.33% of the Company’s issued and outstanding common stock.

Third Quarter Financial Performance Highlights

The following summarizes certain key financial information for the third quarter of 2011:

  • Revenue: Revenue was $10.7 million for the three months ended September 30, 2011, an increase of $1.9 million, or 22.1%, from $8.8 million for the same period last year.

  • Gross Profit and Margin: Gross profit was $3.4 million for the three months ended September 30, 2011, an increase of $0.45 million, or 15.3%, from $2.9 million for the same period last year. Gross margin was 31.5% for the three months ended September 30, 2011, as compared to 33.3% for the same period last year.

  • Net Income: Net income was $1.3 million for the three months ended September 30, 2011, a decrease of $0.8 million, or 40.7%, from $2.1 million for the same period last year.

2

  • Fully diluted net income per share: Fully diluted net income per share for the three months ended September 30, 2011 was $0.04, as compared to $0.09 for the same period last year.

Results of Operations

Comparison of Three Months Ended September 30, 2011 and September 30, 2010

The following table shows key components of our results of operations during the three months ended September 30, 2011 and 2010, in both dollars and as a percentage of our revenue.

(All amounts, other than percentages, in U.S. Dollars)
                         
    Three Months Ended     Three Months Ended  
    September 30, 2011     September 30, 2010  
          % of           % of  
    Dollars     Revenue     Dollars     Revenue  
Revenue $  10,711,139     100.00%   $  8,771,019     100.00%  
Cost of revenue   7,342,247     68.55%     5,848,371     66.68%  
Gross profit   3,368,892     31.45%     2,922,648     33.32%  
Operating expenses                        
     Selling expenses   269,467     2.52%     27,834     0.32%  
     General and administrative expenses   697,341     6.51%     322,625     3.68%  
Total operating expenses   966,808     9.03%     350,459     4.00%  
Income from operations   2,402,084     22.43%     2,572,189     29.33%  
Other income (expenses)                        
     Interest income   642     0.01%     -     0.00%  
     Interest expenses   (464,170 )   -4.33%     (173,244 )   -1.98%  
     Other (expenses) income   (1,559 )   -0.01%     -     0.00%  
     Value added tax refund   -     0.00%     526,399     6.00%  
     Government grant   31,184     0.29%     -     0.00%  
Total other income (expenses)   (433,903 )   -4.05%     353,155     4.03%  
Income before income taxes   1,968,181     18.38%     2,925,344     33.35%  
Less: income tax expense   702,862     6.56%     791,257     9.02%  
Net income $  1,265,319     11.81%   $  2,134,087     24.33%  

Revenue. We generate revenue from the sales of our industrial fiber boards, laminate flooring, wooden flooring, and related flooring products. Our revenue increased to $10.7 million for the three months ended September 30, 2011, from $8.8 million for the same period in 2010, representing a 22.1% increase. The increase in revenue was mainly due to an increase in average unit sales price with stable sales volume across all product categories.

In terms of product lines, sales of our laminate flooring and fiber board products accounted for approximately 62.6% and 37.4% of our revenue, respectively, for the three months ended September 30, 2011, as compared to approximately 64.5% and 35.5%, respectively, for the same period in 2010. We did not sell any hard wood flooring products in the third quarter because we are still developing this new product market.

The average unit sales price of our laminate flooring products increased slightly by approximately 2.3% for the three months ended September 30, 2011. We sold approximately 1.00 million square meters of laminate flooring products during the three months ended September 30, 2011, as compared to approximately 1.07 million square meters of laminate flooring products for the same period in 2010. We were able to maintain the relatively stable sales volume as last year with the increased average unit sales price mainly due to our continued promotion and market expansion efforts for this product line.

The average sales price of our fiber board products increased approximately 26% in the third quarter of 2011 as compared to the same period last year. A larger portion of our products sold in this quarter was 15mm fiber board which generally has a higher sales price than our 12mm fiber board which was the major products sold in the same quarter last year. Sales volume remained fairly stable. We sold approximately 0.6 million pieces of fiber boards during the three months ended September 30, 2011 as compared to approximately 0.59 million pieces of fiber boards for the comparative period in 2010.

