10-K 1 american.htm AMERICAN NANO SILICON TECHNOLOGIES, INC. 10K 2013-09-30 american.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K

[ x ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

       For the fiscal year ended September 30, 2013

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

       For the transition period from ______ to ______

Commission File Number  000-52940
 
 
American Nano Silicon Technologies, Inc.
(Exact name of registrant as specified in its charter)
 
California
 
33-0726410
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
Nanchong Shili Industrial Street,
Economic and Technology Development Zone,
Xiaolong Chunfei Industrial Park
   
Sichuan, China
 
637005
(Address of principal executive offices)
 
(Zip Code)
 
86-817-3634888
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act: None
 
Securities Registered Pursuant to Section 12(g) of the Act:  Common Stock, $.0001 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 406 of the Securities Act.    Yes __ No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes __ No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-K (ss.229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No __
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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  No _ 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained,  to the best of registrant's  knowledge,  in definitive proxy or information  statements incorporated  by reference  in Part III of this Form 10-K or any  amendment to this Form 10-K. [ ]

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. (Check One)
 
Large accelerated filer ___   Accelerated filer ___   Non-accelerated filer ___   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 

As of January 23, 2014, 46,917,445 shares of common stock, par value $.0001 per share, were outstanding.
 
The aggregate market value of Common Stock held by non-affiliates of the Registrant on March 31, 2013, the last business day of the Company's second fiscal quarter, was $183,428 (18,342,807 shares of common stock held by non-affiliates) based upon the closing price of $.01 as quoted by OTCQB on such date. Shares of common stock held by each director, each officer and each person who owns 10% or more of the outstanding common stock have been excluded from this calculation in that such persons may be deemed to be affiliates.
 
Documents incorporated by reference: NONE
 
 
 

 
 
TABLE OF CONTENTS
 
Part I  
Page
     
ITEM 1    
DESCRIPTION OF BUSINESS
1
     
ITEM 1A.
RISK FACTORS
8
     
ITEM 1B.
UNRESOLVED STAFF COMMENTS
17
     
ITEM 2.
DESCRIPTION OF PROPERTY
18
     
ITEM 3. 
LEGAL PROCEEDINGS
18
     
ITEM 4.
MINE SAFETY DISCLOSURE
  18
     
Part II
   
     
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
19
     
ITEM 6.
SELECTED FINANCIAL DATA
19
     
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS
19
     
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  24
     
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  24
     
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  42
     
ITEM 9A
CONTROLS AND PROCEDURES
  42
     
ITEM 9B
OTHER INFORMATION
  43
     
Part III
   
     
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
  43
     
ITEM 11.
EXECUTIVE COMPENSATION
 45
     
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  47
     
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  48
     
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 48
     
Part IV
   
     
ITEM 15.
EXHIBITS
49
     
 
SIGNATURES
50
 
 
 

 
 
PART I
 
FORWARD LOOKING STATEMENTS
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including "anticipates", "believes", "expects", "can", "continue", "could", "estimates", "expects", "intends", "may", "plans", "potential", "predict", "should" or "will" or the negative of these terms or other comparable terminology. These statements are only predictions. Uncertainties and other factors may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements.

In this report, “we”, “our”, “us” or the “Company” sometimes refer collectively to American Nano Technologies, Inc. and its subsidiaries and affiliated companies.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this Form 10-K is filed, and we do not intend to update any of the forward-looking statements after the filing date to conform these statements to actual results, unless required by law.
 
ITEM 1.   DESCRIPTION OF BUSINESS
 
We are a nano-technology chemical manufacturer. We manufacture and market “Micro Nano Silicon™,” our proprietary product, in China. Micro Nano Silicon is an ultra fine crystal that can be utilized as a non-phosphorous additive in detergents, as an accelerant additive in cement, as a flame retardant additive in rubber and plastics and as a pigment for paint. Micro Nano Silicon can replicate the chemical additives that are utilized in these products, but is less expensive and more environmentally friendly than competitive products. We are in the process of developing additional uses for Micro Nano Silicon for the petrochemical, plastic, rubber, paint and ceramic  industries. We have entered into a long-term joint research and development agreement with the China Academy of Science, a technology research institution, and Southwest University of Science and Technology’s Department of Material Science and Engineering to assist us in our research and development activities.
 
Until May 2011, the primary use for Micro Nano Silicon was as a synthetic additive in non-phosphorous detergent products. In May 2011 we suspended operations in order to move our manufacturing to a new facility.  Testing of the manufacturing systems in the new facility was completed at the end of 2012, and we initiated manufacturing operations there at the end of January 2013.  With the expanded manufacturing capacity provided by the new facility, we have also expanded our product offerings.  For the immediate future, in addition to the detergent additive, we will market a flame retardant additive incorporating Micro Nano Silicon, which will be marketed for use in rubber and plastic products.

Our first non-sample deliveries of the new flame retardant product were made in February 2013, as we already have a substantial contract for the product.  We plan to commence our full marketing program in 2014, and are optimistic about the prospects for a rapid return to profitable operations.

Present and Future Products

Our core product

Our core product, Micro-Nano Silicon™, is an ultra-fine crystal structure consisting of silicon dioxide and quartz.  Under the effect of a special catalyst, those materials polymerize and crystallize. The crystal is three-dimensional with a tetravalent and electrically neutral silicon atom. The aluminum atom is a trivalent atom sharing four oxygen atoms with one negative charge combined. The hole in the middle of the crystal can capture a positive ion. The compound can have a complex reaction with ions of calcium, magnesium, iron, copper, and manganese. Since it is ultra-white, ultra-fine, phosphorus-free, with a special crystalline structure, chelating and filtering performance lends itself to a use in washing products, cosmetics and other products. 
 
 
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Flame retardant additive for rubber and plastic

In 2011 we completed development of a flame retardant additive for rubber and plastic materials based on our Micro Nano Silicon.  Materials using Micro Nano Silicon additives have passed our own stringent flame retardancy tests.

Currently, halogenated products have a 90% share of the flame retardant additive market. In early 2000, the Chinese government banned the use of halogenated additives in certain rubber and plastic products.  Accordingly, management believes that environmental concerns will cause a market shift to non-halogenated flame retardant additives, such as Micro Nano Silicon. According to baike.baidu.com, in 2009, the annual global production of plastic material was over 300 million tons with an annual demand for flame retardant additives in excess of 24 million tons. We commenced limited production of Micro Nano Silicon as a flame retardant additive on January 2, 2012.  During that year we delivered sample quantities to potential customers, and spent 2012 revising our manufacturing systems in response to customer feedback.  At the end of 2012 we executed a contract to deliver 2,000 tons of flame retardant additives per year to a customer who pays us $868 per ton.  We commenced manufacturing for that order at the end of January 2013 and delivered some products to the customer during the year ended September 30, 2013. We recorded $200,274 of revenue from flame retardant additives during the year ended September 30, 2013, the remainder  of our revenue was related to our detergent additive.
 
Non-phosphate detergent additive

Until May 2011 our business was primarily focused on the use of Micro Nano Silicon as a non-phosphorous additive for detergents.  Micro-Nano Silicon™ can effectively chelate calcium and magnesium ions in water, softening the water in order to improve the washing effect and to prevent damage to clothes.  In this way the product actually reduces the amount of detergent required for washing a load of laundry, and accordingly is more cost efficient to use.  

According to "China Industry Detergent Product" 2010 volume number 2, the worldwide annual demand for non-phosphorous additives for detergents and washing products is in excess of one million tons and in excess of 300,000 tons in China. In 2009 worldwide revenue from sales of household detergents was in excess of $64 billion, of which $3.6 billion was attributable to China. In China the revenue generated from the sale of non-phosphorous detergents has grown at a compounded annual growth rate of 22% for the period from 2005 to 2010 to $2.4 billion and in excess of 26 billion tons. According to IBISWorld, revenue for the Soap, Washing Powder and Synthetic Detergent Manufacturing industry in China has been  increasing at average annualized rate of 9.6% over the past five years to $26.2 billion in 2013.
 
Commencing in the 1970s the United States, Japan and other developed countries began banning the use of phosphates in detergent products. In the United States nonphosphate detergents account for approximately 56% of the market and in Japan close to 100% of the market. Management believes that the market for non-phosphorous detergent additives in China will continue to grow as wider areas of China adopt the common international practice of banning the use of phosphates in household detergents.

The primary ultra fine crystal nonphosphate auxiliary agent in the detergent industry is 4A- zeolite. Auxilliary agents in detergents are builders that enhance detergency and are essential to creating a cost effective detergent product for consumer use. It is estimated that the annual demand for 4A-zeolite is in excess of 300,000 tons. Based on our own research, we believe that Micro Nano Silicon is a more effective auxiliary agent than 4A-zeolite.  4A zeolite is less effective than Micro-Nano Silicon™ at ion-exchange  and  is slow-acting at energy-saving lower wash temperatures.  In addition, 4A Zeolite is insoluble in water, has the potential to re-deposit dirt, and tends to dull the color of clothes after washing.  Micro-Nano Silicon™ has a higher level of performance in each of these aspects.

 
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Because of the opportunities presented by the market for flame retardant additives, and because of the superior margins that we can achieve selling flame retardant additive, we suspended our production of the detergent additive for two years.  We are now in the process of rebuilding our market for the detergent additive. During fiscal year 2013 we obtained $598,117 in revenue from the sale of the detergent additive, primarily as a raw material for other detergent manufacturers, but also as a complete detergent product in limited quantities that we made to order.

Accelerator additive for cement

Today, China is the world’s leading producer of building materials. According to Global Construction Perspectives 2010, the Chinese, construction market will be worth an estimated $2.5 trillion by 2020. In addition, the number of cement production plants and concrete production facilities has continued to increase.  It is estimated that the production of concrete will increase by 10% over the next 10 years.  However, energy consumption in China’s cement production industry is approximately 15% higher than the average level of energy utilized in the cement production industry in the United States and other western countries. Cement accelerators speed the cure time of cement and enables concrete to be placed in the winter without the concern for frost damage.  As an accelerator agent Micro Nano Silicon can be utilized in a chemical rotary kiln to lower production costs as compared to more expensive lime rotary kilns. The Chinese government has announced a goal to reduce energy consumption by 20%.  

Management believes that we would be able to market Micro Nano Silicon to the cement industry to lower production costs and assist cement manufacturers’ compliance with energy saving regulations.  We had already developed a marketable accelerator additive, and had initiated some sales of the additive before we suspended operations in 2011.  When our financial and labor resources permit, we may re-enter that market.

Our Competitive Strengths
 
We believe the following strengths contribute to our competitive advantages and differentiate us from our competitors:

-  
Proprietary Product: Micro Nano Silicon™ is a proprietary product with already developed applications as a non-phosphorous additive in detergent, as an accelerant additive in cement, and as a flame retardant additive in rubber and plastics.  In addition, we believe that we will be able to develop additional uses for Micro Nano Silicon in the petrochemical, plastic, rubber, paint and ceramic industries.

-  
Cost Effectiveness. Micro Nano Silicon is significantly less expensive than its primary competition, but equally effective.  Micro Nano Silicon provides cost savings as an accelerant in the cement market and could be sold at a fraction of the cost of its primary competition in the paint pigment market.  In addition, as a result of its flame retardant capabilities, we believe that Micro Nano Silicon will be less expensive as a flame retardant product in the plastic and rubber industries than comparable products.

-  
Environmentally-friendly: Micro Nano Silicon™ is a non-halogenated and non-phosphorous additive.  We believe that we will be able to capitalize on the Chinese government’s desire to promote products which are less harmful to the environment than those that are currently being utilized.

-  
Large Distribution Network: Our largest distribution partner is Chongqing Trading Company, a state owned enterprise, with a sales network throughout China. The sales network encompasses seven districts and eight major cities.

-  
Proximity to local customers and low transportation cost: We are the only supplier of nonphosphate and non-halogenated additives in southwestern China.  Accordingly,  we can ship our products to customers in local areas at considerably lower transportation costs than our competitors.
 
 
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Our Strategy

Our goal is to establish Micro Nano Silicon as a chemical additive in a wide range of products and industries. We intend to achieve this goal by implementing the following strategies:

Expand the uses for Micro Nano Silicon™:   We have already sold Micro Nano Silicon as a detergent additive, as an accelerator agent for use in the cement industry, and as a flame retardant.  Although we are currently marketing only the detergent additive and the flame retardant additive, as our participation in that market matures, we intend to introduce other product lines, such as a pigment for paints.

● 
Research and development effort:  Our immediate focus will be on developing advanced flame retardant products, which would allow us to enter markets in China now dominated by imports.  When resources permit, we intent to reinitiate the process of developing additional uses for Micro Nano Silicon for the petrochemical, plastic, rubber, paint and ceramic industries. We have entered into a long-term joint research and development agreement with the China Academy of Science, a technology research institution, and Southwest University of Science and Technology’s Department of Material Science and Engineering to assist us in our research and development activities.
 
  
Increase sales force and distribution channels:  We distribute Micro Nano Silicon primarily through distributors. We intend to increase our sales force in order to establish additional distribution relationships to increase our distribution network and the availability of our products throughout China.
 
History of the Company

Nanchong Chunfei Nano-Silicon Technologies Co., Ltd. (“Nanchong Chunfei”) was incorporated in the People’s Republic of China (the “PRC” or “China”) in August 2006. Nanchong Chunfei directly owned 90% of Sichuan Chunfei Refined Chemicals Co., Ltd. (“Chunfei Chemicals”), a Chinese corporation established under the laws of PRC on January 6, 2006. Chunfei Chemicals itself owned 92% of Sichuan Hedi Veterinary Medicines Co., Ltd. (“Hedi Medicines”), also a Chinese company incorporated under the law of PRC on June 27, 2002. 
 
