Attached files
Registration
Statement No. ______
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CHANGDA
INTERNATIONAL HOLDINGS, INC.
(Exact
Name of Registrant in Its Charter)
Nevada
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2870
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98-0521484
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
Number)
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10th
Floor Chenhong Building
No.
301East Dong Feng Street
Weifang,
Peoples Republic of China
Telephone: +86-536 8513228
(Address,
Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s
Principal Executive Offices)
Laughlin
Associates, Inc.
2533 N.
Carson Street
Carson
City, Nevada 89706
(Name,
Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent
for Service)
Copies
to:
Richard
A. Friedman, Esq.
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Sichenzia
Ross Friedman Ference LLP
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61
Broadway
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New
York, New York 10006
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Tel:
(212) 930-9700
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Fax:
(212) 930-9725
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Approximate date of commencement of
proposed sale to the public: from time to time after the effective date
of this registration statement.
If any of the securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, check the following box.
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated
filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do
not check if a smaller
reporting
company)
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1
CALCULATION
OF REGISTRATION FEE
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||||
Title
of Each Class of
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Securities
to be Registered
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Proposed
Maximum
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Amount
of
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||||||||
Aggregate
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Registration
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||||||||
Offering
Price(1)
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Fee
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||||||||
Units,
each consisting of one share of Common Stock, $.001 par value, and
one Class A Warrant
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$ | 20,700,000 | $ | 1,475.91 | |||||
Shares
of Common Stock included as part of the Units
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— | — | (2) | ||||||
Class A
Warrants included as part of the Units
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— | — | (2) | ||||||
Shares
of Common Stock underlying the Class A Warrants included in the
Units(3)
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$ | 10,350,000 | $ | 737.96 | |||||
Total
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$ | 2,213.87 | |||||||
(1)
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Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(o) of the Securities Act of 1933, as amended.
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(2)
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No
fee pursuant to Rule 457(g) of the Securities Act of 1933, as
amended
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(3)
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Pursuant
to Rule 416, there are also being registered such additional
securities as may be issued to prevent dilution resulting from stock
splits, stock dividends or similar transactions as a result of the
anti-dilution provisions contained in the Class A
Warrants.
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THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION
8(a), MAY DETERMINE.
2
This information in this prospectus is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
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SUBJECT TO COMPLETION, DATED DECEMBER 31,
2009
PRELIMINARY
PROSPECTUS
$
CHANGDA
INTERNATIONAL HOLDINGS, INC.
[_____] Units
We are
selling [_____] units, each unit consisting of one share of our common stock and
one Class A warrant. Each Class A warrant entitles the holder to
purchase one-half a share of our common stock at a price of $[_____], and will
expire on [_____], 2015. The Class A warrants will be exercisable [_____]
days after issuance.
There is
presently no public market for our units or Class A warrants, and no market
for the units will exist. Our common stock is currently quoted on the
Over-the-Counter Bulletin Board under the symbol "CIHD.OB." On December 30,
2009, the last reported market price of our common stock on the Over-the-Counter
Bulletin Board was $3.41. We have applied to list our common shares
on the NYSE Amex. We cannot assure you, however, that our securities
will be listed on the NYSE Amex on or before the date of this
prospectus.
These
are speculative securities. Investing in our securities involves significant
risks. You should purchase these securities only if you can afford a complete
loss of your investment. See “Risk Factors” beginning on
page 7.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
Underwriting
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Proceeds
to
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|||||||||||
Price
to
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Discounts
and
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Converted
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||||||||||
Public
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Commissions(1)
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Organics
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Per
Unit
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$
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$
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$
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||||||
Total
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$
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$
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$
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(1)
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This
amount does not include a non-accountable expense allowance in the amount
of __% of the gross proceeds, or $
($ per unit) payable to
_______________.
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Delivery
of the units will be made on or
about , 2010. We have
granted the underwriters a __-day option to purchase up to [_____] additional
units solely to cover over-allotments, if any.
In
connection with this offering, we may also agree to sell to [_____] an option to
purchase up to [_____] % of the units sold for $100. If the underwriter
exercises this option, each unit may be purchased for
$ per unit ( % of the
price of the units sold in the offering).
The date
of this prospectus
is ,
2010
3
TABLE
OF CONTENTS
Prospectus
Summary
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5 |
Risk
Factors
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9 |
Special
Note Regarding Forward Looking Statement
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21 |
Use
of Proceeds
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21 |
Determination
of Offering Price
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21 |
Capitalization
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23 |
Dilution
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23 |
Underwriting
and Plan of Distribution
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51 |
Business
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33 |
Description
of Property
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44 |
Legal
Proceedings
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44 |
Market
for Common Equity and Related Stockholder Matters
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22 |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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25 |
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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32 |
Quantitative
and Qualitative Disclosures About Market Risk
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48 |
Management
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45 |
Executive
Compensation
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47 |
Security
Ownership of Certain Beneficial Owners and Management
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48 |
Transactions
with Related Persons, Promoters and Certain Control
Persons
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50 |
Legal
Matters
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54 |
Experts
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54 |
Disclosure
of Commission Position of Indemnification for Securities Act
Liabilities
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54 |
Index
to Financial Statements
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F-1 |
You
should rely only on the information contained or incorporated by reference to
this prospectus in deciding whether to purchase our common stock. We have not
authorized anyone to provide you with information different from that contained
or incorporated by reference to this prospectus. Under no circumstances should
the delivery to you of this prospectus or any sale made pursuant to this
prospectus create any implication that the information contained in this
prospectus is correct as of any time after the date of this prospectus. To the
extent that any facts or events arising after the date of this prospectus,
individually or in the aggregate, represent a fundamental change in the
information presented in this prospectus, this prospectus will be updated to the
extent required by law.
We
obtained statistical data, market data and other industry data and forecasts
used throughout this prospectus from market research, publicly available
information and industry publications. Industry publications generally state
that they obtain their information from sources that they believe to be
reliable, but they do not guarantee the accuracy and completeness of the
information. Nevertheless, we are responsible for the accuracy and completeness
of the historical information presented in this prospectus, as of the date of
the prospectus.
4
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. It does
not contain all of the information that you should consider before investing in
our securities. You should read the entire prospectus carefully, including the
section entitled “Risk Factors” and our consolidated financial statements and
the related notes. In this prospectus, we refer to Changda International
Holdings, Inc. as “we” “our” or “Changda” which includes our wholly owned
subsidiary, Changda International Ltd., which conducts its operations through
its wholly owned subsidiaries, Weifang Changda Fertilizer Co., Ltd and Weifang
Changda Chemical Col, Ltd., in the People’s Republic of China.
Corporate
History
We
produce chemical and microbial organic-inorganic compound fertilizers. Our
chemical fertilizer products are classified into three types, namely complex
fertilizers, compound fertilizers and slow- release compound fertilizers with
more than 10 product lines sold under the “CHANGDA” and “FENGTAI WOSIDA”
brands.
Compound
fertilizer products are produced by initiating chemical reactions between the
three key nitrogen, phosphorous and potassium nutrients during the production
process; each granule contains a combination of these nutrients so as to provide
balanced distribution capabilities.
Our
principal compound fertilizers are sulfur-based compound fertilizer, ammoniated
sulfur-based compound fertilizer and chloric-based compound
fertilizer.
Slow-release
compound fertilizer products allow the fertilizer nutrients to be released
progressively, enabling plants to absorb most of the nutrients and enhance yield
rate. Slow-release compound fertilizers are also more convenient, as they
require less frequent applications. We have modified and developed
controlled-release (which is a subset of slow-release) fertilizers.
Our
microbial organic-inorganic compound fertilizer is a new type of fertilizer. In
general, it helps plants to secure nitrogen from the air and to dissolve useful
minerals such as phosphorus and potassium from soil thus facilitating absorption
of these useful minerals by plants and enhancing their stress resistance. The
organic and inorganic elements enhance soil fertility and crop yield
respectively.
In recent
years, with the increase in health awareness among consumers in the PRC, the
production and sale in the PRC of green food and organic food products, or food
products using organic fertilizers, has increased significantly.
We were
incorporated on January 25, 2007, in the state of Nevada under the name
Promodoeswork.com, Inc. We subsequently changed our name to Changda
International Holdings, Inc. We have never declared bankruptcy, we
have never been in receivership, and we have never been involved in any legal
action or proceedings.
On
January 15, 2009, Darryl Mills, our major shareholder and affiliate consummated
an Affiliate Stock Purchase Agreement with Allhomely International, Limited.
Pursuant to such agreement, Allhomely International Limited acquired a total
2,000,000 restricted shares (pre-reverse split) of our common
stock. Also on January 15, 2009, John Spencer, Derrick Waldman,
and Louis Waldman, shareholders and affiliates of the Company, consummated a
Restricted Stock Purchase Agreement with Allhomely International
Limited. Pursuant to such agreement, Allhomely
International Limited acquired a total 2,200,000 restricted shares (pre-reverse
split) of our common stock.
As
the result, ,Allhomely International Limited acquired a total 4,200,000 shares
(pre-reverse split) of our common stock, resulting in a change of
control.
Immediately
prior to the closing of this transaction, Louis Waldman served as our President,
and Derrick Waldman served as the our Secretary and
Treasurer. Immediately following the closing of the transaction
Mr. Jan Pannemann was nominated and elected by the Board of Directors as our
sole officer, to act as President and Chief Executive Officer and to serve until
his successors shall be elected and qualified until the earlier
of death, resignation or removal in the manner provided for in our
by-laws.
Also
following the closing of the transaction Mr. Jan Pannemann was appointed as our
sole Director to serve until his successors shall be elected and qualified on
the earlier of death, resignation or removal in the manner provided for in the
Company’s by-laws. Following the election and appointment of Mr. Jan Pannemann
as officer and Director, Louis Waldman, Derrick Waldman, and John Spencer
tendered their resignations as our officers and directors.
5
On
February 13, 2009, we entered into a Share Exchange Agreement under which we
issued Forty Seven Million Seven Hundred Twenty Nine Thousand Nine Hundred Sixty
Four (47,729,964) shares of our common stock (pre-reverse split), to
the shareholders of Changda International Limited in
exchange for 100% of the issued and outstanding capital stock of Changda
International Limited. As a result of the Share Exchange Agreement
Changda International Limited became our wholly-owned subsidiary. As
of the date of the Share Exchange Agreement, Changda International Limited held,
directly or indirectly, the entire equity interest in Changda
Chemical, Shandong Fengtai, Changda Fertilizer and
Changda Heze.
Following
our acquisition of Changda International Ltd., as set forth in the following
diagram, Changda International Ltd. became our direct wholly-owned subsidiary
and Changda International, directly or indirectly, holds the entire equity
interest in Changda Fertilizer, Changda Chemical, Shandong Fengtai and Changda
Heze.
Corporate
Overview
Our
current corporate structure is set forth below:
Organizational
History of Changda International Limited
On
December 1, 2000, Changda Chemical was formed, which is engaged in the
production and sale of a snow melting agent. In view of the continuing expansion
in the agricultural sector and supportive government policies, Changda
Fertilizer was formed on April 24, 2003, which is engaged in the production and
sale of various fertilizers, including chemical, organic and compound
fertilizers. In March 2007, Changda Chemical began to set up production lines
for thiophene and fire retardant agents, which were completed and put into
production in September 2007 and July 2008 respectively. Changda Heze was
established on September 3, 2007 to take advantage of the continued growth in
demand for microbial organic-inorganic compound fertilizers and slow-release
fertilizers. All of our current production lines of are located in Shandong
Province, Peoples Republic of China, or PRC. Shandong Fengtai was established on
May 17, 2004, jointly owned by Changda Fertilizer (75 percent) and Seiwa
Fertilizer Co. Ltd , or Seiwa, a Japanese company (25 percent), to develop
export sales to Japan. On June 13, 2008, we entered into an agreement with Seiwa
whereby we acquired the remaining twenty-five percent interest in Shangdong
Fengtai from Seiwa for a cash consideration of US$130,500.
Changda
International Limited was incorporated on April 2, 2007 in the Republic of
Marshall Islands as the holding company of our operating
subsidiaries. Changda International Limited holds, directly or
indirectly, the entire equity interest in Changda Fertilizer, Changda Chemical,
Shandong Fengtai and Changda Heze.
Our
principal business office is located at 10th
Floor, Chenhong Building, No. 301East Dong Feng Street, Weifang, Peoples
Republic of China and our telephone number is +86 536 851 3228. Our website
address is http://changdastock.com .
Information contained on our website or any other website does not constitute
part of this prospectus.
6
THE
OFFERING
Securities
Offered
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[______] units, at
$ per unit (plus [______] additional units
if the representative of the underwriters exercise the over-allotment
option), each unit consisting of
· One
share of common stock; and
· One
Class A warrant
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Each
Class A warrant is exercisable for one-half a share of common
stock. The Class A warrants will be exercisable
__ days after issuance. The Class A warrants will expire at
5:00 p.m., New York City time, on ________, 2015.
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Number
of shares outstanding on the date of effectiveness of this registration
statement
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______
shares (1)
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Number
of shares outstanding on the date after the unitsoffered and registered
are sold
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______
shares (1)
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Use
of Proceeds
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We
intend to use the net proceeds of this offering for working capital,
general corporate purposes and investments in production facilities and
equipment.
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OTC
Bulletin Board symbol for Our Common Stock
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CIHD.OB
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Risk
Factors
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The
securities offered by this prospectus are speculative and involve a high
degree of risk and investors purchasing securities should not purchase the
securities unless they can afford the loss of their entire investment. See
“Risk Factors” beginning on page ___.
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(1)
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The
number of shares of our common stock to be outstanding after this offering
is based on the number of shares outstanding as of _____,
2009.
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7
SUMMARY
FINANCIAL INFORMATION
The
following tables set forth our summary statement of operations data for the
fiscal years ended December 31, 2008 and 2007, for the nine months ended
September 30, 2009 and 2008, and our summary balance sheet as of
September 30, 2009. Our statement of operations data for the fiscal years
ended December 31, 2008 and 2007 were derived from our audited consolidated
financial statements of Changda International Limited, our wholly-owned
subsidiary, included elsewhere in this prospectus. Our statement of operations
data for the nine months ended September 30, 2009 and 2008 and our balance
sheet data as of September 30, 2009 were derived from our unaudited interim
condensed consolidated financial statements included elsewhere in this
prospectus. In the opinion of management the unaudited interim condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of our operating results and financial position for those periods
and as of such dates. The results for any interim period are not necessarily
indicative of the results that may be expected for a full year.
The
results indicated below and elsewhere in this prospectus are not necessarily
indicative of our future performance. You should read this information together
with “Capitalization,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” our consolidated financial statements and
related notes and our unaudited condensed consolidated financial statements and
related notes included elsewhere in this prospectus.
Changda
International Holdings Inc.
Nine
Months Ended
September
30,
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Changda
International Limited
Fiscal
Year Ended
December
31,
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|||||||||||||||
2009
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2008
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2008
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2007
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Statements
of Operations Data
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(Unaudited)
US$’000
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US$’000
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||||||||||||||
Revenue
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$ | 51,978 | $ | 53,732 | $ | 80,958 | $ | 38,245 | ||||||||
Cost
of Sales
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43,581 | 45,632 | 67,907 | 31,417 | ||||||||||||
Gross
Profit
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8,397 | 8,100 | 13,051 | 6,828 | ||||||||||||
Operating
Expenses
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3,811 | 3,225 | 6,122 | 3,034 | ||||||||||||
Operating
Income
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4,586 | 4,875 | 6,929 | 3,794 | ||||||||||||
Income
before Income Taxes
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4,415 | 4,601 | 6,576 | 3,753 | ||||||||||||
Income
Taxes
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940 | 669 | 931 | - | ||||||||||||
Net
Income (Loss)
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$ | 3,475 | $ | 3,932 | $ | 5,645 | $ | 3,753 | ||||||||
Other
Comprehensive Income
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50 | 784 | 1,025 | 285 | ||||||||||||
Total
Comprehensive Income
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3,525 | 4,716 | 6,670 | 4,038 | ||||||||||||
Earnings
Per Common Share Data
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Basic
and Diluted
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$ | 0.0619 | $ | 0.0734 | ||||||||||||
Weighted
Average Number of Common
Shares
Outstanding
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56,096,059 | 53,599,965 |
Changda
International Holdings, Inc.
September
30, 2009
(Unaudited)
US$’000
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Changda
International Limited
December
31, 2008
US$’000
|
|||||||
Balance Sheet Information: | ||||||||
Working
capital
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$ | 8,553 | $ | 6,890 | ||||
Total
assets
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39,532 | 35,114 | ||||||
Total
liabilities
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14,585 | 13,912 | ||||||
Retained
earnings
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15,602 | 12,573 | ||||||
Stockholders’
equity
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24,947 | 21,202 |
8
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this prospectus before making an investment
decision with regard to our securities. The statements contained in or
incorporated into this offering that are not historic facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied by
forward-looking statements. If any of the following risks actually occurs, our
business, financial condition or results of operations could be harmed. In that
case, the trading price of our common stock could decline, and you may lose all
or part of your investment.
Risks
Associated with Our Business
RISKS
RELATING TO OUR BUSINESS OPERATIONS
We
are a newly formed company with no operating history and therefore investors are
not able to assess our prospects on the basis of past
results
Although
as a group, we have a history going back to 2000, Changda International
Holdings, Inc. was incorporated on January 25, 2007 and has no significant
trading, operating or financial history. It may be difficult, therefore, to
evaluate our current or future prospects. In addition, new products such as
microbial fertilizer and thiophene which were launched in 2007 cannot be
construed as an indication of the future performance. We will also launch new
types of fertilizer after completion of the new production plant in Heze,
Shandong Province. Certain business segments are in an initial stage of
operation, and may therefore incur additional business risk.
We rely on China Post Logistics to
secure new distributors.
,
For each
of the three years ended December 31, 2006, 2007 and 2008 , sales via China Post
and its branch offices accounted for approximately 51 percent, 61 percent 70
percent, respectively, of our total turnover. For the nine months ended
September 30, 2009, sales via China Post and its branch offices accounted for
approximately 69% of our total turnover. If there is any disruption
in our business relationship with China Post and we fail to secure new
distributors with a similar sales network in the PRC, our operation and
profitability may be adversely affected.
We
are dependent upon key personnel and the loss of key personnel, or the inability
to hire or retain qualified personnel, could have an adverse effect on our
business and operations
Our
performance is to a significant extent dependent upon the continuing services
and performance of key management personnel and in particular the co-founders,
two of whom are also Executive Directors. Our future success will depend, in
part, on our ability to attract and retain highly qualified management and
technical personnel. There can be no assurance that we will be successful in
hiring or retaining qualified personnel. The loss of key personnel, or the
inability to hire or retain qualified personnel, could have an adverse effect on
our business and operations.
We
are subject to PRC laws allowing a required maximum of 30 days’ notice of
termination by key management
Under the
laws of the PRC, no employee can be required to give longer than 30 days’ notice
of the termination of their employment. Although the key management personnel in
the PRC have been hired on employment contracts with an initial fixed term of 3
to 5 years, there is a risk that any of the key management personnel could cease
employment on 30 days’ notice at any time.
There
is a risk of infringement of our intellectual property rights in the
PRC
All our
fertilizer and chemical products are sold under the “CHANGDA” and “FENGTAI
WOSIDA” trademarks which are registered as trademarks in the PRC. In addition,
two patent applications have been granted and eight patent applications are
still pending. There can be no assurance that the existing legal protection in
the PRC will effectively prevent unauthorized use of our “CHANGDA” and “FENGTAI
WOSIDA” trademarks or the misappropriation by third parties of the technology
associated with our applied/registered patents.
Policing
unauthorized use of our trademarks and the proprietary technology may be
difficult, costly and ineffective, and there can be no assurance that any steps
taken by us will effectively prevent any such misappropriation or infringement
from occurring. Unauthorized use of our trademarks and patented technology could
adversely affect our performance and business reputation. Failure to renew our
trademarks could also adversely affect our performance and business
reputation.
In
relation to the eight patent applications which are still pending, should we
fail in our application for securing such patents, we may not be able to prevent
the unauthorized use of our technology and methods as set out in the
applications. In this event, unauthorized use of our production methods and
technologies could adversely affect our performance.
9
We
may be subject to claims of infringement of third-party intellectual property
rights
From time
to time, third parties may assert against us alleged patent, copyright,
trademark, knowhow, or other intellectual property rights to technologies that
are important to our business. In particular, we may be subject to intellectual
property infringement claims relating to micro-organic compound fertilizers from
a Mr. Jiu Shun Chen. Mr. Chen and one of the Co-founders, Mr. Qing Ran Zhu, who
were co-applicants in relation to three patent applications relating to
micro-organic compound fertilizers, but those patent applications, were rejected
by the China Patent Office. Changda Fertilizer used the underlying technology as
set out in the patent applications in manufacturing its products in 2006 and
2007, and the sales of those products made up a significant portion of Changda
Fertilizer’s revenues in 2006 and 2007; however, the products related to the
patents in question are no longer in production by us and are not anticipated to
be produced by us in the future.
Any
claims that our products or processes, whether in relation to the specific
circumstances set out above or otherwise, infringe the intellectual property
rights of others, regardless of the merit or resolution of such claims, could
cause us to incur significant costs in responding to, defending, and resolving
such claims, and may divert the efforts and attention of our management and
technical personnel away from the business. As a result of such intellectual
property infringement claims, we could be required or otherwise decide it is
appropriate to pay third-party infringement claims; discontinue manufacturing,
using, or selling particular products subject to infringement claims;
discontinue using the technology or processes subject to infringement claims;
develop other technology not subject to infringement claims, which could be
time-consuming and costly or may not be possible; and/or license technology from
the third-party claiming infringement, which license may not be available on
commercially reasonable terms.
The
occurrence of any of the foregoing could result in unexpected expenses or
require us to recognize an impairment of our assets, which would reduce the
value of the assets and increase expenses. In addition, if we alter or
discontinue the production of affected items, our revenue could be negatively
impacted.
We
may fail to obtain statutory permits/certificates/approvals or to renew existing
statutory permits/ certificates/ approvals
(a)
|
Fertilizer
related permits and certificates
|
Industrial
production permits and fertilizer registration certificates are statutory
requirements for the production and/or distribution of certain fertilizers in
the PRC. As at the date of this document, these permits and certificates in
relation to all of our fertilizer products have been obtained. Failure to renew
these industrial production permits and/or fertilizer registration
certifications upon their respective expiry dates could adversely affect our
operations.
(b)
|
Real
estate approvals
|
We have
not obtained formal title certificates to some of the properties we occupy and
one landlord lacks the legal right to lease properties to us, which may
materially and adversely affect our right to use such properties.
Changda
Heze is constructing fertilizer manufacturing facilities on a parcel of land
with an area of approximately 53,333 square meters in the Mudan Industrial Park,
Heze City, Shandong Province. Although we had entered into a letter
of intent with the local government in Heze regarding the purchase of the land
from the State, we are still in the process of obtaining the relevant land use
right certificates and building ownership certificates for the land and the
constructions being built thereon. Upon obtaining the relevant certificates for
these properties, we will have the legal right to occupy, let, transfer and
mortgage such properties. However, we may not be able to obtain all of the title
certificates we currently lack, in which case our rights as owner or occupier of
the land and the constructions may be adversely affected as a result of the
absence of the formal title certificates as described above and we may be
subject to lawsuits or other actions. Moreover, Changda Heze may also be subject
to fines of 5 to 10 percent of the cost of constructions built by Changda Heze
on the land without first obtaining construction approvals (construction costs
were approximately RMB 20.1 million through September 30,
2009).
Changda
Chemical leases a parcel of land with an area of approximately 22,500 square
meters from Xinxing Village Villagers’ Committee (the “Committee”). Changda
Chemical has built manufacturing facilities on the land. The Committee does not
have the right to lease the land to Changda Chemical because the land is
collectively-owned land for agricultural purposes and therefore is not permitted
to be leased for industrial purposes. Although we have received written
certifications from the local authority that Changda Chemical has attended to
all relevant procedures using the land and that the land is, according to the
municipal planning authority, intended for industrial purposes, the lease may be
deemed invalid under PRC law. If the lease is terminated or invalidated, we may
be forced to seek alternative premises, without entitlement to any compensation
and incur additional costs relating to such relocations. Moreover, Changda
Chemical may also be subject to fines of 5 to 10 percent of the cost of the
constructions built by Changda Chemical on the land without first obtaining
construction approvals (construction costs were approximately RMB 4.3m,
approximately U.S.$629,000).
10
(c)
|
Safety
and environmental approvals
|
We have
obtained production safety approvals with respect to our manufacturing lines
which are currently in use for our fertilizer and chemical business. Failure to
renew these approvals upon their respective expiry dates could adversely affect
our operations.
There
are differences between PRC and U.S. Generally Accepted Accounting
Principles
Our
profits are derived from our subsidiaries established in the PRC. The profits
available for distribution for companies established in the PRC are determined
in accordance with PRC accounting standards, which may differ from the amount
arrived at under the United States Generally Accepted Accounting
Principles. In the event that the amount of the profits determined
under the PRC accounting standard in a given year is less than that determined
under the US GAAP, we may not have funds to allow distribution of profits to our
shareholders.
There
is an untested market for thiophene and fire retardant chemical
It is
possible that if and when our thiophene and fire retardant chemical products are
launched into the market, the originally predicted market may have changed
either due to an increase in the supply of such products or changes in the
demand for such products. Therefore, there is no assurance that we will be able
to sell any of our new products as planned, and failure to do so may have an
adverse impact on our business, operations and financial condition.
There
is no assurance that we will sustain the growth in our business
Our
compound annual growth rate of sales revenue from 2006 to 2008 was approximately
47.73%, and our compound annual growth rate of net income was approximately
55.02% during this same period. Under the influence of raw materials price and
economic circumstance, the sales revenue of the first three quarters of 2009 was
$51,978,000 and the net income of the first three quarters of 2009 was
$3,475,000, as compared to $53,732,000 of sale revenue and $3,932,000 of net
income for the first three quarters of 2008.
There is
no assurance that such growth rate can be sustained or that we can retain and
attract qualified management, employees and customers. In the event that we are
unable to maintain such attributes, we may have negative growth or stagnant
growth, which in turn may impair our business operations and
profitability.
There
is no assurance that we will sustain increasing profit margin
Raw
materials for fertilizer products have risen significantly in the last several
years. We expect continued volatility and uncertainty in prices for raw
materials. In addition, our operations, like those of other PRC fertilizer
companies, are also subject to extensive regulation by the PRC Government
authorities such as the Ministry of Agriculture, the State Development Planning
Commission, the Ministry of Commerce, the State Bureau of Taxation and the local
pricing bureaus, which exercise extensive control over various aspects of our
operations: pricing mechanisms for our raw materials and main products;
industry-specific taxes and fees; and import and export quotas and procedures.
As a result, we may face significant constraints on our ability to implement our
business strategies or to maximize our profitability. Any price increase in raw
materials and any change to the regulation by the PRC Government authorities may
adversely affect our fertilizer business and our profitability and financial
results.
There
is no assurance that we will be able to maintain a prolonged relationship with
existing and ex-employees
We have a
total of approximately182 employees and skilled labor working in our offices and
production facilities in the PRC. Our directors are of the view that we have not
experienced any labor disputes which could lead to material undesirable
disruptions to our operations and business. However, there can be no assurance
that we will be able to maintain a prolonged good relationship with our existing
or ex-employees and that no labor disruptions will occur in the future. Should
any industrial action or labor unrest occur, our business operations could be
adversely affected.
We
face competition from other fertilizer and chemical producers and sellers.
Therefore, business and prospects may be adversely affected if we are not able
to compete effectively.
We
operate in markets where we compete with domestic chemical and organic
fertilizer and chemical producers and sellers of similar or larger size and
scale in the PRC. In addition, a number of foreign companies have established
fertilizer and chemical manufacturing enterprises in the PRC, and other foreign
manufacturers may do so in the future. We also operate in a very competitive
international fertilizer market. Such domestic and foreign competitors may have
greater access to financial resources, higher levels of vertical integration,
better operating efficiency and longer operating histories. If we are
unable to improve product quality, performance and price competitiveness or if
we are unable to anticipate and respond to changing market demand, maintain
operating efficiency and economies of scale, and control costs in connection
with the planned expansion, raw materials and energy, our business and prospects
may be adversely affected and we may not be able to compete
effectively.
11
Our
business and operations require capital investment. Failure to raise sufficient
capital in a timely manner may adversely affect business and results of
operations
In
accordance with our development plan, we intend to expand our operations in
Heze, Shandong Province of the PRC. Management may from time to time have other
business expansion plans that require further capital. If we are unable to
obtain such additional funding, we may not be able to pay for the necessary
capital expenditures needed for expansion, or to implement proposed business
strategies or at all. Any of the above could impede the implementation of our
business strategies or prevent us from entering into transactions that would
otherwise benefit business on commercially reasonable terms or at all and
adversely affect its financial condition and results of operations.