3

Cost of revenue. Our cost of revenue is primarily comprised of the costs of our raw materials, labor and overhead. Our cost of revenue increased $1.5 million, or 26%, to $7.3 million for the three months ended September 30, 2011, from $5.8 million for the same period in 2010. The cost of revenue as a percentage of revenue increased from 67% for the three months ended September 30, 2010 to 69% for the three months ended September 30, 2011. Such increase was primarily due to the significant increase in cost of raw materials primarily including wood, chemical boards and papers. Unit cost for these raw materials has increased 19 to 20% compared to the same period in 2010. The rise in raw material cost is due to macro inflationary environment in China, which in turn resulted in the increase in unit cost and until selling price of our products.

Gross profit and gross margin. Our gross profit is equal to the difference between our revenue and our cost of revenue. Our gross profit increased $0.5 million, or 15%, to $3.4 million for the three months ended September 30, 2011, from $2.9 million for the same period in 2010. Gross profit as a percentage of net revenue (gross margin) was 31% and 33% for the three months ended September 30, 2011 and 2010, respectively. The decrease in the gross margin was primarily driven by the decreased gross margin of our laminate flooring products. The respective gross margins for our laminate flooring and fiber board products were 25% and 25% for the three months ended September 30, 2011, as compared to 32% and 21% for the same period in 2010. The drop in the gross margin of our laminate flooring product line was mainly attributable to a greater percentage increase in average cost than the percentage increase in average sales price.

Selling expenses. Our selling expenses are comprised primarily of sales commissions, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, travel expense, consulting fees and other sales related costs. Our selling expenses increased by $241,633, or 868%, to $269,467 for the three months ended September 30, 2011, from $27,834 for the same period in 2010. The increase was primarily a result of the expansion of our sales network leading to increased salary, welfare expenses and advertisement and exhibition expenses. Our salary expenses for the three months ended September 30, 2011 amounted to $144,315, compared to $12,171 for the same period in 2010. Our welfare expenses for the three months ended September 30, 2011 amounted to $36,100, compared to $1,447 for the same period in 2010. Our advertisement and exhibition expenses for the three months ended September 30, 2011 amounted to $49,806, compared to $623 for the same period in 2010. Due to continued efforts to promote our brand recognition and marketing in the PRC, our travel and consultation expenses also increased and contributed to the increase of selling and marketing expenses. Our travel expenses for the three months ended September 30, 2011 amounted to $22,182, compared to $10,137 for the same period in 2010. Our consultation expenses for the three months ended September 30, 2011 amounted to $9,093, compared to $721 for the same period in 2010.

General and administrative expenses. General and administrative expenses consist primarily of compensation and benefits to our management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Our general and administrative expenses increased $374,716, or 116%, to $697,341 for the three months ended September 30, 2011, from $322,625 for the same period in 2010. This increase was mainly due to the hiring of additional staff to manage our expanding business, particularly in our finance department, to assist with the increased administrative duties associated with being a public company. This also led to increases of related welfare expenses.

Other income (expense). We had $433,903 in other expenses for the three months ended September 30, 2011, as compared to other income of $353,155 for the same period in 2010. Compared to same period in 2010, we incurred more expenses in this quarter mainly because of a higher interest expense of $290,926 resulting from increased bank borrowings during the three months ended September 30, 2011. We had approximately $19.6 million bank loans as of September 30, 2011 as compared to $4.5 million as of September 30, 2010. In addition, a majority of the 2010 other income was attributable to a $0.53 million value added tax refund. According to a tax refund approval notice issued by the Tax Administration of the Ministry of Finance of the PRC, certain items, including our wood flooring and wooden fiber sheets are qualified for the refund of VAT in 2009 and 2010. No such tax refund approval notice was issued for 2011. During the three months ended September 30, 2011, we received $31,184 in government grant income for use in research and development of applied technology as compared to $0 for the same period in 2010.