On August 26, 2006, American Nano-Silicon Technologies, Inc., a Delaware corporation (“ANST”), acquired a 95% interest in Nanchong Chunfei.  On May 24, 2007, American Nano Silicon Technologies, Inc., a California  corporation (“we” or the “Company”), acquired ANST in exchange for 25,181,450 shares of our common stock. On September 6, 2011, the Company acquired all of the minority interests in its subsidiaries  by issuing 1,650,636 shares of common stock to Pu Fachun, who was the holder of the minority interests. The issued shares represented five percent of the outstanding shares after the issuance.  Thereafter, Nanchong Chunfei, Chunfei Chemicals, and Hedi Medicines became wholly owned subsidiaries of ANST.

On May 28, 2013, the Company assigned 10% of the equity in Chunfei Chemicals to each of Mr. Fachun Pu, Mr. Qiwei Zhang and Mr. Jianbo Liu, and assigned 5% of the equity in Hedi Medicines to Mr. Fachun Pu, and the assignees paid to the Company cash equal to the registered equity amount.  At the same time, Messrs Pu, Zhang and Liu agreed to hold those equity interests solely for the benefit of the Company, to pay over to the Company any distributions or dividends they receive, to vote their interests as directed by the Company, and to resell the interests to the Company at its option for cash equal to the registered equity amount.  The exchange was made in order to relieve the two subsidiaries of the regulatory burdens associated with being a wholly foreign owned entity in China.
 
 
4

 
 
The Company’s current corporate structure is below.
 
 
(1) Includes 30% of Chunfei Chemicals owned by Pu Fachun Zhang Qiwei and Jianbo Liu for the benefit of Nanchong Chunfei.

(2) Includes 5% of Hedi Medicines owned by Pu Fachun for the benefit of Chunfei Chemicals.

Research and Development

Our business model is based upon developing additional uses for Micro Nano Silicon. Our research and development activities are focused on developing such uses as well as developing nano filitering technology and the production processes for our products.
 
 
5

 
 
During fiscal year 2013, we spent $55,698 on research and development. During fiscal year 2012, we expended $464,898 on research and development. Our fiscal 2012 research and development expenses included $94,701 we paid to Sichuan University of Science and Technology in research and development fees for developing our flame retardant product line. By entering into cooperative research agreements with research institutions and universities, we are able to limit our overhead expenses, but still benefit from the innovations achieved. Fiscal 2012 expenses also included the market value of  2 million shares of common stock that we issued to Qiwei Zhang, our Chief Engineer and a member of the Board of Directors.  The shares were awarded as compensation for Mr. Zhang’s role in the development of a flame retardant agent.

We have entered into cooperative research and development agreements with the China Academy of Science, a technology research institution, and Southwest University of Science and Technology’s Department of Material Science and Engineering to assist us in our research and development activities. These cooperative agreements allow us to tap into the innovative process without having to expend up front capital toward the development.

We believe that the future success of our business depends upon our ability to improve our production processes and develop additional uses for Micro Nano Silicon.  To avoid product obsolescence, we will continue to monitor technological changes in our industry as well as users' demands for new products. Failure to keep pace with future technological changes could adversely affect our revenues and operating results in the future.  Although we believe that Micro Nano Silicon can be utilized in a number of industries, there can be no assurance that we will gain market acceptance of our products in such industries.
 
Raw Materials and Production
 
Our facilities are located in close proximity to our suppliers.  Quartz and bauxite are the primary raw materials used in the production of Micro-Nano Silicon™ There are abundant quartz mineral resources in nearby Chinese districts such as Hechuan and Qingchuan and abundant supplies of bauxite  in Hechuan and nearby Chongqing and Guizhou. Similarly other raw materials such as caustic soda, calcined soda, sodium sulphate anhydrous and calcium carbonate powder are also available in sufficient quantities, good quality and competitive cost in Sichuan province.  For the year ended September 30, 2013 and 2012, we had generated very limited sales and made very limited purchases.  Therefore we did not rely on any particular vendors and customers.

In August 2013 we developed a production line in our factory dedicated to production of sodium silicate, one of our chief raw materials.  In-house production of this material will reduce the cost to us significantly and will improve its quality.
  
 Employees
 
We have approximately 122 full-time employees. The breakdown of our employees is as follows:

Production Line
   
36
 
Quality Control and Workshop
   
15
 
Foreman/Production Line managers
   
8
 
Engineers
   
12
 
Warehouse
   
3
 
Cooks/Cleaners/Guards
   
8
 
Senior Management
   
7
 
Office Administrators
   
15
 
Accounting
   
6
 
Sales and Marketing
   
12
 
         
Total
   
122
 

All of our full-time employees are based inside China. Our employees are not represented by any labor union and are not organized under a collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relationships with our employees are generally good.
 
 
6

 
 
We do not have any payment obligations for any retirees and we do not currently retain any independent contractors. We purchase pension insurance, medical insurance and unemployment insurance for all full time employees in accordance with China's Labor Law. We believe that should we require additional employees at any of our facilities that we will be able to meet our needs from the locally available labor pool.

 Intellectual Property

We rely on a combination of patent, trademark and trade secret protection and other unpatented proprietary information to protect our intellectual property rights in Micro Nano Silicon.  Our success will depend in part on our ability to obtain patents and preserve other intellectual property rights covering our products. We intend to continue to seek patents on our inventions when we deem it commercially appropriate. The process of seeking patent protection can be lengthy and expensive, and there can be no assurance that patents will be issued for currently pending or future applications or that our existing patents or any new patents issued will be of sufficient scope or strength or provide meaningful protection or any commercial advantage to us. We may be subject to, or may initiate, litigation or patent office interference proceedings, which may require significant financial and management resources. The failure to obtain necessary licenses or other rights or the advent of litigation arising out of any such intellectual property claims could have a material adverse effect on our operations.
 
Distribution and Customers
 
We are currently selling Micro Nano Silicon through distributors and our own sales staff.   Our in-house sales staff of 12 employees seeks to establish relationships with additional distributors of our products. We intend to increase the size of our sales force as we increase our production capacity. In order to create awareness and acceptance of our products we occasionally sponsor charitable events.  

During the year ended September 30, 2013, one customer accounted for 64.8% of our sales revenue and another accounted for 13.4%.   During the year ended September 30, 2012, when we had very limited sales, we did not rely on any particular customer.
  
Competition

We face competition from many other chemical suppliers and manufacturers, many of which have significantly greater name recognition and financial, technical, manufacturing, personnel, marketing, and other resources than we have.  The geographic market in which we compete is in China. Our competitors may be able to devote greater resources to the development, promotion and sale of their products than we do.

We compete primarily on the effectiveness and the price of our products. Both the flame retardant additive and the detergent additive markets are highly fragmented, with hundreds of chemical additive manufacturers throughout the country.  Although we believe that Micro Nano Silicon is more cost effective and provides better performance than our competitors’ products, we cannot assure you that we will be able to obtain wide spread market acceptance of Micro Nano Silicon as a flame retardant additive. With respect to Micro Nano Silicon, as a detergent additive, as an accelerator additive in cement,  and as a pigment in paints, we believe that we will be able to gain market acceptance of our product as a result of the potential cost savings from the use of our product. However, we cannot assure you that this will be the case.

 
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ITEM 1A.   RISK FACTORS
 
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
 
RISKS RELATED TO OUR OPERATIONS
 
We currently have negative cash flow and negative working capital.  We will not be able to fully resume operations without additional injections of capital.
 
As shown in the accompanying financial statements, the Company has negative cash flow for the years ended September 30, 2013 and 2013, and at September 30, 2013 the Company’s current liabilities exceeded its current assets by $13.2 million.  In addition, approximately $13.5 million of the Company’s loans will be due in 2014.  The Company suspended manufacturing operations in May 2011 as part of an effort to relocate the production facilities. The Company resumed limited production on January 2, 2012 in its new facilities, but did not generate significant revenue until the fourth quarter of fiscal 2013, and is still operating at a low level of production. The current cash and inventory level will not be sufficient to support the Company’s resumption of its normal operations and repayments of the loans.  As a result of these factors, our independent registered public accountant has, in the audit opinion included in this Report, expressed substantial doubt about the Company’s ability to continue as a going concern.  The Company will need additional funds to meet its operating and financing obligations until sufficient cash flows are generated from production to sustain operations and to fund future development and financing obligations. The Company’s largest shareholder and President, Mr. Pu Fachun, has the intention to continue providing necessary funding for the Company’s normal operations. It is not certain, however, that he will be able to provide sufficient funds.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

We are initiating substantially revised operations, and will face all of the risks of a new business.

The relocation of our operations to new facilities was done to expand our manufacturing capacity, but also to enable us to initiate a new manufacturing operation.  Prior to May 2011 our manufacturing operations produced one product:  our detergent additive.  Since we resumed normal operations, we have been manufacturing both the detergent additive and our flame retardant additive.  Because of this change, we face the risk of the unknown that occurs whenever new operations are initiated.  Our market is uncertain; new customers will have to be secured.  And the problems that may develop in manufacturing the flame retardant additive on a large scale are as yet unknown.  For this reason, the expansion of our new operations in fiscal 2014 may be disrupted and/or delayed by factors not yet anticipated.
 
If one of our principal suppliers ceased to provide raw materials to us, it could disrupt our production activities, reduce our sales, and result in a loss of customers.
 
We depend on a limited number of suppliers. We do not have long-term contracts with our suppliers. Because we do not have long-term contracts, our suppliers generally are not required to provide us with any guaranteed minimum production levels. As a result, we may not be able to obtain sufficient quantities of critical raw materials in the future. Although we have access to other available sources for the supply of raw materials, a delay or interruption by our suppliers may harm our business. In addition, the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand in the event we must switch to a new supplier. The time and effort to obtain a new supplier could result in additional costs, diversion of resources or reduced manufacturing yields, any of which would negatively impact our operating results. Our dependence on a limited number of suppliers exposes us to numerous risks, including the following:
 
 
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§
 
our suppliers may cease or reduce production or deliveries, raise prices or renegotiate terms;
 
 
§
 
delays by our suppliers could significantly limit our ability to meet customer demand;
 
 
§
 
we may be unable to locate a suitable replacement on acceptable terms or on a timely basis, if at all; and
 
 
§
 
delays caused by supply issues may harm our reputation, frustrate our customers and cause them to turn to our competitors for future projects.

Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.

In recent years, the capital and credit markets have experienced extreme volatility and disruption. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers.  Recently, the Chinese government has been encouraging Chinese banks to restrict their lending, in order to reduce the risk of inflation in China. We have historically relied on credit to fund our business and we need liquidity to pay our operating expenses. Without sufficient liquidity, we will be forced to curtail our operations, and our business will suffer.  Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to operate and grow our business. As such, we may be forced to delay raising capital or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility.  Our results of operations, financial condition, cash flows and capital position could be materially adversely affected by disruptions in the financial markets.
 
We do not carry any business interruption insurance, products liability insurance or any other insurance policy.  As a result, we may incur uninsured losses, increasing the possibility that you would lose your entire investment in our company.

We could be exposed to liabilities or other claims for which we would have no insurance protection.  We do not currently maintain any business interruption insurance, products liability insurance, or any other comprehensive insurance policy.  As a result, we may incur uninsured liabilities and losses as a result of the conduct of our business.  There can be no guarantee that we will be able to obtain additional insurance coverage in the future, and even if we are able to obtain additional coverage, we may not carry sufficient insurance coverage to satisfy potential claims. Should uninsured losses occur, any purchasers of our common stock could lose their entire investment.

Because we do not carry products liability insurance, a failure of any of the products marketed by us may subject us to the risk of product liability claims and litigation arising from injuries allegedly caused by our products. We cannot assure that we will have enough funds to defend or pay for liabilities arising out of a products liability claim. To the extent we incur any product liability or other litigation losses, our expenses could materially increase substantially. There can be no assurance that we will have sufficient funds to pay for such expenses, which could end our operations and you would lose your entire investment.
 
We could be liable for damages for defects in our products pursuant to the Tort Liability Law and Product Liability Law of the PRC.
 
The Tort Liability Law of the People’s Republic of China, which was passed during the 12th Session of the Standing Committee of the 11th National People’s Congress on December 26, 2009, states that manufacturers are liable for damages caused by defects in their products and sellers are liable for damages attributable to their fault. If the defects are caused by the fault of third parties such as the transporter or storekeeper, manufacturers and sellers are entitled to claim for compensation from these third parties after paying the compensation amount.
 
 
9

 
 
We rely heavily on our founder, Chairman, Chief Executive Officer, Chief Financial Officer and President, Mr. Pu Fachun. The loss of his services could adversely affect our ability to source products from our key suppliers and our ability to sell our products to our customers.

Our success depends, to a significant extent, upon the continued services of Mr. Pu, who is our founder, Chairman of the Board, Chief Executive Officer, Chief Financial Officer and President. Mr. Pu has, among other things, developed key personal relationships with our suppliers and customers. We greatly rely on these relationships in the conduct of our operations and the execution of our business strategies.  The loss of Mr. Pu could, therefore, result in the loss of favorable relationships with one or more of our suppliers and/or customers. We do not maintain "key person" life insurance covering Mr. Pu or any other executive officer. The loss of Mr. Pu could significantly delay or prevent the achievement of our business objectives and adversely affect our business, financial condition and results of operations.
 
We may not be able to effectively recruit and retain skilled employees, particularly scientific, technical and management professionals.
 
Our ability to compete effectively depends largely on our ability to attract and retain certain key personnel, including scientific, technical and management professionals. We anticipate that we will need to hire additional skilled personnel in all areas of our business. Industry demand for such employees, however, exceeds the number of personnel available, and the competition for attracting and retaining these employees is intense. Because of this intense competition for skilled employees, we may be unable to retain our existing personnel or attract additional qualified employees to keep up with future business needs. If this should happen, our business, operating results and financial condition could be adversely affected.