Product
liability is not covered under our insurance policies
Any
defects in our fertilizer and chemical products could result in economic loss,
adverse customer reaction, negative publicity, and additional expenditure to
rectify the problems and/or legal proceedings instituted against us. We have not
maintained any insurance policy against losses that may arise from such claims.
Any litigation relating to such liability may be expensive and time consuming,
and successful claims against us could result in substantial monetary liability
or damage to our business reputation and disruption to our business
operations.
Our
business is subject to operation risks beyond our control and could have a
detrimental effect on our profitability
Our
financial performance is at all times subject to operational risks which may
include factors that are beyond our control. The production process could face
unforeseen operating problems and therefore production could be delayed and
financial performance would be adversely affected. Unanticipated additional
maintenance of the plant would also impact upon production capacity and revenue
projections. This potential downtime would impact upon our results.
Operations
are subject to hazards and natural disasters that may not be fully covered by
our insurance policies
We make
substantial investments in complex manufacturing and production facilities and
transportation equipment. Many of the production processes, raw materials and
certain finished products are potentially destructive and dangerous in
uncontrolled or catastrophic circumstances, including operating hazards, fires
and explosions, and natural disasters such as typhoons, floods, earthquakes and
major equipment failures for which insurance may not be obtainable at a
reasonable cost or at all. Should an accident or natural disaster occur, it may
cause significant property damage, disruption to operations and personal
injuries and our insurance coverage may be inadequate to cover such loss. Should
an uninsured loss or a loss in excess of insured limits occur, we could suffer
from damage to our reputation or lose all or a portion of production capacity as
well as future revenues anticipated to derive from the relevant facilities. Any
material loss not covered by our insurance policies could materially and
adversely affect our business, financial condition and operations.
Possible
shortage in supply or price fluctuations of raw materials may have a detrimental
effect on our profitability
We have
not experienced any significant shortage of raw materials during the past few
years. The purchase prices of major raw materials such as urea increased in
2008. We have managed to pass on the additional cost to our customers by raising
the selling price of our major products; however, we have not entered into any
long-term supply contracts with suppliers of major raw materials and cannot
guarantee that we will be able to pass any future increases in raw material
purchase prices on to consumers. In the event that there is a significant
shortage or change in the purchase price of raw materials in the future and we
are unable to transfer resulting cost increases to our customers, our business
operations and profitability may be adversely affected.
Reliance
on the PRC market
For the
fiscal years ended December 31, 2006, 2007 and 2008, 84 percent, 92 percent and
94 percent of our sales were derived from the PRC market,
respectively. For the nine months ended September 30, 2009, 99
percent of our sales were derived from the PRC market. We expect that domestic
sales will continue to account for a significant portion of our total turnover.
If there is any material adverse change in political, economic or legal
conditions in the PRC market, our sales and profitability may be adversely
affected.
We
may fail to achieve our outline business objectives
The
future plans as set out in this document have been formulated on the basis of a
number of assumptions in relation to future events, which by their nature are
subject to changes and uncertainties and may not materialize. Although we will
endeavor to execute such plans there is no assurance that our plans will
materialize or be executed in accordance with the stated timeframe or that our
objectives will be fully accomplished.
Moreover,
we expect our business plans to be financed by the net proceeds from the
Offering and cash generated from operations. In the event that these funds are
insufficient to finance our business plans and we are unable to raise funds
through other financing activities, our business plans may not materialize as
described in this document.
12
Loss
of or refusal of extension for preferential tax treatments
Changda
Chemical enjoys a tax concession with fifteen percent exemption from enterprise
income tax from 2009 to 2011. Shandong Fengtai Fertilizer enjoys a tax
concession with full exemption from enterprise income tax from 2008 to 2009, and
will have a fifty percent exemption from enterprise income tax from 2010 to
2012. All productions of fertilizer enjoy tax concession from value added tax.
Accordingly, any loss or refusal of an extension for these preferential tax
treatments could increase our tax expenditure in the future and could have an
adverse effect on our business, operations or financial conditions.
Failure
to make payments for the compulsory social insurance schemes may result in late
charges or third party claims
Changda
Fertilizer and Changda Chemical failed to make due payments for the compulsory
social insurance schemes for their employees in accordance with the relevant PRC
laws and the companies are subject to a late charge on the outstanding social
insurance premiums. The employees also have the right to claim damages in
connection with the non-payment of the social insurance. No claim, late charge
nor penalty has been imposed on us as at December 2008. Although we have made
provision for the outstanding premium, the late charges and the penalties, and
the Co-founders have executed a deed of indemnity in favor of the Company
against any costs and liabilities which may be suffered or incurred by us, our
operations and financial results may be adversely affected if any such claim is
made against us and the Co-founders are unable to comply with their indemnities
obligations.
RISKS
RELATING TO THE FERTILIZER AND CHEMICAL INDUSTRIES IN THE PRC
The
cyclical nature of our business will expose us to potentially significant
fluctuations in our financial condition
Our sales
volumes and revenues are derived from two main product lines, fertilizer and
chemical products. In the normal course of business, we are exposed to
fluctuations in supply and demand and the prices of our products depend on a
number of factors, including general economic conditions, cyclical trends in
end-user markets, and supply and demand imbalances. In addition, prices of our
fertilizer products also depend on weather conditions, which have a greater
relevance because of the seasonal nature of fertilizer application. The domestic
price of fertilizers is also affected by demand for agricultural products and
affordability of fertilizers by farmers, PRC Government policies and other
factors beyond our control. Changes in supply result from capacity additions or
reductions and from changes in inventory levels. We cannot guarantee that its
prices will remain at recent or current levels or that they will increase in the
future.
We
face significant challenges and changes in government policies, including
changes to VAT policies, adjustments of export custom duties and accession to
the WTO, which could affect the operational environment of our industry and thus
our financial performance.
To ensure
a sufficient supply of fertilizers to meet the domestic demand in the PRC, the
PRC Government has historically adjusted its policies towards the export of
fertilizers, in particular through the cancellation of VAT refunds and
imposition of export tariffs. The PRC Government’s policies regarding export
tariffs have historically encouraged or discouraged exports, and the PRC
Government changed its tax regime for exports several times during the Track
Record Period and thereafter. In addition, the PRC Government may from time to
time change its VAT refund policies based on the level of supply or demand.
While we previously enjoyed VAT refunds for exports of our fertilizer products,
we are currently subjected to a seasonal export tariff ranging from 20 percent
to 185 percent. Because of such changes in taxes and export tariffs payable on
exports of fertilizer products, our sales are primarily domestically focused. We
may in the future be subject to further changes in tax liabilities, which may
further affect the mix of domestic and export sales and have an adverse impact
on our business, results of operations and net profits.
As part
of its WTO concession commitment, the PRC is obliged to open its domestic
fertilizer market to foreign participation within five years of its accession to
the WTO by allowing foreign participation in the trading and distribution of
fertilizers in the PRC. Whereas domestic fertilizer prices are insulated from
fluctuations of international market prices prior to the PRC’s World Trade
Organization accession, we anticipate that international market prices will have
an increasingly direct impact on our fertilizer prices as the PRC gradually
relaxes its fertilizer trade restrictions.
Results
of operations are subject to seasonality and could be negatively impacted by
adverse weather conditions and seasonality
Sales of
fertilizer and snow melting agent products to end-users are seasonal in nature.
In general, we generate a greater amount of net sales and revenue during
planting months such as March to April and September to October each year for
its fertilizer business. For the snow melting agent business, net sales are
higher during the winter season only. Accordingly, revenue and results of
operations may be affected by seasonal variations in demand for our
products.
13
Imposition
of tariffs on export sale of fertilizer products could affect our overall
operations and profitability
In order
to ensure fertilizer supply in domestic market and the stable price of
fertilizer, PRC Government will make coordination of export tariff at all times.
If the export tariff imposed on fertilizer highly increase, the export will be
affected and our export sales and income will be reduced
accordingly.
RISKS
RELATING TO DOING BUSINESS IN CHINA
Adverse
changes in economic and political policies of the Chinese government could have
a material adverse effect on the overall economic growth of China, which could
adversely affect our business.
Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in China. China’s economy
differs from the economies of most developed countries in many respects,
including with respect to the amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources. While the Chinese economy has experienced significant growth in the
past 20 years, growth has been uneven across different regions and among various
economic sectors of China. The Chinese government has implemented various
measures to encourage economic development and guide the allocation of
resources. Some of these measures benefit the overall Chinese economy, but may
also have a negative effect on us. For example, our financial condition and
results of operations may be adversely affected by government control over
capital investments or changes in tax regulations that are applicable to us.
Since early 2004, the Chinese government has implemented certain measures to
control the pace of economic growth. Such measures may cause a decrease in the
level of economic activity in China, which in turn could adversely affect our
results of operations and financial condition.
Any
deterioration of political relations between the United States and the PRC could
impair our operations.
The
relationship between the United States and the PRC is subject to sudden
fluctuation and periodic tension. Changes in political conditions in the PRC and
changes in the state of Sino-U.S. relations are difficult to predict and could
adversely affect our operations or cause potential acquisition candidates or
their goods and services to become less attractive. Such a change could lead to
a decline in our profitability. Any weakening of relations between
the United States and the PRC could have a material adverse effect on our
operations.
Changes
in foreign exchange regulations and future movements in the exchange rate of RMB
may adversely affect our financial condition and results of operations and our
ability to pay dividends
The
exchange rate of the RMB depends to a large extent on economic and political
developments in the PRC and around the world. Currently, the RMB is freely
exchangeable in current account transactions, but government-controlled in
capital accounts. Our principal accounting records and domestic sales are in
RMB, but our revenue derived from export sales is denominated in foreign
currencies. As a result, our operations are exposed to fluctuations in the
exchange rate of the RMB against these foreign currencies. Any appreciation of
the RMB would increase our cost of production and may have an adverse impact on
our export sales. We will be able to pay dividends in foreign currencies without
prior approval from the PRC’s State Administration of Foreign Exchange by
complying with certain procedural requirements. However, there is no assurance
that these foreign exchange policies regarding payment of dividends in foreign
currencies will continue in the future. Fluctuations in the exchange rate of the
RMB may cause uncertainty to our financial condition and adversely affect our
operating results.
The
Chinese economy may experience inflationary pressure, which may lead to an
increase in interest rates and a slowdown in economic growth.
In
response to concerns regarding the PRC’s high rate of growth, the PRC Government
has taken measures to slow down economic growth to a more manageable level.
Among the measures that the PRC Government has taken are restrictions on bank
loans in certain sectors. These measures have contributed to a slowdown in
economic growth in the PRC and a reduction in demand for consumer goods.
Consequently, these measures and any additional measures, including a possible
increase in interest rates, could contribute to a further slowdown in the
Chinese economy, which in turn could adversely affect the future demand of the
our products and our operating results.
14
Restrictions
on receipt of dividends from, and transfer of funds to, our Chinese operating
subsidiaries may be imposed
Changda
International Ltd is incorporated in the Republic of the Marshall Islands and is
the holding company of our operating subsidiaries. At present, Changda
Fertilizer, Changda Chemical, Changda Heze and Shangdong Fengtai are the only
subsidiaries. The ability of Changda Fertilizer, Changda Chemical, Changda Heze
and Shangdong Fengtai and any future subsidiaries which are Wholly Foreign Owned
Enterprises, or WFOEs, to declare dividends and other payments to Changda
International Ltd may be restricted by factors that include changes in
applicable foreign exchange and other laws and regulations in the PRC and in the
Marshall Islands.
In
particular, under PRC law, profit available for distribution from the PRC
operating subsidiaries is determined in accordance with generally accepted
accounting principles in the PRC. This calculation may differ from the one
performed in accordance with IFRS. As a result of the potential difference in
profit calculation, there is a risk that the PRC subsidiaries may not have
sufficient profit to distribute so as to allow distributions to the shareholders
in the future. In addition, distributions by our subsidiaries other than as
dividends may be subject to governmental approval and taxation.
Any
transfer of funds to our PRC subsidiaries, either as a shareholder loan or as an
increase in registered capital, is subject to registration or approval of
certain PRC governmental authorities, including the relevant administration of
foreign exchange and/or the relevant examining and approval authority. Further,
it is not permitted under PRC law for our PRC subsidiaries to lend money to each
other/another member. Therefore, it is difficult to change our capital
expenditure plans once the relevant funds have been remitted to our PRC
subsidiaries. These limitations on the free flow of funds between our companies
and our PRC subsidiaries could restrict our ability to act in response to
changing market conditions and to reallocate funds from one PRC subsidiary to
another in a timely manner.
Uncertainties
with respect to the Chinese legal system could adversely affect us.
Our
operations in China are governed by Chinese laws and regulations. We are
generally subject to laws and regulations applicable to foreign investments in
China and, in particular, laws applicable to wholly foreign-owned enterprises.
The Chinese legal system is based on written statutes. Prior court decisions may
be cited for reference but have limited precedential value.
Since
1979, Chinese legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the Chinese legal system is
based in part on government policies and internal rules (some of which are not
published on a timely basis or at all) that may have a retroactive effect. As a
result, we may not be aware of our violation of these policies and rules until
some time after the violation. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and
management attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us or our management.
We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements. In addition, all of our assets are
located in, and other than our chief financial officer, all of our other senior
executive officers reside within, China. As a result, it may not be possible to
effect service of process within the United States or elsewhere outside China
upon our senior executive officers and directors not residing in the United
States, including with respect to matters arising under U.S. federal securities
laws or applicable state securities laws. Moreover, our Chinese counsel has
advised us that China does not have treaties with the United States or many
other countries providing for the reciprocal recognition and enforcement of
judgment of courts. As a result, our public shareholders may have substantial
difficulty in protecting their interests through actions against our management
or directors than would shareholders of a corporation with assets and management
members located in the United States
.
Governmental
control of currency conversion may affect the value of your
investment.
The
Chinese government imposes controls on the convertibility of RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive substantially all of our revenues in RMB. Shortages in the availability
of foreign currency may restrict the ability of our Chinese subsidiaries and our
affiliated entity to remit sufficient foreign currency to pay dividends or other
payments to us, or otherwise satisfy their foreign currency denominated
obligations. Under existing Chinese foreign exchange regulations, payments of
current account items, including profit distributions, interest payments and
expenditures from trade-related transactions, can be made in foreign currencies
without prior approval from China State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval from
appropriate government authorities is required where RMB is to be converted into
foreign currency and remitted out of China to pay capital expenses such as the
repayment of bank loans denominated in foreign currencies. The Chinese
government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay dividends in foreign currencies to
our stockholders.
15
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC. We can make
no assurance, however, that our employees or other agents will not engage
in such conduct for which we might be held responsible. If our employees or
other agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our
business, financial condition and results of operations.
Exchange
controls that exist in the PRC may limit our ability to utilize our cash flow
effectively.
We are
subject to the PRC’s rules and regulations affecting currency conversion. Any
restrictions on currency exchanges may limit our ability to use our cash flow
for the distribution of dividends to our stockholders or to fund operations we
may have outside of the PRC. Conversion of RMB, the currency of the PRC, for
capital account items, including direct investment and loans, is subject to
governmental approval in the PRC, and companies are required to open and
maintain separate foreign exchange accounts for capital account items. We cannot
be certain that the regulatory authorities of the PRC will not impose more
stringent restrictions on the convertibility of the RMB, especially with respect
to foreign exchange transactions. Because a significant component for many of
our customized pressure containers, the steel vessels, is manufactured outside
of the PRC, our inability to pay our foreign manufacturer may impair our ability
to manufacture our products.
Fluctuations
in the exchange rate could have a material adverse effect upon our
business.
We
conduct our business in RMB. To the extent our future revenue are denominated in
currencies other the United States dollars, we would be subject to increased
risks relating to foreign currency exchange rate fluctuations which could have a
material adverse affect on our financial condition and operating results since
our operating results are reported in United States dollars and significant
changes in the exchange rate could materially impact our reported
earnings.
Due
to the nature of our business, we are subject to certain environmental
regulation.
Our
operations are subject to environmental and safety regulation in the PRC. Such
regulation covers a wide variety of matters, including, without limitation,
prevention of waste, pollution and protection of the environment, labor
regulations and worker safety. We may also be subject, under such regulations,
to clean up costs and liability for toxic and hazardous substances which may
exist on or under any of our properties or which may be produced as a result of
our operations. In particular, the acceptable level of pollution and the
potential clean up costs and obligations and liability for toxic or hazardous
substances for which we may become liable as a result of our activities may be
impossible to assess against the current legal framework and current enforcement
practices of the PRC. In addition, environmental legislation and permit regime
are likely to evolve in a manner which will require stricter standards and
enforcement, increased fines and penalties for non-compliance, more stringent
environmental assessments of proposed projects and heightened degree of
responsibility for companies and their directors and employees.
The
downturn in the economy of the PRC may slow our growth and
profitability
The
development of the countryside and agricultural sector is linked China’s overall
economic growth. There can be no assurance that a 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. Our
fertilizer business is dependent on the ability of the Chinese farmers to afford
our products, thus any significant disruptions in the food/ agricultural
products market might adversely affect our business. Our chemical business is
dependent the further development of Chinese consumer safety standards,
increased demand for standardized drugs and further creation as well as
extension of useable during winter time of infrastructures. Any trends that
might lead to lowering of consumer safety standards, decrease spending on
pharmacy, lower demand on infrastructure use during winter time or climatic
effects leading to warmer winters, might affect our business in a negative
way.
We
may be subject in the future to new M&A Regulations.
We have
not obtained the approval of the China Securities Regulatory Commission, or
CSRC, in connection with Admission under the Provisional Regulations on the
Merger and Acquisitions of Domestic Enterprises by Foreign Investors, or New
M&A Regulations. In the event that such an approval is subsequently deemed
to be required, our business, financial results and prospects may be adversely
affected. The New M&A Regulations also establish more complex procedures for
acquisitions conducted by foreign investors which could make it more difficult
to pursue growth through acquisitions.
On August
6, 2006, six PRC regulatory authorities, including the CSRC, promulgated the New
M&A Regulations which came into effective on September 8, 2006. The New
M&A Regulations purport, among other things, to require an offshore special
purpose vehicle or SPV, formed for overseas listing purposes through
acquisitions of PRC domestic companies and controlled directly or indirectly by
PRC domestic companies or individuals, to obtain the approval of various
authorities, including the CSRC, prior to the listing and trading of such SPV’s
securities on an overseas stock exchange. On September 21, 2006, the CSRC
published procedures specifying documents and materials required to be submitted
to it by the SPVs seeking CSRC approval for their overseas listings. However,
the application of this PRC regulation remains unclear and there is currently no
consensus among PRC law firms regarding the scope and applicability of the CSRC
approval requirement.
16
In
accordance with the New M&A Regulations, a SPV is an offshore company
directly or indirectly controlled by a PRC domestic company or a PRC individual
for the purpose of realizing an offshore listing of the interests owned by
it/him in a PRC domestic company.
Our PRC
legal counsel has advised that we are not considered to be a SPV for the
purposes of the New M&A Regulations as we are not directly or indirectly
controlled by PRC domestic companies or PRC individuals. Accordingly, the New
M&A Regulations are not applicable to us and it is not necessary to obtain
the CSRC approval for the Admission.
However,
if the CSRC or other PRC regulatory authorities subsequently determines that we
are required to obtain the CSRC’s written approval for the Admission, we may
face regulatory actions or other sanctions from the CSRC or other PRC regulatory
authorities. In such an event, these regulatory authorities may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, or take other actions that could have a material adverse effect on our
business, financial conditions, results of operations, reputations and
prospects, as well as on the trading price of the Shares.
The New
M&A Regulations also established additional procedures and requirements that
could make merger and acquisition activities by foreign investors more
time-consuming and complex, including requirements in some instances that the
Ministry of Commerce, or MOC, be notified in advance of any change-of-control
transactions in which a foreign investor takes control of a PRC domestic
company. In the future, we may grow our business in part by acquiring other
businesses, although currently we do not have any plans to do so. Complying with
the requirements of the New M&A Regulations could be time-consuming, and any
required approval processes, including obtaining approval from the MOC, may
delay or inhibit our ability to complete such transactions, which could affect
our ability to expand our business or maintain our market share.
PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents.
The State
Administration of Foreign Exchange in the PRC or SAFE, issued a public notice in
October 2005 requiring PRC residents and non-PRC residents who habitually reside
in the PRC for economic reasons, or PRC Residents, to register with the local
SAFE branch before establishing or controlling any company outside of China for
the purpose of capital financing with assets or equities of PRC companies
(referred to in the SAFE notice as an “offshore special purpose company”). PRC
Residents that are shareholders of offshore special purpose companies
established before November 1, 2005 were required to register with the local
SAFE branch before March 31, 2006. According to an Administrative Measure
promulgated by SAFE in November 2006, any ongoing or subsequent foreign exchange
activity conducted by PRC individuals must be registered with the local SAFE
branch.
Pursuant
to the foregoing regulations, the failure of PRC resident shareholders to
register with the local SAFE branch on receiving foreign currency or making
investments with foreign currency, or to amend their SAFE registrations pursuant
to the SAFE notice, or the failure of future shareholders of the Company who are
PRC Residents to comply with the registration procedures set forth in the SAFE
notice, may subject such beneficial owners to fines and legal sanctions and may
also limit our ability to contribute additional capital into the PRC
subsidiaries, limit the ability of the PRC subsidiaries to distribute dividends
to the Company or otherwise adversely affect the business.
Our PRC
legal counsel has advised that we are an overseas company established and
controlled by foreign companies and foreign individuals and hence, do not fall
within the definition of “offshore special purpose company” for the purposes of
the SAFE notice. Accordingly, the aforesaid registration requirements are not
applicable to us and our PRC resident shareholders. If SAFE or other PRC
regulatory authorities subsequently determines that SAFE registration is
required for the establishment of the Company, we may suffer in the manner
described above.
Insurance.
We have
taken out a basic asset insurance policy with China Continent Property &
Casualty Insurance Company Ltd. However, we do not have business disruption
insurance, as we have determined that the risks of disruption and the cost of
insurance are such that we do not require it at this time. Any business
disruption, litigation or natural disaster may result in substantial costs and
diversion of resources. Should any of these events occur they may have a
material adverse risk on our business and financial results.
Industry
restrictions.
Foreign
investment in the PRC is subject to industry-specific restrictions and/or
prohibitions set forth in a Catalogue Guiding Foreign Investment in Industry
(the “Catalogue”). Local governments in the PRC may maintain further
industry-specific restrictions or prohibitions. The Catalogue distinguishes
between different industries in terms of whether foreign investment is
“encouraged”, “restricted”, “prohibited” or “permitted” in such industries. The
different categories generally indicate the disposition of the MOC and other PRC
regulatory authorities to approve foreign investment in a given industry, as
well as having certain tax and other implications. Investments in the encouraged
and permitted categories are generally eligible for approval with relatively few
restrictions. Investment in the “restricted” category is often subject to
limitations on the amount of equity that a foreign investor can hold and to
other restrictions. Moreover, government approval of investments in the
“restricted” category is generally perceived to be harder to secure. Foreign
investment in the “prohibited” category is barred altogether. Such restrictions
on the nature and terms of the Company’s potential investments in the PRC may
limit the opportunities available to us in the PRC.
17
RISKS
RELATING TO AN INVESTMENT IN OUR SECURITIES
You
will experience immediate dilution in the book value per share of the common
stock you purchase as part of the units.
Because
the price per share of the common stock included in the units being offered is
substantially higher than the book value per share of our common stock, you will
suffer substantial dilution in the net tangible book value of the common stock
that you purchase in this offering. See the section entitled “Dilution” below
for a more detailed discussion of the dilution you will incur if you purchase
the units.
If
we do not maintain an effective registration statement or comply with applicable
state securities laws, you may not be able to exercise the Class A
warrants.
For you
to be able to exercise the Class A warrants, the shares of our common stock
to be issued to you upon exercise of the Class A warrants must be covered
by an effective and current registration statement and be qualified or exempt
under the securities laws of the state or other jurisdiction in which you
reside. We cannot assure you that we will continue to maintain a current
registration statement relating to the shares of our common stock underlying the
Class A warrants. As such, you may encounter circumstances in which you
will be unable to exercise the Class A warrants. Consequently, there is a
possibility that you will never be able to exercise the Class A warrants,
and that you will never receive shares or payment of cash in settlement of the
warrants. This potential inability to exercise the Class A warrants may
have an adverse effect on demand for such warrants and the prices that can be
obtained from reselling them.
Our
management might not use the proceeds of this offering effectively.
Our
management has broad discretion over the use of proceeds of this offering. In
addition, our management has not designated a specific use for a substantial
portion of the proceeds of this offering. Accordingly, it is possible that our
management may allocate the proceeds in ways that do not improve our operating
results. In addition, cash proceeds received in the offering may be temporarily
used to purchase short-term, low-risk investments, and such investments might
not be invested to yield a favorable rate of return.
Our
common shares have historically been thinly traded and you may be unable to sell
at or near ask prices or at all if you desire to liquidate your
shares.
Our
common shares are currently traded on the Over-the-Counter Bulletin
Board. The market price for our common stock is particularly volatile
given our status as a relatively small company with a small and thinly traded
“float” that could lead to wide fluctuations in our share price. The price at
which you purchase our common stock may not be indicative of the price that will
prevail in the trading market. You may be unable to sell your common stock at or
above your purchase price if at all, which may result in substantial losses to
you.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares have historically been sporadically and/or
thinly traded. As a consequence of this lack of liquidity, the trading of
relatively small quantities of shares by our stockholders may disproportionately
influence the price of those shares in either direction. The price for our
shares could, for example, decline precipitously in the event that a large
number of our common shares are sold on the market without commensurate demand,
as compared to a seasoned issuer which could better absorb those sales without
adverse impact on its share price. Secondly, we are a speculative or “risky”
investment due to our fluctuating level of revenues or profits to date and
uncertainty of future market acceptance for our current and potential products.
As a consequence of this enhanced risk, more risk-averse investors may, under
the fear of losing all or most of their investment in the event of negative news
or lack of progress, be more inclined to sell their shares on the market more
quickly and at greater discounts than would be the case with the stock of a
seasoned issuer. The following factors may add to the volatility in the price of
our common shares: actual or anticipated variations in our quarterly or annual
operating results; adverse outcomes; and additions or departures of our key
personnel, as well as other items discussed under this “Risk Factors” section,
as well as elsewhere in this registration statement. Many of these factors are
beyond our control and may decrease the market price of our common shares,
regardless of our operating performance. We cannot make any predictions or
projections as to what the prevailing market price for our common shares will be
at any time, including as to whether our common shares will sustain their
current market prices, or as to what effect that the sale of shares or the
availability of common shares for sale at any time will have on the prevailing
market price.
18
The
elimination of monetary liability against our directors and officers under
Nevada law and the existence of indemnification rights to our directors and
officers may result in substantial expenditures by our company and may
discourage lawsuits against our directors and officers.
Pursuant
to our articles of incorporation, we are obligated to indemnify our directors
and officers for monetary damages to our company and our stockholders to the
extent provided by Nevada law. We also have contractual indemnification
obligations under our employment agreements with our chief executive officer and
chief financial officer. The foregoing indemnification obligations could result
in our company incurring substantial expenditures to cover the cost of
settlement or damage awards against directors and officers, which we may be
unable to recoup. These provisions and resultant costs may also discourage our
company from bringing a lawsuit against directors and officers for breaches of
their fiduciary duties, and may similarly discourage the filing of derivative
litigation by our stockholders against our directors and officers even though
such actions, if successful, might otherwise benefit our company and
stockholders.
The
market price for our common stock may be volatile.
The
market price for our common stock is likely to be highly volatile and subject to
wide fluctuations in response to factors including the following:
-
|
actual
or anticipated fluctuations in our quarterly operating
results,
|
-
|
announcements
of new products by us or our
competitors,
|
-
|
changes
in financial estimates by securities
analysts,
|
-
|
changes in
the economic performance or
market valuations of other companies
involved in the same industry,
|
-
|
announcements
by our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital
commitments,
|
-
|
additions
or departures of key personnel,
|
-
|
potential
litigation, or
|
-
|
conditions
in the market.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common
stock.
We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our stockholders.
We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from this offering will be sufficient to meet
our anticipated cash needs for the foreseeable future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to our
stockholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
We
have no present intention to pay dividends.
We have
never paid dividends or make other cash distributions on our common stock, and
we do not expect to declare or pay any dividends in the foreseeable future. We
intend to retain any future earnings for working capital and to finance current
operations and expansion of our business.