Income taxes. Our income taxes decreased by $0.09 million, or 11%, to $0.7 million for the three months ended September 30, 2011, from $0.8 million for the same period in 2010. The decrease was due to the decrease in our taxable income.

Net income. For the three months ended September 30, 2011, we generated a net income of $1.3 million, a decrease of $0.8 million, or 40.7%, from $2.1 million for the same period in 2010, as a result of the cumulative effect of the foregoing factors.

4

Comparison of Nine Months Ended September 30, 2011 and September 30, 2010

The following table shows key components of our results of operations during the nine months ended September 30, 2011 and 2010, in both dollars and as a percentage of our revenues.

(All amounts, other than percentages, in U.S. Dollars)
                         
    Nine Months Ended     Nine Months Ended  
    September 30, 2011     September 30, 2010  
          % of           % of  
    Dollars     Revenue     Dollars     Revenue  
Revenue $  29,611,048     100.00%   $  25,696,546     100.00%  
Cost of revenue   19,390,075     65.48%     17,085,785     66.49%  
Gross profit   10,220,973     34.52%     8,610,761     33.51%  
Operating expenses                        
     Selling expenses   995,699     3.36%     146,481     0.57%  
     General and administrative expenses   1,602,111     5.41%     1,062,610     4.14%  
Total operating expenses   2,597,810     8.77%     1,209,091     4.71%  
Income from operations   7,623,163     25.74%     7,401,670     28.80%  
Other income (expenses)                        
     Interest income   24,217     0.08%     -     0.00%  
     Interest expenses   (1,099,182 )   -3.71%     (231,761 )   -0.90%  
     Other (expenses) income   (31,923 )   -0.11%     43,988     0.17%  
     Value added tax refund   -     0.00%     1,950,176     7.59%  
     Government grant   76,598     0.26%     -     -  
Total other income (expenses)   (1,030,290 )   -3.48%     1,762,403     6.86%  
Income before income taxes   6,592,873     22.26%     9,164,073     35.66%  
Less: Provision for income taxes   1,884,480     6.36%     2,012,055     7.83%  
Net income $  4,708,393     15.90%   $  7,152,018     27.83%  

Revenue. Our revenue increased to $29.6 million for the nine months ended September 30, 2011, from $25.7 million for the same period in 2010, representing a 15% increase. The increase in revenue was mainly due to higher sales volume in the first quarter of 2011 after the expansion of our sales and distribution network, coupled with increase in unit sales price of both our laminate flooring and fiber boards. During the nine months ended September 30, 2011, we sold approximately 2.9 million square meters of laminate flooring products and approximately 1.6 million pieces of fiber boards, as compared to approximately 1.6 million square meters of laminate flooring products and approximately 2.2 million pieces of fiber boards for the same period in 2010. In addition, we started selling hard wood flooring products in the first quarter of 2011 and sold approximately 0.05 million square meters of hard wood flooring products in the nine months ended September 30, 2011. Our respective sales of laminate flooring products, fiber board products and hard wood flooring products accounted for approximately 64.0%, 35.9% and 0.1% of our revenue for the nine months ended September 30, 2011, as compared to 46.1%, 53.9% and 0% for the same period in 2010.

Cost of revenue. Our cost of revenue increased $2.3 million, or 13%, to $19.4 million for the nine months ended September 30, 2011, from $17.1 million for the same period in 2010. The increase was generally in line with the increase in sales volume. Cost of revenue as a percentage of revenue remain relatively consistent as we had a slight decrease from 66% for the nine months ended September 30, 2010 to 65% for the nine months ended September 30, 2011 primarily attributable to our fiber board product line. As a percentage of revenue, cost of revenue for our fiber board product line was 74% for the nine months ended September 30, 2011, as compared to 78% for the same period in 2010. The decrease was due to the fact that the percentage increase in the unit selling price of fiber boards outpaced the percentage increase in the raw material cost. The unit cost of major raw materials had a percentage increase between 2% to 29% while the unit selling price of 12mm and 15mm fiber boards increased by 7% and 25%, respectively. To minimize the impact of continuing rise in raw material cost, we hope that through our research and development efforts, we can improve our manufacturing technology of this product line which we expect to result in lower consumption of raw materials.