Our business could be materially adversely affected if we cannot protect our patents and intellectual property rights or if we infringe on the intellectual property rights of others.

Our intellectual property rights are important to our business. Currently, there are limited safeguards in place to protect our intellectual property rights, and the protective steps we intend to take may be inadequate to deter misappropriation of those rights.  We have filed and intend to continue to file patent applications. If a particular patent is not granted, the value of the invention described in the patent would be diminished. Further, even if these patents are granted, they may be difficult to enforce.  Efforts to enforce our patent rights could be expensive, distracting for management, unsuccessful, cause our patents to be invalidated, and frustrate commercialization of products. Additionally, even if patents are issued, and are enforceable, others may independently develop similar, superior, or parallel technologies to any technology developed by us, or our technology may prove to infringe upon patents or rights owned by others. Thus, the patents held by us may not afford us any meaningful competitive advantage. Our inability to maintain our intellectual property rights could have a material adverse effect on our business, financial condition and ability to implement our business plan. If we are unable to derive value from our intellectual property, the value of your investment in us will decline.
 
Our failure to effectively manage growth could harm our business.
 
We have rapidly and significantly expanded our business and we will endeavor to further expand our business. Our recent and anticipated growth is expected to place, a significant strain on our managerial, operational, and financial resources. To manage our potential growth, we must implement and improve our operational and financial systems and to expand, train, and manage our employee base. We cannot assure you that our systems, procedures, or controls will be adequate to support our operations. Our inability to effectively manage growth, if any, could harm our business.
 
 
10

 
 
Our facilities and information systems could be damaged as a result of disasters or unpredictable events, which could have an adverse effect on our business operations.
 
Our headquarters and major facilities including manufacturing plants and research and development centers are located in China. If major disasters such as earthquakes, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur, or our information system or communications network breaks down or operates improperly as a result of such events, our facilities may be seriously damaged, and we may have to stop or delay production and shipment. We may incur expenses relating to such damages.
 
We face significant competition and may not be able to successfully compete.
 
Our current and future competitors are likely to have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater brand recognition, and more established relationships in the industry than we have, each of which may allow them to gain greater market share. As a result, our competitors may be able to develop and expand their offerings more rapidly, adapt to new or emerging technologies and changes more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale and devote greater resources to the marketing and sale of their technology and products than we can. We cannot assure you that we will successfully differentiate our current and proposed technology and products from the technologies and products of our competitors, that the marketplace will consider our technology and products to be superior to competing technologies and products, or that we will be able to compete successfully with our competitors.

RISKS RELATED TO DOING BUSINESS IN CHINA

Substantially all of our assets are located in the PRC and substantially all of our revenues are derived from our operations in China. So changes in the political and economic policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.

Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.

The PRC’s legal system is a civil law system based on written statutes. Unlike the common law system prevalent in the United States, decided legal cases have little value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to, governmental approvals required for conducting business and investments, laws and regulations governing the   chemical business and product safety, national security-related laws and regulations and export/import laws and regulations, as well as commercial, antitrust, patent, product liability, environmental laws and regulations, consumer protection, labor, and financial and business taxation laws and regulations.

 
11

 
 
The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

Our principal operating subsidiary, Nanchong Chunfei, is considered a foreign invested enterprise under PRC laws, and as a result is required to comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of foreign invested enterprises. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. 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

 
levying fines;

 
revoking our business license, other licenses or authorities;

 
requiring that we restructure our ownership or operations.

Investors may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws, including the federal securities laws or other foreign laws against us or our management.

All of our current operations, including the manufacturing and distribution of our products, are conducted in China. Moreover, most of our directors and officers are nationals and residents of China.  All or substantially all of the assets of these persons are located outside the United States and in the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.

If our land use rights are revoked, we would have no operational capabilities.
 
Under Chinese law land is owned by the state or rural collective economic organizations.  The state issues to the land users the land use right certificate.  Land use rights can be revoked and the land users forced to vacate at any time when redevelopment of the land is in the public interest.  The public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent.  We rely on these land use rights and the loss of such rights would have a material adverse effect on our company.

The ability of our Chinese operating subsidiaries to pay dividends may be restricted due to foreign exchange control regulations of China.

The ability of our Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balance of the Chinese operating subsidiaries. Because substantially all of our operations are conducted in China and substantially all  of our revenues is generated in China, substantially all of our revenue being earned and currency received are denominated in Renminbi (RMB).

RMB is subject to the exchange control regulation in China, and, as a result, we may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars. Accordingly, we may not be able to access Nanchong Chunfei’s funds which may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations.

 
12

 
 
We will not be able to complete an acquisition of prospective acquisition targets in the PRC unless their financial statements can be reconciled to U.S. generally accepted accounting principles in a timely manner.
 
Companies based in the PRC may not have properly kept financial books and records that may be reconciled with U.S. generally accepted accounting principles. If we attempt to acquire a significant PRC target company and/or its assets, we would be required to obtain or prepare financial statements of the target that are prepared in accordance with and reconciled to U.S. generally accepted accounting principles. Federal securities laws require that a business combination meeting certain financial significance tests require the public acquirer to prepare and file historical and/or pro forma financial statement disclosure with the SEC. These financial statements must be prepared in accordance with, or be reconciled to U.S. generally accepted accounting principles and the historical financial statements must be audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), or PCAOB. If a proposed acquisition target does not have financial statements that have been prepared in accordance with, or that can be reconciled to, U.S. generally accepted accounting principles and audited in accordance with the standards of the PCAOB, we will not be able to acquire that proposed acquisition target. These financial statement requirements may limit the pool of potential acquisition targets with which we may acquire and hinder our ability to expand our operations.
  
We face risks related to natural disasters, terrorist attacks or other events in China that may affect usage of public transportation, which could have a material adverse effect on our business and results of operations.
 
Our business could be materially and adversely affected by natural disasters, terrorist attacks or other events in China.  For example, in early 2008, parts of China suffered a wave of strong snow storms that severely impacted public transportation systems. In May 2008, Sichuan Province in China suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties.  The May 2008 Sichuan earthquake has had a material adverse effect on the general economic conditions in the areas affected by the earthquake.  Any future natural disasters, terrorist attacks or other events in China could cause a reduction in usage of or other severe disruptions to, public transportation systems and could have a material adverse effect on our business and results of operations.
 
We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer (“Circular 698”) that was released in December 2009 with retroactive effect from January 1, 2008.

The Chinese State Administration of Taxation (SAT) released a circular (Guoshuihan No. 698 – Circular 698) on December 15, 2009 that addresses the transfer of shares by nonresident companies.  Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China.  Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company.  Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes.

 
13

 
 
There is uncertainty as to the application of Circular 698.  For example, while the term "indirectly transfer" is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise.  In addition, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to balance if our company complies with the Circular 698.  As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.
 
The foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.

To the extent that we need to convert U.S. Dollars into Renminbi for our operational needs, our financial position and the price of our common stock may be adversely affected should the Renminbi appreciate against the U.S. Dollar at that time. Conversely, if we decide to convert our Renminbi into U.S. Dollars for the operational needs or paying dividends on our common stock, the dollar equivalent of our earnings from our subsidiaries in China would be reduced should the dollar appreciate against the Renminbi. We currently do not hedge our exposure to fluctuations in currency exchange rates.
 
Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including dollars, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of the Renminbi relative to the U.S. Dollar has remained stable and has appreciated slightly against the U.S. Dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued due to China’s current monetary policies and have pressured China to allow the Renminbi to float freely in world markets. In July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the dollar. Under the new policy the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. While the international reaction to the Renminbi 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 further and more significant appreciation of the Renminbi against the dollar.

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.  According to the National Bureau of Statistics of China, in November 2013, the annual consumer price index went up by 3.0 percent year-on-year. The inflation rate rose 2.5 percent both in cities and in rural areas. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies such as raw materials, it may have an adverse effect on our profitability.

Furthermore, 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.  In January 2010, the Chinese government took steps to tighten the availability of credit including ordering banks to increase the amount of reserves they hold and to reduce or limit their lending.  The implementation of such policies may impede 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.  In April 2006, the People’s Bank of China raised the interest rate again.  Repeated rises in interest rates by the central bank, in addition to tighter credit and lending restrictions on banks, would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products.

 
14

 
 
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. A significant portion of our assets may be in the form of cash deposited with banks in the PRC, and in the event of a bank failure, we may not have access to our 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.

As our ultimate holding company is a California corporation, 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 may 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.
 
 If we make equity compensation grants to persons who are PRC citizens, they may be required to register with the State Administration of Foreign Exchange of the PRC, or SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt an equity compensation plan for our directors and employees and other parties under PRC law.

On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also known as “Circular 78.” It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s covered equity compensation plan prior to April 6, 2007. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming. If it is determined that any of our equity compensation plans are subject to Circular 78, failure to comply with such provisions may subject us and participants of our equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees. In that case, our ability to compensate our employees and directors through equity compensation would be hindered and our business operations may be adversely affected.

Under the New EIT Law, we may be classified as “resident enterprises” of China for tax purpose, which may subject us to adverse tax consequences.

The new PRC Enterprise Income Tax Law (the “New EIT Law”) and its implementing rules became effective on January 1, 2008. Under the New EIT Law, enterprises are classified as resident enterprises and non-resident enterprises.  An enterprise established outside of China with its “de facto management bodies” located within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese domestic enterprise for enterprise income tax purposes.  The implementing rules of the New EIT Law define a de facto management body as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.  Due to the short history of the New EIT law and lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company such as American Nano and American Nano Delaware. Both American Nano and American Nano Delaware have all members of their management team located in China. If the PRC tax authorities determine that American Nano or American Nano Delaware is a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, the New EIT Law provides that dividends paid between “qualified resident enterprises” are exempted from enterprise income tax. A recent circular issued by the State Administration of Taxation regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises and established outside of China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC shareholders. It is unclear whether the dividends that American Nano Delaware receives from Nanchong Chunfei  will constitute dividends between “qualified resident enterprises” and would therefore qualify for tax exemption, because the definition of qualified resident enterprises is unclear and the relevant PRC government authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. We are actively monitoring the possibility of “resident enterprise” treatment for the applicable tax years.
 
 
15

 
 
Dividends payable by us to our foreign investors and any gain on the sale of our shares may be subject to taxes under PRC tax laws.

If dividends payable to our shareholders are treated as income derived from sources within China, then the dividends that shareholders receive from us, and any gain on the sale or transfer of our shares, may be subject to taxes under PRC tax laws.

Under the New EIT Law and its implementing rules, PRC enterprise income tax at the rate of 10% is applicable to dividends payable by us to our investors that are non-resident enterprises so long as such non-resident enterprise investors do not have an establishment or place of business in China or, despite the existence of such establishment of place of business in China, the relevant income is not effectively connected with such establishment or place of business in China, to the extent that such dividends have their sources within the PRC.  Similarly, any gain realized on the transfer of our shares by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived from sources within China and we are considered as a resident enterprise which is domiciled in China for tax purpose.  Additionally, there is a possibility that the relevant PRC tax authorities may take the view that the capital gain derived by our overseas shareholders or investors from the share transfer is deemed China-sourced income, in which case such capital gain may be subject to a PRC withholding tax at the rate of up to 10%.  If we are required under the New EIT Law to withhold PRC income tax on our dividends payable to our foreign shareholders or investors who are non-resident enterprises, or if you are required to pay PRC income tax on the transfer or our shares under the circumstances mentioned above, the value of your investment in our shares may be materially and adversely affected.

In January 2009, the State Administration of Taxation promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises (“Measures”), pursuant to which, the entities which have the direct obligation to make the following payment to a non-resident enterprise shall be the relevant tax withholders for such non-resident enterprise, and such payment includes: incomes from equity investment (including dividends and other return on investment), interests, rents, royalties, and income from assignment of property as well as other income subject to enterprise income tax received by non-resident enterprises in China.  Further, the Measures provides that in case of  an equity transfer between two non-resident enterprises which occurs outside China, the non-resident enterprise which receives the equity transfer payment shall, by itself or engage an agent to, file a tax declaration with the PRC tax authority located at place of the PRC company whose equity has been transferred, and the PRC company whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise.  However, it is unclear whether the Measures refer to the equity transfer by a non-resident enterprise which is a direct or an indirect shareholder of  said PRC company.  Given these Measures, there is a possibility that we may have an obligation to withhold income tax in respect of the dividends paid to non-resident enterprise investors.

A downturn in the economy of the PRC may slow our growth and profitability.

Substantially all of our revenues are generated from sales in China.  The growth of the Chinese economy has been uneven across geographic regions and economic sectors. There can be no assurance that growth of the Chinese economy will be steady or that any downturn will not have a negative effect on our business, especially if it results in either a decreased use of our products or in pressure on us to lower our prices.

 
16

 
 
Because our business is located in the PRC, we may have difficulty establishing adequate management, legal and financial controls, which we are required to do in order to comply with U.S. securities laws.

PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and, computer, financial and other control systems. Most of our middle and top management staff are not educated and trained in the Western system, and we may have difficulty hiring new employees in the PRC with such training. In addition, 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. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.
 
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.

We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds.
 
The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to improve our internal control over financial reporting.
 
In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, or disclosure of management’s assessment of our internal controls over financial reporting, may have an adverse impact on the price of our common stock.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS

Not applicable.

 
17

 
 
 ITEM 2.   DESCRIPTION OF PROPERTIES
 
All land in the PRC is government owned and may not be sold to any individual or company. However, the government grants the user a “land use right” to use the land. Our land use right was originally acquired by Fachun Pu, our Chairman, Chief Executive Officer and principal shareholder, in September 2000 for the amount of $833,686 and was transferred to us as a capital investment. In fiscal year 2008, we paid a stamp tax in the amount  $69,539 to get a certificate of the land use right.