19
Our
corporate actions are substantially influenced by our principal stockholders and
affiliated entities.
As of
December 30, 2009, our management members and their affiliated entities own or
have the beneficial ownership right to approximately 2,168,335 shares of our
common stock, representing approximately 11.43% of our voting power. These
stockholders, acting individually or as a group, could exert substantial
influence over matters such as electing directors and approving mergers or other
business combination transactions. In addition, because of the percentage of
ownership and voting concentration in these principal stockholders and their
affiliated entities, elections of our board of directors will generally be
within the control of these stockholders and their affiliated entities. While
all of our stockholders are entitled to vote on matters submitted to our
stockholders for approval, the concentration of shares and voting control
presently lies with these principal stockholders and their affiliated entities.
As such, it would be difficult for stockholders to propose and have approved
proposals not supported by management. There can be no assurances that matters
voted upon by our officers and directors in their capacity as stockholders will
be viewed favorably by all stockholders of the company.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
We are
subject to reporting obligations under the U.S. securities laws. The SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting.
Our
reporting obligations as a public company will place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and are
important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price of
our stock. Furthermore, we anticipate that we will incur considerable costs and
use significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.
Shares
eligible for future sale may adversely affect the market.
From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. Any substantial sale of our common stock pursuant to
Rule 144 or pursuant to any resale prospectus (including sales by investors of
securities acquired in connection with this offering) may have a material
adverse effect on the market price of our common stock.
We
may be subject to "penny stock" regulations.
The
Securities and Exchange Commission, or SEC, has adopted rules that regulate
broker-dealer practices in connection with transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ system, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system). Penny stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from those rules, to deliver a standardized
risk disclosure document prepared by the SEC, which specifies information about
penny stocks and the nature and significance of risks of the penny stock market.
A broker-dealer must also provide the customer with bid and offer quotations for
the penny stock, the compensation of the broker-dealer, and our sales person in
the transaction, and monthly account statements indicating the market value of
each penny stock held in the customer's account. In addition, the penny stock
rules require that, prior to a transaction in a penny stock not otherwise exempt
from those rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the trading activity in the secondary market for
stock that becomes subject to those penny stock rules. These additional sales
practice and disclosure requirements could impede the sale of our securities.
Whenever any of our securities become subject to the penny stock rules, holders
of those securities may have difficulty in selling those
securities.
Changda
International Ltd is subject to the Republic of the Marshall Islands company
law.
Changda
International Ltd is a business company incorporated in the Republic of the
Marshall Islands on April 2, 2007 under the Business Corporations Act. There are
a number of differences between the corporate structures of the Company and that
of a public limited company incorporated in England under the Act.
20
We
cannot guarantee the accuracy of the forward-looking statements.
This
document contains forward-looking statements, including, without limitation,
statements containing the words “believe’’, “anticipate’’, “expect’’ and similar
expressions. Such forward-looking statements involve unknown risks,
uncertainties and other factors which may cause our actual results, financial
condition, performance or achievements, or industry results generally to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Given these
uncertainties, prospective investors are cautioned not to place any undue
reliance on such forward-looking statements. To the extent lawfully permitted,
we disclaim any obligations to update any such forward-looking statements in
this document to reflect future events or developments.
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
prospectus contains forward-looking statements. Such forward-looking statements
include statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans, and (e) our anticipated needs for
working capital. Forward-looking statements, which involve assumptions and
describe our future plans, strategies, and expectations, are generally
identifiable by use of the words “may,” “should,” “expect,” “anticipate,”
“estimate,” “believe,” “intend,” or “project” or the negative of these words or
other variations on these words or comparable terminology. This information may
involve known and unknown risks, uncertainties, and other factors that may cause
our actual results, performance, or achievements to be materially different from
the future results, performance, or achievements expressed or implied by any
forward-looking statements. These statements may be found under “Prospectus
Summary”, “Management's Discussion and Analysis of Financial Condition and
Results of Operations” and “Description of Business,” as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under “Risk Factors” and
matters described in this prospectus generally. This prospectus may contain
market data related to our business, which may have been included in articles
published by independent industry sources. We are responsible for the accuracy
and completeness of the historical information contained in this market data as
of the date of this prospectus. However, this market data also includes
projections that are based on a number of assumptions. If any one or more of
these assumptions turns out to be incorrect, actual results may differ
materially from the projections based on these assumptions. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this prospectus will in fact occur. In addition to the
information expressly required to be included in this filing, we will provide
such further material information, if any, as may be necessary to make the
required statements, in light of the circumstances under which they are made,
not misleading.
Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this prospectus as well as other pubic reports which
may be filed with the United States Securities and Exchange Commission. You
should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances, unless and to the extent required by applicable law. Neither the
Private Securities Litigation Reform Act of 1995 nor Section 27A of the
Securities Act of 1933, as amended, provides any protection for statements made
in this prospectus.
USE
OF PROCEEDS
We
estimate the gross proceeds from the offering, prior to deducting underwriting
discounts and commissions and the estimated offering expenses payable by us,
will be approximately ________. This estimate is based on an assumed offering
price of $___ (the closing share price on _____). We intend to use
the net proceeds of this offering for working capital, general corporate
purposes and investments in production facilities and equipment. We
have no definitive agreements or commitments with respect to the use of the
proceeds from this offering. Our management may decide to change the use of the
net proceeds from this offering if opportunities or needs arise. Such
opportunities and needs could include payment of certain contractual
obligations, the need to make increased capital or operating expenditures if we
change our business plan, or payment of an unexpected liability. The actual use
of the proceeds may vary significantly and will depend on a number of factors,
including our future revenue and cash generated by operations and the other
factors described in the section entitled “Risk Factors” appearing elsewhere in
this prospectus. Accordingly, our management will have broad discretion in
applying the net proceeds of this offering.
DETERMINATION
OF OFFERING PRICE
Our
common stock has been quoted on the Over-the-Counter Bulletin Board under the
symbol “CIHD” since June 23, 2008. Trading of a security on the Over-the-Counter
Bulletin Board is made through a market maker. Our lead underwriter, [________],
however, is not obligated to make a market in our securities, and even after
making a market, can discontinue market making at any time without notice.
Neither we nor the underwriters can provide any assurance that an active and
liquid trading market in our securities will develop or, if developed, that the
market will continue.
21
The
public offering price of the shares offered by this prospectus has been
determined by negotiation between us and the underwriters. Among the factors
considered in determining the public offering price of the shares
were:
•
|
our
history and our prospects;
|
•
|
the
industry in which we operate;
|
•
|
the
status and development prospects for our
products;
|
•
|
our
past and present operating results;
|
•
|
the
previous experience of our executive officers;
and
|
•
|
the
general condition of the securities markets at the time of this
offering.
|
The
offering price stated on the cover page of this prospectus should not be
considered an indication of the actual value of the shares. That price is
subject to change as a result of market conditions and other factors, and we
cannot assure you that the shares can be resold at or above the public offering
price.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock began quoting on the OTC Bulletin Board on July 24, 2008 under the
symbol “PDWK.OB” In February 2009, our symbol was changed to
“CIHI.OB” in connection with our name change. On November 17, 2009,
our symbol was changed to “CIHD.OB” when our 3 for 1 reverse stock split became
effective. The prices, as presented below, represent the
highest and lowest intra-day prices for our common stock as quoted on the OTC
Bulletin Board which take into account the 1 for 3 reverse stock split. Such
over-the-counter market quotations may reflect inter-dealer prices, without
markup, markdown or commissions and may not necessarily represent actual
transactions.
Quarter Ended
|
|
High ($)
|
|
Low ($)
|
|
Third
Quarter (Beginning 7/24/08)
|
.06
|
.06
|
|||
Fourth
Quarter 2008
|
.06
|
.06
|
|||
First
Quarter 2009
|
1,500.015
|
.06
|
|||
Second
Quarter 2009
|
6.00
|
3.27
|
|||
Third
Quarter 2009
|
5.70
|
1.65
|
|||
Fourth
Quarter (through December 30, 2009)
|
6.00
|
2.26
|
The closing price of our common
stock on the OTC Bulletin Board on December 30, 2009 was $3.41.
Number
of Stockholders
As of
December 30, 2009, there were approximately 300 holders of record of our common
stock.
Dividend
Policy
Holders
of our Common Stock are entitled to receive dividends if and when declared by
our Board of Directors out of funds legally available for distribution. Any such
dividends may be paid in cash, property or shares of our common
stock.
We have
not paid any dividends since its inception, and it is not likely that any
dividends on its Common Stock will be declared in the foreseeable future. Any
dividends will be subject to the discretion of our Board of Directors, and will
depend upon, among other things, our operating and financial condition and our
capital requirements and general business conditions.
Securities
Authorized for Issuance under Equity Compensation Plans
As of the
date hereof, there are no awards granted under any option or other incentive
plan.
22
CAPITALIZATION
The
following table sets forth our capitalization as of September 30,
2009:
·
|
on
an actual basis giving effect to a 1-for-3 reverse stock split our common
stock;
|
·
|
on
an adjusted basis to reflect the sale of [______] common stock at the
assumed initial public offering price of $[___] per share, less the
estimated underwriting discounts and commissions and estimated offering
expenses payable by us.
|
You
should read this information in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our consolidated
financial statements and related notes appearing elsewhere in this prospectus.
Actual
|
As Adjusted
|
|||||||
(audited)
|
(unaudited)
|
|||||||
Current
and long-term
obligations
|
$ | $ | ||||||
Shareholders’
equity (deficit):
|
||||||||
Common
Stock, $0.001 par value: 300,000,000 shares authorized (actual); [_______]
shares issued and outstanding (actual); unlimited number of shares
authorized (as adjusted): [________] shares issued and outstanding (as
adjusted)
|
||||||||
Additional
paid-in capital
|
||||||||
Accumulated
deficit
|
||||||||
Total
shareholders’ equity (deficit)
|
||||||||
Total
capitalization
|
$ |
This
table assumes no exercise by the representative of the underwriters of their
option to purchase up to an additional [_____] units from us to cover
over-allotments.
This
table should be considered in conjunction with the sections of this prospectus
captioned “Use of Proceeds” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” as well as the financial
statements and related notes included elsewhere in this
prospectus.
DILUTION
The net
tangible book value of our common shares on September 30, 2009 was $[____] or
$[____] per common share. The net tangible book value per share represents the
amount of our total tangible assets less total liabilities, divided by the
number of common shares outstanding.
After
giving effect to our sale of [_____] common stock in this offering at an assumed
public offering price of $[___] per share (excluding the underwriter’s
over-allotment option), and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, our as adjusted net
tangible book value would be approximately $[____], or approximately $[____] per
share. This represents an immediate increase in net tangible book value of
$[____] per share to existing shareholders and an immediate dilution in pro
forma net tangible book value of $[____] per share to new investors purchasing
our common shares in this offering.
The
following table illustrates the per share dilution:
Assumed
public offering price per share
|
$ | |||
Net
tangible book value per share as of September 30,
2009
|
$ | |||
Increase
in net tangible book value per share attributable to this
offering
|
$ | |||
Net
tangible book value per share as adjusted after this
offering
|
$ | |||
Dilution
per share to new investors
|
$ | |||
23
If the
underwriters over-allotment option is exercised in full, there will be an
increase in as adjusted net tangible book value to $[___] per share to existing
shareholders and an immediate dilution in as adjusted net tangible book value of
$[___] per share to new investors in this offering.
The
following table sets forth, on the pro forma basis discussed above as of
September 30, 2009, the differences between the number of common stock purchased
from us (excluding the underwriter’s over-allotment option), the total price and
average price per share paid by our existing shareholders and by the new
investors, before deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, using the estimated public offering
price of $[___] per share.
Shares
Purchased
|
Total
Consideration
|
Average
Price
Per Share
|
|||
Our
existing shareholders
|
%
|
%
|
$
|
||
New
investors
|
|
|
|
|
|
Total
|
%
|
$
|
%
|
||
If the
underwriters exercise their over-allotment option in full to purchase [_______]
additional common shares in this offering, the pro forma net tangible book value
per share after the offering would be $[___] per share, the increase in pro
forma net tangible book value per share to existing shareholders would be $[___]
per share and the dilution to new investors purchasing shares in this offering
would be $[___] per share.
24
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the consolidated
financial statements and related notes to the consolidated financial statements
included elsewhere in this prospectus. This discussion contains forward-looking
statements that relate to future events or our future financial performance.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. These forward-looking statements are based largely
on our current expectations and are subject to a number of uncertainties and
risks including those set forth in the “Risk Factors” section above. Actual
results could differ materially from these forward-looking
statements. Actual results may differ materially from current
expectations. Additional information relating to the Company, including our
previous Report on Form 8-K, can be found on SEDAR at www.sedar.com and on EDGAR
at www.sec.gov/edgar.shtml.
Overview
We are,
through our wholly-owned subsidiary, Changda International Ltd. (“Changda
International”) and its wholly-owned subsidiaries in the People’s Republic of
China (“PRC”), Weifang Changda Fertilizer Co., Ltd. and Weifang Changda Chemical
Co., Ltd., engaged in the fertilizer and chemical businesses.
Weifang
Changda Fertilizer Co., Ltd. (“Changda Fertilizer”) and Weifang Changda Chemical
Co., Ltd. (“Changda Chemical”) are legally registered and operated enterprises
in PRC. Changda Fertilizer is a pioneer and supplier of advanced fertilizer in
PRC, while Changda Chemical is one of the biggest manufacturers and exporters of
environmentally friendly snow melting agent in PRC. Our industrial chemical
products include snow-melting agent, thiophene, flame retardant, calcium
chloride, and magnesium chloride.
Our
annual production capacities are:
Various
fertilizers
|
300,000
tons
|
Snow
melting agents
|
300,000
tons
|
Thiophene
|
500
tons
|
Flame
retardant
|
1,000
tons
|
During
the quarter ended September 30, 2009, we produced a total of approximately
39,184 tons of various fertilizers, 40 tons of snow melting agent, 53 tons of
thiophene, and 4,561 tons of other chemicals, of which approximately
31,498 tons, 38 tons, 47 tons, and 3,338 tons, respectively, were sold. The
sales value of various fertilizers, snow melting agent, thiophene, and other
chemical products amounted to approximately $9,443,028, $2,819, $194,994, and
$535,763, which respectively accounted for 92.79%, 0.03%, 1.92%, and 5.26% of
our total sales revenue for the quarter ended September 30, 2009.
During
the year ended December 31, 2008, we produced a total of approximately 187,614
tons of various fertilizers, 31,824 tons of snow melting agent, 282 tons of
thiophene, and 36,999 tons of other chemical products, of which 189,434 tons,
32,924 tons, 308 tons, and 31,918 tons, respectively, were sold. The
sales value of various fertilizers, snow melting agents, thiophene, and other
chemical products amounted to approximately $72,857,138, $2,820,115, $2,130,322,
and $3,150,826, which accounted for approximately 90.0%, 3.5%, 2.6%, and 3.9%,
respectively, of our total sales revenue for the year ended December 31,
2008.
25
The
following table shows the breakdown of volume and sales amount by product
categories for the quarters ended September 30, 2009 and 2008.
Product
|
Sales
volume (tons)
Quarter
ended September 30, 2009
|
Sales
revenue
(US$
‘000) (%)
Quarter
ended September 30, 2009
|
Sales
volume (tons) Quarter ended
September 30, 2008
|
Sales
revenue
(US$
‘000) (%)
Quarter
ended September 30, 2008
|
Fertilizers
|
31,498
|
9,443
(92.79)
|
22,238
|
8,153
(90.09)
|
Thiophene
|
47
|
195
(1.92)
|
90
|
696
(7.69)
|
Snow
Melting Agents
|
38
|
3
(0.03)
|
175
|
23
(0.25)
|
Other
Chemical Products
|
3,338
|
536(5.26)
|
1,144
|
178
(1.97)
|
Total
|
34,921
|
10,177
(100.00)
|
23,647
|
9,050
(100.00)
|
The
following table shows the breakdown of volume and sales amount by product
categories for the years ended December 31, 2008 and 2007.
Product
|
Sales
volume
(tons)
Year
ended
December
31, 2008
|
Sales
revenue
(US$
‘000)
Year
ended
December
31, 2008
|
Sales
volume
(tons)
Year
ended
December
31, 2007
|
Sales
revenue
(US$
‘000)
Year
ended
December
31, 2007
|
||||||||||||
Fertilizers
|
189,434
|
72,857
|
139,175
|
34,495
|
||||||||||||
Snow
Melting Agents
|
32,924
|
2,820
|
46,068
|
2,621
|
||||||||||||
Thiophene
|
308
|
2,130
|
60
|
458
|
||||||||||||
Other
Chemical Products
|
31,918
|
3,151
|
20,053
|
671
|
||||||||||||
Total
|
254,584
|
80,958
|
205,356
|
38,245
|
Our key
raw materials include potassium chloride, potassium sulphate, urea, ammonium
phosphate, and sulphur. Since the second half of 2007, we have seen marked
volatility in the prices of those raw materials, mostly due to the increasing
processing cost of the raw materials caused by higher international market price
of sulphur and non-renewable resources such as petroleum and coal. In 2008, with
the booming domestic demand for fertilizers in China, we experienced worsening
shortage and climbing price of potassium chloride. In order to
maintain a comparatively stable fertilizer price, the Chinese government
continually promulgated a number of supportive and preferential policies to
ensure fertilizer supply and to improve the purchasing power of farmers,
consequently ensuring the food safety in PRC. We believe these
government policies will help boost our fertilizer sales.
The
$586 billion government stimulus announced in November 2008 has sustained the
development of rural infrastructure and water supply projects in rural areas,
among other projects. Infrastructure construction, an important
pillar of China’s economic progress, will contribute to the growth of the
agriculture industry and the demand for our products. Two other major
factors that we envisage will promote the essential need for our fertilizers
are: 1) the increasing domestic consumption and export demand for China’s
agricultural products, and 2) the decreasing availability of arable farm
lands.
The
rapid economic growth in China over the past two decades has led to income
growth that elevated millions of consumers from poverty, resulting in dramatic
improvements of standards of living and diet diversification to more protein
based. As the world’s largest agricultural economy, China produces and consumes
a wide range of agricultural products, from traditional staple grains such as
wheat and rice, to more varieties of fruits, vegetables, livestock, poultry and
fish, as the demand by a wealthier domestic consumer base and export market
dictates. The use of our microbial organic and slow-release fertilizers are
essential to augment agricultural production to meet the food needs of a large
population with demand for high quality produce, vegetables and fruits that are
organic and pollution-free. Even the production of grain for feed given to
livestock utilizes fertilizers.
China’s
agricultural production comes almost entirely from small-scale operations.
According to China’s 2007 agricultural census, the country has 200 million farm
households and an estimated 122 million hectares (494 million acres) of
cultivated land—an average of 0.6 hectare (1.5 acres) per household. These small
land holdings are typically divided into several parcels that are not adjacent
to each other. Industrial and urban growth further decreased the
agricultural land base. To coax production out of such small plots,
farm households engage in intensive agricultural practices, including high
levels of fertilizer application and raising two or three crops per year on a
single plot.
26
With the
growing global and domestic demand for pharmaceutical base product, we are
confident about the sales growth of our chemical products as well. We
have aligned ourselves with large corporate and government clients for the
distribution of these products. Our snow melting agent had gained a
10% market share in Japan. We are focused in increasing our product
variety and strengthening our presence in the market.
We
believe that research and development, quality control and production capacity
are key factors to maintaining and improving our competitive position and
enhance our long term growth potential. As a result, we continually place
emphasis on:
1. Research
and development of new products;
2. Product
quality control;
3. Improvement
of operating efficiency and employee competence;
4. Expansion
of production capacity;
5. Further
exposure to bigger markets and diversified customers.
Our
newly developed fertilizer product, microbial semi-organic slow release
fertilizer, has been tested by our customers and received a good response.
Functional fertilizer will be the emphasis in our future research and
development activities.
Our
company obtained its ISO 9001 and ISO 14001 certifications in July 25, 2007. Our
qualified output rate of the products certified for ISO reached 100% compliance.
This helped us not only in increasing productivity, but also in acquiring a
growing number of loyal customers.
We adopt
multi-brand and multi-channel sales strategy and constantly strive to broaden
our customer base. We believe a broader customer base will mitigate the
potential operational risk for us. We also believe that a broad market for our
products can increase demand for our products, reduce the threat of negative
market changes, and provide additional opportunities for our
growth.
27
Results
of Operations
Three
months ended September 30, 2009 compared to the three months ended September 30,
2008
The
following table shows our operating results for the three months ended September
30, 2009 and 2008 and nine months ended September 30, 2009
and 2008.
Changda
International Holdings, Inc.
|
||||||||||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||||||
(UNAUDITED
- Presented in $'000 except share data)
|
||||||||||||||||
Nine
months
|
Nine
months
|
Three
months
|
Three
months
|
|||||||||||||
ended
|
ended
|
ended
|
ended
|
|||||||||||||
September
30, 2009
|
September 30,
2008
|
September
30, 2009
|
September
30, 2008
|
|||||||||||||
INCOME
|
||||||||||||||||
Operating
revenues
|
51,978
|
53,732
|
10,177
|
9,050
|
||||||||||||
COST
OF SALES
|
||||||||||||||||
Cost
of sales
|
43,581
|
45,632
|
8,530
|
7,893
|
||||||||||||
GROSS
PROFIT
|
8,397
|
8,100
|
1,647
|
1,157
|
||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Administrative
expenses
|
3,811
|
3,225
|
1,093
|
598
|
||||||||||||
Financial
costs
|
212
|
346
|
66
|
111
|
||||||||||||
Other
expenses (income)
|
(41
|
)
|
(72
|
)
|
(5
|
)
|
(10
|
)
|
||||||||
Taxation
|
940
|
669
|
169
|
94
|
||||||||||||
Total
Operating Expenses
|
4,922
|
4,168
|
1,323
|
793
|
||||||||||||
NET
PROFIT
|
3,475
|
3,932
|
324
|
364
|
||||||||||||
EARNINGS
PER BASIC AND DILUTED
|
||||||||||||||||
COMMON
SHARE ($)
|
.0619
|
.0734
|
.0057
|
.0068
|
||||||||||||
WEIGHTED
AVERAGE NUMBER OF
|
||||||||||||||||
COMMON
SHARES OUTSTANDING
|
56,096,059
|
53,599,965
|
56,611,853
|
53,599,965
|
Operating
Revenues
Revenues
for the three months ended September 30, 2009 of approximately $10,177,000
compared to the net sales of approximately $9,050,000 for the three months ended
September 30, 2008 represents an increase of approximately $1,127,000 or 12.45%.
The increase in sales revenue was mostly due to the increase in the volume of
fertilizer sales, offsetting the decrease in the average sales price of
fertilizers.
28
Cost
of Sales
Cost of
sales for the three months ended September 30, 2009 was approximately
$8,530,000, or 83.8% of net sales. Cost of sales for the three months
ended September 30, 2008 was approximately $7,893,000 or 87.2% of net
sales. The decrease in cost of sales resulted from the decreasing
production cost caused by lower raw material price for fertilizers and chemical
products.
Gross
Profit
Total
gross profit for the three months ended September 30, 2009 was approximately
$1,647,000 or 16.2% of net sales compared to approximately $1,157,000 or 12.8%
of net sales for the three months ended September 30, 2008. The increase in
gross profit was mostly due to the decrease of production cost stemming from
lower raw material price.
Operating
Expenses
Operating
expenses consist primarily of transportation expenses, commission, promotion and
advertising expenses, freight charges and general and administrative expenses.
Operating expenses amounted to approximately $1,093,000, or 10.74% of net sales
for the three months ended September 30, 2009 as compared to approximately
$598,000 or 6.61 % of net sales for the three months ended September 30,
2008.
Income
Taxes
The PRC
Subsidiaries having been wholly owned foreign subsidiaries of CIHD are subject
to effective tax rates of 34% and 21% for the quarters ended September 30, 2009
and 2008, respectively, as a result of tax grants by the local government of
economic development. The income tax paid was approximately $169,000 for the
three months ended September 30, 2009 and $94,000 for same period in
2008 .
Net
Income
Our net
income was approximately $324,000 for the three months ended September 30, 2009
and approximately $364,000 for the three months ended September 30, 2008. The
decrease in net income was largely due to the increase in operating
expenses, and income taxes. Net income as a percentage of total net sales
approximated 3.18% and 4.02% for the three months ended September 30, 2009 and
2008, respectively.
29
Fiscal
year ended December 31, 2008 compared to fiscal year ended December 31,
2007
The
following table shows our operating results for the years ended December 31,
2008 and 2007 ($000).
Changda
International Limited
Fiscal
Year Ended
December
31,
|
Changda
International Limited
Fiscal
Year Ended
December
31,
|
|||||||
2008
|
2007
|
|||||||
INCOME
|
||||||||
Operating
revenues
|
80,958
|
38,245
|
||||||
COST
OF SALES
|
||||||||
Cost
of sales
|
67,907
|
31,417
|
||||||
GROSS
PROFIT
|
13,051
|
6,828
|
||||||
OPERATING
EXPENSES
|
||||||||
Administrative
expenses
|
6,122
|
3,034
|
||||||
Financial
costs
|
449
|
176
|
||||||
Other
expenses (income)
|
(96
|
)
|
(135
|
)
|
||||
Taxation
|
931
|
-
|
||||||
Total
Operating Expenses
|
7,406
|
3,075
|
||||||
NET
PROFIT
|
5,645
|
3,753
|
||||||
EARNINGS
PER BASIC AND DILUTED
|
||||||||
COMMON
SHARE ($)
|
0.11
|
0.07
|
||||||
WEIGHTED
AVERAGE NUMBER OF
|
||||||||
COMMON
SHARES OUTSTANDING (BASIC AND DILUTED)
|
53,599,964
|
53,599,964
|
Operating
Revenues
Revenues
for the year ended December 31, 2008 of approximately $80,958,000 compared to
the net sales of approximately $38,245,000 for the year ended December 31, 2007
represents an increase of approximately $42,713,000 or 111.68%. The substantial
increase in sales revenue was basically due to the boost in production resulting
from the expansion of the plant facilities.
Cost
of Sales
Cost of
sales for the year ended December 31, 2008 amounted to approximately
$67,907,000, representing approximately 83.88% of net sales. Cost of
sales for the corresponding period in 2007 amounted to approximately
$31,417,000, representing approximately 82.15% of net sales. The
increase in the percentage of cost of sales in relation to net sales by
approximately 1.73% resulted from the increase in raw material price,
specifically the cost of potassium chloride.
Gross
Profit
Total
gross profit for the year ended December 31, 2008 amounted to approximately
$13,051,000, representing approximately 16.12% of net sales. Gross profit for
the corresponding period in 2007 amounted to approximately $6,828,000,
representing approximately 17.85% of net sales. The decrease in the percentage
gross profit percentage by approximately 1.73% resulted from the increase in raw
material price, specifically the cost of potassium chloride.
Operating
Expenses
Operating
expenses consist primarily of transportation expenses, commission, promotion and
advertising expenses, freight charges and general and administrative expenses.
Operating expenses amounted to approximately $6,122,000, or approximately 7.56%
of net sales for the year ended December 31, 2008 as compared to approximately
$3,034,000, or approximately 7.93 % of net sales for the year ended December 31,
2007.
Income
Taxes
The PRC
Subsidiaries having been wholly owned foreign subsidiaries of CIHD are subject
to effective tax rates of 14% for the year ended December 31, 2008, as a result
of tax grants by the local government for economic development. The income tax
paid was approximately $931,000. No income tax was paid for the year
ended December 31, 2007.
Net
Income
Our net
income was approximately $5,645,000, representing approximately 6.97% of net
sales for the year ended December 31, 2008, compared to approximately
$3,753,000, representing approximately 9.81% of net sales for the year ended
December 31, 2007. The decrease in net income was mainly attributed to the
increases in cost of sales, interest expense, and income tax paid for
2008.
30
Liquidity
and Capital Resources
Operating
Activities
Net cash
provided by operating activities for the nine months ended September 30, 2009
amounted to approximately $20,000 while net cash used in operating activities
for the nine months ended September 30, 2008 amounted to approximately
$638,000. The increase of approximately $658,000 was primarily
due to the decrease in outstanding accounts receivable and increase in trade and
other payables.
Net cash
provided by operating activities for the years ended December 31, 2008 and 2007
were approximately $1,889,000 and $4,046,000, respectively, or a decrease of
approximately $2,157,000. The decrease was mainly due to increase in
inventories and receivables.
Investing
Activities
Net cash
used in investment activities for the nine months ended September 30, 2009 and
September 30, 2008 amounted to approximately $172,000 and $1,678,000
respectively. This represents a decrease of approximately
$1,506,000 which was mainly due to the decrease in
acquisition of property, plant and equipment.