Gross profit and gross margin. Our gross profit increased $1.6 million, or 19%, to $10.2 million for the nine months ended September 30, 2011, from $8.6 million for the same period in 2010. Such increase in overall gross profit was mainly due to an approximately 27% increase in gross profit generated from sales of fiber boards which more than offset an approximately 6% decrease of gross profit from sales of laminate flooring products. Gross profit as a percentage of net revenue (gross margin) was 35% and 34% for the nine months ended September 30, 2011 and 2010, respectively. The slight increase in gross margin was primarily driven by increased gross margin of fiber board products. Gross margins for our laminate flooring products and fiber board products were 26% and 26%, respectively, for the nine months ended September 30, 2011, as compared to 34% and 22%, respectively, for the same period in 2010. The gross margin of new hard wood flooring products was 24.8% for the nine months ended September 30, 2011. The improved gross margin of fiber board product line was due to the decrease in cost of revenue as noted above. The drop in gross margin of laminate flooring products was mainly attributable to a combined effect of decrease in their unit sales price and increase in unit cost. The average sales price of laminate flooring products per square meter dropped approximately 10% from the nine months ended September 30, 2010 as a result of intense competition in the market for similar products.

5

Selling expenses. Our selling expenses increased significantly by $0.8 million, or 580%, to $1.0 million for the nine months ended September 30, 2011, from $0.1 million for the same period in 2010. The increase was primarily a result of the expansion of our sales network leading to increased salary, welfare expenses and advertisement and exhibition expenses. Our salary expenses for the nine months ended September 30, 2011 amounted to $0.7 million, compared to $0.3 million for the same period in 2010. Our welfare expenses for the nine months ended September 30, 2011 amounted to $0.1 million, compared to $5,859 for the same period in 2010. Our advertisement and exhibition expenses for the nine months ended September 30, 2011 amounted to $0.2 million, compared to $55,045 for the same period in 2010. Due to continued efforts to promote our brand and marketing in the PRC, we also incurred more travel and consultation expenses. Our travel expenses for the nine months ended September 30, 2011 amounted to $72,292, compared to $17,974 for the same period in 2010. Our consultation expenses for the nine months ended September 30, 2011 amounted to $96,325, compared to $721 for the same period in 2010.

General and administrative expenses. Our general and administrative expenses increased $0.5, million or 51%, to $1.6 million for the nine months ended September 30, 2011, from $1.1 million for the same period in 2010. This increase was mainly due to the hiring of additional staff to manage our expanding business, particularly in our finance department, to assist with the increased administrative duties associated with being a public company. This also led to increases of related welfare expenses.

Other income (expense). We had $1.0 million in net other expenses for the nine months ended September 30, 2011, as compared to net other income of $1.8 million for the same period in 2010. The $2.8 million decrease in other income (expense) was primarily due to value added tax refund of $1.9 million received in the nine months ended September 30, 2010 coupled with higher interest expense of $1.1 million resulting from increased bank borrowings during the nine months ended September 30, 2011, as compared to $0.2 million interest expense for the comparative period in 2010.

Income taxes. Our income taxes decreased by $0.1 million, or 6%, to $1.9 million for the nine months ended September 30, 2011, from $2.0 million for the same period in 2010. The decrease was due to the decrease in our taxable income.

Net income. For the nine months ended September 30, 2011, we generated a net income of $4.7 million, a decrease of $2.4 million, or 34%, from $7.2 million for the same period in 2010, as a result of the cumulative effect of the foregoing factors.

Liquidity and Capital Resources

As of September 30, 2011, we had cash and cash equivalents of $72,045. The following table summarizes the key cash flow metrics from our condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010.