The land use right entitles us to the exclusive use of the property on which our facilities are located until July 2051.  Our facilities are located at the Nanchong Shili Industrial Street, Economic and Technology Development Zone, Xiaolong Chunfei Industrial Park Nanchong, Sichuan province. Our facilities are located in an economic development zone and are supplied with low-cost water, electricity, gas and communication facilities.  It has good transportation links with a location that is situated close to the Chengdu-to-Nanchong expressway, the Nanchong-to-Chongqing expressway and the Nanchong railway station.
 
Our manufacturing campus covers an area of 54,000 square meters. The campus has the following separate structures:

Structure
 
area in square meters
 
       
Engineering
   
830
 
Corporate/Administrative offices
   
5000
 
Dormitory
   
4000
 
Testing/Quality Control
   
4200
 
Nano Silicon production
   
5300
 
Sodium Aluminate production
   
1274
 
Flame retardant production
   
4434
 
Nano Silicon workshop
   
4416
 
Boiler plant
   
1341
 
Raw materials
   
5003
 
 
ITEM 3.   LEGAL PROCEEDINGS
 
During the 2013 fiscal year, Jian Zhou, a shareholder, commenced a legal action against American Nano Silicon Technologies, Inc.  Mr. Zhou alleges that he is entitled to 857,142 shares of American Nano common stock in connection with the acquisition of Nanchong Chunfei by American Nano in 2007.  In response to the allegation, American Nano has asserted that all of the shares to which Mr. Zhou was entitled were issued to him. The trial court has dismissed Mr. Zhou’s claim, and he has appealed the dismissal to the court of appeals.

Except as set forth above, we have not been involved in any material litigation or claims. We are not aware of any material potential litigation or claims against us which would have a material adverse effect upon our results of operations or financial condition.
 
ITEM 4.   MINE SAFETY DISCLOSURE

Not Applicable.
 
 
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ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
                (a) Market Information
 
Our common stock is currently quoted on the OTCQB under the symbol “ANNO”. The following table sets forth the range of high and low bid quotations for each quarter within the last two fiscal years. These quotations as reported by either the OTCQB or the OTCBB reflect inter-dealer prices without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions. 
 
Period
 
High
   
Low
 
Quarter Ended December 31, 2011  
 
$
0.30
   
$
0.30
 
Quarter Ended March 31, 2012
 
$
0.39
   
$
0.01
 
Quarter Ended June 30, 2012
 
$
0.16
   
$
0.16
 
Quarter Ended September 30, 2012
 
$
0.16
   
$
0.16
 
                 
Quarter Ended December 31, 2012 
 
$
0.03
   
$
0.03
 
Quarter Ended March 31, 2013
 
$
0.01
   
$
0.01
 
Quarter Ended June 30, 2013
 
$
0.07
   
$
0.07
 
Quarter Ended September 30, 2013
 
$
0.08
   
$
0.07
 

(b) Shareholders
 
On January 11, 2014 there were approximately 1,121 holders of record of our common stock.

(c)  Dividends
 
Since the Company’s incorporation, no dividends have been paid on our Common Stock. We intend to retain any earnings for use in our  business  activities,  so it is not expected that  any  dividends  on our  common  stock  will be  declared  and  paid in the foreseeable future.
 
 (d)  Equity Compensation Plans
 
We do not have any equity compensation plans.  During fiscal year 2012 we issued 2,000,000 shares of common stock to reward our Chief Engineer for his contribution to the development of our new additive product.  During fiscal year 2011 we issued options for 800,000 shares to certain of our employees.  Neither grant was made pursuant to a formal plan and neither grant was submitted for approval by the Company's shareholders.

ITEM 6.   SELECTED FINANCIAL DATA
 
Not applicable.
 
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS.

The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-K. The following discussion contains forward-looking statements reflecting our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You are also urged to carefully review and consider our discussions regarding the various factors which affect our business, including the information provided under the caption “Risk Factors (Item 1A).” See the cautionary note regarding forward-looking statements at the beginning of Part I of this Form 10-K.
   
 
19

 
 
Restructuring of our Operations
 
In May 2011, the Company began moving to its new factory site located at Nanchong Shili Industrial Street, Economic and Technology Development Zone, Xiaolong Chunfei Industrial Park, which is approximately 12.4 miles from the Company's previous factory site. We expect the new site to provide us an annual manufacturing capacity of approximately 10 million tons. The Company temporarily suspended production to facilitate the move, resulting in a significant decrease in sales beginning in the third quarter of fiscal year 2011. On December 8, 2011, the Company announced that it had successfully relocated to its new facility in Nanchong, Sichuan, China. In addition to housing existing equipment and machinery from its previous facility, ANNO’s latest facility also contains new equipment that enables the Company to increase its product diversification capabilities as well as manufacture its new flame retardant additive product.
 
Flame retardant additive is a new refined chemical product for the Company, which has very strict standards. We began trial production of the product on January 2, 2012 and during calendar year 2012  conducted several rounds of testing of the quality of the product by asking potential customers for trial use. Through calendar year 2012 we were recalibrating our production process according to feedback received from potential customers. By December 2012 we had satisfied ourselves regarding the quality of our new manufacturing systems, and were prepared to return to normal operations. We commenced commercial production of the flame retardant at the end of January 2013, albeit at a reduced level of production due to our lack of working capital.

During 2012, we signed a contract with a customer to provide 2,000 tons of products a year at a price of $868 per ton. As of September 30, 2013, we had delivered some products to the customer that signed the contract with us, but at a quantity short of that specified in the contract due to shortage of working capital. Because of the inefficiency of operating at a low production level and because of high costs of raw materials, the sales were recorded at a loss. During the year ended September 30, 2013, the Company recorded $200,273 of revenue from flame retardant additive, the remainder  of our revenue was related to our detergent additive

Critical Accounting Policies
 
Our consolidated financial information has been prepared in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Some of our accounting policies require a higher degree of judgment than others in their application.
 
When reviewing our consolidated financial statements, the following should also be considered: (1) our selection of critical accounting policies, (2) the judgment and other uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. In our preparation of the accompanying  consolidated financial statements for the year ended September 30, 2013, there were two estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results.  These were:

·
Our determination, described in Note 8 to the consolidated financial statements, to record a 100% allowance for our deferred tax assets.  The determination to record the allowance with respect to our U.S. deferred tax assets was based on the uncertainty that we would realize income taxable in the U.S. in future years.  The determination with respect to our China deferred tax assets was based on the uncertainty that it is more likely than not that we will not be able to realize sufficient income within the requisite time period to utilize the deferred asset.
   
·
Our determination described in Note 2 to the consolidated financial statements and quantified in Note 4, to record a $3,422,352 impairment loss.  The impairment loss was recorded because the local government levied the land in which the Company’s facilities were located in. The local government will give the Company certain compensation that has not been decided yet.
 
 
20

 
 
Results of Operations
 
Revenues

Our revenues increased by 793% or $709,012 from $89,378 for the year ended September 30, 2012 to $798,390 for the year ended September 30, 2013. The significant increase in revenue is primarily because the Company started partial operationsin January 2013 and has not started full operation at the date of report. During the year ended September 30, 2012, the equipment and production line in the new facility was undergoing adjustments, and we recorded revenue on sale of sample quantities only. The Company expects to have significant revenue during the fiscal year 2014.

During the year ended September 30, 2013, the Company recorded $200,273 revenue from flame retardant additive. $538,588 revenue from the sale of detergent additive, and $59,529 revenue from the sale of detergent.
 
Gross Loss

Our factory has a production capacity of 10 million tons.  During fiscal 2013 we shipped fewer than 1,000 tons. As a result of this failure to utilize the capacity of our facilities, our operations are very inefficient.  Our gross loss for the years ended September 30, 2013 and 2012, therefore, were negative $1,310,527and $46,673respectively.  We will continue to operate at an unprofitable level until we secure sufficient working capital to enable us to approach full production.

Selling, General and Administrative Expenses
 
Our selling, general and administrative, or SG&A, expenses include expenses associated with salaries and other expenses related to marketing and administrative activities. In addition, we have incurred expenses through the use of consultants and other outsourced service providers to take advantage of specialized knowledge and capabilities that we require for short durations of time to avoid unnecessary hiring of full-time staff.
 
Our SG&A expenses for the years ended September 30, 2013 and 2012 were $1,368,670 and $2,034,728 respectively. The decrease in SG&A expenses from fiscal year 2013 to fiscal year 2012 was due, in part, to the $348,205 stock-based compensation expense that we incurred during fiscal 2012, when we issued stock options to employees and non-employees.    

 Research and Development Expenses
 
Our business model is based upon developing additional uses for Micro Nano Silicon. Our research and development activities are focused on developing such uses as well as developing nano filtering technology and the production processes for our product. 

Since 2011, the focus of our operations has been the move to a new facility. This has distracted us from our research and development activities.  For the years ended September 30, 2013 and 2012, we expended $55,698 and $464,898, respectively,  on research and development.  For the year ended September 30, 2013, we incurred less research and development expenses compared with the same period in 2012, as we focused entirely on initiating the manufacturing of our new product, flame retardant additive.

We believe that the future success of our business depends upon our ability to improve our production processes and develop other usages for Micro Nano Silicon.  To avoid product obsolescence, we will continue to monitor technological changes in our industry as well as users' demands for new products. Failure to keep pace with future technological changes could adversely affect our revenues and operating results in the future.  Although we believe that Micro Nano Silicon can be utilized in a number of industries, there can be no assurance that we will gain market acceptance of our products in such industries.

 
21

 
 
Impairment of property, plant and equipment

During the year ended September 30, 2013, the Company revalued the long-lived assets in our old facility for impairment and recognized an impairment loss from property, plant and equipment of $3,422,352. The impairment loss was recorded because the local government cancelled our right to use the land on which some of the Company’s prior facilities were located. The local government will give the Company certain compensation that has not been decided yet.

Other Income and Expense
 
As a result of the factors discussed above, we recorded a loss from operations of $6,157,247 and $2,546,299 for the years ended September 30, 2013 and 2012, respectively.  In both years, however, non-operating income and expense had a significant effect on our net income.

The primary element of Other Income and Expense during fiscal year 2013 was interest expense of $1,418,100 relating to loans from banks and other lenders, and imputed interest expenses of $305,077 relating to loans from related parties.  Our interest expense was much higher in fiscal 2013 than 2012, as we secured additional institutional loans during the year.

In March and June 2010 we sold 4 million series B warrants. The warrants permitted the investors to buy additional common shares at the prices specified in the warrant agreements.  Because the exercise price of the warrants could change in certain circumstances, the fair value of the warrants was recorded as warrant liabilities on our balance sheet.  At the end of each quarter, we re-calculated the fair value of the warrants using the Black-Scholes model, and recorded any increase or decrease in that fair value as other income or other expense.  Because the market price of our common stock fell during fiscal years 2013 and 2012, the fair value of the warrants also fell by $363,958 and $1,181,141, respectively.  We recognized these changes in our Statements of Operations as “other income” The warrants expired unexercised during fiscal 2013, so this financing will have no further effect on our results of operations.

Most of the line item generically identified as “other income” for the year ended September 30, 2013 consists of a subsidy of $219,707 that the Company received from its local government to compensate for Company land occupied and used by the local government.
 
Net Income
 
Primarily due to our gross loss and the impairment charge, we incurred a net loss of $7,172,094 and $2,086,393 for the years ended September 30, 2013 and 2012, respectively.  Once we fully launch our flame retardant additive product line, we believe that the top line benefits will more than compensate for the increased expenses, and we will realize more income from operations in future periods.  

Liquidity and Capital Resources
 
   
As of September 30,
 
   
2013
   
2012
 
Total current assets
 
$
1,326,591
   
$
418,637
 
Total current liabilities
   
14,571,249
     
8,376,608
 
Working capital deficiency
 
$
(13,244,658)
   
$
(7,957,971)
 
 
At September 30, 2013 we had a working capital deficiency of $13,244,658, representing an increase of $5,286,687 in the deficit during the fiscal year 2013.  Our current assets on September 30, 2013 were only $1,326,591, of which only $848,024 were liquid.   Our current liabilities are primarily composed of short term loans totaling $5,345,800, short term related parties payables totaling $5,500,997 due to Mr. Pu Fachun and entities owned by Mr. Pu Fachun, the single largest shareholder and president of the Company, and $2,438,187 being the current portion of our long term loans. Due to our negative cash flow and working capital deficit, our auditors expressed substantial doubt about the Company’s ability to continue as a going concern in the audit report included in this Annual Report.
 
 
22

 
 
The Company completed construction of its new plant in January 2012, with the exception of one production line, but did not reach a significant level of production until the fourth quarter of fiscal 2013. We expect our affiliate companies will continue to lend the money needed to sustain us through this transition period. Also, we will look for financing from local banks and third parties. However, we did not have any commitments from them. If we are not able to obtain sufficient funds to operate our business, we will not generate sufficient cash flow to repay our short term liabilities.

The following tables summarize our contractual obligations as of September 30, 2013, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 
Payments due by period
 
 
Total
 
Less than
1 year
 
1-3
Years
 
3-5
Years
 
5+
Years
 
Related parties indebtedness
 
$
6,916,865
   
$
5,500,997
   
$
1,415,868
   
$
   
$
 
Loan payable to unrelated parties
   
8,804,211
     
7,783,987
     
1,020,224
     
     
 
Total contractual obligations
 
$
15,721,076
   
$
13,284,984
   
$
2,436,092
   
$
   
$
 
  
For the year ended September 30, 2013, our operations used $2,946,523 in cash. This was approximately equal to our operating loss, net of the $3,422,352 expense recorded due to impairment of property, plant and equipment.