Net cash
used for investing activities for the years ended December 31, 2008 and 2007
were approximately $2,901,000, and $9,326,000, respectively, or a decrease of
approximately $6,425,000. The decrease was primarily due to the decline in new
investments in property, plant and equipment.
Financing
Activities
Net cash
used in financing activities for the nine months ended September 30, 2009
amounted to $98,000 while net cash from financing activities for the nine months
ended September 30, 2008 amounted to approximately $1,368,000. This
represents a decrease of approximately $1,466,000 which was primarily due to the
decrease in new bank and other loans issued.
Net cash
provided by financing activities for the years ended December 31, 2008 and 2007
were approximately $544,000 and $5,494,000, respectively, or a decrease of
approximately $4,950,000. The proceeds of the 2008 long-term
borrowing of approximately $ 7,845,000 was offset by payments of short-term
borrowings amounting to approximately $7,266,000, resulting in reduced cash
inflow compared to 2007. Further, in 2008 there was no increase in
paid-in capital, unlike the increase of approximately $3,148,000 that occurred
in 2007.
Future
cash commitments
In order
to improve our performance and competitiveness, we are constructing our Heze
fertilizer plant and are preparing to rebuild our second chemical plant. We have
already invested a total of $4,136,681 into our Heze plant. However, an
additional $19,700,000 for construction is expected to be incurred and
$11,500,000 for matching working capital will be required. These amounts will be
financed primarily through self-financing and fund raising from third party
lenders or investors.
Critical Accounting Policies and
Estimates
Management's
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance generally accepted accounting principles in the United States of
America. Our financial statements reflect the selection application of
accounting policies which require management to make significant estimates and
judgments.
We have
disclosed in the notes to our financial statements those accounting policies
that we consider to be significant in determining our results of operations and
our financial position which we are incorporating by reference herein. We
believe that the following reflect the more critical accounting policies that
currently affect our financial condition and results of operations.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with USGAAP
requires the management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reported periods. The management evaluates
these estimates and judgments on an ongoing basis and bases their estimates on
experience, current and expected future conditions, third-party evaluations and
various other assumptions that they believe are reasonable under the
circumstances. The results of these estimates form the basis for making
judgments about the carrying values of assets and liabilities as well as
identifying and assessing the accounting treatment with respect to commitments
and contingencies.
Actual
amounts could differ from those estimates. Estimates are used for, but not
limited to, the accounting for certain items such as allowance for doubtful
accounts, depreciation and amortization, inventory allowance, taxes and
contingencies.
Recognition
of Revenue
Revenue
is recognized when it is probable that the economic benefits will flow to the
Group and when the revenue and costs, if applicable, can be measured reliably
and on the following basis.
Sale of
goods is recognized on transfer of risks and rewards of ownership, which
generally coincides with the time when the goods are delivered to customers and
the title is passed.
Accounts
Receivable
Accounts
receivables are stated based on the amounts invoiced to customers. We review our
accounts receivable on a regular basis and a provision for bad debts is
determined and recorded in the accounts based on age analysis of the
balances.
A
valuation allowance for amounts anticipated to be uncollected is recorded as
needed. A considerable amount of judgement is required in assessing
the ultimate realization of these receivables, including the current
creditworthiness and the past collection history of each debtor. If
the financial conditions of these debtors were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowance will be
required.
Property,
plant and equipment
Property,
plant and equipment, other than construction in progress, are stated at cost
less accumulated depreciation and accumulated impairment losses.
The cost
of an item of property, plant and equipment comprises its purchase price and any
directly attributable costs of brining the asset to its working condition and
location for its intended use. Repairs and maintenance are charged to
the income statement during the period in which they are incurred.
Depreciation
is provided to write off the cost less accumulated impairment losses of
property, plant and equipment, other than construction in progress, over their
estimated useful lives from the date on which they are available for use and
after taking into account of their estimated residual values, using the
straight-line method. Where parts of an item of property, plant and
equipment have different useful lives, the cost or valuation of the item is
allocated on a reasonable basis and depreciated separately.
Foreign
currency translation
Items
included in the Company’s consolidated financial statements are measured using
the currency of the primary economic environment in which the Group operates
(“functional currency”).
Foreign
currency transactions are translated into the functional currency using the
exchange rates prevailing at the dates of the transactions. Foreign currency
transaction gains and losses are recognized in current operations, whilst
translation adjustments are recognized in other comprehensive income, which in a
separate component of stockholders’ equity.
The
presentational currency is the United States Dollars.
Off
Balance Sheet Arrangements
The
Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.
31
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
On
February 17, 2009, we dismissed Moore & Associates, Chartered, or Moore
& Associates, as our independent registered public accounting firm,
effective immediately. The decision to change accountants was
recommended and approved by the Board of Directors on February 17,
2009.
The
report of Moore & Associates on the financial statements for the two fiscal
years ended June 30, 2008 and 2007 did not contain an adverse opinion or
disclaimer of opinion, or was modified as to uncertainty, audit scope, or
accounting principal. There were no disagreements with Moore &
Associates during the two most recent fiscal years and subsequent interim period
through February 17, 2009.
On March
12, 2009, Moore & Associates furnish a letter addressed to the Commission
stating whether or not Moore & Associates agrees with the statements noted
above and is incorporated by reference herein as Exhibit 16.1.
On
January 22, 2009, we engaged Mazars LLP, Certified Public Accountants, as our
independent registered public accounting firm.
On
December 3, 2009, our Board of Directors approved the dismissal of Mazars LLP,
or Mazars UK, as our independent auditors.
Since
Mazars UK did not issue a report on our financial statements for the fiscal
years ended December 31, 2008 and 2007 or any other relevant period, no report
of Mazars UK on our financial statements contained an adverse opinion or
disclaimer of opinion, or was qualified or modified as to uncertainty, audit
scope or accounting principles.
From the
date of Mazars UK’s engagement, January 22, 2009, through December 3,
2009: (i) there have been no disagreements with Mazars UK on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Mazars UK, would have caused it to make reference to the subject matter of the
disagreement in connection with its reports and (ii) Mazars UK did not advise us
of any of the events requiring reporting in this Current Report on Form 8-K
under Item 304(a)(1) of Regulation S-K.
On
December 3, 2009, Mazars UK furnish a letter addressed to the Commission stating
whether or not Mazars agrees with the statements noted above and is incorporated
by reference herein as Exhibit 16.2.
On December 3, 2009, our Board of
Directors ratified and approved our engagement of Mazars CPA Limited, or Mazars
HK, as our independent auditors.
During
the years ended December 31, 2008 and 2007 and through December 3, 2009, neither
the Company nor anyone on its behalf consulted Mazars HK regarding (i) the
application of accounting principles to a specific completed or contemplated
transaction, (ii) the type of audit opinion that might be rendered on our
financial statements, or (iii) any matter that was the subject of a disagreement
or event identified in response to Item 304(a)(1) of Regulation S-K (there being
none).
32
BUSINESS
We
were incorporated on January 25, 2007, in the state of Nevada under the name
Promodoeswork.com, Inc. We subsequently changed our name to Changda
International Holdings, Inc. We have never declared bankruptcy, we
have never been in receivership, and we have never been involved in any legal
action or proceedings.
On
January 15, 2009, Darryl Mills, our major shareholder and affiliate consummated
an Affiliate Stock Purchase Agreement with Allhomely International, Limited.
Pursuant to such agreement, Allhomely International Limited acquired a total
2,000,000 restricted shares (pre-reverse split) of our common
stock. Also on January 15, 2009, John Spencer, Derrick Waldman,
and Louis Waldman, shareholders and affiliates of the Company, consummated a
Restricted Stock Purchase Agreement with Allhomely International
Limited. Pursuant to such agreement, Allhomely
International Limited acquired a total 2,200,000 restricted
shares (pre-reverse split) of our common stock.As the result,
,Allhomely International Limited acquired a total 4,200,000
shares (pre-reverse split) of our common stock, resulting in a change
of control.
Immediately
prior to the closing of the above transaction, Louis Waldman served as our
President, and Derrick Waldman served as the our Secretary and
Treasurer. Immediately following the closing of the transaction
Mr. Jan Pannemann was nominated and elected by the Board of Directors as our
sole officer, to act as President and Chief Executive Officer and to serve until
his successors shall be elected and qualified until the earlier
of death, resignation or removal in the manner provided for in our
by-laws.
Also
following the closing of the transaction Mr. Jan Pannemann was appointed as our
sole Director to serve until his successors shall be elected and qualified on
the earlier of death, resignation or removal in the manner provided for in the
Company’s by-laws. Following the election and appointment of Mr. Jan Pannemann
as officer and Director, Louis Waldman, Derrick Waldman, and John Spencer
tendered their resignations as our officers and directors.
On
February 13, 2009, we entered into a Share Exchange Agreement under which we
issued Forty Seven Million Seven Hundred Twenty Nine Thousand Nine Hundred Sixty
Four (47,729,964) shares (pre-reverse split) of our common
stock, to the shareholders of Changda International
Ltd. in exchange for 100% of the issued and outstanding capital stock of Changda
International Ltd.. As a result of the Share Exchange Agreement
Changda International Ltd. became our wholly-owned subsidiary. As of
the date of the Share Exchange Agreement, Changda International Ltd. held,
directly or indirectly, the entire equity interest in Changda
Chemical, Shangdong Fengtai, Changda Fertilizer and Changda
Heze.
Following
our acquisition of Changda International Ltd., as set forth in the following
diagram, Changda International Ltd. became our direct wholly-owned subsidiary
and Changda International, directly or indirectly, holds the entire equity
interest in Changda Fertilizer, Changda Chemical, Shandong Fengtai and Changda
Heze.
Our
Corporate Structure
Our
current corporate structure is set forth below:
33
Organizational
History of Changda International Limited
Changda
Chemical was formed on December 1, 2000, to engage in the production and sale of
a snow melting agent. In view of the continuing expansion in the agricultural
sector and supportive government policies, the Changda Fertilizer was
established on April 24, 2003, which is engaged in the production and sale of
various fertilizers, including chemical, organic and compound fertilizers. In
March 2007, Changda Chemical began to set up production lines for thiophene and
fire retardant agents, which were completed and put into production in September
2007 and July 2008 respectively. Changda Heze was established on September 3,
2007 to take advantage of the continued growth in demand for microbial
organic-inorganic compound fertilizers and slow-release fertilizers. All current
production lines of the Company are located in Shandong Province, Peoples
Republic of China (“PRC”). Shandong Fengtai was established on May 17, 2004,
jointly owned by Changda Fertilizer (75 percent) and Seiwa Fertilizer Co. Ltd
(“Seiwa”), a Japanese company (25 percent), to develop export sales to Japan. On
June 13, 2008, the Company and Seiwa entered into an agreement whereby the
Company acquired the remaining twenty-five percent interest in Shangdong Fengtai
from Seiwa for a cash consideration of US$130,500. The equity transfer is
closed.
Changda
International Ltd. was incorporated on April 2, 2007 in the Republic of Marshall
Islands as the holding company of our operating subsidiaries. Changda
International Ltd. holds, directly or indirectly, the entire equity interest in
Changda Fertilizer, Changda Chemical, Shangdong Fengtai and Changda
Heze.
Overview
of the Business
We are
principally engaged in the research and development, manufacture and sale of
fertilizer and chemical products in the PRC. During the years ended December 31,
2005, 2006 and 2007, our sales revenue from fertilizers accounted for
approximately 77.4 percent, 81.2 percent, 90.0 percent and 94.2 percent of the
total aggregate revenue in 2005, 2006, 2007 and the six months ended on June 30,
2008 respectively. Fertilizers we manufacture can be broadly classified into
chemical compound fertilizers and microbial organic and inorganic compound
fertilizers. The chemical products manufactured by the Company consist of snow
melting agents and various other industrial chemicals.
Primary
Products
We
produce chemical and microbial organic-inorganic compound fertilizers. Our
chemical fertilizer products are classified into three types, namely complex
fertilizers, compound fertilizers and slow- release compound fertilizers with
more than 10 product lines sold under the “CHANGDA” and “FENGTAI WOSIDA”
brands.
Compound
fertilizer products are produced by initiating chemical reactions between the
three key nitrogen, phosphorous and potassium nutrients during the production
process; each granule contains a combination of these nutrients so as to provide
balanced distribution capabilities.
34
Our
principal compound fertilizers are sulfur-based compound fertilizer, ammoniated
sulfur-based compound fertilizer and chloric-based compound
fertilizer.
Slow-release
compound fertilizer products allow the fertilizer nutrients to be released
progressively, enabling plants to absorb most of the nutrients and enhance yield
rate. Slow-release compound fertilizers are also more convenient, as they
require less frequent applications. We have modified and developed
controlled-release (which is a subset of slow-release) fertilizers.
Our
microbial organic-inorganic compound fertilizer is a new type of fertilizer. In
general, it helps plants to secure nitrogen from the air and to dissolve useful
minerals such as phosphorus and potassium from soil thus facilitating absorption
of these useful minerals by plants and enhancing their stress resistance. The
organic and inorganic elements enhance soil fertility and crop yield
respectively.
In recent
years, with the increase in health awareness among consumers in the PRC, the
production and sale in the PRC of green food and organic food products, or food
products using organic fertilizers, has increased significantly.
Customers, sales and
distribution
We
distribute some of our fertilizer products to farmers through China Post
Logistics (Shandong) Limited; a subsidiary of the China Postal Service (“China
Post”), which provides postal services in the PRC. Other distribution channels
used by the Company include five exclusive distributions centers. We also
distribute fertilizer products overseas to Seiwa in Japan. The Directors believe
these distribution channels minimize our promotion costs by taking advantage of
China Post and Seiwa’s sales channels and goodwill to penetrate target markets,
and also minimize transportation costs as products are distributed primarily to
China Post and Seiwa rather than directly to end-users.
In 2008,
approximately 97 percent of our fertilizer products were sold within Shandong
Province in the PRC, while approximately 3 percent of our fertilizer sales were
made to Japan. Domestic sales are settled in RMB while export sales are settled
in USD. Terms of sale are usually cash on delivery or cash in advance of
delivery and a credit period is not normally granted to customers. Fertilizer
sales are subject to seasonality, being comparatively higher during planting
months such as March to April and September to October each year.
Distribution
Agreement with China Post
On
December 28, 2007, Weifang Changda Fertilizer Co., Ltd. entered into a
distribution agreement with China Post Logistics(Shangdong) Co., Ltd., which
authorized China Post Logistic(Shangdong) Co., Ltd to be the exclusive
distributor of Fengtaiwosida Series of fertilizer in the area of Shangdong
Province. The distribution agreement expires on December 27, 2012.
On
December 25, 2008, Changda Fertilizer entered into a Sales Agency Agreement with
China Post (Shandong), Dongying Branch, or China Post-Dongying Branch. Pursuant
to such agreement, Changda Fertilizer authorized China Post-Dongying Branch to
be the Sales agent for its Fengtaiwosida Brand compound fertilizers in Dongying
area. Each order made by China Post-Dongying Branch shall be within the scope of
5% of 30,000 tons. The authorization is valid from January 1, 2009 through
December 31, 2009.
On
December 25, 2008, Changda Fertilizer entered into a Sales Agency Agreement with
China Post (Shandong), Weifang Branch, or China Post-Weifang Branch. Pursuant to
this agreement, Changda Fertilizer authorized China Post-Weifang Branch to be
the Sales agent for its Fengtaiwosida Brand compound fertilizers in Weifang
area. Each order made by Weifang Branch shall be within the scope of 5% of
40,000 tons. The authorization is valid from January 1, 2009 through December
31, 2009.
Materials,
production process and facilities
The key
raw materials we use in the production of our fertilizers are urea, potassium
sulphate, potassium chloride, ammonium sulphate, ammonium phosphate and potash.
Our chemical fertilizer products are manufactured through chemical reactions
occurring between different inorganic fertilizer materials so as to provide a
balanced proportion of all nutrients. Our microbial organic-inorganic compound
fertilizer products are manufactured from bacteria combined with inorganic and
organic elements. Most of the raw materials are sourced domestically in the PRC
and are paid for in RMB. Our payout terms with its suppliers vary from a credit
period of up to 60 days to cash payments in advance.
Our
fertilizer production facilities are located in Weifang and Heze, Shandong
Province in the PRC, consisting of land parcels with a total site area of
approximately 151,164 square meters. There are two production lines for the
manufacture of chemical fertilizers, and two production lines for the
manufacture of the microbial organic-inorganic compound fertilizers and
slow-release compound fertilizers, with an aggregate annual capacity of 300,000
tonnes in 2008.
35
Chemical
Business
Products
Our
principal chemical products are snow melting agents and various other industrial
chemicals. Snow melting agents are de-icing salt, consisting of a
combination of sodium chloride, calcium chloride, magnesium chloride and
additives in varying levels for different customer segments and uses. The
products are a white, odorless and soluble solid compound and are used primarily
to de-ice airports, roads and golf courses in the winter seasons, spread by
winter service vehicles.
Our
industrial chemical products range includes thiophene, calcium chloride and
magnesium chloride. Thiophene is a colourless and transparent liquid which is
primarily used in the pharmaceutical raw materials industry as a medicine
chemical auxiliary, and for the synthesisation of anti-bacterial fungus. Calcium
chloride and magnesium chloride are used for dust control on roads and also as
essential product inputs for a wide range of industrial usage such as in cement
production.
Customers,
sales and distribution
We mainly
sell and distribute our snow melting agents and thiophene to industrial
end-users through its sales team. Most of our snow melting agent products are
sold to Japanese customers and in total made up 11 percent, 6.5 percent and 5.3
percent of our sales in 2006, 2007 and 2008 respectively. Changda Chemical
supplied 10 percent of snow melting agent demanded in Japan in
2007.
Thiophene
was commercialized in the first half of 2008 and sales were not material.
Domestic sales are settled in RMB while sales to Japan are settled in USD.
Payment terms are usually by cash payment for sales to Japan. Payment terms for
domestic sales are usually cash in advance of delivery, although a credit period
of up to 60 days may be granted to repeat customers. Snow melting agent sales
are subject to seasonality, being comparatively higher during October to
February each year.
Materials,
production process and facilities
The
principal raw materials in the chemical products include sodium chloride,
calcium chloride, magnesium chloride and additives. For each of the three years
ended December 31, 2006, 2007 and 2008, consumption of sodium chloride, calcium
chloride and magnesium chloride accounted for approximately 16 percent, 13
percent and 21 percent of the Company’s total cost of sales, respectively and
approximately 13 percent, 11 percent and 19 percent of its turnover
respectively. De-icing agents are manufactured by granulisation and drying of
various chlorides and additives. Thiophenes are manufactured from the
catalisation and distillation of butadiene and sulphur.
At
present, we purchase most of our principal raw materials locally. All of our
suppliers are paid in RMB. Most of our suppliers do not allow a credit
period.
Our
chemical production facilities are located in Shandong Province in the PRC and
occupy a total site area of 69,278 square meters. Three production lines are
utilized for the manufacture of snow melting agent products, while one
production line is operated to produce thiophene and one production line is
operated to produce fire retardant agent. Total annual production capacity in
2008 was 301,500 tonnes (tonnes is a metric measure of weight equivalent to
1,000 kilograms).
Like all
other sectors the chemical industry in China also has been affected by global
economic crisis. Nevertheless the industry now shows signs of recovery-
according to China Chemical Industry News (CCIN) the overall production
increased by 1.1% in the first 8 months of 2009 compared to the same period in
the previous year. Specialty Chemicals (+10.6%) and Rubber Related
Chemicals (+10.4%) gained particularly strong. In 2006, global sales
of chemical products amounted to just under 2 180 billion Euros, reflecting a
growth rate of almost 8 percent against 2005. Europe and Asia have roughly equal
positions as the major chemical manufacturers, closely followed by North
America. China ranks second only to the United States, its chemical industry
outgrow Germany in 2005 and Japan in 2006 with 205 billion Euros worth in
sales.
36
Investment
in the chemical sector is still growing strongly. Investment
undertaken by the Chinese chemical Industry (Billion RMBs compared to previous
year period)
Sector
|
1st
Half. 2008
|
1st
Half. 2009
|
Change
|
|||||||||
Petrochem
|
77,4 | 83,2 | 7,5 | % | ||||||||
Base
Chemicals
|
192,8 | 248,9 | 29,1 | % | ||||||||
Pharmacy
|
43,1 | 60,8 | 41,1 | % | ||||||||
Fibres
|
13,0 | 11,5 | -11,5 | % | ||||||||
Rubber
Products
|
21,8 | 28,5 | 30,7 | % | ||||||||
Plastic
Products
|
45,8 | 59,8 | 30,6 | % | ||||||||
Total
|
393,9 | 492,7 | 25,1 | % |
(Source:
Germany Trade and Invest (GovOrg) & China Chemical Industry News (Industry
Federation Publication), National Bureau of Statistics, German Chemical Industry
Federation VCI )
Information
on the Industry
Classification
and Function of Fertilizers
Fertilizers
are used to provide, maintain and improve plant nutrition and enhance the
performance of the soil in which plants grow, with the aim of increasing
agricultural output, improving the quality of agricultural products and
increasing plants’ resistance to disease. As set out below, fertilizers come in
both organic and inorganic forms.
Chemical
Fertilizers (Inorganic Fertilizers)
Chemical
fertilizers are manufactured using inorganic material of wholly or partially
synthetic origin, and are added to the soil to sustain plant growth. Chemical
fertilizers generally contain one or more of the following nutrients, which are
essential to plant growth:
• Nitrogen
Nitrogen
plays an important role during plant growth. It is a component of amino acids in
plants, which are the building blocks of protein. Nitrogen also helps the crop
yield. It not only increases the output of agricultural products, but also
improves their quality.
• Potassium
Potassium
is essential in its ionic form for metabolism. Potassium encourages crops to use
nitrogen more efficiently, increases production, improves crop quality and
increases crop resistance.
• Phosphorous
Phosphorus
is the component of cell protoplasm in the plant. It plays an important role in
cell growth and proliferation. It also assists in photosynthesis, and
accelerates root growth of seedlings and the growth of plump-eared
grain.
In
accordance with their mineral nutrient content, chemical fertilizers can be
divided into four types, namely nitrogen, phosphate, potash and compound
fertilizers.
Organic
Fertilizers
Organic
fertilizer is made up of materials of natural origin (primarily derived from
plants and/or animals) that release nutrients into the soil as its constituent
parts are broken down by micro-organisms.
Organic
fertilizers promote the growth and reproduction of micro-organisms in the soil,
improve the physical, chemical and biological characteristics of the soil, and
increase the soil’s capacity to hold water and nutrients, thus creating a
favorable environment for plant growth.
37
GLOBAL
DEMAND AND SUPPLY OF FERTILIZER
The
steady growth of the global population and of the world economy has contributed
to increased demand for agricultural products. Other factors, including the
development of bio-energy (partly in response to rising oil prices) and the
implementation of favorable agricultural policies in certain countries, have
also promoted agricultural growth, which in turn has led to growth in demand for
fertilizers.
Like
other commodities, fertilizers have been affected by the economic downturn in
2008. Aggregate world fertilizer demand in 2008/09 is seen as down 5.1% compared
with the previous year, from 168.1 to 159.6 Mt nutrients. Drops in consumption
are registered in all the regions except South Asia and Eastern Europe and
Central Asia. (Source IFA June 2009)
Global
Fertilizer Consumption (million metric tons nutrients)
Year
|
N
|
P
|
K
|
Total
|
06/07
|
97.4
|
38.1
|
26.9
|
162.4
|
07/08
|
101.0
|
38.8
|
28.3
|
168.1
|
08/09
(estimated)
|
99.4
|
36.0
|
24.3
|
159.7
|
09/10
(forecast)
|
102.0
|
38.1
|
25.3
|
165.4
|
13/14
(forecast)
|
111.1
|
44.3
|
31.4
|
186.8
|
Source:
IFA, June 2009
An
International Fertilizer Association (“IFA”) report indicates that, in response
to relatively high agricultural commodity prices in 2007, as well as to policies
promoting fertilizer use in many Asian countries and favorable weather
conditions in the northern hemisphere, global fertilizer demand in 2007 was at
168.7 million metric (Mt) tons of nutrients. At the regional level, the bulk of
the increase in demand is forecast to come from Asia and, to a lesser extent,
from Latin America. South Asia and East Asia together are forecast to account
for 62% of the total global growth. If Latin America is added, the three regions
together are forecast to account for three-fourth of the increase in global
demand in the next five years. The IFA report projects an average global growth
of the fertilizer consumption of 2.8% to the year 2013 with a then global
consumption of 186.8 million tons.
The PRC
is one of the fastest growing economies in the world and primary industry
(farming, forestry, animal husbandry, sideline production and fishery) accounts
for over 10 percent of the PRC’s total gross domestic product.
The PRC
has a huge population of 1.3 billion. In contrast, the country’s farmland is
relatively limited, with approximately 122 million hectares of arable land. Per
capita arable land is less than 0.1 hectares.
Accordingly,
the PRC Government attaches great importance to the PRC’s issues concerning
“countryside, farmers and agriculture”. It has promulgated a series of
agricultural measures in favor of farmers since 2004, such as agricultural tax
relief, adopting agricultural subsidies and controlling arable area, so as to
promote the continued growth of agricultural production and farmers’ income. The
net income per capita of China's rural residents in the first half of 2009 year
increased 8.1% year-on-year. The net income per capita of China's rural
residents in the first half of 2009 year increased 8.1% year-on-year. In 2008,
farmers' net income per capita was 4,761 yuan, a growth of 8%over the previous
year, according to a survey released by the Chinese Academy of Social Sciences,
the country's government think tank in April. According to the Chinese Ministry
of Agriculture the central fiscal has so far allocated 123 billion yuan in
subsidizing farmers' purchase of seed, diesel, fertilizers and other production
materials this year, rising 19.4 percent over the previous year. (National
Bureau of Statistics).The PRC’s total grain output reached 528.5 million tonnes
in 2008.
OVERVIEW
OF THE PRC FERTILIZER INDUSTRY
The PRC’s
chemical fertilizer industry plays an important role in the world fertilizer
industry. The PRC is one of the largest fertilizer producers and it accounts for
34 percent of global consumption (168.7 million tonnes – by effective component)
in 2007.
In order
to encourage investment in the fertilizer industry, the PRC Government has
promulgated a number of preferential policies, including zero rate VAT for
fertilizer products, preferential electricity prices and cheaper railway
transportation.
The PRC’s
continuous economic growth, agricultural development, growing demand for
fertilizers and preferential fertilizer industry policies combine to promote the
development of the fertilizer industry. According to the National
Bureau of Statistics, the PRC’s output of chemical fertilizers grew from 37.9
million tonnes (by effective component) in 2002 to 57.9 million tonnes (by
effective component) in
2007,
with an average annual growth rate of 8.8 percent. After a slowdown in 2008 in
the wake of the international economic crisis, the China National Bureau of
Statistics reported a 9.5% year-on-year increase in chemical fertilizer
production in the first half of 2009.
38
Development
trend of Chinese fertilizers
1.
|
Continuous
development of chemical fertilizers
|
The
pressure to use a decreasing area of land to feed a growing population has
resulted in a consistent upward trend in the output of chemical fertilizers in
the PRC. The use of compound fertilizers in particular has grown continuously in
recent years.
2.
|
Development
opportunity for slow/controlled release
fertilizers
|
The PRC
Government’s 11th Five-Year Technology Development Planning and the National
Mid/Long- Term Science and Technology Development Planning Framework of 2006
indicated the direction for the development of technology of Chinese
fertilizers, focusing on research and development of environmentally-friendly
fertilizers’ key technologies and developing compound slow release and
controlled-release fertilizers. The development and increased usage of slow
release and controlled release fertilizers should serve to reduce agricultural
pollution, and also to save non-renewable resources.
COMPOUND
FERTILIZERS IN THE PRC
Compound
fertilizers have become increasingly popular over the past decade and the
consumption of them has been growing at the fastest rate among the categories
listed. The consumption of compound fertilizers in the PRC has grown from
approximately 6,708,000 tonnes in 1995 to approximately 13,032,000 tonnes in
2005, representing a CAGR of approximately 7.66 percent The Directors believe
that the increasing popularity of compound fertilizers in the PRC derives from
their greater nutrient content compared with that of single-fertilizer mixtures,
and the fact that they can be adapted to give crops a variety of different
nutrients to cater for different conditions and times of
application.
EMERGENCE
OF ORGANIC FERTILIZERS
Chemical
fertilizers provide plants with immediately available nutrients to sustain plant
growth and have been widely used in traditional PRC agricultural production for
decades. Prolonged usage of chemical fertilizers will reduce the soil’s
beneficial organism population and harden the soil. More and more countries are
therefore shifting gradually towards the use of organic
fertilizers.