Cash Flow            
             
    Nine Months Ended  
    September 30,  
    2011     2010  
Net cash (used in) provided by operating activities $  (3,715,575 ) $  2,744,432  
Net cash used in investing activities   (8,334,032 )   (6,202,457 )
Net cash provided by financing activities   11,756,689     3,350,958  
Effects of exchange rate change in cash   2,153     329,050  
Net (decrease) increase in cash and cash equivalents   (290,765 )   221,983  
Cash and cash equivalents at beginning of the period   362,810     748,493  
Cash and cash equivalent at end of the period $  72,045   $  970,476  

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Operating Activities

Net cash used in operating activities was $3.7 million for the nine months ended September 30, 2011, as compared to net cash provided by operating activities of $2.7 million for the same period in 2010. The decrease in net cash from operating activities was primarily due to a decrease of $2.4 million in net income, an approximately $5.6 million cash outflow in inventory purchases which was primarily offset with a corresponding increase in bills payable which are utilized to pay our suppliers for raw material purchases, a $7.3 million outflow in deposits and prepaid expenses primarily for deposits paid to suppliers of raw materials and goods supplies. In addition, as a result of increase in our bills payable, our cash outflow for the restricted cash balance, which serves as collaterals for bills payable, increased by $2.6 million. The significant increase in inventory during the nine months ended September 30, 2011 was attributable to increased inventory and raw materials purchases in anticipation of the development of our sales network in some selected markets in China, as evidenced by our $12.9 million inventory balance as of September 30, 2011 and our $9.5 million sales order backlog.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2011 was $8.3 million, as compared to $6.2 million for the same period in 2010. The net cash used in investing activities was primarily due to our purchase of land use rights for approximately $2.5 million during the nine months ended September 30, 2011. In addition, we paid approximately $5.8 million as prepayment for properties under construction for the expansion of our facilities.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2011 was $11.8 million, as compared to $3.4 million for the same period in 2010. The increase in net cash provided by financing activities was primarily due to increased bank borrowings of $17.7 million to fund our expansion. Such increase was offset by repayment of two short term bank loans totaled $3.1 million that matured in June and July 2011. In addition, we paid off $2.9 million payable to Mr. Yulu Bai for the purchase cost of the forestry land use right that Mr. Bai had paid on behalf of the Company.

Loan Commitments

As of September 30, 2011, the amount, maturity date and term of each of our bank loans were as follows:

          Interest              
Bank   Amount*     Rate     Maturity Date     Duration  
China Merchant Bank $  3,913,282     8.484%     March 7, 2012     1 year  
Xingyi City Rural Cooperative Bank   3,756,751     8.715%     April 29, 2012     1 year  
Bank of Chongqing   3,130,625     7.572%     June 28, 2012     1 year  
Xingyi City Rural Cooperative Bank    782,656     9.5667%     August 2, 2012     1 year  
Guiyang City Nanming Rural Credit Cooperative Bank   3,913,282     8.775%     November 18, 2012     22 months  
Guiyang City Nanming Rural Credit Cooperative Bank   4,069,813     8.775%     January 18, 2013     2 years  
Total $  19,566,409                    
* Calculated based on the exchange rate of $1 = RMB 6.3885                    

Four of the above loans were guaranteed by other entities. On March 7, 2011, Guizhou Huacheng Real Estate Co., Ltd. (“Guizhou Huacheng”) entered into a pledge agreement with Guiyang Branch, China Merchant Bank (“China Merchant Bank”) to guarantee a loan of $3.9 million that we borrowed from China Merchant Bank. Guizhou Huacheng used its pledged property to guarantee our repayment of the loan principal and accrued interests. The term of the pledge is from March 3, 2011 to September 2, 2012. During the term of this agreement, Guizhou Huacheng has the obligation to submit the title and other ownership certificates of the pledged property to Chongqing Bank and maintain the pledged property in good condition. Our director, Yudong Ji is the Chairman of Guizhou Huacheng. No payment was made by us to Guizhou Huacheng for the guarantee.