Our operations used $1,805,536 in cash during the year ended September 30, 2012.  This was approximately equal to our operating loss, net of $348,205 in stock-based compensation that is a non-cash expense. Over the long term, our net income will generally lag the cash provided by our operations because depreciation and amortization, a non-cash expense, reduces net income.  However, for the year ended September 30, 2012, our depreciation and amortization expense of $1,299,041 was offset in large part by the other income of $1,181,140 that we recorded by reason of the decrease in the fair value of our derivative liabilities. Because the derivative liabilities terminated in March 2013, the derivative liabilities will not have a significant effect on our net income in the future.  As a result, our net income in the future will generally be less than the cash provided by our operations, although occasional events may alter that relationship.

The largest demand on our cash during fiscal year 2012 was our ongoing construction activities.  For the year ended September 30, 2012, we used $4,522,481 in investing activities, all of which was attributable to additions to property and equipment.  We used $1,504,616 in investing activities, all of which was attributable to additions to property and equipment and construction in progress for the year ended September 30, 2013.

To fund that expenditure as well as the cash used in operations, we received the proceeds of related parties’ loan of $1,670,957 the proceeds from short term loans of 2,160,363 and the proceeds from long term loan of 629,610 for the year ended September 30, 2013.

We received the proceeds from loan from related parties of $2,952,692, the proceeds from short-term loans of $1,159,217 and the proceeds from long-term loan of $2,088,392 for the year ended September 30, 2012.

 
23

 
 
We believe that there is potential application for Micro Nano Silicon in several markets.  Future expansion into other product lines, however, will require additional capital.  For that reason we continue to pursue opportunities for financing. We have at this time, however, no firm commitments for additional funds.

As of the date of this report, we do not have sufficient cash to operate for the next 12 months. However, we have a commitment from our president, Mr. Pu Fachun to secure financing through third party loans or personal loans to provide us with sufficient liquidity for the next 12 months.
 
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 or results of operations.

Impact of Accounting Pronouncements
 
There were no recent accounting pronouncements that have had a material effect on the Company’s financial position or results of operations.

ITEM 7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable. 

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
24

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
To the Board of Directors and Stockholders of
American Nano Silicon Technologies, Inc.
 
 
We have audited the accompanying consolidated balance sheet of American Nano Silicon Technologies, Inc. and subsidiaries as of September 30, 2013 and the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the 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. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Nano Silicon Technologies, Inc. and subsidiaries as of September 30, 2013, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s current liabilities exceed its current assets by $13.2 million at September 30, 2013. The Company suspended its operations in May 2011 as part of an effort to relocate the production facilities and resumed limited production on January 2, 2012. The current cash and inventory level will not be sufficient to support the Company’s resumption of its normal operations and repayments of its loans.  In addition, the Company has suffered negative cash flows for past two years. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 
/s/Paritz & Company, P.A.
 
 
Hackensack, New Jersey
January 22, 2014
 
 
 
 
25

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
To the Board of Directors and Stockholders of
American Nano Silicon Technologies, Inc.
 
We have audited the accompanying consolidated balance sheet of American Nano Silicon Technologies, Inc. and subsidiaries as of September 30, 2012 and the related consolidated statement of comprehensive loss, changes in stockholders’ equity, and cash flows for the year ended September 30, 2012. American Nano Silicon Technologies, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Nano Silicon Technologies, Inc. and subsidiaries as of September 30, 2012 , and the results of their operations and their cash flows for the year ended September 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company suspended its operations in May 2011.  In addition, the Company has suffered negative cash flows for the year ended September 30, 2012 and has a net working capital deficiency as of September 30, 2012 that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
/s/ Friedman LLP
 
   
New York, New York
   
January 11, 2013
 
 
 
26

 
 
AMERICAN NANO SILICON TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
               
     
September 30,
   
September 30,
 
     
2013
   
2012
 
               
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 75,901     $ 56,661  
Accounts receivable
    338,312       11,594  
Inventory, net of reserve
    433,811       246,086  
Advance payments
    289,368       29,035  
Prepaid expense and other receivables
    66,042       23,864  
Prepaid value-added tax
    123,157       51,397  
Total Current Assets
    1,326,591       418,637  
                   
Property, plant and equipment, net
    22,786,880       25,620,557  
                   
Other assets:
               
Land use rights, net
    1,013,848       1,018,256  
Total other assets
    1,013,848       1,018,256  
                   
Total Assets
  $ 25,127,319     $ 27,057,450  
                   
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                   
Current liabilities:
               
Accounts payable
  $ 187,605     $ 400,220  
Short term loans
    5,345,800       3,043,189  
Taxes payable
    55,926       171,446  
Due to related parties
    5,500,997       4,200,314  
Long term loans-current portion
    2,438,187       143,182  
Accrued expenses and other payables
    1,042,734       418,257  
                   
Total Current Liabilities     14,571,249       8,376,608  
                   
Long-term liabilities
               
Long term loans
    1,020,224       2,661,078  
Due to related parties
    1,415,868       1,385,315  
Derivative liabilities-warrants
    -       363,958  
Total Long Term Liabilities
    2,436,092       4,410,351  
                   
Total Liabilities
    17,007,341       12,786,959  
                   
Commitment and Contingencies
           
                   
Stockholders' Equity
               
Common stock, $0.0001 par value, 200,000,000 shares authorized; 46,917,445 and 39,061,840  shares issued and outstanding as of September 30, 2013 and 2012, respectively
    4,692       3,906  
Additional paid-in-capital
    14,474,258       13,689,967  
Accumulated other comprehensive income
    2,291,219       2,054,715  
Accumulated deficit
    (8,650,191 )     (1,478,097 )
Total  Stockholders' Equity
    8,119,978       14,270,491  
                   
Total Liabilities and Stockholders' Equity
  $ 25,127,319     $ 27,057,450  
 
The accompany notes are an integral part of the consolidated financial statements
 
 
27

 

AMERICAN NANO SILICON TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
             
   
For the Years Ended
 
   
September 30,
 
   
2013
   
2012
 
             
Revenues
  $ 798,390     $ 89,378  
                 
Cost of Goods Sold
    2,108,917       136,051  
                 
Gross Loss
    (1,310,527 )     (46,673 )
                 
Operating Expenses
               
Research and development expense
    55,698       464,898  
Selling, general and administrative
    1,368,670       2,034,728  
Impairment of properly, plant and equipment
    3,422,352       -  
Total operating expense
    4,846,720       2,499,626  
                 
Loss from operations
    (6,157,247 )     (2,546,299 )
                 
Other Income( Expense)
               
Interest expense - related party
    (473,194 )     (85,818 )
Interest expense, net
    (1,249,983 )     (694,692 )
Change in fair value of derivative liabilities
    363,958       1,181,141  
Other income
    229,346       59,689  
Total other income(expense)
    (1,129,873 )     460,320  
                 
Net Loss  Before  Income Taxes
    (7,287,120 )     (2,085,979 )
                 
Provision for (benefit from) Income Taxes
    (115,026     414  
                 
Net Loss
    (7,172,094 )     (2,086,393 )
Other Comprehensive Loss
               
Foreign currency translation adjustment
    236,504       245,297  
Comprehensive Loss
  $ (6,935,590 )   $ (1,841,096 )
                 
Loss per common share
               
Basic and diluted
  $ (0.18 )   $ (0.06 )
                 
Weighted average number of common shares
               
Basic and diluted
    39,407,719       36,665,319  
 
The accompany notes are an integral part of the consolidated financial statements
 
 
28

 
 
AMERICAN NANO SILICON TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
                           
(Accumulated deficit)
       
   
Common Stock
         
Accumulated Other
   
Total
 
   
par value $.0001
   
Additional
   
Comprehensive
   
Retained
   
Stockholders'
 
   
Shares
   
Amount
   
Paid in Capital
   
Income
   
Earnings
   
Equity
 
                                     
Balance at September 30, 2011
    31,362,130     $ 3,136     $ 11,306,806     $ 1,809,418     $ 608,296     $ 13,727,656  
                                              -  
Stock based compensation
    2,132,564       213       347,992                       348,205.00  
Net income (loss)
                                    (2,086,393 )     (2,086,393 )
Acquisition of non-controlling interest
    1,650,636       165       (165 )                     -  
Stock issued for loan settlement
    3,116,510       312       1,869,596                       1,869,908  
Imputed interest for non interest bearing related party loans
                    85,818                       85,818  
Other Comprehensive Loss Options exercised     800,000       80       79,920                       80,000  
Foreign currency translation adjustments
                            245,297               245,297  
                                                 
Balance at September 30, 2012
    39,061,840       3,906       13,689,967       2,054,715       (1,478,097 )     14,270,491  
                                                 
Common stock issued for loan settlement-related party
    6,000,000       600       479,400                       480,000  
Net loss
                                    (7,172,094 )     (7,172,094 )
Stock issued for penalty on stock purchase
    1,855,605       186       (186 )                     -  
Imputed interest for non interest bearing related party loans
                    305,077                       305,077  
Foreign currency translation adjustments
                            236,504               236,504  
                                                 
Balance at September 30, 2013
    46,917,445     $ 4,692     $ 14,474,258     $ 2,291,219     $ (8,650,191 )   $ 8,119,978  
 
The accompany notes are an integral part of the consolidated financial statements
 
 
29

 
 
AMERICAN NANO SILICON TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
               
     
For the Years Ended September 30,
 
     
2013
   
2012
 
               
Cash Flows From Operating Activities:
           
Net Loss
    $ (7,172,094 )   $ (2,086,393 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Inventory markdown
    54,218       44,914  
Provision(recovery) for Bad debt
    37,671       (35,256 )
Change in fair value of derivative liabilities
    (363,958 )     (1,181,141 )
Depreciation and amortization
    1,459,405       1,299,041  
Stock based compensation expense
    -       348,205  
Imputed interest expense for non interest bearing related party loans
    305,077       85,818  
Impairment of property, plant and equipment
    3,422,352       -  
Changes in operating assets and liabilities:
               
Accounts receivable
    (321,845 )     16,089  
Inventory
      (233,937 )     (176,865 )
Advance payments
    (256,019 )     (28,806 )
Prepaid expense and other receivables
    (78,735 )     64,133  
Prepaid value-added tax
    (69,850 )     (36,359 )
Accounts payable
    (218,309 )     5,612  
Taxes payable
      (117,386 )     57,356  
Accrued expenses and other payables
    606,887       (181,884 )
Cash used in operating activities
    (2,946,523 )     (1,805,536 )
                   
Cash Flows From Investing Activities:
               
Additions to property and equipment
    (1,504,616 )     (4,522,481 )
                   
Cash used in investing activities
    (1,504,616 )     (4,522,481 )
                   
Cash Flows From Financing Activities
               
Proceeds from option exercise     -       80,000  
Proceeds of related parties loans, net
    1,670,957       2,952,692  
Proceeds from short term loans, net
    2,203,873       1,159,217  
Proceeds of long term loans, net
    586,100       2,088,392  
Cash provided by financing activities
    4,460,930       6,280,301  
                   
Effect of exchange rate changes on cash and cash equivalents
    9,449       11,581  
                   
Increase (decrease) in cash and cash equivalents
    19,240       (36,135 )
                   
Cash and Cash Equivalents - Beginning of the year
    56,661       92,796  
                   
Cash and Cash Equivalents - End of the year
  $ 75,901     $ 56,661  
                   
SUPPLEMENTAL CASH FLOW INFORMATION:
               
During the period, cash was paid for the following:
               
Interest expense
  $ 1,194,691     $ 621,151  
Income tax
    $ 166     $ 414  
Non-cash investing and financing activities:
               
Unpaid property, plant and equipment additions, included in accounts payable
  $ -     $ (334,943 )
Common stock issued for loan settlement
  $ 480,000     $ 1,869,907  
 
The accompany notes are an integral part of the consolidated financial statements
 
 
30

 
 
AMERICAN NANO SILICON TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012
 
Note 1 – ORGANIZATION AND BASIS OF PRESENTATION
 
American Nano-Silicon Technologies, Inc. (the “Company” or “ANNO”) was incorporated in the State of California on September 6, 1996. Since 2006, the Company has been primarily engaged in the business of manufacturing and distributing refined consumer chemical products through its subsidiaries, Nanchong Chunfei Nano-Silicon Technologies Co., Ltd. (“Nanchong Chunfei”), Sichuan Chunfei Refined Chemicals Co., Ltd. (“Chunfei Chemicals”),  and Sichuan Hedi Veterinary Medicines Co., Ltd. (“Hedi Medicines”).

On August 26, 2006, ANNO, through its wholly owned subsidiary American Nano Silicon Technologies, Inc., a Delaware corporation (“ANST”), acquired a 95% interest in Nanchong Chunfei, a company incorporated in the People’s Republic of China (the “PRC” or “China”). Nanchong Chunfei directly owned 90% of Chunfei Chemicals, a Chinese corporation established under the laws of PRC on January 6, 2006. Chunfei Chemicals itself owned 92% of Hedi Medicines, also a Chinese company incorporated under the law of PRC on June 27, 2002.
 
On September 6, 2011, the Company acquired all minority interests in its subsidiaries by agreeing to issue 1,650,636 shares of common stock to the minority interest holders. Thereafter, Nanchong Chunfei, Chunfei Chemicals, and Hedi Medicines became wholly owned subsidiaries of ANNO. The shares were issued to the minority interest holders on November 28, 2011.