Organic
fertilizer has been listed as one of the key development products in the 11th
Five-Year Plan for Ecology Protection, promulgated in October 2006. The PRC
Government also indicated that it would increase spending on research and
development on organic fertilizer products and technologies in the next five to
ten years. These new policies will help the farmers to realize the advantages of
using organic fertilizers, especially for farmland with poor soil structure and
fertility after prolonged inappropriate use of chemical fertilizers.
Accordingly, the Directors believe that demand for organic fertilizers will
remain strong in the coming years.
PRC
GOVERNMENT SUPPORT FOR THE FERTILIZER INDUSTRY
According
to the PRC National Bureau of Statistics, the PRC is currently the largest
fertilizer market in the world whereby fertilizer production and consumption
account for 34.3 percent of the global market and the annual average growth rate
in fertilizer application for 2002-2007 was 8.8 percent with demand growth
higher than the world average level. The Directors expect that the steady growth
of the PRC’s population and rising income will lead to demand for a diet with
higher protein such as meat, which requires grain as feedstock. The PRC’s
urbanization and industrialization will result in a continued decline in
available arable farm land, thus making it essential for the PRC to raise its
agricultural products yield to ensure adequate food supply. At the same time,
the Directors believe that economic reform in the PRC will lead to a growth in
consumer demand for cash crops such as vegetables and fruits, which generally
require the application of higher volumes of fertilizers than traditional farm
crops. The PRC Government has mandated that farmers increase crop yields in
order to decrease the nation’s dependence on food imports; the growing consensus
on the need to use environmentally friendly fertilizers has also been a factor
in the growth of the business of the Company. The Directors believe that as a
result of these factors, the demand for and the usage of fertilizers in the PRC
will increase and that, as one of the fast-growing and competitive fertilizer
producers in the PRC, the Company will benefit from the growth of the Chinese
fertilizer market.
As
fertilizer usage is key to increasing grain production yields, the PRC
Government has been encouraging fertilizer application and hence production.
Fertilizer production enterprises are given a number of benefits by the PRC
Government in terms of electricity supply and transportation. Since 2004, the
PRC Government has introduced several preferential VAT policies directly for the
benefit of fertilizer production enterprises; for instance, 50 percent of the
VAT collected from urea producers is refundable to these producers. To further
support the industry, from 1 July 2005, urea producers were temporarily exempted
from paying VAT, pursuant to a joint announcement made in May 2005 by the
Ministry of Finance and State Administration of Taxation. The purpose of these
preferential tax policies, and other supportive policies from the Government, is
to promote domestic fertilizer supply and stable fertilizer prices.
39
In
addition, the 11th Five-Year Plan for National Agricultural & Rural Economic
Development, promulgated in August 2006, establishes a goal of an annual 0.65
percent increase in comprehensive grain productive capacity over five years,
assuming an annual 0.18 percent decrease in planted grain acreage. The allowance
for the agricultural industry reached RMB 63.8 billion in 2008, representing an
increase of 131 percent over 2007. The PRC Government has recently declared that
it will strive to double the income of Chinese farmers by 2020 from the 2008
level and elevate the nation’s agricultural productivity to a higher level. The
11th Five-Year Plan for Fertilizer Industry, issued by the PRC’s National
Development and Reform Commission in October 2006, urges that the nation’s
fertilizer production should reach 60 million tonnes by 2010, which represents
an approximately 25 percent growth above the production in 2004. The Directors
believe that these policies will lead to a sustained demand for each type of
fertilizer.
OVERVIEW
OF THE PRC CHEMICAL INDUSTRY
The
chemical industry is the third largest in the PRC and accounted for 10 percent
of the country’s GDP in 2006 according to the PRC National Bureau of Statistics.
Chinese consumption constituted 35 percent to 40 percent of global demand growth
for chemicals. The growth in domestic demand for chemicals alone in 2005 and
2006 was 7 percent to 8 percent, according to the PRC National Bureau of
Statistics.
Despite
this growth however, the PRC has a net chemical trade deficit and remains
heavily dependent on imported raw materials, which have over recent years been
affected by upward price trends in the world market caused by heavy global
demand for raw materials, petroleum and other input.
Our major
production facilities and sales offices are located in Weifang, Shandong
Province in the PRC. At the date of this document, we have approximately 182
employees, including the Executive Directors. Most of the employees work in
Shandong Province.
The
breakdown of the employees by function is as follows:
|
Changda Fertilizer
|
Changda Chemical
|
Changda
International
|
Total
|
||||||||||||
Directors
|
- | - | 5 | 5 | ||||||||||||
Management
and administration
|
9 | 6 | 3 | 18 | ||||||||||||
Finance
and Accounting
|
13 | 5 | - | 18 | ||||||||||||
Sales
and marketing
|
15 | 6 | - | 21 | ||||||||||||
Product
Development
|
6 | 7 | - | 13 | ||||||||||||
Production
|
49 | 46 | - | 95 | ||||||||||||
Quality
Control
|
6 | 6 | - | 12 | ||||||||||||
Total
|
98 | 76 | 8 | 182 |
Intellectual
Property
All of
our fertilizer products are sold under the “CHANGDA” trade mark, which was
granted by the PRC authorities on October 14, 2008, other than those sold
through China Post, which are sold under the “FENGTAI WOSIDA” trade mark, which
was granted by the PRC authorities on October 7, 2008. The “CHANGDA” trade mark
covers a wide range of fertilizer products, including agricultural fertilizers,
animal fertilizers, compound fertilizers and plant fertilizers.
40
All the
Company’s chemical products are also sold under the “CHANGDA” trade mark. The
trademark “CHANGDA” for the chemical products was applied for in June 2006 and
June 2007. The registered trademark “Changda” has been granted by National
Bureau of Intelligence Property on May 28, 2009 and September 7, 2009,
respectively.
A total
of eight patent applications have been filed in the PRC in relation to the
various production methods and technology currently employed by us for our
fertilizer business. In addition, we have, together with Mr. Qing Ran Zhu filed
two patent applications in the PRC in relation to its snow melting agent product
and thiophene production methods and technology for its chemical business
segment. A summary of our patents is set out below:
Company
Business
|
Patent
Description
|
Patent
registration
No.
|
Status
|
Date
of patent
filed/issued
|
||||
Fertilizer
|
High
silicon compound fertilizer product and its Production
Process
|
200710110812.1
|
Filed
|
June
11, 2007
|
||||
Sprout
and Article Formation Production Process for Compound
Fertilizer
|
200610043439.8
|
Granted
|
December
12, 2007
|
|||||
An
Organic-Compound Fertilizer and its Production Process
|
200810007504.0
|
Filed
|
February
26, 2008
|
|||||
Intelligent
Sulfur Film Coating for Large Granular Urea or Granular Compound
Fertilizers
|
200710195664.8
|
Filed
|
December
5, 2007
|
|||||
A
Soil Conditioner Containing Nitrogen and Phosphor
|
200810007850.9
|
Filed
|
February
26, 2008
|
|||||
A
Social Conditioner and its Production Process
|
200810007503.6
|
Filed
|
February
26, 2008
|
|||||
Resin
capsule fertilizer and technology 1
|
200810126410.5
|
Filed
|
June
26, 2008
|
|||||
Resin
capsule fertilizer coating
|
200810126411.X
|
Filed
|
June
26, 2008
|
|||||
Chemical
|
Treatment
method of a Sulphur contained Tar Waste produced in Manufacture Process
for Thiophene 1
|
200710195665.2
|
Filed
|
December
5, 2007
|
||||
Anti
Freeze Combination and its Production Process
|
200610043440.0
|
Granted
|
December
25, 2007
|
1
Patent applications were filed in the name of Mr. Qing Ran Zhu, who has signed
an instrument stating that he will assign the patents to Changda Chemical and
Changda fertilizer (wherever applicable) free of consideration after the patents
are granted.
Currently,
two patent applications have been granted to our PRC subsidiaries and eight
applications are still pending. Upon completion of the registration as the owner
of the filed patents, we will be able to enjoy all rights and benefits in those
patents.
Insurance
We have
taken out a basic asset insurance policy with China Continent Property &
Casualty Insurance Company Ltd. However, we do not have business disruption
insurance, as we have determined that the risks of disruption and the cost of
insurance are such that it does not required it at this time. Any business
disruption, litigation or natural disaster may result in substantial costs and
diversion of resources. Should any of these events occur they may have a
material adverse risk on our business and financial results.
Research
and Development
We devote
considerable effort and resources in improving the quality of its existing
products and accelerating the development of new products. We have a research
and development team comprising 14 staff. Most members of the research and
development team have either bachelors or master’s degrees in related fields.
They have considerable experience in soil studies, plant nutrition and
fertilizers and chemistry. The main functions of the research and development
team are to:
i.
|
conduct
research and technical feasibility studies on the formulae, manufacturing
processes, quality and stability of the Company’s
products;
|
|
ii.
|
keep
the Company abreast of the latest developments in both the global and
domestic chemical fertilizer markets; and
|
|
iii.
|
formulate
and evaluate the strategic policies for the Company’s products to enhance
their marketability.
|
41
In
addition to research and development into new products and production processes,
our research and development centre also provides after-sales support and
training to its distributors and customers. Such services not only help to build
and strengthen customer relationships, but also allow us to receive feedback on
its products for continuous development and improvement.
Our
Competitors
Given the
relatively high cost of transporting fertilizers and the poor transport links
across parts of rural China, the major competitors to the Company’s fertilizer
business are companies located in Shandong Province or nearby, many of which are
small family-run operations. The Company also faces some competition from larger
quasi-national companies, in particular:
●
Shandong Hualu-Hengsheng Chemical Co., which operates various fertilizer
production lines, including those for urea and ammonia, in Dezhou, Shandong
Province;
● China
Blue Chemical Ltd, which supplies an extensive range of fertilizers. It operates
in the main agricultural regions of China, including Shandong
Province;
● Hubei
Yihua Chemical Industry Co., which supplies the domestic market with a range of
chemical fertilizers. It is based in Hubei Province in Eastern
China;
● Qinghai
Salt Lake Potash, a leading fertilizer company which specializes in the
production of potassium chloride, a product that it sells throughout
China;
●
Sinofert Holdings Ltd. (“Sinofert”) is an investment company with shareholdings
in various undertakings which operate in the Chinese fertilizer market.
Sinofert’s two main business streams – sources and distribution – operate
nationwide. Sinofert produces all three nutrient-based fertilizers – nitrogen,
phosphate and potash – as well as a range of compound products: potash is its
leading profit generator.
In terms
of its specialty chemicals business, competition for the Company is less
clear-cut. In particular, contracts for its snow melting products normally
follow the submission of tenders, both in mainland China and in overseas
markets; in the latter case, the Company will normally be competing against
local suppliers.
Competitive
Strengths
The
Directors believe that, compared with other PRC fertilizer manufacturers, the
following principal competitive strengths contribute to our historical success
and future prospects:
Experienced
management team
The
management team has average industry experience of over 10 years in production,
financial and business management. The Directors believe the management team
possesses the leadership, vision and in depth industry knowledge to anticipate
and take advantage of market opportunities, to formulate sound business
strategies, and to execute the strategies in an effective manner to maximize the
benefit to Shareholders. Senior management has been able to achieve
cost-efficient, organic and acquisitive growth of the Company’s business as well
as effective integration of management and operations. A corporate management
system, business philosophy and corporate culture have contributed to the
success of our historical growth.
Strong
distribution channel anchored by an exclusive distribution agreement with China
Post
Our sales
are primarily in Shandong Province, one of the major agricultural provinces in
the PRC, and overseas to Japan. We supplied 10 percent of snow melting agents
demanded in Japan in 2007. We have established a broad distribution network,
including five exclusive distribution centers in Shandong Province, and an
exclusive distribution agreement with China Post, which has a broad network of
80,000 distribution centers in 18 cities in Shandong Province. We have a large
corporate and government client base. We are able to obtain information on the
identity of end-users, so as to establish on-going and direct business
relationships with them, providing technical training and after-sales services.
Training seminars are also conducted on a regular basis for end-users, to
familiarize them with our products and promote brand presence and enhance market
value.
We review
the strengths of potential distributors, including their financial soundness,
market coverage and reputation, to evaluate potential candidates before
appointing them as distributors.
42
A
developer of next generation microbial organic-inorganic compound fertilizers
and slow-release compound fertilizers
Prolonged
application of synthetic chemical additives to soil leads to deterioration of
soil condition and water pollution. Unlike inorganic fertilizers, our microbial
organic-inorganic compound fertilizer products may facilitate the preservation
of soil fertility and the prevention of some plant diseases. In 1998, the State
Council of the PRC launched the “Rich Soil Project” in the PRC, with the
objective of improving the deteriorating arable soil condition by promoting the
usage of organic fertilizers. Our microbial organic-inorganic compound
fertilizer products are consistent with this government policy, and the
Directors believe they will contribute to the protection of the
environment.
Excellent
growth in turnover and asset scale compared to peers in the PRC
Between
2006 and 2008, the Company achieved a CAGR of 48 percent in turnover and 52
percent in net income. This is significantly greater than the growth rates
exhibited by the Company’s listed peers. The Directors believe that the use of
the proceeds of the offering to fund the new plant in Heze, the expansion of new
chemical lines and the advancement of research and development shall help the
Company to continue on this strong growth trajectory.
Full
scale research and development support with patent coverage over both the
fertilizer and chemical key products
Our
product range of fertilizers and chemical products are covered by two granted
patents and eight patents which are pending. We have a strong focus on research
and development to ensure that the quality of its products is continuously
improved and to accelerate the development of new products. The
Directors are confident that our capabilities in developing new products and
production processes will allow the Company’s products to remain at the
forefront of those available in our target markets.
Strong
brand with national awards and accreditations
Our
brands are well known in the Shandong province of the PRC, which is our key
target market. The products offered are associated with high quality fertilizer
products.
Fertilizer
sector receives significant support from the PRC government
The PRC
Government has expressed strong support for the agricultural industry, declaring
that farmers’ incomes should double from the 2008 level by 2020 and that
agricultural productivity should increase. The PRC Government has also expressed
support for the fertilizer industry in particular, stating that annual
fertilizer production should reach 60m tonnes by 2010, representing a 25 percent
increase over the 2004 level. The Directors believe that these policies will
lead to a sustained demand for each type of fertilizer.
Our
internal processes and environmental procedures are ISO9001/ISO 14000
certified
The
internal processes and environmental procedures we adopted ensure that quality
control, efficiency and environmental awareness are of the highest level. This
has been recognized by the attaining of the internationally recognized ISO 9001
and ISO 14000 certifications.
Quality
Control Standards and Procedures
Stringent
quality control measures are implemented throughout the fertilizer and chemical
products’ production process in accordance with national standards. Each of the
plants has a quality control team in place to ensure product quality meets the
standards set by the PRC Government.
The
quality management and control system of the production facilities encompasses
the following features:
• Process
control – well-trained management and operating personnel to optimize
operations, stabilize production and ensure product quality.
•
Packaging and storage – systematic package and storage procedures are in place
to ensure proper packaging and to avoid any damage to the products during
storage in the Company’s warehouses.
• Testing
and Inspection – testing appliances are installed. Quality inspection teams
undertake random tests of both intermediate and finished products on a sample
basis to ensure the products comply with the required standards. Testing
processes include checking physical appearance and composition of
nutrients.
•
Machinery and equipment management – engineers and other personnel conduct
regular checks and repairs to maintain production.
43
Legal
Proceedings
Currently
we are not involved in any pending litigation or legal proceeding.
PROPERTY
In China,
there is no private ownership of land. Rather, all real property is owned by the
government. The government issues a certificate of property right, which is
transferable, generally has a term of 50 years and permits the holder to use the
property. All of our properties are suitable and adequate for the
purposes for which they are used in our business.
Address
|
Size
(square meters)
|
Size
(square feet)
|
Term
|
|||||
Land
use right owned by
Weifang
Changda Fertilzer Co., Ltd
|
South
of Mengjia Village, East of Changda Road, Binhai Economic Development
Zone, Weifang
|
104,370
|
1,123,429
|
October
18,2006 through September 10, 2056
|
||||
Land
use right owned by
Weifang
Changda Chemicals Co., Ltd.
|
Lingang
Industrial Zone, Binhai Economic Development Zone, Weifang
|
46,778
|
503,514
|
March
27, 2007 through December 27, 2056
|
We hold a
building permit in the name of Heze Changda Fertilizer Co., Ltd. for 47,794 sq.
meters (503,686 sq. feet) of space at South of Beihuan Road, North of
Zhouzhuang, Heze. We are currently in the process of applying for a
land use permit for this property.
We are
also party to a land rental agreement, dated January 1, 2008 by and between
Weifang Changda Chemical Co., Ltd. and Weifang Binhai Economic Development Zone,
Dajiawa St. Xinxing Village Committee for 22,500 sq. meters (242,188 sq. feet)
of space located at East Xinxing Village, Binhai Economic Development Zone,
Weifang pursuant to which have agreed to rent the property for 50 year term at a
price of RMB 800 per year.
LEGAL
PROCEEDINGS
From time
to time we may become a party to certain legal actions arising out of the normal
course of its business. In management’s opinion, none of these actions will have
a material effect on our operations, financial condition or liquidity. No form
of proceedings has been brought, instigated or is known to be contemplated
against us by any governmental agency.
44
MANAGEMENT
Directors
and Executive Officers
The
following table sets forth the names and ages of the members of our Board of
Directors and our executive officers and the positions held by
each. Each member of the Board of Directors serves for a term of one
year, or until his or her successor has been duly elected and has been
qualified. Each of our officers serve until they are replaced by the Board of
Directors.
Name
|
Age
|
Position
|
||
QingRan
Zhu
|
48
|
Chief
Executive Officer and Director
|
||
Leodegario
Quinto Camacho
|
57
|
Chief
Financial Officer
|
||
Jan
Pannemann
|
36
|
Executive
Vice President
|
||
HuaRan
Zhu
|
55
|
Director
|
||
Carsten
Aschoff
|
39
|
Director
|
||
David
Cohen
|
68
|
Director
|
||
Craig
Marshak
|
50
|
Director
|
The
following information with respect to the principal occupation or employment of
each nominee for director, the principal business of the corporation or other
organization in which such occupation or employment is carried on, and such
nominee’s business experience during the past five years, has been furnished to
the Company by the respective directors:
Qing Ran Zhu, Chief Executive Officer and
Executive Director (age 48)
Mr. Zhu
has over 20 years of experience working in the sales and marketing of feed
products in the PRC agricultural industry. Before co-founding Changda Fertilizer
and Changda Chemical, Mr. Zhu was the Vice General Manager of Weifang Legang
Food Company and obtained extensive knowledge about food production, and
consequently food and health regulations in the domestic market. Mr. Zhu
graduated from Weifang Vocational College with where he majored in
Economics Administration.
Leodegario Quinto Camacho, Chief Financial Officer (age
57)
Mr.
Camacho has over 34 years of experience as a financial controller in both public
and private companies in the United States and the Philippines. As a
professional Certified Public Accountant for 33 years, he is a member of the
American Institute of Certified Public Accountants, New Jersey Society of
Certified Public Accountants and Association of Filipino-American Accountants.
Mr. Camacho is currently serving in a CPA firm Camacho & Camacho LLP in New
Jersey.
Hua Ran Zhu, Director (age
55)
Mr. Zhu
has over 20 years of experience working in the chemical industry. Before
co-founding Changda Fertilizer and Changda Chemical, Mr. Zhu was in charge of
the production workshop and machinery safety department in Shandong Haihua
Group, thereby building years of expertise and experience in the production and
safety of chemical products. Mr. Zhu graduated from the University of Shandong
Government Official Distance-Learning.
Jan Pannemann , Executive Vice President (age
36)
Mr.
Pannemann has six years of experience as a project manager and independent
business advisor in the City of London. Mr. Pannemann is also a co-founder of
Qingdao China Partners Investment Advisory, a PRC centric strategic management
advisory company, which was successfully merged in 2007 with now PLUS Markets
quoted Geo Genesis Group Ltd. Mr Pannemann currently lives and works in the
PRC.
Carsten Aschoff, Director (age
39)
Mr.
Aschoff has over 10 years’ management experience with various technology
companies in both Germany and the PRC. Mr. Aschoff is currently the director of
Siger Trading Ltd and Siger Technologies GmbH in Germany since March 2006 and
August 2006 respectively. From July 2005 to March 2006, Mr.Aschoff was involved
in freelance consulting work in the PRC. Between 2002 and June 2005, Mr. Aschoff
was the general manager for Shandong Linuo Paradigma Co. Ltd. in Jinan, China.
He was responsible for business development, production and distribution of
solar thermal systems. From 1998 to 2003, Mr. Aschoff was the lecturer at the
University of Applied Science HFT in Stuttgart, Faculty of Architecture –
“technical development” and “sustainable building”. Between 1996 and 2001, Mr.
Aschoff was working in the product management in Paradigma Energie-und
Umwelttechnik GmbH & Co. KG, Karlsbad, Germany.
David Cohen, Director (age
68)
Mr. Cohen
is a licensed attorney who has been a Member of the New York State Bar
Association for the last 25 years. For the last 5 years he has been a sole
practitioner with a general business law practice with a specialty in litigation
and creditors’ issues. Previously, David managed the bankruptcy
practice at Herzfeld & Rubin, P.C. and prior to that was a partner at Cohen
& Lippman, LLP a law firm with primarily a business law practice. Mr. Cohen
is a Graduate of New York Law School.From 2001 to 2004, David Cohen has served
as an independent Director of Laidlaw Global Corporation, a Financial Holding
company with multiple subsidiaries while the Company was listed on the American
Stock Exchange and for a time on the OTC Bulletin-Board. In that function, he
served as an independent Director and Member of the Audit Committee and the
Compensation Committee. Prior to becoming a lawyer, Mr. Cohen served in the
United States military in a communication unit based in Germany and was a Senior
Executive for an Aviation company headquartered in Vienna, Austria with
worldwide charter operations.
45
Craig Marshak, Director (age
50)
Mr.
Marshak has extensive experience in the area of corporate finance, having
co-founded Trafalgar Capital Advisors, and the Trafalgar Capital Specialized
Investment Fund, registered in Luxembourg. Mr. Marshak has served as Head of
Investment Banking and Partner since its launch in January 2007. During this
period, Mr. Marshak advised on the $45 million capital raising for Wits Basins
acquisition of the Xiaonanshan Iron Ore Project in the Anhui Province
in Eastern China, (west of Shanghai), where London Capital PLC was introduced as
a Strategic Partner. Prior to that, Mr. Marshak served as
Co-Head of the Nomura Technology and Growth Capital Principal Investment Fund
and Corporate Finance group from February 1998 to January 2001. Among the
projects Mr. Marshak advised on during his time at Nomura was the first round
institutional investment into Shopping.com and its predecessor DealTime, later
sold to Ebay for $600 million. Thereafter, Mr. Marshak was active in Israel
related Venture Capital having served on the Board of Directors of Arbel
Capital, a Technology Investment Bank headquartered in Tel Aviv, where he served
as head of International Investment Banking, and advised on the
pre-IPO and Listing of Medgenics on the London Stock Exchange AIM
Market. During this time, Mr. Marshak acted as Senior Advisor to ARM
Corporate Finance, a London headquartered investment banking firm now part of
Religare Hitchens Harrison.
Mr.
Marshak commenced his career at Wertheim Schroders New York offices, where he
focused on mergers and acquisitions and corporate finance advisory work and
subsequently moved to Schroders offices in London where he held a senior
position in the International Finance Group, focusing on cross border
transactions and international companies raising capital on the London Stock
Exchange. Mr. Marshak was active in leading large global offerings for companies
in Turkey, Greece, and Israel, where his experience in Chemicals included
advising the Israel government on the $300 million privatization of Israel
Chemicals.Mr. Marshak graduated with a bachelors degree, summa cum laude, in
Economics and Political Science from Duke University, Durham, North Carolina,
and during that time received a one year Roger Alan Opel Scholarship to attend
the London School of Economics. He also received a J.D. degree from the Harvard
Law School.
Neither
Mr. QingRan Zhu, Mr. HuaRan Zhu, Mr. Aschoff, Mr. Cohen nor Mr. Marshak have
been involved in any of the following proceeding during the past five
years:
1.
|
any
bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that
time;
|
2.
|
any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor
offenses);
|
3.
|
being
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities;
or
|
4.
|
being
found by a court of competent jurisdiction (in a civil action), the SEC or
the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
|
Committees
of the Board
Our
business, property and affairs are managed by or under the direction of the
board of directors. Members of the board are kept informed of our business
through discussion with the chief executive and financial officers and other
officers, by reviewing materials provided to them and by participating at
meetings of the board and its committees.
Our board
of directors has had three committees - the audit committee, the compensation
committee and the corporate governance/nominating committee. The audit committee
is comprised of David Cohen, Craig Marshak and Carsten Aschoff, with Mr. Marshak
as chairman. The compensation committee is comprised of David Cohen, Craig
Marshak and Carsten Aschoff, with Mr. Cohen as chairman. The nomination
committee is comprised of David Cohen, Craig Marshak and Carsten Aschoff, with
Mr. Aschoff as chairman.
Audit
Committee and Audit Committee Financial Expert
Our audit
committee consists of three independent directors: David Cohen, Craig Marshak
and Carsten Aschoff. Our board of directors has determined, based on information
furnished by Mr. Marshak and other available information, that he meets the
requirements of an “audit committee financial expert” as such term is defined in
the rules promulgated under the Securities Act of 1933 and the Exchange Act of
1934, as amended. On September 30, 2009, Craig Marshak was appointed to serve as
chairman of the audit committee, and to serve as our audit committee financial
expert.
46
The
responsibilities of our audit committee will include:
·
|
assist
the Board of Directors in fulfilling its responsibilities by reviewing (i)
the financial reports provided by the Company to the Securities and
Exchange Commission, the Corporation's stockholders or to the general
public, and (ii) the Corporation's internal financial and accounting
controls,
|
·
|
oversee
the appointment, compensation, retention and oversight of the work
performed by any independent public accountants engaged by the
Corporation
|
·
|
recommend,
establish and monitor procedures designed to improve the quality and
reliability of the disclosure of the Corporation's financial condition and
results of operations
|
·
|
recommend,
establish and monitor procedures designed to facilitate (i) the receipt,
retention and treatment of complaints relating to accounting, internal
accounting controls or auditing matters and (ii) the receipt of
confidential, anonymous submissions by employees of concerns regarding
questionable accounting or auditing
matters,
|
·
|
engage
advisors as necessary, and
|
·
|
determine
the funding from the Corporation that is necessary or appropriate to carry
out the Committee's duties.
|
Compensation
Committee
Our
compensation committee consists of three independent directors: David Cohen,
Craig Marshak and Carsten Aschoff. On October 8, 2009, David Cohen was appointed
to serve as chairman of the compensation committee. Our compensation committee
will provide assistance to the Board of Directors in discharging the Board of
Directors' responsibilities relating to management organization, performance,
compensation and succession.
Nominating
Committee
Our
nominating committee consists of three independent directors: David Cohen, Craig
Marshak and Carsten Aschoff. On October 8, 2009, Carsten Aschoff was appointed
to serve as chairman of the nominating committee. The nomination
committee will be involved evaluating the desirability of and recommending to
the board any changes in the size and composition of the board, evaluation of
and successor planning for the chief executive officer and other executive
officers.
Code
of Ethics
We
have adopted a code of ethics that applies to our officers, directors and
employees, including our chief executive officer, senior executive officers,
principal accounting officer, and other senior financial officers. A copy of our
code of ethics will also be provided to any person without charge, upon written
request sent to us at our offices located at 10th
Floor Chenhong Building, No. 301East Dong Feng Street, Weifang, Peoples Republic
of China.
.
Director
Independence
Three of
our directors, Craig Marshak, David Cohen and Carsten Aschoff, are independent
directors, using the Nasdaq definition of independence. These three
directors comprise the audit, compensation and nominating
committee.
Compliance
With Section 16(A) Of The Exchange Act.
Section
16(a) of the Securities Exchange Act of 1934, requires our directors, executive
officers and persons who own more than 10% of our common stock to file with the
SEC initial reports of ownership and reports of changes in ownership of common
stock and other of our equity securities. During the fiscal year ended December
31, 2009, all of our officers, directors and 10% shareholders were late in the
filing of their Form 3s.
EXECUTIVE
COMPENSATION
Summary Compensation
Table
The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended December 31, 2008 and 2007 by
the Chief Executive Officer and each of our other two highest paid executives
whose total compensation exceeded $100,000 during the fiscal years ended
December 31, 2008 and 2007 (if any).