On June 29, 2011, Guizhou Huacheng entered into a pledge agreement with Guiyang Branch, Bank of Chongqing (“Chongqing Bank”) to guarantee a loan of $3.1 million that we borrowed from Chongqing Bank. Guizhou Huacheng pledged its property to guarantee our repayment of the loan principal and accrued interests. During the term of this agreement, Guizhou Huacheng has the obligation to submit the title and other ownership certificates of the pledged property to Chongqing Bank and maintain the pledged property in good condition. No payment was made by us to Guizhou Huacheng for the guarantee.

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On July 4, 2011, certain of our officers and directors, including Yulu Bai,Yudong Ji, Yi Zeng and Bei Shi also entered into a guarantee agreement with Chongqing Bank to guarantee the loan of $3.1 million that we borrowed from Chongqing Bank. The term of the guaranty is from July 4, 2011 to June 28, 2014. If we fail to repay the principal and accrued interests pursuant to our loan agreement with Xingyi Bank, these individual guarantors will have the joint and several liability to pay off the loan.

On April 30, 2011, Guizhou Dingshengxin Guarantee & Investment Co., Ltd., Xi’nanzhou Branch (“Dingshengxin”) entered into a guarantee agreement with Guizhou Xingyi Rural Cooperative Bank (“Xingyi Bank”) to guarantee a loan of $3.8 million that we borrowed from Xingyi Bank. The term of the guaranty is from April 30, 2011 to April 29, 2014. If we fail to repay the principal and accrued interests pursuant to our loan agreement with Xingyi Bank, Dingshengxin will have the joint and several liability to pay off the loan. We paid approximately $0.17 million to Dingshengxin for the guarantee.

On August 3, 2011, Dingshengxin entered into a guarantee agreement with Xingyi Bank to guarantee a loan of $0.8 million that we borrowed from Xingyi Bank. The term of the guaranty is from August 3, 2011 to August 3, 2014. If we fail to repay the principal and accrued interests pursuant to our loan agreement with Xingyi Bank, Dingshengxin will have the joint and several liability to pay off the loan. We paid approximately $36,000 to Dingshengxin for the guarantee.

We are not aware of any material trend, event or capital commitment, which would potentially adversely affect liquidity. In the event a material trend develops, we believe that our cash on hand and cash flow from operations will meet part of our present cash needs and we will require additional cash resources, including loans, to meet our expected capital expenditure and working capital for the next 12 months. In the future we may also require additional cash resources due to changed business conditions or acquisitions that we may decide to pursue. In addition, because substantially all of our revenues are generated from our indirect PRC subsidiaries, Aosen Forestry and Silvan Flooring, the ability of our PRC subsidiaries to make dividends and other payments to us is subject to the PRC dividend restrictions. Current PRC law permits payments of dividend by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to the statutory reserve fund can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. As we disclosed above, our PRC subsidiaries did not allocate their after-tax profits to the statutory general reserve fund pursuant to the PRC regulations. As of September 30, 2011, we had allocated an aggregate of RMB10,380,366 (approximately $1.6 million) to our fund.

If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

Obligations Under Material Contracts

In addition to the loan obligations disclosed above, we have the following material contractual obligations:

  • On February 2, 2010, we entered into a financial advisory agreement to appoint Asia Regal Financial Capital Group Co., Ltd. and Shenzhen Junwei Investment and Development Co., Ltd. as financial advisors. Pursuant to the agreement, we are obligated to issue to the financial advisors 100,000 shares of common stock at $0.10 per share prior to December 31 of every year within 5 years from the quotation of our stock in the OTC markets. The agreement contains an exclusivity provision whereby we have agreed to engage them as our sole financial advisors for a 2-year period following such stock quotation and contains a $1 million liquidated damages provision for breach of such exclusivity.

  • As of September 30, 2011, the total estimated contract costs to complete the production line for wooden fiber sheet are approximately $58.3 million (RMB372.4 million) of which the Company has completed and paid for approximately $6.1 million (RMB39.2 million). The remaining of $52.2 million (RMB333.2 million) will be completed and paid by the end of 2013.