On May 28, 2013, the Company assigned 10% of the equity in Chunfei Chemicals to each of Mr. Fachun Pu, Mr. Qiwei Zhang and Mr. Jianbo Liu, and assigned 5% of the equity in Hedi Medicines to  Mr. Fachun Pu, and the assignees paid to the Company cash equal to the registered equity amount.  At the same time, Messrs Pu, Zhang and Liu agreed to hold those equity interests solely for the benefit of the Company, to pay over to the Company any distributions or dividends they receive, to vote their interests as directed by the Company, and to resell the interests to the Company at its option for cash equal to the registered equity amount.

The accompanying consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America.

Going Concern
 
As shown in the accompanying consolidated financial statements, the Company had negative cash flows from operations for the year ended September 30, 2013 and the Company’s current liabilities exceed its current assets by $13.2 million at September 30, 2013. The Company suspended manufacturing operations in May 2011 as part of an effort to relocate the production facilities. The Company resumed limited production on January 2, 2012. The current cash and inventory level will not be sufficient to support the Company’s resumption of its normal operations and repayments of its loans. In addition, the Company has suffered negative cash flows for the past two years.  These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.  The Company will need additional funds to meet its operating and financing obligations until sufficient cash flows are generated from anticipated production to sustain operations and to fund future development and financing obligations. We expect, but provide no assurance, that the affiliate companies owned by the Company’s largest shareholder and President, Mr. Pu Fachun, will continue providing necessary funding for the Company’s normal operations. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Reclassifications

Certain amounts of prior period were reclassified for presentation purposes.

 
31

 
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of consolidation

The consolidated financial statements represent the consolidated accounts of the Company and its subsidiaries, Nanchong Chunfei, Chunfei Chemicals and Hedi Medicines. All significant intercompany balances and transactions have been eliminated in the consolidation.

Use of estimates

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, the management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Significant estimates required to be made by the management include, but are not limited to, the recoverability of long-lived assets and the valuation of inventories, valuation of warrant liabilities, the valuation of deferred tax assets, and fair value of other financial instruments. Actual results could differ from these estimates.

Risks and uncertainties

The operations of the Company are located in the PRC. Accordingly, the Company's business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, in addition to the general state of the PRC economy. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Fair value of financial instruments
 
The Company adopted the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1- Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2- Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
 
Level 3- Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash, accounts receivable, prepaid expenses, other receivables, advance to suppliers, short-term loan, accounts payable, advance from customers, other payables and accrued expenses approximate their fair market value based on the short-term maturity of these instruments. The carrying value of the long-term debt approximates fair value based on market rates and terms currently available to the Company. The Company uses Level 2 method to measure fair value of its derivative warrant liability (see note 10). The Company did not identify any other assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with ASC 820.
 
 
32

 
 
Cash and cash equivalents

Cash and cash equivalents include cash on hand and cash on deposit and all highly liquid debt instruments with an original maturity of three months or less.

Accounts receivable
 
The Company's policy is to maintain reserves for potential credit losses on accounts receivable. Provisions are made against accounts receivable to the extent which they are considered to be doubtful. Accounts receivable on the balance sheet are stated net of such provisions. These provisions are based on management’s analysis of customers’ credit history and current relationships with those customers. Based on this assessment, it has been concluded that realization losses on balances outstanding at year-end will be immaterial.
  
Allowances for doubtful accounts receivable balances are recorded when circumstances indicate that collection is doubtful for particular accounts receivable. Management estimates such allowances based on historical evidence such as amounts that are subject to risk.

Inventory

Inventories consist of  raw materials and packing supplies. Inventories are valued at the lower of cost or market with cost determined on a weighted average basis. Market value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale.

Property, plant & equipment
  
Property, plant and equipment are stated at cost. The cost of an asset is comprised of its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Depreciation and amortization are calculated using the straight-line method over the following useful lives:
 
Buildings and improvements   
39 years
Machinery, equipment and automobiles  
5-10 years
    
Construction in progress represents direct costs of construction or acquisition and design fees incurred for the Company’s new plant and equipment. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until it is completed and ready for its intended use.
     
Expenditures for maintenance and repairs are charged to expense as incurred. Additions, renewals and betterments are capitalized.
 
Impairment of long-lived assets
 
In accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company recognized an impairment loss of $3,422,352 and $0 for the years ended September 30, 2013 and 2012, respectively.

Advance payments

Advance payments represent the payments made and recorded in advance for goods and services.  Advances were also made for the purchase of the materials and equipment for the Company’s construction in progress.

 
33

 
 
Revenue recognition

The Company recognizes revenue under the FASB Codification Topic 605 (“ASC Topic 605”). Revenue is recognized when all the following have occurred: persuasive evidence of arrangement with customers, products are delivered, fees are fixed and determinable and collection is reasonably assured.  Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advance from customers.
 
Shipping and handling

Shipping and handling costs incurred for shipping of finished products to customers are included in selling expense and totaled $43,346 and $7,805 for the years ended September 30, 2013, and 2012, respectively.

Taxation

Income taxes

The Company accounts for income tax under the provisions of ASC 740-10-25, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances will also be established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
 
Uncertain tax positions

During the course of business, there are certain transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or changes in the tax law. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
 
Value added tax

Value added tax is imposed on goods sold in or imported in the PRC. Value added tax payable in the People’s Republic of China is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of value added tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year. The Company had value added tax recoverable of $123,157 and $51,397 as of September 30, 2013 and 2012, respectively.

Earnings (Loss) per share

Earnings per share are calculated in accordance with the ASC 260, “Earnings per Share.” Basic net earnings per share are based upon the weighted average number of common shares outstanding, but excluding shares issued as compensation that have not yet vested. Diluted net earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised, and that all unvested shares have vested. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

 
34

 
 
Statement of cash flows
 
In accordance with ASC 230, cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Concentration of credit risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of advances to suppliers and other receivables arising from its normal business activities. The Company does not require collateral or other security to support these receivables.  The Company routinely assesses the financial strength of its debtors and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts.

Foreign currency translation

The Company’s principal country of operations is the PRC. The financial position and results of operations of the Company are determined using the local currency, Renminbi (“RMB”), as the functional currency. Foreign currency transactions are translated at the applicable rates of exchange in effect at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. Revenues and expenses are translated at the average exchange rates in effect during the reporting period. Equity accounts are translated in the historical exchange rate when the transactions took place.
 
RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand. Translation of amounts from RMB into US dollar has been made at the following exchange rates for the respective years:

September 30, 2013
 
Balance sheet
RMB 6.1501 to US$1.00
Statement of operations and comprehensive loss
RMB 6.2383 to US$1.00
   
September 30, 2012
 
Balance sheet
RMB 6.2857 to US$1.00
Statement of operations and comprehensive loss
RMB 6.3357 to US$1.00
 
Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated Other Comprehensive Income".  Gains and losses resulting from foreign currency translations are included in Comprehensive Income (Loss).
 
Note 3 – INVENTORY
 
The inventory consists of the following:
 
   
September 30,
2013
   
September 30,
2012
 
Raw materials
 
$
128,669
   
$
73,191
 
Packing supplies
   
40,393
     
22,126
 
Work-in-process
   
60,032
     
55,170
 
Finished goods
   
204,717
     
95,599
 
                Total
 
$
433,811
   
$
246,086
 

The Company recorded inventory markdown allowance of $54,218 and $45,271 for the year ended September 30, 2013 and 2012 respectively.

 
35

 
 
Note 4–PROPERTY, PLANT AND EQUIPMENT
 
The property, plant and equipment consisted of the following:
 
 
September 30,
2013
 
September 30,
2012
 
             
Machinery & Equipment
 
$
9,255,914
   
$
8,942,612
 
Plant & Buildings
   
16,226,794
     
15,876,637
 
     Sub total
   
25,482,708
     
24,819,249
 
                 
Less: Accumulated Depreciation
   
(4,255,928
)
   
(2,741,974
)
Add: Construction in Process
   
1,560,100
     
3,543,282
 
                 
Property, Plant and Equipment
 
$
22,786,880
   
$
25,620,557
 
 
Depreciation expense for the years ended September 30, 2013 and 2012 was $1,432,921 and $1,272,896, respectively.

NOTE 5 - RELATED PARTY TRANSACTIONS
 
The Company periodically borrows money from its shareholders to finance the operations.  The details of loans from related parties are as follows:
 
   
September 30,
2013
 
September 30,
2012
 
Short term:
           
Short term loan from Sichuan Chunfei Real Estate
 
$
856,163
   
$
1,837,809
 
Short term loan from Sichuan Chunfei Daily Chemical
   
364,723
     
-
 
Short term loan from Mr.Pu Fachun
   
1,649,040
     
2,362,505
 
Short-term loan from Sichuan Lamate Technology Co.Ltd.
   
2,614,811
     
-
 
Short term loan from Sichuan Shubei Feed Co.Ltd.
   
16,260
     
-
 
                 
   
$
5,500,997
   
$
4,200,314
 
 Long term:
               
Loan From Mr.Pu Fachun
   
1,415,868
     
1,385,315
 
   
$
1,415,868
   
$
1,385,315
 
 
Sichuan Chunfei Daily Chemicals Co. Ltd (“Daily Chemical”) and Sichuan Chunfei Real Estate (“Chunfei Real Estate”) are owned by Mr. Pu Fachun. Sichuan Shubei Feed Co.Ltd. is owned by Mr. Pu Xidi, son of Mr. Pu Fachun. Sichuan Lamate Technology Co., Ltd. is owned by Mr. Zhang Qiwei, a member of the Company’s Board of Directors.
 
 
36

 
 
The long term loan from Mr. Pu Fachun is non interest bearing and due on December 31, 2014.
 
The Company recorded imputed interest at 6% per annum and recorded $305,077 and $$85,818 for non-interest bearing related party loans for the years ended September 30, 2013 and 2012, respectively.

The following table summary related party loans with interest and non interest:
 
   
Non
 interest
 bearing
   
Bearing
 interest from
0.9%-4% per month
 
Short term loan
  $ 3,736,787     $ 1,764,210  
Long term loan
    1,415,868       -  
    $ 5,152,655     $ 1,764,210  
 
NOTE 6 - LAND USE RIGHT
 
All land in the People’s Republic of China is government owned and cannot be sold to any individual or company. However, the government grants the user a “land use right” (the Right) to use the land. The Company has the Right to use the land on which its facilities are located for 50 years and amortizes the Right on a straight-line basis over the period of 50 years. As of September 30, 2013 and 2012, intangible assets consisted of the following: 
 
   
September 30,
2013
   
September 30,
2012
 
Land use rights
 
$
1,202,191
   
$
1,176,249
 
Less: accumulated amortization
   
(188,343
)
   
(157,993
)
                 
   
$
1,013,848
   
$
1,018,256
 

The amortization expense for the years ended September 30, 2013 and 2012 was $26,485 and $26,145, respectively.

 
37

 
 
NOTE 7 – SHORT TERM AND LONG-TERM LOANS
 
The short term and long-term loans include the following:

   
September 30,
2013
   
September 30,
2012
 
             
a) Loan payable to Nanchong City Bureau of Finance due on demand, fixed interest rate of 0.465% per month
 
$
650,400
   
$
636,365
 
                 
b) Loan payable to Nanchong Commercial Bank due on January 24, 2014 and July 1, 2014 at fixed interest rate of 6.6% per annum, guaranteed by a third party
   
1,626,000
     
-
 
                 
c) Loan payable to Nanchong Bank of Communications due on July 1, 2014, at floating interest rate, guaranteed by  third parties,  Mr. Pu Fachun and Zhang Xuchu and Feng Ting, Hedi Medichines
   
813,000
     
-
 
                 
d) Loan payable to Nanchong Commercial Bank due on January 4, 2013 and June 28, 2013, at fixed interest rate of 6.941% and 7.216% per annum, the loan was paid in full.
   
-
     
1,590,913
 
                 
e) Individual loans from various investors,  bearing non-interest and due on July 1, 2013 (See note 11)
   
-
    100,000  
                 
f) Individual loans from unrelated parties, which are due on demand and bearing interests from 0% to 72% per annum
   
2,256,400
     
-
 
                 
g)Loan payable to Evergrowing Bank at a floating rate. Balance was paid in full in the year ended September 30, 2013
   
-
     
715,911
 
                 
Total Short Term Loans
 
$
5,345,800
   
$
3,043,189
 
                 
                 
a) Individual loans from unrelated parties at monthly interest rate of 0%-6%
   
3,358,411
     
2,804,260
 
                 
b) Individual loans from various investors, bearing interest of 12% per annum and due on July 1, 2015, as extended  (See note 11)
   
100,000
     
-
 
                 
 Less: current portion of long term loans
   
2,438,187 
     
143,182 
 
                 
Total Long Term Loans
 
$
1,020,224
   
$
2,661,078
 

The Company pledged its land use right and its building and equipment to a third party to secure the bank loans The Company recorded interest expense of $1,250,266 and $694,692 for the years ended September 30, 2013 and 2012, respectively.
 
NOTE 8 – INCOME TAXES
 
The Company’s subsidiaries are governed by the Income Tax Law of the People’s Republic of China, which mandates a corporate income tax rate of 25%.  Hedi Medicine has been taxed at a flat rate of 260 RMB per quarter since calendar year 2012.
 
 
38

 
 
The following table reconciles the U.S. statutory rates to the Company's effective tax rate for the years ended September 30, 2013 and 2012:
 
   
For the years ended September 30
 
   
2013
   
2012
 
US statutory income tax rate
    35 %     35 %
Non-taxable item in US
    -2 %     -20 %
Change in valuation allowance - US
    -33 %     -15 %
China income tax statutory rate
    25 %     25 %
Change in valuation allowance - China
    -25 %     -25 %
Prior period tax adjustment
    -1.6 %     0 %
Effective rate
    -1.6 %     0 %
 
The Company incurred a net operating loss for the year ended September 30, 2013. As of September 30, 2013 net operating loss carry forwards for United States and China income tax purposes amounted to $2.4 million and $10.2 million, respectively, which may be available to reduce future years' taxable income. These carry forwards will expire, if not utilized, beginning in 2028 through 2033 for U.S tax purposes and 2017 through 2018 for China income tax purposes. Management believes that the realization in the U.S. of the benefits arising from these losses appear to be uncertain due to the Company's business operations being primarily conducted in China and foreign income not recognized in the United States for United States income tax purposes. It is also uncertain that it is more likely that not that the China business operation will have income taxable in China. Accordingly, the Company has provided a 100% valuation allowance as of September 30, 2013 and 2012, respectively for the temporary difference related to the loss carry-forwards.
 