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||
QingRan
Zhu
|
2008
|
$
|
35,050
|
-
|
-
|
-
|
-
|
$
|
35,050
|
||||
2007
|
$
|
27,740
|
-
|
-
|
-
|
-
|
$
|
27,740
|
|||||
47
Outstanding
Equity Awards at Fiscal Year-End
There
were no unexercised options, unvested stock awards or equity incentive plan
awards for any of our executive officers outstanding as of December 31,
2008.
Employment
Agreements, Termination of Employment and Change-in-Control
Arrangements
Except as
described below, we currently have no employment agreements with any of our
executive officers, nor any compensatory plans or arrangements resulting from
the resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer’s
responsibilities following a change-in-control.
On
December 8, 2008, our wholly-owned subsidiary, Weifang Changda Fertilizer Co.,
Ltd., entered into a three-year employment contract with QingRan Zhu, our
Chairman and Chief Executive Officer. Pursuant to the Agreement, Mr. Zhu will
act as general manager of the Company with a base salary of $120,000 per annum.
On the three year anniversary of the agreement, the agreement will automatically
renew for another three years from the anniversary date. In addition, Mr. Zhu is
entitled to participate in any and all benefit plans, from time to time, in
effect for employees, along with vacation, sick and holiday pay in accordance
with policies established and in effect from time to time. Mr. Zhu is also
entitled to receive an annual bonus at the discretion of Weifang based on its
performance. The Company may terminate Mr. Zhu with or without cause
at its sole discretion. Upon termination of Mr. Zhu’s employment not
for cause, he shall be entitled to 50% of his average monthly regular salary for
the preceding twelve months from the date of termination for an additional
twelve months. During the term of his employment and for a period of
two years thereafter, Mr. Zhu will be subject to non-competition and
non-solicitation provisions, subject to standard exceptions.
On
December 8, 2008, our wholly-owned subsidiary, Weifang Changda Chemical Co.,
Ltd., entered into a three-year employment contract with HuaRan Zhu, our
Director. Pursuant to the Agreement, Mr. Zhu will act as general manager of the
Company with a base salary of $120,000 per annum. On the three year anniversary
of the agreement, the agreement will automatically renew for another three years
from the anniversary date. In addition, Mr. Zhu is entitled to participate in
any and all benefit plans, from time to time, in effect for employees, along
with vacation, sick and holiday pay in accordance with policies established and
in effect from time to time. Mr. Zhu is also entitled to receive an annual bonus
at the discretion of Weifang based on its performance. The Company
may terminate Mr. Zhu with or without cause at its sole
discretion. Upon termination of Mr. Zhu’s employment not for cause,
he shall be entitled to 50% of his average monthly regular salary for the
preceding twelve months from the date of termination for an additional twelve
months. During the term of his employment and for a period of two
years thereafter, Mr. Zhu will be subject to non-competition and
non-solicitation provisions, subject to standard exceptions.
DIRECTOR
COMPENSATION
None of
our other directors receive any compensation from us for services rendered as
directors during the fiscal year ended December 31, 2008.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of December 30, 2009, with
respect to the beneficial ownership of the
outstanding common stock by (i) any holder of more than five (5%) percent; (ii)
each of the
Company's executive officers and directors; and (iii) the Company's directors
and executive officers as a group. Except as otherwise indicated, each of the
stockholders listed below has sole voting and investment power over the shares
beneficially owned.
48
Title
of Class
|
Name
and Address of Beneficial Owner (1)
|
Amount
and Nature of Beneficial Ownership (2)
|
Percentage
of Common Stock (2)
|
5%
Stockholder
|
|||
Common
Stock
|
Hudson
International Limited (3)
c/o
Weifang Changda Fertilizer Co. Limited
10thFloor, Chenhong Building
No. 301
East
Dong Feng Street
Weifong,
Shangdong, PRC, 261041
|
2,144,000
|
11.3%
|
Common
Stock
|
Exceed
International Limited (4)
c/o
Weifang Changda Fertilizer Co. Limited
10thFloor, Chenhong Building
No. 301
East
Dong Feng Street
Weifong,
Shangdong, PRC, 261041
|
3,877,334
|
20.45%
|
Common
Stock
|
AllHomely
International Limited (5)(6)
c/o
Weifang Changda Fertilizer Co. Limited
10thFloor, Chenhong Building
No. 301
East
Dong Feng Street
Weifong,
Shangdong, PRC, 261041
|
7,378,658
|
38.9%
|
Executive
Officers and Directors
Common
Stock
|
Qingran
Zhu (5)(6)
Chief
Executive Officer and Director
|
0
|
*
|
Common
Stock
|
Leodegario
Quinto Camacho
Chief
Financial Officer and Director
|
3,334
|
*
|
Common
Stock
|
Huaran
Zhu (3)(7)
Executive
Director
|
2,144,000
|
11.3%
|
Common
Stock
|
Carsten
Aschoff (8)
Director
Lindenstr.
10
D-91580
Petersaurach
Germany
|
6,667
|
*
|
Common
Stock
|
David
Cohen (9)
Director
|
6,000
|
*
|
Common
Stock
|
Craig
Marshak
Director
|
8,334
|
*
|
All Directors and
Executive Officers as a Group (6
Persons)
|
2,168,335
|
11.43%
|
* less
than 1%.
(1)
|
Unless
otherwise indicated, the address of each beneficial owner is c/o Changda
International Holdings, Inc., 10th Floor Chenhong Building, No. 301 East
Dong Feng Street, Weifang, Shandong, People’s Republic of China
261041.
|
(2)
|
In
determining beneficial ownership of our Common Stock as of a given date,
the number of shares shown includes shares of Common Stock which may be
acquired on exercise of warrants or options or conversion of convertible
securities within 60 days of that date. In determining the percent of
Common Stock owned by a person or entity on December 30, 2009, (a) the
numerator is the number of shares of the class beneficially owned by such
person or entity, including shares which may be acquired within 60 days on
exercise of warrants or options and conversion of convertible securities,
and (b) the denominator is the sum of (i) the total shares of common stock
outstanding on December 30, 2009, which was 18,964,025, and (ii) the total
number of shares that the beneficial owner may acquire upon exercise of
any warrants, options and conversion of any convertible securities. Unless
otherwise stated, each beneficial owner has sole power to vote and dispose
of its shares.
|
(3)
|
Hudson
International Limited (“Hudson”) is owned by our director, Huaran Zhu, and
Wen Jun Wang, who own 79% and 21% of the interest in Hudson,
respectively. Huaran Zhu is the sole officer and director of Hudson.
Huaran Zhu, the majority shareholder of Hudson, has voting and dispositive
control over the shares of Common Stock owned by
Hudson.
|
(4)
|
Fen
Ran Zhu, the sister of Qingran and Huaran Zhu, owns 42% of Exceed
International Limited (“Exceed”). Gang Zhang and Tao Wang own 31% and 27%
of Exceed International Limited, respectively. Ms. Zhu is the sole officer
and director of Exceed. Ms. Zhu, Ms. Zhang, and Ms. Wang are
deemed to beneficially own the shares of Common Stock held by Exceed in
proportion to their interest in
Exceed.
|
49
(5)
|
AllHomely
International Limited (“AllHomely”) is owned by our chief executive
officer Qingran Zhu and our executive vice president Jan Pannemann. Mr.
Zhu and Mr. Pannemann are the sole officers and directors of AllHomely and
own 23% and 77% of the interest in AllHomely, respectively. Mr.
Pannemann, the majority shareholder of AllHomely, has voting and
dispositive control over the shares of Common Stock owned by
AllHomely.
|
(6)
|
Qingran
Zhu, our Chief Executive Officer and director, is an officer and director
of AllHomely, but does not hold voting or dispositive control over the
Common Stock owned by AllHomely. Accordingly, Mr. Zhu disclaims
beneficial ownership of these
shares.
|
(7)
|
Huaran
Zhu, a director, holds 79% of the interest in Hudson and has voting and
dispositive control over the shares of Common Stock held by Hudson.
Accordingly, Mr. Zhu’s total ownership includes all of the shares of
Common Stock held by Hudson. Huaran Zhu is the sole officer and
director of Hudson.
|
(8)
|
As
partial payment for services as director, the Company granted Carsten
Aschoff a two-year warrant to purchase up to 6,667 shares of Common
Stock at $1.60 per share.
|
(9)
|
As
partial payment for services as director, the Company granted David Cohen
3,000 shares of common stock of the Company, par value $0.001 per share,
and two-year warrants to purchase 3,000 shares of common stock with an
exercise price of $1.50 per share.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On August
21, 2008, Shangdong Fengtai Fertilizer Co., Ltd. entered into a loan contract
with Agricultural Bank of China, Shouguang Branch, for a loan in the amount of
RMB 4,500,000. The loan is due and payable on the maturity date of August 21,
2009. The interest rate should be 30% more than the Benchmark Lending Rate
issued by the China Central Bank and should be adjusted every month, with the
executed interest rate as 9.711%. Interests should be paid monthly. Interest
rate for late payments is 40% more than the executed interest rate. In the case
that the loan is used for unauthorized purposes, interest rate for the portion
used without authorization should be 100% more than the executed interest rate.
The loan is secured by the real property of Weifang Changda Chemicals Co.,
Ltd.
On
November 21, 2007, Weifang Changda Fertilizer Co., Ltd. entered into a loan
agreement with Bank of East Asia (China), Dalian Branch, for a loan in the
amount of RMB 15,000,000. The loan is due and payable on the maturity date of
January 18, 2010. The loan is subject to an annual interest rate that is 10%
more than the 2-year Benchmark Lending Rate issued by China Central Bank on the
date that the loan is received, which is to be adjusted every 6 months. The loan
is secured by Weifang Changda Fertilizer Co., Ltd.’s land use rights and the
real property on it, and guaranteed by Qingran Zhu.
On
December 20, 2006, Changda Fertilizer entered into a Sales Agency Agreement with
Weifang Moda International Trading Co., Ltd., or Moda. Pursuant to this
agreement, Changda Fertilizer authorized Moda to be the Sales agent for its
Changda Brand compound fertilizers in Shandong Province. Each order made by Moda
shall be 5,000 tons, with a 5% margin up or down. The authorization is valid
from January 1, 2007 through December 31, 2007. QingRan Zhu and
HuaRan Zhu , our chief executive officer and director, respectively, owned 40%
and 30% of the outstanding capital stock of Moda, respectively
On
December 25, 2006, Changda Fertilizer entered into a Purchase Agreement with
Changle Hengrui Trading Co., Ltd., or Changle . Pursuant to this agreement,
Changda Fertilizer purchased from Changle 2,100 tons of monoammonium phosphate
at the price of RMB 1780 per ton and 520 tons of potassium sulphate at the price
of RMB 520 per ton, totaling RMB 4,830,000 and the orders shall be delivered in
two installments in February 2007 and March 2007. On August 10,
2007, Changda Fertilizer entered into a Purchase Agreement with Changle.
Pursuant to this agreement, Changda Fertilizer purchased from Changle 1,000 tons
of ammonium hydrogen carbonate at the price of RMB 700 per ton and 800 tons of
ammonium chloride at the price of RMB 650 per ton, totaling RMB 1,220,000. The
ammonium hydrogen carbonate shall be delivered in four installments and the
ammonium chloride in two installments. On February 18, 2008, Changda
Fertilizer entered into a Purchase Agreement with Changle. Pursuant to this
agreement, Changda Fertilizer purchased from Changle 200 tons of slow-released
urea at the price of RMB 2,860 per ton and 100 tons of light-burnt magnesium
powder at the price of RMB 500 per ton, totaling RMB 622,000 and the orders
shall be delivered in March 2008. Lijiang Wang, Tao Wang and Cairan Zhu owned
40%, 30% and 30% of the outstanding capital stock of Changle,
respectively. Lijiang Wang and Tao Wang are our
employees. Cairan Zhu is related to QingRan Zhu and HuaRan Zhu , our
chief executive officer and director, respectively.
50
On
September 3, 2009, Changda Fertilizer entered into a Credit Facility Agreement
with the China Merchants Bank, Weifang Branch, for a credit facility in the
amount of RMB 10,000,000. The loan is due and payable on the maturity date of
September 2, 2010. The interest rate is to be determined on application of loans
under the credit facility agreement. The maximum amount under the credit
facility agreement is guaranteed by Changda Chemicals and Qingran Zhu through
separate Maximum Irrevocable Guarantee Agreements, effective September 3, 2009.
Pursuant to the Maximum Irrevocable Guarantee Agreements, Changda Chemicals and
Qingran Zhu are jointly and severally liable for any unpaid loans, interests, or
fees arising under the agreement. Pursuant to the Credit Facility Agreement, on
September 3, 2009, Changda Fertilizer applied for a loan in the amount of RMB
5,000,000. The loan is due and payable on the maturity date of September 2,
2010. The loan is subject to a fixed annual interest rate that is 20% more than
the 12-month Benchmark Lending Rate issued by China Central Bank on the date
that the loan is received. In the case of late payment, the annual interest rate
is 50% more than the 12-month Benchmark Lending Rate issued by China Central
Bank on the due date of payment. In the case of unauthorized use of the loan,
the annual interest rate is 100% more than the 12-month Benchmark Lending Rate
issued by China Central Bank on the date of unauthorized use.
On
January 12, 2009, Huaran Zhu entered into a personal Loan Contract with Shandong
Shouguang Rural Cooperative Bank for a loan in the amount of RMB 1,400,000. The
loan is subject to a monthly interest rate of 40% more than the Benchmark
Interest Rate. The interest is due and payable on the 20th of
each month and the principal on the maturity date of January 5, 2010. The loan
is guaranteed by Fenran Zhu and Xueran Zhu through a separate Guarantee
Contract, effective January 12, 2009, pursuant to which Fenran Zhu and Xueran
Zhu are jointly and severally liable for the loan. The loan is also secured by a
mortgage of a real property owned by Weifang Xinli Architectural Decoration Co.,
Ltd.
On July
5, 2007, Changda Chemicals entered into a loan agreement with Huaran Zhu for an
unsecured loan in the amount of RMB 1,000,000. The loan is not subject to any
interest. Huaran Zhu may request for part or all payment in 7 days notice to
Changda Chemicals. The loan is payable in case of emergency use. On September 8,
2007, Changda Chemicals entered into a loan agreement with Huaran Zhu for an
unsecured loan in the amount of RMB 1,000,000. The loan is not subject to any
interest. Huaran Zhu may request for part or all payment in 7 days notice to
Changda Chemicals. The loan is payable in case of emergency use. On November 2,
2007, Changda Chemicals entered into a loan agreement with Huaran Zhu for an
unsecured loan in the amount of RMB 500,000. The loan is not subject to any
interest. Huaran Zhu may request for part or all payment in 7 days notice to
Changda Chemicals. The loan is payable in case of emergency
use. On June 10, 2008, Changda Chemicals entered into an
agreement with Huaran Zhu for an unsecured loan in the amount of RMB 10,258,000.
The loan is not subject to any interest. Huaran Zhu is a director of
the Company.
On June
4, 2008, Changda Fertilizer entered into a loan agreement with Qingran Zhu for
an unsecured loan in the amount of RMB 6,883,000. The loan is not subject to any
interest. The loan is due and payable two years after the date that the loan is
received.
On
September 3, 2008, Changda Chemicals entered into an agreement with Xueran Zhu.
Pursuant to such agreement, Changda Chemicals authorized Xueran Zhu to make a
personal loan of RMB 2,800,000 from Agricultural Bank of China for the benefit
of Changda Chemicals, and is responsible for the repayment and any debt arising
from the loan. Xueran Zhu is the brother of QingRan Zhu and HuaRan
Zhu , our chief executive officer and director, respectively.
UNDERWRITING
We and
the underwriters named below have entered into an underwriting agreement with
respect to the units being offered. Subject to certain conditions, each
underwriter is severally committed to purchase all of the units offered hereby
in the respective amounts indicated in the following table, other than those
units covered by the over-allotment option described below. [________] is the
representative of the underwriters.
Number
of
|
||
Underwriters
|
Units
|
|
|
Units
sold by the underwriters to the public will initially be offered at the public
offering price set forth on the cover of this prospectus. Any units sold by the
underwriters to securities dealers may be sold at a discount of up to
$[________] per unit from the public offering price. If all the units are not
sold at the public offering price, the underwriters may change the offering
price and the other selling terms.
We have
granted to the underwriters an over-allotment option to purchase up to
[________] additional units from us at the same price to the public, less
underwriting discounts. The underwriters may exercise this option any time
during the __-day period after the date of this prospectus, but only to cover
over-allotments, if any.
We may
agree to sell to the representative of the underwriters, for $100, an option to
purchase up to a total
of units ([____]% of
the units sold). The units issuable upon exercise of this option are identical
to those offered by this prospectus. This option is exercisable at $[____] per
share (([____]% of the price of the shares sold in the offering), commencing on
a date which is one year from the effective date of the registration statement
and expiring five years from the effective date of the registration statement.
The option may not be transferred for one year from the effective date of the
registration statement.
51
We
estimate that the total fees and expenses payable by us, excluding underwriting
discounts and commissions, will be approximately $[____]. The following table
shows the underwriting fees to be paid to the underwriters by us in connection
with this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters’ over-allotment option.
No
Exercise
|
Full
Exercise
|
|||
Per
share paid by us
|
||||
Total
|
We have
agreed to indemnify the underwriters against certain liabilities, including
civil liabilities under the Securities Act, or to contribute to payments that
the underwriters may be required to make in respect of those
liabilities.
We and
each of our directors, executive officers and beneficial holders of greater than
5% of our common stock have agreed to certain restrictions on the ability to
sell additional shares of our common stock for a period ending 180 days
after the date of this prospectus, subject to extension as described below. We
and they have agreed not to directly or indirectly offer for sale, sell,
contract to sell, grant any option for the sale of, or otherwise issue or
dispose of, any shares of common stock, options or warrants to acquire shares of
common stock, or any related security or instrument, without the prior written
consent of [____]on behalf of the underwriters, subject to certain
exceptions.
The
lock-up period described in the preceding paragraph will be extended if (1)
during the last 17 days of the lock-up period we issue an earnings release
or material news or a material event relating to us occurs or (2) prior to the
expiration of the lock-up period we announce that we will release earnings
results during the 16-day period beginning on the last day of the lock-up
period, in which case the lock-up period will be extended until the expiration
of the 18-day period beginning on the date of issuance of the earnings release
or the occurrence of the material news or material event.
To
facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of our common stock during and
after the offering. Specifically, the underwriters may over-
allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock than have been sold to them by us. Short sales involve the sale by
the underwriters of a greater number of shares than they are required to
purchase in this offering. “Covered” short sales are sales made in an amount not
greater than the underwriters’ over-allotment option to purchase additional
shares in this offering. The underwriters may close out any covered short
position by either exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. “Naked” short sales are sales in excess of this option.
The underwriters must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could adversely affect
investors who purchase in this offering.
In
addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock in the open market and
may impose penalty bids. If penalty bids are imposed, selling concessions
allowed to syndicate members or other broker dealers participating in the
offering are reclaimed if shares of common stock previously distributed in the
offering are repurchased, whether in connection with stabilization transactions
or otherwise. The effect of these transactions may be to stabilize or maintain
the market price of the common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also effect the
price of the common stock to the extent that it discourages resales of the
common stock. The magnitude or effect of any stabilization or other transactions
is uncertain. These transactions may be effected on The NASDAQ Capital Market or
otherwise and, if commenced, may be discontinued at any time.
From time
to time in the ordinary course of their respective business, certain of the
underwriters and their affiliates may also in the future engage in commercial
banking or investment banking transactions with us and our
affiliates.
DESCRIPTION
OF CAPITAL STOCK
The
following information describes our capital stock as well as certain provisions
of our certificate of incorporation and bylaws. This description is only a
summary. You should also refer to our certificate of incorporation and bylaws,
which have been filed as exhibits to the registration statement of which this
prospectus is a part.
Our
authorized capital stock consists of 100,000,000 shares of common stock,
$0.001 par value per share. As of November 13, 2009, we had 18,964,025
shares of common stock outstanding.
52
Common
Stock
Each
outstanding share of common stock has one vote on all matters requiring a vote
of the stockholders. There is no right to cumulative voting; thus, the holders
of 50% or more of the shares outstanding can, if they choose to do so, elect all
of the directors. In the event of a voluntary or involuntary liquidation, all
stockholders are entitled to a pro rata distribution after
payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the common stock. The holders of the
common stock have no preemptive rights with respect to future offerings of
shares of common stock.
Dividend
Policy
We have
not declared or paid any cash dividends and do not intend to pay any cash
dividends in the foreseeable future. We intend to retain any future earnings for
use in the operation and expansion of our business. Any future decision to pay
cash dividends on common stock will be at the discretion of our board of
directors and will depend upon our financial condition, results of operation,
capital requirements and other factors our board of directors may deem relevant.
Holders of common stock are entitled to dividends if, as and when declared by
the Board out of the funds legally available therefor. It is our present
intention to retain earnings, if any, for use in our business. The payment of
cash dividends on the common stock included in the units is unlikely in the
foreseeable future.
Class A
Warrants
Each
Class A warrant entitles the holder to purchase one share of our common
stock at a price of $ per share, subject
to adjustment as discussed below, at any time commencing 60 days after
issuance. The Class A warrants will expire on ______, 2015 at
5:00 p.m., New York City time. The Class A warrants are not
redeemable.
The
exercise price and number of shares of common stock issuable on exercise of the
Class A warrants may be adjusted in certain circumstances including in the
event of a stock dividend, or our recapitalization, reorganization, merger or
consolidation. However, the Class A warrants will not be adjusted for
issuances of common stock, preferred stock or other securities at a price below
their respective exercise prices.
The
Class A warrants may be exercised upon surrender of the warrant on or prior
to the expiration date at the offices, with the exercise form on the reverse
side of the warrant certificate completed and executed as indicated, accompanied
by full payment of the exercise price, by certified check payable to us, for the
number of Class A warrants being exercised. The Class A warrantholders
do not have the rights or privileges of holders of common stock and any voting
rights until they exercise their Class A warrants and receive shares of
common stock. After the issuance of shares of common stock upon exercise of the
Class A warrants, each holder will be entitled to one vote for each share
held of record on all matters to be voted on by stockholders.
No
Class A warrants will be exercisable unless at the time of exercise a
prospectus relating to common stock issuable upon exercise of the Class A
warrants is current and the common stock has been registered or qualified or
deemed to be exempt under the securities laws of the state of residence of the
holder of the Class A warrants. We will use our reasonable efforts to
maintain a current prospectus relating to common stock issuable upon exercise of
the Class A warrants until the expiration of the Class A warrants.
However, we cannot assure you that we will be able to do so. The Class A
warrants may be deprived of any value and the market for the Class A
warrants may be limited if the prospectus relating to the common stock issuable
upon the exercise of the Class A warrants is not current or if the common
stock is not qualified or exempt from qualification in the jurisdictions in
which the holders of the Class A warrants reside.
No
fractional shares will be issued upon exercise of the Class A warrants.
However, we will pay to the Class A warrantholder, in lieu of the issuance
of any fractional share that is otherwise issuable to the Class A
warrantholder, an amount in cash based on the market value of the common stock
on the last trading day prior to the exercise date.
Purchase
Option
We have
agreed to sell to the representative of the underwriters an option to purchase
up to a total of
units at a per-unit price of $ . For a more
complete description of the purchase option, including the terms of the units
underlying the option, see the section of this prospectus entitled
“Underwriting.”
53
LEGAL
MATTERS
The
validity of the shares sold by us under this prospectus will be passed upon for
us by Sichenzia Ross Friedman Ference LLP in New York, New
York.
EXPERTS
The
financial statements of Changda International Limited as of and for the years
ended December 31, 2008 and 2007 included in this prospectus have been audited
by Mazars CPA Limited, independent certified public accountants to the extent
and for the periods set forth in their report appearing elsewhere herein and are
included in reliance upon such report given upon the authority of that firm as
experts in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We are
subject to informational filing requirements of the U.S. Securities Exchange Act
of 1934, as amended, and its rules and regulations. This means that we will file
reports and other information with the U.S. Securities and Exchange Commission.
You can inspect and copy this information at the Public Reference Facility
maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can
receive additional information about the operation of the SEC's Public Reference
Facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site
that will contain the reports and other information that we file electronically
with the Commission and the address of that website is http://www.sec.gov
.
This
prospectus is part of a registration statement we filed with the
SEC. We have not authorized anyone to provide you with any
information other than that provided in this prospectus. We have not authorized
anyone to provide you with different information. We are not making an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus is accurate as of any date other
than the date on the front of the document.
54
Changda
International Holdings, Inc.
Index
to Consolidated Financial Statements
Page
|
||
Changda International Limited | ||
Report
of Independent Registered Public Accounting Firm
|
F-2 | |
Consolidated Statements of
Operations for the years ended December 31, 2008 and
2007
|
F-3 | |
Consolidated Balance Sheets at
December 31, 2008 and 2007
|
F-4 | |
Consolidated Statements of
Changes in Stockholders Equity for the years ended December 31, 2008
and 2007
|
F-5 | |
Consolidated Statements of Cash
Flows for the years ended December 31, 2008 and
2007
|
F-6 | |
Notes to Consolidated Financial
Statements
|
F-7 - F-26 | |
Changda
International Holdings, Inc.
|
||
Consolidated Balance Sheets at
September 30, 2009 (unaudited) and December 31, 2008
(unaudited)
|
F-27 | |
Consolidated Statements of
Operations for the three and nine month periods ended September 30,
2009 and 2008 (unaudited)
|
F-28 | |
Consolidated Statements of Cash
Flows for the nine month periods ended September 30, 2009 and 2008
(unaudited)
|
F-29 | |
Notes to Consolidated Interim
Financial Statements (unaudited)
|
F-30 - F-39 |
F-1
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of
Changda
International Limited
We have
audited the accompanying consolidated balance sheets of Changda International
Limited ("Changda International") and its subsidiaries (together with Changda
International, collectively referred to as the "Company") as of December 31,
2008 and 2007, and the related consolidated statements of operations and
comprehensive income, stockholders' equity and cash flows for each of the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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 auditing 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. Our audits also included
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 the Company as of December
31, 2008 and 2007, and the results of its operations and its cash flows for each
of the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/
Mazars CPA Limited
Mazars
CPA Limited
Certified
Public Accountants
Hong
Kong
Date:
October 12, 2009
F-2
Changda
International Limited
Consolidated
Statements of Operations and
Other
Comprehensive Income
For the
years ended December 31, 2008 and 2007
Years
ended December 31,
|
||||||||||||
2008
|
2007
|
|||||||||||
Note
|
US$’000
|
US$’000
|
||||||||||
Operating
Revenues
|
80,958 | 38,245 | ||||||||||
Cost
of sales
|
(67,907 | ) | (31,417 | ) | ||||||||
Gross
profit
|
13,051 | 6,828 | ||||||||||
Operating
expenses
|
||||||||||||
Depreciation of property, plant
& equipment
|
(250 | ) | (204 | ) | ||||||||
Amortization of prepaid lease
expenses
|
(33 | ) | (33 | ) | ||||||||
Selling, general and
administrative expenses
|
(5,839 | ) | (2,797 | ) | ||||||||
Operating
income
|
6,929 | 3,794 | ||||||||||
Interest income
|
16 | 4 | ||||||||||
Other income
|
80 | 131 | ||||||||||
Interest
expense
|
(449 | ) | (176 | ) | ||||||||
Income
before income taxes
|
6,576 | 3,753 | ||||||||||
Income
taxes
|
4 | (931 | ) | - | ||||||||
Net
income
|
5,645 | 3,753 | ||||||||||
Attributable
to
|
||||||||||||
Owners of the
Company
|
5,645 | 3,777 | ||||||||||
Minority
interest
|
- | (24 | ) | |||||||||
5,645 | 3,753 | |||||||||||
Net
income
|
5,645 | 3,753 | ||||||||||
Other
comprehensive income
|
||||||||||||
Foreign currency translation
adjustment
|
1,025 | 285 | ||||||||||
Comprehensive
income
|
6,670 | 4,038 | ||||||||||
The
financial statements should be read in conjunction with the accompanying
notes.