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  • As of September 30, 2011, the total estimated contract costs to complete the production line for wooden floor are approximately $23.7 million (RMB151.6 million) of which the Company has completed and paid for approximately $0.2 million (RMB1.6 million). The remaining of $23.5 million (RMB150.0 million) will be completed and paid by the end of 2013.

  • As of September 30, 2011, the total estimated contract costs to complete a property are approximately $9.8 million (RMB62.7 million) of which the Company has completed and paid for approximately $6.7 million (RMB42.5 million). The remaining of $3.1 million (RMB20.2 million) will be completed and paid by the end of 2011.

  • As of September 30, 2011, we have operating lease commitments for four store leases and two warehouse leases, the leases expire through year 2013. Our future minimum lease payments are as follow: $19,988 for the remainder of 2011, $81,060 for 2012, $74,567 for 2013 and $10,380 for 2014.

Seasonality

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introduction.

Inflation

Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and our industry and continually maintain effective cost controls in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.

Critical Accounting Policies

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Recent Accounting Pronouncements

See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this report.

PART II
OTHER INFORMATION

ITEM 6.  EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference:

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Exhibit No. Description
   
10.1 English Translation of Loan Contract, dated February 25, 2011, by and between China Merchant Bank Co., Ltd. Guiyang Branch and Qian Xi Nan Aosen Forestry Company, Limited.
   
10.2 English Translation of Working Capital Loan Contract, dated April 30, 2011, by and between Guizhou Xingyi Rural Cooperative Bank and Qian Xi Nan Aosen Forestry Company, Limited.
   
10.3 English Translation of Working Capital Loan Contract, dated June 29, 2011, by and between Guiyang Branch, Bank of Chongqing Co., Ltd. and Qian Xi Nan Aosen Forestry Company, Limited.
   
10.4 English Translation of Working Capital Loan Contract, dated August 3, 2011, by and between Guizhou Xingyi Rural Cooperative Bank and Qian Xi Nan Aosen Forestry Company, Limited.
   
10.5 English Translation of Working Capital Loan Contract, dated January 19, 2011, by and between Guiyang Nanming District Rural Credit Cooperative Bank, Xinhu Lu Branch and Qian Xi Nan Aosen Forestry Company, Limited.
   
10.6 English Translation of Working Capital Loan Contract, dated January 19, 2011, by and between Guiyang Nanming District Rural Credit Cooperative Bank, Xinhu Lu Branch and Qian Xi Nan Silvan Flooring Company, Limited.
   
10.7 English Translation of Pledge Agreement, dated March 7, 2011, by and between China Merchant Bank Co., Ltd. Guiyang Branch and Guizhou Huacheng Real Estate Co., Ltd.
   
10.8 English Translation of Pledge Agreement, dated June 29, 2011, by and between Guiyang Branch, Bank of Chongqing and Guizhou Huacheng Real Estate Co., Ltd.
   
10.9 English Translation of Guarantee Agreement, dated July 4, 2011, by and among Guiyang Branch, Bank of Chongqing, Ji Yudong, Zeng Yi, Bai Yulu and Shi Bei.
   
10.10 English Translation of Guarantee Agreement, dated April 30, 2011, by and between Guizhou Xingyi Rural Cooperative Bank and Guizhou Dingshengxin Guarantee & Investment Co., Ltd., Xi’nanzhou Branch.
   
10.11 English Translation of Guarantee Agreement, dated August 3, 2011, by and between Guizhou Xingyi Rural Cooperative Bank and Guizhou Dingshengxin Guarantee & Investment Co., Ltd., Xi’nanzhou Branch.
   
31.1 Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.

Date: February 28, 2012

SILVAN INDUSTRIES, INC.

By: /s/ Yulu Bai                                                      
Yulu Bai
Chief Executive Officer
(Principal Executive Officer)

By: /s/ Jiyong He                                                  
Jiyong He
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)