 The following table reconciles the changes of deferred tax asset for the years ended September 30, 2013 and 2012:
 
   
September 30,
2013
   
September 30, 
2012
 
United States:
               
 Deferred tax asset from loss carry-forward-Beginning
 
$
836,543
   
$
658,622
 
 Addition: loss carry-forward
   
18,749
     
177,921
 
 Valuation allowance-Beginning
   
(836,543
)
   
(658,622
 Addition: Valuation allowance
   
(18,749
   
(177,921
)
                 
 Deferred tax asset-net
 
$
-
   
$
-
 
 
China:
           
 Deferred tax asset from loss carry forward-Beginning
 
$
185,246
   
$
-
 
 Addition: loss carry-forward
   
1,899,377
     
185,246
 
 Valuation allowance-Beginning
   
(185,246
   
-
 
 Addition: Valuation allowance
   
(1,899,377
)
   
(185,246)
 
                 
 Deferred tax asset-net
 
$
-
   
$
-
 

The Company’s open tax years for its U.S. federal and state income tax returns are for the tax years after 2010. These tax returns are subject to examination by the tax authorities.
 
NOTE 9 – CONCENTRATION OF RISKS
 
For the year ended September 30, 2013, two customers accounted for 64.8% and 13.4% of total sales.

We generated very limited sales and made very limited purchases in the year ended September 30, 2012. Therefore we did not rely on any particular customer or vendor for the period.

None of the vendors and customers mentioned above is a related party to the Company.

 
39

 
 
NOTE 10 – WARRANT LIABILITIES
 
In March and June 2010, the Company issued 4,200,000 shares of common stock and Warrants to purchase 4,000,000 shares of Common Stock (Series B Warrants) to three accredited institutional funds and an accredited investor for $2,000,000.
 
The Company concluded  that the Series B Warrants  should be treated as derivative liabilities because the warrants are entitled to a price adjustment provision to allow the exercise price to be reduced in the event the Company issues or sells any additional shares of common stock at a price per share less than the then-applicable exercise price or without consideration, which is typically referred to as a “down-round protection” or “anti-dilution” provision.  The Company uses Level 2 inputs to measure fair value of its warrant liability.
 
During the year ended September 30, 2013, the Company's warrant liability accounts were as follows: 
 
Opening balance
 
$
363,958
 
Issued in the year ended September 30, 2013
   
-
 
Change in warrant liabilities
   
(363,958)
 
Exercised in the year ended September 30, 2013
   
-
 
Closing balance, September 30, 2013
 
$
 
 
As of September 30, 2013, 4,000,000 warrants have expired and none were exercised.
 
NOTE 11 – STOCKHOLDERS’ EQUITY

On September 18, 2013, the Company issued six million shares of common stock to Mr.Pu Fachun, CEO of the Company,  at a price of approximately $0.08 per share in satisfied some loans from Mr. Pu Fachun by issuing these shares.
 
On September 13, 2013 the Company issued 1,855,605 shares of common stock to the investors in the private placement of securities completed in March and June of 2010.  The shares were issued in satisfaction of the Company’s obligation under the second paragraph of Section 6.14 of the Securities Purchase Agreement dated March 19, 2010, which obligation accrued as a result of the Company’s failure to realize $5 million in net post-tax income (as defined in that agreement) for the fiscal year ended September 30, 2011. No fair value is used because the issuance of stock is treated as reallocation of proceeds on the common stock issued on private placement.

In connection with the arrangement to cause the shares to be issued, the investors agreed that the maturity date of the $100,000 loan (See note 7) that they made to the Company on May 1, 2011 was extended to July 1, 2015, with interest accruing in the interim at a rate of 12% per annum, payable quarterly.

A. Share based payments

In April 2012, 51,282 shares of restricted common stock were issued at $0.16 per share, the fair value of the shares at the issuance date, to one of the Company’s independent directors as compensation for his services from April 2011 to October 2012.  The shares were valued at $8,205 and expensed as a part of general and administrative expenses.
 
In April 2012, 2,000,000 shares of restricted common stock were issued at $0.16 per share, the fair value of the shares at the issuance date, to the Company’s Chief Engineer  as compensation for his role in  the development of a flame retardant agent, which is expected to make a major contribution to the Registrant’s revenues in the future. The fair value of the shares was expensed as R&D expense in the quarter in which the stock was granted.

In November, 2011, 51,282 shares of restricted common stock were issued at $0.39 per share, the fair value of the shares at the issuance date, to one of the Company’s independent directors as compensation for his services from October 2011 to March 2012.  The shares were valued at $20,000 and expensed as a part of general and administrative expenses.
 
In November, 2011, 30,000 shares of restricted common stock were issued to the investors in the Company’s 2010 private placement, in settlement of their contractual claim to additional shares if the Company failed to achieve the net income target specified in their stock purchase agreement. No fair value is used because the issuance of stock is treated as reallocation of proceeds on the common stock issued on private placement.
 
In November, 2011, the Company issued 1,650,636 shares of restricted common stock to Mr. Pu Fachun in exchange for his transfer of  all minority interests in the Company’s subsidiaries.
 
 
40

 
 
B: Earnings Per Share
 
The following is a reconciliation of the basic and diluted earnings (loss) per share computations for the years ended September 30 , 2013 and 2012:
 
   
2013
   
2012
 
Net income (loss) for basic and diluted earnings (loss) per share
 
$
(7,172,094
)
 
$
(2,086,393)
 
Weighted average shares used in basic and diluted computation
   
39,407,719
     
36,665,319
 
                 
Earnings (loss) per share: Basic and diluted
 
$
(0.18
)
 
$
(0.06)
 
 
For the year ended September 30, 2012, a total of 4,000,000 warrants have not been included in the calculation of diluted earnings per share in order to avoid any anti-dilutive effect.

 C. Option exercise

In April 2012, 800,000 options were exercised at an exercise price of $0.10 per share. 800,000 shares of common stock were issued accordingly. As of September 30, 2013 and 2012, there are no options outstanding.

NOTE 12– COMMITMENTS AND CONTINGENCIES
 
Employment Agreements
 
As of May 1, 2008, we entered into indefinite employment agreements with Pu Fachun and Zhang Changlong.  The agreements provide for an annual salary of $10,000 to Mr. Pu and an annual salary of $7,500 to Mr. Zhang.
 
The agreements provides that the officers’ compensation will be reviewed by the Board of Directors not less frequently than annually, and may be adjusted upward at any time in the sole discretion of the Board of Directors. The officers will be eligible for bonus compensation to be awarded at such times and in such amounts as determined by the board in its sole discretion. The term of each agreement commenced on the effective date of May 1, 2008 and will continue until an event of termination under the agreement, including the following (i) the disability of the officer, (ii) upon the death of any officer, or (ii) upon thirty days’ written notice from either party.
 
 Remuneration of Directors
 
The Board of Directors has agreed that it will compensate Mr. Robert Fanella upon commencement of his service and on each anniversary of his commencement date, with $10,000 cash plus $40,000 in the form of restricted shares of the Company’s common stock, calculated on the average closing price per share for the five (5) trading days preceding and including the date stock is issued. The Board will also compensate  each of Mr. He Ping, Mr. Lü Shuming, and Mr. Liu Dechun upon commencement of his service and on each anniversary of his commencement date, with $5,000 in cash.
 
Litigation
 
During the 2013 fiscal year, Jian Zhou, a shareholder, commenced a legal action against American Nano Silicon Technologies, Inc.  Mr. Zhou alleges that he is entitled to 857,142 shares of American Nano common stock in connection with the acquisition of Nanchong Chunfei by American Nano in 2007.  In response to the allegation, American Nano has asserted that all of the shares to which Mr. Zhou was entitled were issued to him. The trial court has dismissed Mr. Zhou’s claim, and he has appealed the dismissal to the court of appeals.
 
NOTE 13 –SUBSEQUENT EVENT

The Company has evaluated subsequent events for purposes of recognition or disclosure through the date these financial statements were issued.
 
 
41

 

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Not applicable.

ITEM 9A.   CONTROLS AND PROCEDURES.

 (a)            Evaluation of disclosure controls and procedures.
 
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of September 30, 2013. That evaluation revealed that the lack of expertise in U.S. accounting principles among the personnel in our Chinese headquarters created a material weakness in our disclosure control and procedures.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2013, such controls and procedures were not effective.
 
(b)             Changes in internal controls.
 
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting (as defined in SEC Rule 13a-15(f)) that occurred during the fourth quarter of the year covered by this annual report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
(c)             Management’s Report on Internal Control over Financial Reporting.
 
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. We have assessed the effectiveness of those internal controls as of September 30, 2013, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control – Integrated Framework (1992) as a basis for our assessment.
 
A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified material weaknesses in our internal control over financial reporting. The material weaknesses consisted of the lack of expertise in U.S accounting principles among the personnel in our Chinese headquarters and insufficient oversight of the Company’s external financial reporting and internal control over financial reporting.
 
Our books are maintained and our financial statements are prepared by the personnel employed at our executive offices in Sichuan in the People’s Republic of China. Few of our employees have experience or familiarity with U.S accounting principles. The lack of accounting personnel who are trained in U.S. accounting principles could lead to improper classification of items and other failures to make the entries and adjustments necessary to comply with U.S. GAAP. Because of the above material weaknesses, management’s assessment is that the Company’s internal controls over financial reporting were not effective as of September 30, 2013.
 
 
42

 
 
ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors, Executive Officers and Corporate Governance
 
Name
Age
Position
Pu Fachun
59
CEO, CFO, President
Zhang Qiwei
42
Director
Zhang Changlong
58
Director
Robert J. Fanella
63
Independent Director
He Ping
41
Independent Director
Lü Shuming
70
Independent Director
Liu Dechun
38
Independent Director
 
The following is a summary of the business experience of our officers and director:
 
Pu Fachun is an entrepreneur with over 20 years of experience in the management of chemicals businesses. Mr. Pu started his career as a production technician at the Nanchong Chemical Plant in Sichuan in 1972. In 1994, he founded Sichuan Chunfei Investment Company and managed it as Chairman until he established Nanchong Chunfei  Nano-Silicon Technologies Co. Ltd in 2006. Mr. Pu was central in the development and commercialization of the Company’s products. Mr. Pu joined the Company as a director and President and Chairman in July of 2007.
 
Zhang Qiwei was appointed as a director of American Nano Silicon Technologies, Inc. on July 8, 2010. Mr. Zhang has served as as the general manager of Nanchong Chunfei Nano Silicon Technology Co Ltd, subsidiary of American Nano Silicon Technology, since early 2003. From 1999 to 2002, Mr. Zhang was the chief technical officer of Nanchong Chunfei Investment Group. Before joining Nanchong Chunfei Investment Group, Mr. Zhang earned his undergraduate degree in Chemical Engineering from Sichuan University, and he graduated in 1998.
  
Zhang Changlong has been General Inspector of Finance of Sichuan Chunfei Investment Group Co., Ltd. since October 2006.  He is trained as a senior accountant, and formerly served as Section Chief of the Treasurer’s Office of the Nanping Bureau of Forestry, as Section Chief of the Treasurer’s Office of the Weft-Knitted Knitting Plant of Sichuan Nanchong Gaoping District, as finance chief of Shenzhen Huifeng Industry Co., Ltd., and financial adviser to Nanchong Jialing Pharmaceutical Co., Ltd, a position he held since 2001 prior to taking his position with Sichuan Chunfei Investment Group. Mr. Zhang joined the Company as a director in July of 2007.

Robert J. Fanella.  Mr. Fanella, CPA, was appointed as an independent director and Audit Committee Chairman  in April 2009.  During Mr. Fanella’s more than 35 years career specializing in corporate finance and accounting, he was responsible for audit and financial service oversight for both private and publicly traded companies.  Since 2006, Mr. Fanella has been an independent financial consultant, working on various financial and operational projects for companies in industries such as electronic manufacturing, industrial plating, chemical, and health products.   In addition, fFrom April, 2011 to March 2012, Mr. Fanella served as CFO for ARCIS Resources Corporation (OTC Pink: ARCS). From 2002 to 2006, Mr. Fanella was employed as CFO/Owner of Tru-Way, Inc., a metal fabrication business mainly serving the electronics manufacturing industry.  The business was sold in 2006.  From 1984 to 2002, Mr. Fanella was employed as CFO by MicroEnergy, Inc., a public company of which he was co-founder.  MicroEnergy, Inc was a manufacturing firm designing and selling custom switch-mode power supplies to major companies in the OEM electronics market.   During the 12 year period prior to founding MicroEnergy, Inc., Mr. Fanella was the CFO/Controller for two smaller businesses in the electronics manufacturing business and welding supplies distribution business, and he spent seven years at Motorola, Inc., in various capacities from Financial Analyst to Business Controller.  Mr. Fanella currently serves on the Board of Directors and also is Audit Committee Chairman for China YCT International Group, Inc (OTCQB: CYIG).   Mr. Fanella was awarded a Bachelor of Science Degree in Finance by Northern Illinois University in 1972.  He was awarded a Masters of Business Administration Degree in Finance with a Marketing concentration from the University of Chicago in 1979.  In 1975 Mr. Fanella was registered as a certified public accountant (CPA) in Illinois.
 