F-3
Changda
International Limited
Consolidated
Balance Sheets
As of
December 31, 2008 and 2007
As of December
31,
|
||||||||||||
2008
|
2007
|
|||||||||||
ASSETS
|
Note
|
US$ '000
|
US$
'000
|
|||||||||
Current
assets
|
||||||||||||
Cash
and cash equivalents
|
575 | 979 | ||||||||||
Restricted
bank balances
|
315 | |||||||||||
Trade
and other receivables, net
|
5 | 9,098 | 5,402 | |||||||||
Government
grant receivable in respect of taxation
|
4 | 2,713 | 1,888 | |||||||||
Inventories
|
6 | 4,158 | 1,600 | |||||||||
Current
portion of prepaid lease payments, net
|
7 | 37 | 34 | |||||||||
Total
current assets
|
16,581 | 10,218 | ||||||||||
Non-current
assets
|
||||||||||||
Property,
plant and equipment, net
|
8 | 16,809 | 14,207 | |||||||||
Prepaid
lease payments less current portion, net
|
7 | 1,720 | 1,646 | |||||||||
Intangible
assets, net
|
4 | 4 | ||||||||||
18,533 | 15,857 | |||||||||||
Total
assets
|
35,114 | 26,075 | ||||||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||
Current
liabilities
|
||||||||||||
Trade
and other payables
|
9 | 3,147 | 2,836 | |||||||||
Short-term
interest-bearing borrowings
|
10 | 1,940 | 3,438 | |||||||||
Other
short-term borrowings
|
13 (c) | 1,629 | 2,573 | |||||||||
Dividend
payable
|
- | 33 | ||||||||||
Income
tax payables
|
2,975 | 1,888 | ||||||||||
Total
current liabilities
|
9,691 | 10,768 | ||||||||||
Non-current
liabilities
|
||||||||||||
Deferred
government grants
|
11 | 809 | 775 | |||||||||
Long-term
interest-bearing borrowings
|
10 | 2,408 | - | |||||||||
Other
long-term borrowing
|
13 (c) | 1,004 | - | |||||||||
4,221 | 775 | |||||||||||
Total
liabilities
|
13,912 | 11,543 | ||||||||||
Commitments
and contingencies
|
14 | |||||||||||
Stockholders'
equity
|
||||||||||||
Common
stock, US$0.0001 per value each:
|
||||||||||||
300,000,000
shares authorized 53,599,964 shares issued and outstanding
|
1 | 5 | 5 | |||||||||
Additional
paid-in capital
|
5,050 | 5,050 | ||||||||||
Statutory
reserves
|
12 | 2,264 | 1,323 | |||||||||
Accumulated
other comprehensive income
|
1,310 | 285 | ||||||||||
Retained
earnings
|
12,573 | 7,869 | ||||||||||
Total
stockholders' equity
|
21,202 | 14,532 | ||||||||||
Total
liabilities and stockholders' equity
|
35,114 | 26,075 |
The
financial statements should be read in conjunction with the accompanying
notes.
F-4
Changda
International Limited
Consolidated
Statements of Stockholders’ Equity
For the
years ended December 31, 2008 and 2007
Common
stock issued
|
||||||||||||||||||||||||||||||||
Number
of
shares
|
Amount
|
Additional
paid-in
capital
|
Statutory
reserves
|
Accumulated
other
comprehensive
income
|
Retained
earnings
|
Minority
interests
|
Total
stockholders'
equity
|
|||||||||||||||||||||||||
US$’000
|
US$’000
|
US$’000
|
US$’000
|
US$’000
|
US$’000
|
US$’000
|
||||||||||||||||||||||||||
Balance
as of January 1, 2007
|
53,599,964 | 5 | 5,050 | 702 | - | 4,713 | - | 10,470 | ||||||||||||||||||||||||
Capital
contribution from minority stockholders
|
- | - | - | - | - | - | 32 | 32 | ||||||||||||||||||||||||
Disposal
of a subsidiary
|
- | - | - | - | - | - | (8 | ) | (8 | ) | ||||||||||||||||||||||
Net
income
|
- | - | - | - | - | 3,777 | (24 | ) | 3,753 | |||||||||||||||||||||||
Transfer
to statutory reserves
|
- | - | - | 621 | - | (621 | ) | - | - | |||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 285 | - | - | 285 | ||||||||||||||||||||||||
Balance
as of December 31, 2007
|
53,599,964 | 5 | 5,050 | 1,323 | 285 | 7,869 | - | 14,532 | ||||||||||||||||||||||||
Net
income
|
- | - | - | - | - | 5,645 | - | 5,645 | ||||||||||||||||||||||||
Transfer
to statutory reserves
|
- | - | - | 941 | - | (941 | ) | - | - | |||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 1,025 | - | - | 1,025 | ||||||||||||||||||||||||
Balance
as of December 31, 2008
|
53,599,964 | 5 | 5,050 | 2,264 | 1,310 | 12,573 | - | 21,202 | ||||||||||||||||||||||||
The
financial statements should be read in conjunction with the accompanying
notes.
F-5
Changda
International Limited
Consolidated
Statements of Cash Flows
For the
years ended December 31, 2008 and 2007
Year
ended December 31,
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
2008
US$'000
|
2007
US$ '000
|
||||||
Net
income
|
5,645 | 3,753 | ||||||
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||
Depreciation
of property, plant and equipment
|
1,568 | 971 | ||||||
Amortization
of prepaid lease payments
|
33 | 33 | ||||||
Gain
on disposal of interest in a subsidiary
|
- | (35 | ) | |||||
Exchange
differences
|
72 | 143 | ||||||
Government
grants recognized
|
(17 | ) | (16 | ) | ||||
Provision
for doubtful debts
|
75 | - | ||||||
Gain
on disposal of property, plant and equipment
|
(1 |
)
|
- | |||||
Changes
in operating assets and liabilities:
|
||||||||
Inventories
|
(2,454 | ) | (299 | ) | ||||
Government
grant receivable in respect of taxation
|
(702 | ) | (1,648 | ) | ||||
Trade
and other receivables, net
|
(3,419 | ) | (1,283 | ) | ||||
Trade
and other payables
|
125 | 779 | ||||||
Income
tax payables
|
964 | 1,648 | ||||||
Net
cash provided by operating activities
|
1,889 | 4,046 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase
of property, plant and equipment
|
(3,279 | ) | (7,021 | ) | ||||
Acquisition
of intangible assets
|
- | (4 | ) | |||||
Deposit
paid for acquisition of land use right
|
- | (855 | ) | |||||
Deposit
paid for acquisition of property, plant and equipment
|
- | (1,123 | ) | |||||
Proceeds
from disposal of property, plant and equipment
|
43 | - | ||||||
Additions
of land lease prepayments
|
- | (16 | ) | |||||
Net
cash from disposal of subsidiary
|
- | 8 | ||||||
Release
of (Investment in) restricted bank balances
|
335 | (315 | ) | |||||
Net
cash used in investing activities
|
(2,901 | ) | (9,326 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Repayment
of bank and other loans
|
(7,266 | ) | (1,233 | ) | ||||
New
bank and other loans raised
|
7,845 | 3,587 | ||||||
Capital
injection
|
- | 3,116 | ||||||
Capital
contribution from minority stockholders
|
- | 32 | ||||||
Dividend
paid
|
(35 | ) | (8 | ) | ||||
Net
cash provided by financing activities
|
544 | 5,494 | ||||||
Net
(decrease) increase in cash and cash equivalents
|
(468 | ) | 214 | |||||
Cash
and cash equivalents at beginning of year
|
979 | 715 | ||||||
Effect
on exchange rate changes
|
64 | 50 | ||||||
Cash and cash equivalents
at end of
year
|
575 | 979 | ||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
|
||||||||
INFORMATION
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
449 | 176 | ||||||
Income
taxes
|
673 | - | ||||||
Major
non-cash transaction:
|
||||||||
Construction
in progress not yet been paid at year end and included in other
payable
|
32 | 185 | ||||||
The
financial statements should be read in conjunction with the accompanying
notes.
F-6
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
ChangdaInternational
Limited ("Changda International") was incorporated on April 2, 2007 under
Marshall Islands law. Changda International is an investment holding company
with no operations. The principal activities of its subsidiaries (together with
Changda International, collectively referred as "the Company" or "the Group")
are the manufacture and sales of fertilizers, snow melting agent and drugs
intermediate. The Company sells mainly to the Chinese
markets.
Details
of Changda International's subsidiaries as of December 31, 2008 are as
follows:
Name
|
Place
and
date
of
establishment
/
incorporation
|
Percentage
of effective equity interest / voting right attributable to the
Company
|
Principal
activities
|
Weifang
Changda Fertilizer Co., Limited
(“Changda
Fertilizer”)*
|
Weifang,
the People’s
Republic
of China
(“PRC”)
April
24, 2003
|
100%
|
Manufacture
and sales of fertilizers
|
Weifang
Changda Chemical Industry Co., Limited(“Changda
Chemical”)*
|
Weifang,
PRC
December
1, 2000
|
100%
|
Manufacture
and sales of snow melting agent and drugs intermediate
|
Shangdong
Fengtai Fertilizer Co., Limited
(“Shangdong
Fengtai”)*
|
Shangdong,
PRC
May
17, 2004
|
100%
|
Manufacture
and sales of fertilizer
|
Heze
Changda Fertilizer Co., Limited
(“Heze
Changda”)*
|
Heze,
PRC
September
3, 2007
|
100%
|
Dormant
|
*
This is a direct translation of the name in Chinese for identification purpose
only and is not the official name in English.
On July
6, 2007, Changda International acquired a 25% interest in Changda Fertilizer and
Changda Chemical, which became foreign invested joint venture companies and the
approval from relevant government authority were obtained on August 13, 2007 and
August 10, 2007 respectively.
On
December 17, 2007, Changda International entered into Share Transfer Agreements
("Agreements") with the stockholders of Changda Fertilizer and Changda Chemical
(the "Stockholders") whereby Changda International acquired all of the issued
and outstanding common stock from the Stockholders in costing of US$1,865,000
and US$1,192,000, respectively, totaling US$3,057,000. Further, the Stockholders
acquired an aggregate 40,199,973 newly-issued shares of Changda Internaional's
common stock, par value of US$0.0001 each, representing 75% of Changda
International's common stock issued and outstanding upon completion of the share
exchange (the "Share Exchange Transaction").
F-7
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
1. ORGANIZATION
AND PRINCIPAL ACTIVITIES (CONTINUED)
Upon the
completion of the Share Exchange Transaction on December 17, 2007, there were
53,599,964 shares of Changda International's common stock issued and
outstanding.
In order
to rationalize the corporate structure, Changda International on June 13, 2008
entered into an agreement with Seiwa Fertilizer Co. Ltd whereby Changda
International acquired the 25% interest in Shangdong Fengtai at a cash
consideration of US$130,500. As a consequence, Shangdong Fengtai is owned by
Changda Fertilizer (75%) and Changda International (25%).
The
acquisition by Changda International of Changda Fertilizer is deemed to be a
reverse acquisition in accordance with generally accepted accounting principles.
In accordance with the Accounting and Financial Reporting Interpretations and
Guidance prepared by the staff of the U.S. Securities and Exchange Commission,
Changda International (the legal acquirer) is considered the accounting acquiree
and Changda Fertilizer (the legal acquiree) is considered the accounting
acquirer. The consolidated financial statements of the consolidated entity is in
substance be those of Changda Fertilizer, with the assets and liabilities, and
revenues and expenses, of Changda International being included effective from
the date of completion of Share Exchange Transaction. Changda International is
deemed to be a continuation of business of Changda Fertilizer. The outstanding
common stock of Changda International prior to the Share Exchange Transaction is
accounted for at their net book value and no goodwill is
recognized.
In
connection with the merger, Changda International acquired 100% of the equity
shares from the stockholders of Changda Chemical, of which is subject to the
common control, in exchange for cash and its own shares. This transaction is
deemed to have taken place at the beginning of the comparative period in
accordance with SFAS No. 141 (Business Combinations).
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Accounting
principles
The
consolidated financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States of
America ("USGAAP").
Basis
of consolidation
The
consolidated financial statements include the financial information of Changda
International Limited and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated upon consolidation.
Revenue
recognition
Revenue
is recognised when it is probable that the economic benefits will flow to the
Group and when the revenue and costs, if applicable, can be measured reliably
and on the following basis.
Sale of
goods is recognised on transfer of risks and rewards of ownership, which
generally coincides with the time when the goods are delivered to customers and
the title is passed.
F-8
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Research
and development
All costs
of research and development activities are generally expensed as incurred.
Research and development costs were US$166,175 and US$38,642 for the years ended
December 31, 2008 and 2007, respectively.
Advertising
and promotion costs
Advertising
and promotion costs are expensed as selling expenses as incurred. Advertising
costs were US$252,110 and US$139,751 for the years ended December 31, 2008 and
2007, respectively.
Retirement
plan costs
Payments
to the state managed retirement benefits schemes are charged to general and
administrative expenses in the consolidated statements of operations and
comprehensive income as and when the related employee services are
provided.
Income
taxes
The
charge for current income tax is based on the results for the period as adjusted
for items that are non-assessable or disallowed. It is calculated using tax
rates that have been enacted or substantively enacted by the balance sheet
date.
Deferred
tax is provided, using the liability method, on all temporary differences at the
balance sheet date between the tax bases of assets and liabilities and their
carrying amounts in the financial statements. However, if the deferred tax
arises from initial recognition of an asset or liability in a transaction other
than a business combination that at the time of the transaction affects neither
the accounting profit nor taxable profit or loss, it is not accounted
for.
The
deferred tax liabilities and assets are measured at the tax rates that are
expected to apply to the period when the asset is recovered or the liability is
settled, based on tax rates and tax laws that have been enacted or substantively
enacted at the balance sheet date. Deferred tax assets are recognised to the
extent that it is probable that future taxable profit will be available against
which the deductible temporary differences, tax losses and credits can be
utilized.
Comprehensive
income
SFAS No.
130, "Reporting Comprehensive
Income", requires the presentation of comprehensive income, in addition
to the existing statements of operations. Comprehensive income is defined as the
change in equity during the year from transactions and other events, excluding
the changes resulting from investments by owners and distributions to
owners.
Property,
plant and equipment
Property,
plant and equipment, other than construction in progress, are stated at cost
less accumulated depreciation and accumulated impairment losses.
The cost
of an item of property, plant and equipment comprises its purchase price and any
directly attributable costs of brining the asset to its working condition and
location for its intended use. Repairs and maintenance are charged to the income
statement during the period in which they are incurred.
F-9
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Property,
plant and equipment (continued)
Depreciation
is provided to write off the cost less accumulated impairment losses of
property, plant and equipment, other than construction in progress, over their
estimated useful lives as set out below from the date on which they are
available for use and after taking into account of their estimated residual
values, using the straight-line method. Where parts of an item of property,
plant and equipment have different useful lives, the cost or valuation of the
item is allocated on a reasonable basis and depreciated separately.
Annual
depreciation rate
|
||||
Buildings
|
5% - 10 | % | ||
Plant
and machinery
|
11% - 12 | % | ||
Office
equipment
|
10% - 24 | % | ||
Vehicles
|
10% - 18 | % | ||
Factory
equipment
|
18 | % |
Construction
in progress
Construction
in progress is stated at cost less accumulated impairment losses. Cost includes
all construction expenditure and other direct costs, including interest costs,
attributable to such projects. Costs on completed construction works are
transferred to the appropriate asset category. No depreciation is provided in
respect of construction in progress until it is completed and available for
use.
Prepaid
lease payments
Prepaid
lease payments are up-front payments to acquire fixed term interests in
lessee-occupied land. The premiums are stated at cost and are amortised over the
period of the lease on a straight-line basis to the statement of operations and
other comprehensive income.
Intangible
assets
Trademarks
The
initial cost of acquiring trademarks is capitalised. Trademarks with indefinite
useful lives are carried at cost less accumulated impairment losses. Trademarks
with finite useful lives are carried at cost less accumulated amortization and
accumulated impairment losses. Amortization is provided on the straight-line
basis over their estimated useful lives of 10 years.
Impairment
of long-lived assets
Long-lived
assets are reviewed at least annually for impairment whenever events or changes
in circumstances indicate that the carrying amount of assets may not be
recoverable. It is reasonably possible that these assets could become impaired
as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the carrying amount
of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, impairment is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets and recorded as a reduction of original costs. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell.
F-10
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Inventories
Inventories
are stated at the lower of cost and net realisable value. Cost, which comprises
all costs of purchase and, where applicable, cost of conversion and other costs
that have been incurred in bringing the inventories to their present location
and condition, is calculated using the weighted average cost method. Net realisable value represents the
estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the
sale.
Cash
equivalents
For the
purpose of consolidated statements of cash flows, cash equivalents represent
short-term highly liquid investments which are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes in
value, net of bank overdrafts.
Foreign
currency translation
Items
included in the Company's consolidated financial statements are measured using
the currency of the primary economic environment in which the Group operates
("functional currency").
Foreign
currency transactions are translated into the functional currency using the
exchange rates prevailing at the dates of the transactions. Foreign currency
transaction gains and losses are recognized in current operations, whilst
translation adjustments are recognized in other comprehensive income, which in a
separate component of stockholders' equity.
The
presentational currency is the United States Dollars, presented in
thousands.
Fair
value of financial instruments
The
Company's financial instruments include restricted bank balances, trade and
other receivables or payables, prepayments and borrowings. The management has
estimated that the carrying amount approximates their fair value due to their
short-term nature. The fair value of non-current financial instruments was not
materially different from their carrying value as of December 31, 2008 and
2007.
Government
grants
Government
grants are recognised at their fair value where there is reasonable assurance
that the grant will be received and all attaching conditions will be complied
with. When the grant relates to an expense item, it is recognised as income over
the years necessary to match the grant on a systematic basis to the costs that
it is intended to compensate. Where the grant relates to an asset, the fair
value is credited to a deferred income account and is released to the statement
of operations and other comprehensive income over the expected useful life of
the relevant asset by equal annual instalments.
Shipping
and handling
The
Company includes shipping and handling fees and costs in cost of goods sold.
Related fees and costs charged to customers are classified as
revenue.
F-11
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Provisions
Provisions
are recognised when the Company has a present legal or constructive obligation
as a result of past events, it is probable that an outflow of resources
embodying economic benefits will be required to settle the obligation, and a
reliable estimate of the amount of obligation can be made. Expenditures for
which a provision has been recognised are charged against the related provision
in the period in which the expenditures are incurred. Provisions are reviewed at
each balance sheet date and adjusted to reflect the current best estimate. Where
the effect of the time value of money is material, the amount provided is the
present value of the expenditures expected to be required to settle the
obligation. Where the Company expects a provision to be reimbursed, the
reimbursement is recognised as a separate asset but only when the reimbursement
is virtually certain.
Operating
leases
Leases
where substantially all the rewards and risks of ownership of assets remain with
the leasing company are accounted for as operating leases. Rentals payable and
receivable under operating leases are recognised as expense and revenue on the
straight-line basis over the lease terms.
Use
of estimates
The
preparation of the consolidated financial statements in conformity with USGAAP
requires the management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reported periods. The management evaluates
these estimates and judgments on an ongoing basis and bases their estimates on
experience, current and expected future conditions, third-party evaluations and
various other assumptions that they believe are reasonable under the
circumstances. The results of these estimates form the basis for making
judgments about the carrying values of assets and liabilities as well as
identifying and assessing the accounting treatment with respect to commitments
and contingencies.
Actual
amounts could differ from those estimates. Estimates are used for, but not
limited to, the accounting for certain items such as allowance for doubtful
accounts, depreciation and amortization, inventory allowance, taxes and
contingencies.
Related
parties
Parties
are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operating decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence.
Critical
accounting estimates and judgements
Estimates
and judgments are currently evaluated and are based on historical experience and
other factors including expectations of future events that are believed to be
reasonable under the circumstances. Apart from information disclosed elsewhere
in these financial statements, the following summaries estimates and assumptions
that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
F-12
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Critical
accounting estimates and judgements (continued)
Allowance
of bad and doubtful debts
The
provisioning policy for bad and doubtful debts of the Company is based on the
evaluation of collectability and ageing analysis of the receivables. A
considerable amount of judgement is required in assessing the ultimate
realisation of these receivables, including the current creditworthiness and the
past collection history of each debtor. If the financial conditions of these
debtors were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowance will be required.
Allowance
for inventories
The
Company's management reviews an ageing analysis of inventories at each balance
sheet date, and make allowance for obsolete and slow-moving inventory items
identified that are no longer recoverable or suitable for use in production. The
management estimates the net realisable value for finished goods and
work-in-progress based primarily on the latest invoice prices and current market
conditions. The Company carries out an inventory review on a product-by-product
basis at each balance sheet date and makes allowances for obsolete
items.
Recently
issued accounting pronouncements
"Effective
Date of FASB Statement No. 157", which delays the effective date of SFAS No. 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on at least an
annual basis, to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. The provisions of SFAS No. 157 are to be
applied prospectively as of the beginning of the fiscal year in which it is
applied, with any transition adjustment recognized as a cumulative effect
adjustment to the opening balance of retained earnings. The Company does not
anticipate that the adoption of SFAS No. 157 for nonfinancial assets and
liabilities measured at fair value on a non-recurring basis will have a material
impact on its financial position and results of operations.
On
January 1, 2009, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51," (SEAS 160).
SFAS 160 amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This standard defines a non-controlling interest, previously called
a minority interest, as the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. SFAS 160 requires, among other items, that
a non-controlling interest be included in the consolidated statement of
financial position within equity separate from the parent's equity; consolidated
net income to be reported at amounts inclusive of both the parent's and
non-controlling interest's shares and, separately, the amounts of consolidated
net income attributable to the parent and non-controlling interest all on the
consolidated statement of operations; and if a subsidiary is deconsolidated, any
retained non-controlling equity investment in the former subsidiary be measured
at fair value and a gain or loss be recognized in net income based on such fair
value. This Statement is effective for fiscal years beginning on or after
December 15, 2008. Early adoption is not permitted. The Company's
adoption of SFAS No. 160 will not have a material impact on its financial
position and results of operations.
F-13
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Recently
issued accounting pronouncements (Continued)
On
January 1, 2009, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations," (SFAS 141(R)), which replaces SFAS No. 141, "Business
Combinations," (SFAS 141) but retains the fundamental requirements in SFAS 141,
including that the purchase method be used for all business combinations and for
an acquirer to be identified for each business combination. This standard
defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control instead of the date that the
consideration is transferred. SFAS 141(R) requires an acquirer in a business
combination, including business combinations achieved in stages (step
acquisition), to recognize the assets acquired, liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. It also requires the
recognition of assets acquired and liabilities assumed arising from certain
contractual contingencies as of the acquisition date, measured at their
acquisition-date fair values. Additionally, SFAS 141(R) requires
acquisition-related costs to be expensed in the period in which the costs are
incurred and the services are received instead of including such costs as part
of the acquisition price. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 31, 2008. Early
adoption is not allowed. The Company's adoption of SFAS No. 141(R) will not have
a material impact on its financial position and results of
operations.
On
January 1, 2009, the FASB issued FASB Staff Position (FSP) No. FAS 142-3,
"Determination of the Useful Life of Intangible Assets," (FSP FAS 142-3). FSP
FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible
Assets," (SFAS 142) in order to improve the consistency between the useful life
of a recognized intangible asset under SFAS 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS 141(R) and other
GAAP. This Statement shall be effective for financial statements issued for
fiscal years beginning after December 31, 2008, and interim periods within those
fiscal years. Early adoption is not allowed. The Company's adoption of SFAS No.
142-3 will not have a material impact on its financial position and results
of operations.
On
January 1, 2009, the FASB issued FSP No. EITF 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities," (FSP EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. This Statement shall be effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
years. Early adoption is not permitted. The Company's adoption of FSP No. EITF
03-6-1 will not have a material impact on its financial position and results of
operations.
F-14
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
2.SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Recently
issued accounting pronouncements (Continued)
In
December 2008, the Financial Accounting Standards Board issued FSP No. FAS
132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets,"
(FSP FAS 132(R)-1). FSP FAS 132(R)-1 amends SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits," to
provide guidance on an employer's disclosures about plan assets of a defined
benefit pension or other postretirement plan. This guidance is intended to
ensure that an employer meets the objectives of the disclosures about plan
assets in an employer's defined benefit pension or other postretirement plan to
provide users of financial statements with an understanding of the following:
how investment allocation decisions are made; the major categories of plan
assets; the inputs and valuation techniques used to measure the fair value of
plan assets; the effect of fair value measurements using significant
unobservable inputs on changes in plan assets; and significant concentrations of
risk within plan assets. FSP FAS 132(R)-1 becomes effective for Changda
International on December 31, 2009. As FSP FAS 132(R)-1 only requires enhanced
disclosures, management has determined that the adoption of FSP FAS 132(R)-1
will not have an impact on the Financial Statements.
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS No. 162"). SFAS No. 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with US GAAP for nongovernmental entities.
SFAS No. 162 is effective on November 15, 2008, which is 60 days following the
SEC's September 16, 2008 approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, the meaning of "Present Fairly in Conformity
with GAAP". Any effect of applying the provisions of SFAS No. 162 is to be
reported as a change in accounting principle in accordance with FASB Statement
No. 154, "Accounting Changes and Error Corrections". The Company's adoption of
SFAS No. 162 will not have a material impact on its financial position and
results of operations.
3. OPERATING
RISKS
(a) Concentration
of major customers and suppliers
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
US$’000
|
US$’000
|
|||||||
Major
customers with revenues of more than 10% of the Company’s
sales
|
||||||||
Sales to major
customers
|
22,420 | 9,440 | ||||||
Percentage of
sales
|
28 | % | 25 | % | ||||
Number
|
2 | 1 | ||||||
Major
suppliers with purchases of more than 10% of the Company’s
purchases
|
||||||||
Purchases from major
suppliers
|
10,971 | n/a | ||||||
Percentage of
purchases
|
16 | % | n/a | |||||
Number
|
1 | - |
Accounts
receivable related to the Company's major customers comprised 27% and 0% of all
account receivables as of December 31, 2008 and 2007, respectively.
No
accounts payable as of December 31, 2008 and 2007 are related to the Company's
major suppliers.
Credit
risk represents the accounting loss that would be recognized at the reporting
date if counter parties failed to perform as contracted. Concentrations of
credit risk (whether on or off balance sheet) that arise from financial economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The major
concentrations of credit risk arise from the Company's accounts receivable. Even
though the Company has major concentrations, it does not consider itself exposed
to significant risk with regards to the related receivables.
(b) Country
risks
The
Company's principal operation is conducted in the PRC. Accordingly, its
business, financial condition and result of operation maybe influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC economy.
The
operation in the PRC is subject to special considerations and significant risks.
These include risks associated with, among others, the political, economic and
legal environment and foreign currency exchange and remittance restrictions. The
Company's results maybe 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, remittances abroad, and rates and methods of taxation, inter alia.
The management does not believe these risks to be significant. There can be no
assurance, however, those changes in political and other conditions will not
result in any adverse impact.
F-15
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
3. OPERATING
RISKS (CONTINUED)
(c) Cash and time
deposits
The
Company mainly maintains its cash balances with various banks located in the
PRC. In common with local practice, such amounts are not insured or otherwise
protected should the financial institutions be unable to meet their liabilities.
There has been no history of credit losses. There are neither material
commitment fees nor compensating balance requirements for any outstanding loans
of the Company.
4. INCOME
TAXES
Changda
International had a net operating loss carry-forward for income tax reporting
purposes that might be offset against future taxable income. These net operating
loss carry-forwards are severely limited when Changda International experiences
a change in control. No tax benefit has been reported in the financial
statements, because Changda International believes that it is more likely than
not that the carry-forwards will finally expire and therefore cannot be used.
Accordingly, the potential tax benefits of the loss carry-forwards are offset by
a valuation allowance of the same amount.
Changda
International's subsidiaries are subject to income taxes on an entity basis on
income arising in or derived from the tax jurisdictions in which each entity
domiciles and operates.
In 2006,
the local government of economic development area has granted a special tax
exemption to Changda Fertilizer. In this connection, Changda Fertilizer is
entitled to receive the whole amount of Enterprise Income Tax ("EIT") payable
for its first two profitable years of operation starting from 2006 and followed
by an entitlement to receive 50% of EIT payable for the following three years.
The exemption is not applicable upon the successful listing of any holding
company vehicle in overseas stock market.
For
accounting purpose, taxation for the years has been estimated based on the
assessable profit for the period at a rate of 25% according to the newly
effective EIT Law of the PRC in 2008 ("new EIT Law") (2007:
33%). The respective tax liability has been recognized as tax liability
and the related receivable from the local government of economic development
area has been recognized as government grant receivable in respect of taxation,
as reported in the balance sheet.
Starting
from January 1, 2009, the special tax exemption previously granted to Changda
Fertilizer ceased to effect since it became a subsidiary of a public company
listed in the US stock market. Changda Fertilizer is subject to EIT at a rate of
25% thereafter.
Heze
Changda is subject to EIT at a rate of 25%. EIT has not been provided as the
subsidiary has no assessable profit since establishment.