 
43

 
 
He Ping was appointed as an independent director of American Nano Silicon Technologies, Inc. on April 6, 2009. Dr. He is currently serving as a professor of electrochemical studies at Southwest University of Science and Technology, School of Material Science and Engineering. Dr. He is an active member of the International Society of Electrochemistry (ISE) and the Chinese Chemical Society (CCS). Dr. He has published over 50 essays and dissertations in both national and international academic periodicals. Science Citation Index (SCI) and Engineering Information (EI) have cited over 40 essays wrote by Dr. He and provided them as a researching resource to the public. Dr. He earned his Doctoral degree from Chinese Academy of Science – Changchun Institute of Applied Chemistry in 2005.

Lü Shuming is a senior licensed chemical-engineer with over 30 years of experience in China’s chemical industry. From 2002 to the present, he has served as a chief engineer and counselor at Chengdu Minhui Daily Chemical Technologies Co., Ltd. Prior to that, Mr. Lü was employed as the chief engineer involved in chemical engineering for different companies. Mr. Lü holds a bachelor degree in Chemical Engineering from Sichuan University, wherehe graduated in 1967.
 
Liu Dechun has been appointed as an independent director of American Nano Silicon Technologies, Inc. on April 6, 2009. From 2000 to the present, Mr. Liu has worked as an instructor at Southwest University of Science and Technology, Department of Applied Chemistry. Mr. Liu received his master degree in science in 2000 from Southwest University of Science and Technology. 

All of our directors hold offices until the next annual meeting of the shareholders of the Company, and until their successors have been qualified after being elected or appointed.  Officers serve at the discretion of the board of directors.
  
Audit Committee; Compensation Committee; Nominating Committee.
 
The Board of Directors appointed an audit committee, a compensation committee and a nominating committee in April 2009. The audit committee consists of Mr. Robert J. Fanella as the Chairman, and Mr. Lü, Mr. Liu, and Mr. He as members. Mr. Fanella is qualified to serve as an “audit committee financial expert,” as defined in  the Regulations of the Securities and Exchange Commission, by reason of his experience in public accounting and as a principal financial officer.  Mr. Fanella, Mr. Lü, Mr. Liu, and Mr. He are “independent” directors, as defined in the listing standards of NASDAQ.
 
Shareholder Communications

The Board of Directors will not adopt a procedure for shareholders to send communications to the Board of Directors until it has reviewed the merits of several alternative procedures.

Code of Ethics

The Board of Directors has adopted a code of ethics applicable to the Company’s executive officers.  The Code of Ethics was filed an exhibit to the Company’s Annual Report on Form 10-K for the year ended September 30, 2008.  A copy may be obtained by a shareholder sending written request to the Company, attention Pu Fachun, CEO.

 
44

 
 
Section 16(a) Beneficial Ownership Reporting Compliance

None of the officers, directors or beneficial owners of more than 10% of the Company’s common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the year ended September 30, 2012, except that (a) none of the directors other than Pu Fachun has filed a Form 3, and (b) Pu Fachun failed to file a Form 4 to report his purchase of 6,000,000 shares in September 2013.
 
ITEM 11.   EXECUTIVE COMPENSATION
 
Executive Compensation

The table below itemizes all compensation for the last three fiscal years paid to our Chief Executive Officer and Chief Financial Officer, Pu Fachun There was no officer of the Company whose salary and bonus for services rendered during the year ended September 30, 2013 exceeded $100,000.

 
Fiscal
Year
 
Salary
   
Bonus
   
Stock
Awards
   
Option
Awards
   
Other
Compensation
 
Pu Fachun
2013
 
$
10,000
     
--
     
--
     
--
     
--
 
 
2012
 
$
10,000
     
--
     
--
       
(1)
   
--
 
 
2011
 
$
10,000
     
--
     
--
   
 $
30,000
     
--
 
 
(1)
On September 6, 2011 the Board of Directors granted Mr. Pu a five year option to purchase 75,000 shares for $.10 per share.  The fair value of the option on that date was $30,000.

Employment Agreements

As of May 1, 2008, we entered into an indefinite employment agreement with Pu Fachun.  The agreement provides for an annual salary of $10,000 for each year for the term of the agreement with Mr. Pu.
 
The agreement provides that Mr. Pu’s compensation will be reviewed by the Board of Directors not less frequently than annually, and may be adjusted upward at any time in the sole discretion of the Board of Directors. Mr. Pu will be eligible for bonus compensation to be awarded at such times and in such amounts as determined by the board in its sole discretion. The term of the agreement commenced on the effective date of May 1, 2008 and will continue until an event of termination under the agreement, including the following (i) the disability of Mr. Pu, (ii) upon the death of Mr. Pu, or (ii) upon thirty days’ written notice from either party.
 
 
45

 
 
During the term of the agreement and for a period of eighteen months after the agreement’s termination, Mr. Pu will be subject to a confidentiality agreement and a non-competition covenant, subject to certain conditions. Pursuant to the non-competition covenant, Mr. Pu agreed that he  will not on behalf of, or in conjunction with any person, firm or corporation, other than the Company: (i) engage or participate in our business, (ii) enter the employ of or render any services to any person actively engaged in or directly competitive with our business, (iii) directly or indirectly participate in the ownership, management, operation, financing or control of (or be employed by or consult for or otherwise render services to) any person, corporation, firm or other entity that actively and directly competes with us in the business, (iv) directly solicit for employment any of our employees or any person who was employed by us six months prior to such solicitation.

Equity Grants

The following tables set forth certain information regarding the stock options acquired by the Company’s Chief Executive Officer during the year ended September 30, 2013 and those options held by him on September 30, 2013.

Option Grants in the Last Fiscal Year
 
   
Number of
securities
underlying
option granted
   
Percent of total
options granted to
employees in fiscal year
   
 
Exercise
Price
($/share)
   
 
Expiration Date
   
 
Potential
 realizable value at
 assumed annual rates of
appreciation for option term
 
                             
5
%
   
10
%
Pu Fachun
   
0
     
--
     
--
     
--
     
--
     
--
 
 
The following tables set forth certain information regarding the stock grants received by the executive officer named in the table above during the year ended September 30, 2013 and held by him unvested at September 30, 2013.

Unvested Stock Awards in the Last Fiscal Year
 
   
Number of
Shares That
Have Not
Vested
   
Market Value
of Shares That
Have Not
Vested
 
Pu Fachun
    --       --  
  
The following table summarizes the total compensation earned by all non-employee Directors during the 2012 fiscal year:
 
Director Summary Compensation for FY 2013

The following table summarizes the compensation paid during the fiscal year ended September 30, 2013 to each of our non-employee directors.
 
Name
 
Fee Earned or
Paid in Cash($)
   
All Other
 Compensation ($)
   
Total ($)
 
Robert J. Fanella
 
$
-
   
$
-
(1)
 
$
-
 
He Ping
 
$
5,000
           
 5,000
 
Lü Shuming
 
$
5,000
           
$
 5,000
 
Liu Dechun
 
$
5,000
           
$
 5,000
 
        
(1)     The Company has, to date, failed to compensate Mr. Fanella for services rendered during fiscal 2013.  The Company intends to pay him $13,667, representing his contracted cash payment plus the current market value of the shares to which he is entitled.

In addition to the amounts shown above, non-employee Board members received reimbursement for travel and lodging expenses incurred while attending Board and committee meetings and Board-related activities, such as visits to Company locations.
 
There were no outstanding options or other equity awards at year-end 2013 for non-employee Directors.

 
46

 
 
ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The following table sets forth information with respect to the ownership of the Company's common stock by each person known by the Company to be the beneficial owner of more than five percent (5%) of the Company's common stock, by each director and officer and by all officers and directors as a group.

Name of Beneficial Holder
 
Number of
Shares
   
Percentage of
Class
 
             
Pu Fachun, President/CEO/CFO/Director
   
15,390,528
(1)
   
32.80
%
                 
Zhang Qiwei, Director
   
4,120,000
     
8.78
%
                 
Zhang Changlong, Director
   
30,000
     
0.06
%
                 
Robert J. Fanella, Independent Director
   
195,747
     
0.42
%
                 
He Ping, Independent Director
   
10,000
     
0.02
%
                 
Lü Shuming, Independent Director
   
10,000
     
0.02
%
                 
Liu Dechun, Independent Director
   
10,000
     
0.02
%
                 
All officers and directors (7 persons)
   
19,766,275
(1)
   
42.13
%
                 
Zhou Huakang
   
6,952,758
(2)
   
14.82
%
                 
T Squared Investments LLC
   
3,086,916
(3)
   
6.58
%
                 
T Squared Capital LLC
   
3,086,916
(3)
   
6.58
%
 
(1)            Includes 822,466 shares owned of record by Zhang Lizhi, Mr. Pu’s spouse.

(2)            Includes 2,633,846 shares owned by Wang Ying, with respect to all of which Mr. Zhou has voting and dispositional authority.  Also includes 1,000,000 shares owned by Montasia Capital Opportunity Fund LP, which is controlled by Mr. Zhou.   Also includes 1,818,912 shares owned by Wang Xiaojin, Mr. Zhou’s spouse.

(3)           The amount shown and the following information is derived from the Schedule 13Gs filed by T Squared Investments LLC and T Squared Capital LLC on August 30, 2010.  The amount shown does not include 1,302,424 shares that were issued to T Squared Investments LLC in September 2013. Thomas Sauve is the Managing Member of both entities and has voting and dispositional control over the shares owned by both entities.

Beneficial ownership is determined in accordance with the rules of the S.E.C. and generally includes voting or investment power with respect to securities. In accordance with S.E.C. rules, shares of our common stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days of the date of the table are deemed beneficially owned by the optionees. Subject to community property laws, where applicable, the persons or entities named in the table above have sole voting and investment power with respect to all shares of our common stock indicated as beneficially owned by them.
 
 
47

 
 
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
Certain Relationships
 
The Company periodically borrows money from its shareholders to finance operations.  The details of loans to/from related parties are as follows:
   
   
September 30,
2013
 
September 30,
2012
 
Short term:
           
Short term loan from Sichuan Chunfei Real Estate
 
$
856,163
   
$
1,837,809
 
Short term loan from Sichuan Chunfei Daily Chemical
   
364,723
     
-
 
Short term loan from Mr.Pu Fachun
   
1,649,040
     
2,362,505
 
Short-term loan from Sichuan Lamate Technology Co.Ltd.
   
2,614,811
     
-
 
Short term loan from Sichuan Shubei Feed Co.Ltd.
   
16,260
     
-
 
                 
   
$
5,500,997
   
$
4,200,314
 
 Long term:
               
Loan From Mr.Pu Fachun
   
1,415,868
     
1,385,315
 
   
$
1,415,868
   
$
1,385,315
 
 
Sichuan Chunfei Daily Chemicals Co. Ltd (“Daily Chemical”) and Sichuan Chunfei Real Estate (“Chunfei Real Estate”) are owned by Mr. Pu Fachun. Sichuan Shubei Feed Co.Ltd. is owned by Mr. Pu Xidi, son of Mr. Pu Fachun. Sichuan Lamate Technology Co., Ltd. is owned by Mr. Zhang Qiwei, a member of the Company’s Board of Directors.
 
The long term loan from Mr. Pu Fachun is non interest bearing and due on December 31, 2014.
 
Director Independence

The following members of the Company’s Board of Directors are independent directors, pursuant to the definition of “independent director” under the Rules of The NASDAQ Stock Market:  Robert J. Fanela, He Ping, Lü Shuming and Liu Dechun.
 
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Paritz & Company, P.A. was engaged to serve as the Company’s principal accountant in November 2013.  Until April 2013 Friedman LLP served as the Company’s principal accountant.

Audit Fees
 
The aggregate fees billed from professional services rendered by Paritz & Company, P.A. for the audit of our annual financial statements and review of interim financial information for the fiscal year ended September 30, 2013 was $45,000. The aggregate fees billed from professional services rendered by Friedman LLP, for the audit of our annual financial statements and review of interim financial information for the fiscal year ended September 30, 2012 was $90,000.
 
Audit-Related Fees
 
Partiz & Company, P.A. did not render any audit-related services to us for the fiscal year ended September 30, 2013.

Friedman LLP did not render any audit-related services to us for the fiscal year ended September 30, 2012.
 
 
48

 
 
Tax Fees
 
Paritz & Company, P.A. did not render any tax services to us for the fiscal year ended September 30, 2013.

Friedman LLP did not render any tax services to us for the fiscal year ended September 30, 2012.
 
All Other Fees
 
Paritz & Company, P.A. did not render any other services to us for the fiscal year ended September 30, 2013.

Friedman LLP did not render any other services to us for the fiscal year ended September 30, 2012.
 
ITEM 15.   EXHIBITS

Number
 
Exhibit
 
Location
3.1
 
Amended and Restated Articles of Incorporation
 
Incorporated by reference to Exhibit 32 to Form 10-K filed on January 12, 2009
         
3.3
 
Amended Bylaws
 
Incorporated by reference to Exhibit 33 to Form 10-K filed on January 12, 2009
         
10.1
 
Form of Employment Agreement of Pu Fachun and Zhang Changlong
 
Incorporated by reference to Exhibit 10.4 to Form 10-12G/A filed on September 18, 2008
         
10.2
 
Equity Nominee Agreement dated May 28, 2013 among Fachun Pu, Qiwei Zhang, Jianbo Liu, American Nano Silicon Technologies, Inc., Nanchong Chunfei Nano-Silicon Technologies Co., Ltd., Sichuan Chunfei Refined Chemicals Co., Ltd., and Sichuan Hedi Veterinary Medicines Co., Ltd.
 
Incorporated by reference to Exhibit 10-a in the Current Report on Form 8-K filed on January 15, 2014.