Changda
Chemical was entitled to a special tax exemption granted by the local government
of economic development area since 2006. In this connection, the Company is
entitled to receive a refund of the whole amount of EIT paid for its first two
profitable years of operation starting from 2006.
F-16
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
4.
INCOME TAXES (CONTINUED)
During
the year ended December 31, 2007, Changda Chemical became a WOFE and is subject
to Foreign Enterprise Income Tax. The local government of economic development
area has confirmed that the Company is still entitled to receive the tax
concession granted for the whole year.
In
practice, the amounts entitled to be received have been reported as an exemption
in the respective tax returns submitted by Changda Chemical to the tax bureau
and no assessment of tax payable had been raised by the local tax
bureau.
For
accounting purpose, taxation for the year ended December 31, 2007 has been
estimated based on the assessable profit at a rate of 33%. The respective tax
liability has been recognized and the related receivable from the local
government of economic development area has been recognized as government grant
receivable in respect of taxation, as reported in the balance
sheet.
On
December 29, 2008, Changda Chemical was approved as a high-tech enterprise.
Pursuant to the newly effective Enterprise Income Tax Law of the PRC, tax rate
for an approved high-tech enterprise is 15%. Taxation for the year ended
December 31, 2008 has been estimated based on the assessable profit for the year
at a rate of 15%.
According
to the previous applicable tax law, Shangdong Fengtai was entitled to a tax
holiday of a tax-free period for 2 years from its first profit-making year of
operations and followed by a 50% reduction for the following 3 years ("Tax
Holidays."). Pursuant to the transitional arrangement under the new EIT Law,
Shangdong Fengtai continues to enjoy Tax Holidays, however, the tax-free period
has to be started in 2008 irrespective whether it is profit-making.
(a)
Income tax expenses comprised the following:
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
US$’000
|
US$’000
|
|||||||
Current
taxes arising in the PRC:
|
||||||||
For the year
|
931 | - |
The
Company has early adopted the Statement of Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109"
("FIN 48") issued by the FASB clarifies the accounting and disclosure for
uncertainty in tax positions, as defined, and prescribes the measurement process
and a minimum recognition threshold for a tax
position, taken or expected to be taken in a tax return, that is required to be
met before being recognized in the financial statements. Under FIN 48, the
Company must recognize the tax benefit from an uncertain position only if it is
more-likely-than-not the tax position will be sustained on examination by the
taxing authority, based on the technical merits of the position. The tax
benefits recognized in the financial statements attributable to such position
are measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon the ultimate resolution of the position.
F-17
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
4.
INCOME TAXES (CONTINUED)
(a)
|
Income
tax expenses comprised the following:
(continued)
|
Subject
to the provision of FIN 48, the Company has analyzed its filing positions in all
of the domestic and foreign jurisdictions where it is required to file income
tax returns. As of December 31, 2008 and 2007, the Company has identified the
jurisdictions at PRC as "major" tax jurisdictions, as defined, in which it is
required to file income tax returns. Based on the evaluations noted above, the
Company has concluded that there are no significant uncertain tax positions
requiring recognition in its consolidated financial statements.
As of
December 31, 2008 and 2007, the Company had no unrecognized tax benefits or
accruals for the potential payment or interest and penalties. The Company's
policy is to record interest and penalties in this connection as a component of
the provision for income tax expense. For the years ended December 31, 2008 and
2007, no interest or penalties were recorded.
(b)
|
Reconciliation
from the expected income taxes expenses calculated with reference to the
statutory tax rates in the PRC:
|
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
US$’000
|
US$’000
|
|||||||
Expected
income taxes expenses
|
1,853 | 1,238 | ||||||
Taxable
income exempted / offset by government grant receivable
|
(953 | ) | (1,238 | ) | ||||
Non-taxable
revenue
|
(22 | ) | - | |||||
Non-deductible
expenses
|
31 | - | ||||||
Unrecognized
temporary difference
|
22 | - | ||||||
Income
taxes expenses
|
931 | - |
|
(c)
|
Components
of the Company’s deferred tax assets at December 31, 2008 were as
follows:
|
US$’000
|
||||
Deferred
tax assets:
|
||||
Net
operating loss carryforwards
|
1,385 | |||
Valuation
allowance
|
(1,385 | ) | ||
Total
deferred tax assets
|
- |
F-18
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
5. TRADE
AND OTHER RECEIVABLES
As
of December 31,
|
||||||||||||
2008
|
2007
|
|||||||||||
Note
|
US$’000
|
US$’000
|
||||||||||
Trade
and bills receivables
|
||||||||||||
From
third parties
|
2,855 | 1,531 | ||||||||||
Allowance
for doubtful debts
|
(75 | ) | - | |||||||||
2,780 | 1,531 | |||||||||||
Other
receivables
|
||||||||||||
Deposits,
prepayments and other debtors
|
6,285 | 3,847 | ||||||||||
Due
from a director
|
13(c) | 33 | 9 | |||||||||
Due
from related parties
|
13(c) | - | 15 | |||||||||
6,318 | 3,871 | |||||||||||
9,098 | 5,402 |
6.
INVENTORIES
As
of December 31,
|
||||||||
2008
|
2007
|
|||||||
US$’000
|
US$’000
|
|||||||
At
cost:
|
||||||||
Raw
materials
|
2,631 | 890 | ||||||
Finished
goods
|
1,527 | 710 | ||||||
4,158 | 1,600 |
7. PREPAID
LEASE PAYMENTS, NET
As
of December 31,
|
||||||||
2008
|
2007
|
|||||||
US$’000
|
US$’000
|
|||||||
At
beginning of year
|
1,680 | 1,697 | ||||||
Additions
|
- | 16 | ||||||
Amortization
for the year
|
(33 | ) | (33 | ) | ||||
Exchange
realignment
|
110 | - | ||||||
At
balance sheet date
|
1,757 | 1,680 |
The
up-front payments for operating leases of land in the PRC are amortized over 50
years, the period of lease term.
F-19
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
7. PREPAID
LEASE PAYMENTS, NET (CONTINUED)
Analyzed for reporting purpose
as:
As
of December 31,
|
||||||||
2008
|
2007
|
|||||||
US$’000
|
US$’000
|
|||||||
Non-current
portion
|
1,720 | 1,646 | ||||||
Current
portion
|
37 | 34 | ||||||
At
balance sheet date
|
1,757 | 1,680 |
The
prepaid lease payments together with the buildings (note 8) were pledged to
secure certain short-term and long-term bank borrowings granted to the Company
amounted to US$408,521 (note 13(d)) and US$2,188,503 at December 31, 2008 (2007: US$ Nil and
US$1,205,480) respectively.
8.
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are
summarized as follows:
As
of December 31,
|
||||||||
2008
|
2007
|
|||||||
US$’000
|
US$’000
|
|||||||
Buildings
|
7,321 | 6,274 | ||||||
Plant
and machinery
|
8,871 | 6,236 | ||||||
Office
equipment
|
958 | 878 | ||||||
Vehicles
|
615 | 608 | ||||||
Factory
equipment
|
19 | 15 | ||||||
Construction-in-progress
|
3,013 | 2,534 | ||||||
20,797 | 16,545 | |||||||
Accumulated
depreciation
|
(3,988 | ) | (2,338 | ) | ||||
16,809 | 14,207 |
|
Depreciation
expense was US$1,567,673 and US$971,367 for the years ended December 31,
2008 and 2007, respectively.
|
|
The
Company has pledged its buildings to secure certain short-term and
long-term bank borrowings amounted to US$1,065,072 and US$2,407,353 as at
December 31, 2008 (2007:
US$Nil and US$1,068,493)
respectively.
|
F-20
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
9.
TRADE AND OTHER PAYABLES
As
of December 31,
|
||||||||||||
2008
|
2007
|
|||||||||||
Note
|
US$’000
|
US$’000
|
||||||||||
Trade
payables
|
||||||||||||
To
third parties
|
818 | 448 | ||||||||||
Other
payables
|
||||||||||||
Accrued
charges and other creditors
|
2,131 | 2,257 | ||||||||||
Other
taxes payables
|
183 | 114 | ||||||||||
Due
to a related party
|
13(c) | 15 | 17 | |||||||||
2,329 | 2,388 | |||||||||||
3,147 | 2,836 |
10. INTEREST-BEARING
BORROWINGS
As
of December 31,
|
||||||||
2008
|
2007
|
|||||||
US$’000
|
US$’000
|
|||||||
Bank
loans
|
4,348 | 3,438 | ||||||
Current
portion
|
1,940 | 3,438 | ||||||
Non-current
portion
|
2,408 | - | ||||||
4,348 | 3,438 |
|
The
bank loans, which are secured by prepaid lease payments, building,
personal guarantee by director and corporate guarantee provided by third
parties, carry floating interest rates ranging from 6.8% to 10.5% (2007: 6.7% to 14.6%) per
annum.
|
The loans
mature on various dates ranging from January 2009 through October 2010 and are
due in full with accrued interest on each respective maturity date.
F-21
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
10. INTEREST-BEARING
BORROWINGS (CONTINUED)
Aggregate
annual maturities of long-term debts as at December 31, 2008 are as
follows:
US$’000
|
||||
2009
|
1,940 | |||
2010
|
2,408 | |||
4,348 |
11. DEFERRED
GOVERNMENT GRANTS
Deferred
government grants represent the grants received from local government for
subsidising the prepaid lease payments of the land use right of Changda
Fertilizer’s factory included under intangible assets. Deferred
government grants are released as income over the period of the relevant leases
by equal annual instalments.
12.
STATUTORY RESERVES
|
In
accordance with the relevant PRC laws and regulations, foreign invested
joint venture companies/ wholly-owned foreign enterprise / PRC domestic
companies are required to transfer 10% of income after income taxes, as
determined under PRC accounting standards and regulations, to the
statutory common reserve, until the balance of the fund reaches 50% of the
registered capital of that company. Subject to certain
restrictions as set out in the relevant PRC laws and regulations, the
statutory common reserve may be used to offset against accumulated losses,
if any.
|
The PRC
subsidiary companies are also required to transfer 5% to 10% of their net
income, as determined under PRC accounting standards and regulations, to the
statutory common welfare reserve at the discretion of the board of directors.
For the years ended December 31, 2008 and 2007, the PRC subsidiary companies
transferred US$941,000 and US$621,000, respectively, out of the net income to
the statutory common welfare reserve and the balance of fund reached to
US$2,264,000 and US$1,323,000, respectively, as at each of the balance sheet
date. This reserve can only be used to provide staff welfare facilities and
other collective benefits to the employees of the PRC subsidiary
companies. This reserve is non-distributable other than in the event
of liquidation.
F-22
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
13. RELATED
PARTY TRANSACTIONS
|
In
addition to the transactions / information disclosed elsewhere in these
consolidated financial statements, during the years and at balance sheet
date, the Company had the following transactions and balances with related
parties.
|
(a)
|
Relationship
of related parties
|
Party
|
Existing
relationship with the Company
|
Mr.
Zhu Qing Ran
|
Director
and stockholder of the Company
|
Mr.
Zhu Hua Ran
|
Director
and stockholder of the Company
|
Mr.
Zhu Xiao Ran
|
Former
director and former stockholder of Changda
Fertilizer
|
Mr.
Zhu Cai Ran
|
Family
member of the directors of the Company
|
Mr.
Zhu Xue Ran
|
Former
director of Changda Chemical
|
Ms.
Zhu Fan Ran
|
Former
director of Changda Chemical
|
Changle
Hengrui Trading Co., Ltd. (“Changle”)
|
Majority
stockholder is a management personnel of the Company and other stockholder
is a family member of the directors
of the Company
|
Weifang
Moda International Trade Co., Ltd. (“Moda”)
|
Stockholders
are family members of the directors of the Company
|
Geo
Genesis Group Inc.
|
Stockholder
of the Company
|
(b)
|
Summary
of related party transactions
|
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
US$’000
|
US$’000
|
|||||||
Sales
to a related company
|
||||||||
“Moda”
|
- | 1,019 | ||||||
Purchases
from a related company
|
93 | 1,170 | ||||||
“Changle”
|
||||||||
Key
management personnel, including directors:
|
||||||||
Short-term
employee benefits
|
116 | 9 |
F-23
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
13. RELATED
PARTY TRANSACTIONS (CONTINUED)
(c) Summary
of related party balances
As
of December 31,
|
||||||||
2008
|
2007
|
|||||||
US$’000
|
US$’000
|
|||||||
Loans:
|
||||||||
Loans
from directors and his family members (included in other short-term and
long-term borrowings)
|
2,633 | 2,119 | ||||||
Current
portion
|
1,629 | 2,119 | ||||||
Non-current
portion
|
1,004 | - | ||||||
2,633 | 2,119 |
As
of December 31,
|
||||||||||||
2008
|
2007
|
|||||||||||
Note
|
US$’000
|
US$’000
|
||||||||||
Due
from:
|
||||||||||||
Director
|
||||||||||||
Mr.
Zhu Qing Ran
|
5 | 33 | 9 | |||||||||
Related
parties
Close
family members of key management personnel
|
||||||||||||
Mr.
Zhu Xiao Ran
|
- | 10 | ||||||||||
Mr.
Zhu Cai Ran
|
- | 5 | ||||||||||
5 | - | 15 | ||||||||||
Stockholder
|
||||||||||||
Geo
Genesis Group Inc.
|
9 | 15 | 17 |
|
The
loan from a director of US$1,004,231 is unsecured, interest-free and has a
fixed repayment term of 2 years. All other amounts due from/to related
parties and directors are unsecured, interest-free and have no fixed
repayment term.
|
(d) Assignment
of interest-bearing borrowings
On
September 3, 2008, Zhu Xue Ran signed the deed of assignment with Changda
Chemical and agreed to obtain a personal bank loan amounted to US$408,521 which
was on-lent to Changda Chemical as if Changda Chemical is the
borrower.
(e) Guarantee
A bank
loan of Changda Fertilizer amounted to US$2,188,503 (2007: nil) is secured by a
guarantee issued by a director of the Company.
F-24
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
14. COMMITMENTS
AND CONTINGENCIES
(a) Capital
commitments
|
As
of December 31, 2008 and 2007, the Group had capital expenditure
commitments for construction projects and purchase of machineries of
approximately US$1,346,000 and US$2,397,000,
respectively.
|
(b) Operating
lease commitments
Changda
Chemical leases certain office premises under non-cancelable operating leases.
The lease agreements require monthly rental payments ranging from US$404 to
US$5,147 and expire from January 2013 through December 2057. Rental expenses
under operating leases for the year ended December 31, 2008 was US$12,712 (2007: nil).
The
following table summarizes the approximate future minimum rental payments under
non-cancelable operating leases in effect of December 31, 2008:
As
of
December
31,
|
||||
US$’000
|
||||
2009
|
68 | |||
2010
|
68 | |||
2011
|
68 | |||
2012
|
5 | |||
2013
|
5 | |||
Thereafter
|
217 | |||
Total
|
431 |
(c) Contingent
liabilities
Changda
Chemical has not fully paid the value added tax payable, under relevant PRC tax
regulations, on sales made in prior years. A provision in the amount of
US$893,000 (2007:
US$701,000) to cover the tax under-paid has been made in the financial
statements up to December 31, 2008. Changda Chemical may still be subject to
penalties ranging from 50% to 500% and administration charges at a daily rate of
0.05% of the taxes under-paid. The exact amount of penalty cannot be estimated
with any reasonable degree of certainty.
15. REVERSE
ACQUISITION
|
The
Company has determined that the fair value of the assets acquired in the
reverse acquisition (see Note 1) was US$3,150,000. This was based on the
estimated fair value of the net assets of Changda International (the
accounting acquiree), which consisted of the carrying value of it’s
investment in Changda Fertilizer and Changda Chemical of US$2,000,000 and
US$1,150,000, respectively.
|
F-25
Changda
International Limited
Notes
to the Consolidated Financial Statements
For the
years ended December 31, 2008 and 2007
16. SUBSEQUENT
EVENTS
Subsequent
to December 31, 2008, the Company and Changda International Holdings, Inc.
(“CIHI”, formerly known as Promodoeswork.com, Inc.), a company incorporated in
the United States of America and listed on the OTC Bulletin Board, underwent a
reverse acquisition transaction for which the stockholders of the Company became
the majority stockholders of CIHI and the Company became a wholly-owned
subsidiary of CIHI.
On
January 2, 2009, the Company entered into a Consulting and Advisory Agreement
with Geo Genesis Group, Ltd. (“Geo”) for provision of consulting and advisory
services to the Company for a three-year period. Pursuant to the terms of
Agreement, on January 2, 2009, the Company issued to Geo, warrants to purchase
1,130,000 shares of the Company’s common stock with an exercise price of US$1.2
per share and a maturity date of three years from the date of
issuance.
F-26
Changda
International Holdings, Inc.
Condensed Consolidated Balance
Sheets
|
||||||||
September
30,
2009
|
December
31,
2008
|
|||||||
US$’000
|
US$’000
|
|||||||
ASSETS
|
(unaudited)
|
(unaudited)
|
||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
330
|
579
|
||||||
Trade
and other receivables, net
|
11,027
|
9,098
|
||||||
Inventories
|
8,011
|
4,158
|
||||||
Prepaid
lease payments, net
|
37
|
37
|
||||||
Government
grant receivables in respect of tax
|
2,717
|
2,713
|
||||||
Total
current assets
|
22,122
|
16,585
|
||||||
Intangible
assets
|
3
|
4
|
||||||
Property,
plant and equipment
|
15,712
|
16,809
|
||||||
Prepaid
lease payments, net
|
1,695
|
1,720
|
||||||
Total
assets
|
39,532
|
35,118
|
||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Trade
and other payables
|
4,070
|
3,146
|
||||||
Other
short-term borrowings
|
1,897
|
1,629
|
||||||
Short-term
interest-bearing borrowings
|
4,777
|
1,940
|
||||||
Income
tax payables
|
2,825
|
2,975
|
||||||
Total
current liabilities
|
13,569
|
9,690
|
||||||
Deferred
government grants
|
797
|
809
|
||||||
Long-term
interest-bearing borrowings
|
219
|
2,409
|
||||||
Shareholders’
loan
|
-
|
1,004
|
||||||
Total
liabilities
|
14,585
|
13,912
|
||||||
Commitments
and contingencies
|
-
|
-
|
||||||
Stockholders’
equity
|
||||||||
Common
stock, par value $0.001 per share, 100,000,000 shares authorized,
56,694,164 shares issued and outstanding as of September 30, 2009 and
53,599,965 shares issued and outstanding as of December 31,
2008
|
57
|
54
|
||||||
Additional
paid-in capital
|
5,266
|
5,053
|
||||||
Statutory
reserves
|
2,662
|
2,264
|
||||||
Accumulated
other comprehensive income
|
1,360
|
1,310
|
||||||
Accumulated
profits
|
15,602
|
12,525
|
||||||
Total
stockholders’ equity
|
24,947
|
21,206
|
||||||
Total
liabilities and stockholders’ equity
|
39,532
|
35,118
|
||||||
|
See
the accompanying notes to condensed consolidated financial
statements
F-27
Changda
International Holdings, Inc.
Condensed Consolidated Statements of
Operations and
Other Comprehensive
Income
|
||||||||||||||||
Nine
months
ended
September
30,
2009
|
Nine
months
ended
September
30,
2008
|
Three
months
ended
September
30,
2009
|
Three
months
ended
September
30,
2008
|
|||||||||||||
US$’000
|
US$’000
|
US$’000
|
US$’000
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Operating
revenues
|
51,978 | 53,732 | 10,177 | 9,050 | ||||||||||||
Cost
of sales
|
(43,581 | ) | (45,632 | ) | (8,530 | ) | (7,893 | ) | ||||||||
Gross
profit
|
8,397 | 8,100 | 1,647 | 1,157 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Depreciation of property, plant
and equipment
|
(201 | ) | (183 | ) | (67 | ) | (57 | ) | ||||||||
Amortization of intangible
assets
|
(1 | ) | - | - | - | |||||||||||
Amortization of prepaid lease
expenses
|
(28 | ) | (24 | ) | (10 | ) | (12 | ) | ||||||||
Selling, general and
administrative expenses
|
(3,581 | ) | (3,018 | ) | (1,016 | ) | (529 | ) | ||||||||
Operating
income
|
4,586 | 4,875 | 554 | 559 | ||||||||||||
Other income
|
39 | 70 | 4 | 10 | ||||||||||||
Interest income
|
2 | 2 | 1 | - | ||||||||||||
Interest expenses
|
(212 | ) | (346 | ) | (66 | ) | (111 | ) | ||||||||
Income
before income taxes
|
4,415 | 4,601 | 493 | 458 | ||||||||||||
Income
taxes
|
(940 | ) | (669 | ) | (169 | ) | (94 | ) | ||||||||
Net
income
|
3,475 | 3,932 | 324 | 364 | ||||||||||||
Other
comprehensive income
|
||||||||||||||||
Foreign currency translation
adjustment
|
50 | 784 | 1,481 | 905 | ||||||||||||
Total
comprehensive income
|
3,525 | 4,716 | 1,805 | 1,269 | ||||||||||||
Basic
and diluted earnings
per
common stock ($)
|
0.0619 | 0.0734 | 0.0057 | 0.0068 | ||||||||||||
Weighted
average number of
common
stocks
|
56,096,059 | 53,599,965 | 56,611,853 | 53,599,965 | ||||||||||||
See the
accompanying notes to condensed consolidated financial statements
F-28
Changda International Holdings,
Inc.
Condensed Consolidated Statements of
Cash Flows
|
||||||||
Nine
months
ended
September
30,
2009
|
Nine
months
ended
September
30,
2008
|
|||||||
US$’000
|
US$’000
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
3,475 | 3,932 | ||||||
Adjustment
to reconcile net income to net cash provided by operating
activities
|
||||||||
Depreciation of property, plant
and equipment
|
1,291 | 1,332 | ||||||
Amortization of intangible
assts
|
1 | - | ||||||
Amortization of prepaid lease
payments
|
28 | 24 | ||||||
Exchange
differences
|
19 | - | ||||||
Government grants
recognized
|
(12 | ) | (13 | ) | ||||
Loss (gain) on disposal of
property, plant and equipment
|
1 | (1 | ) | |||||
Issuance of stock in exchange of
services
|
216 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Inventories
|
(3,847 | ) | 140 | |||||
Trade and other receivable,
net
|
(1,917 | ) | (5,764 | ) | ||||
Trade and other
payables
|
919 | (235 | ) | |||||
Income tax
payables
|
(154 | ) | (53 | ) | ||||
Net
cash from (used in) operating activities
|
20 | (638 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase
of property, plant and equipment
|
(173 | ) | (1,720 | ) | ||||
Proceeds
from disposal of property, plant and equipment
|
1 | 42 | ||||||
Net
cash used in investing activities
|
(172 | ) | (1,678 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
New
bank and other loans issued
|
1,940 | 6,326 | ||||||
Repayment
of bank and other loans
|
(2,038 | ) | (5,010 | ) | ||||
Proceeds
from issuance of stock
|
- | 52 | ||||||
Net
cash (used in) from financing activities
|
(98 | ) | 1,368 | |||||
Net
decrease in cash and cash equivalents
|
(250 | ) | (948 | ) | ||||
Cash
and cash equivalents at beginning of period
|
579 | 1,335 | ||||||
Effect
on exchange rate changes
|
1 | 56 | ||||||
Cash
and cash equivalents at end of period
|
330 | 443 | ||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
During
the period, cash was paid for the following:
|
||||||||
Income
taxes
|
1,094 | 183 | ||||||
Interest
|
212 | 346 | ||||||
1,306 | 529 | |||||||
See the
accompanying notes to condensed consolidated financial statements
F-29
Changda International Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial
Statements
1.
|
ORGANIZATION
AND BASIS OF PRESENTATION
|
|
The
accompanying consolidated financial statements present the consolidated
financial position of Changda International Holdings, Inc. (“the Company”)
and its subsidiaries (together “Changda International Group”) as of
September 30, 2009 and December 31, 2008, and its results of
operations for the three-month and nine-month periods ended September 30,
2009 and 2008 and cash flows for the nine months ended September 30, 2009
and 2008.
|
|
The
accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
in the United States of America (“US GAAP”) for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended September 30,
2009 are not necessarily indicative of the results that may be expected
for the year ending December 31,
2009.
|
|
The
Company was incorporated on January 24, 2007 under the laws of the State
of Nevada. On January 15, 2009, Memorandum of Understanding (“Agreement”)
was entered by and among the Company and Changda International Limited
(“Changda International”), a company organized under the laws of Marshall
Islands. Changda International, being the legal acquiree (accounting
acquirer), delivered to the Company, being the legal acquirer (accounting
acquiree), stock certificates representing 100% of the shares in Changda
International. In full consideration and exchange for the shares in
Changda International, the Company issued and exchanged with shareholders
of Changda International 53,599,965 common stock of itself, representing
95% of the Company’s common stock issued and outstanding upon completion
of share exchange (the “Share Exchange Transaction”). Upon the completion
of the Share Exchange Transaction on February 13, 2009, there was
56,529,964 shares of the Company’s common stock issued and outstanding. On
March 30, 2009, the Company elected to change its fiscal year end date
from June 30 to December 31.
|
|
The
Company’s principal subsidiaries are Weifang Changda Chemical Industry
Co., Ltd. (“Changda Chemical”) and Weifang Changda Fertilizer Co., Ltd.
(“Changda Fertilizer”). Changda Chemical is a limited liability company
incorporated in the People’s Republic of China (the
“PRC”). Changda Chemical’s registered office is located at
Weifang Ocean Chemical Industry Developing Zone Industry Area, Shandong,
PRC. The principal activity of Changda Chemical is
manufacturing of snow melting agent and drugs
intermediate. Changda Fertilizer is a limited liability
company incorporated in the PRC. Changda Fertilizer’s registered office is
located at Weifang Binhai Development Zone, Shandong, PRC. The
principal activity of Changda Fertilizer is manufacturing of
fertilizers.
|
F-30
Changda
International Holdings, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
2.
|
PRINCIPAL
ACCOUNTING POLICIES
|
Basis
of consolidation
The
consolidated financial information has been prepared on the historical cost
convention, unless otherwise indicated in this summary of significant accounting
policies.
All
intra-group balance, transactions, income and expenses and profits and losses
resulting from intra-group transactions are eliminated in full.
Research
and development
All costs
of research and development activities are generally expensed as incurred.
Research and development costs were US$112,578 and US$86,059 for the nine-month
periods ended September 30, 2009 and 2008, respectively.
Advertising
and promotion costs
Advertising
and promotion costs are expensed as selling expenses as incurred. Advertising
costs were US$1,462 and US$20,705 for the nine-month periods ended September 30,
2009 and 2008, respectively.
Shipping
and handling
The
Changda International Group includes shipping and handling fees and costs in
cost of goods sold. Related fees and costs charged to customers are
classified as revenue.
Comprehensive
income
Comprehensive
income is defined as the change in equity during the period from transactions
and other events, excluding the changes resulting from investments by owners and
distributions to owners.
Earnings
per common stock
Basic
earnings per common stock is computed by dividing net income to common
stockholders by the weighted average number of common stocks outstanding for the
period. Dilutive earnings per common stock includes the effect of outstanding
stock options, warrants and shares issuable pursuant to convertible debt,
convertible preferred stock and certain stock incentive plans under the treasury
stock method, if including such instruments is dilutive.
During
the period, the Company has no dilutive instruments. Accordingly, the basic and
diluted earnings per common stock are the same.
Property,
plant and equipment
Property,
plant and equipment, other than construction in progress, are stated at cost
less accumulated depreciation and accumulated impairment losses. The
cost of an item of plant and equipment comprises its purchase price and any
directly attributable costs of bringing the asset to its working condition and
location for its intended use. Repairs and maintenance costs are
charged to the condensed consolidated statements of operations and other
comprehensive income during the period in which they are incurred.
F-31
Changda
International Holdings, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
2.
|
PRINCIPAL
ACCOUNTING POLICIES (CONTINUED)
|
|
Property,
plant and equipment (continued)
|
|
Depreciation
is provided to write off the cost less accumulated impairment losses of
property, plant and equipment, other than construction in progress, over
their estimated useful lives as set out below from the date on which they
are available for use and after taking into account of their estimated
residual values, using the straight-line method. Where parts of an item of
property, plant and equipment have different useful lives, the cost or
valuation of the item is allocated on a reasonable basis and depreciated
separately:
|
Annual depreciation rate
|
||||
Buildings
|
5% - 10 | % | ||
Plant
and machinery
|
11% - 12 | % | ||
Office
equipment
|
12% - 19 | % | ||
Vehicles
|
10% - 18 | % | ||
Factory
equipment
|
18 | % |
|
Changda
International Group evaluates the recoverability of these assets whenever
events or changes in circumstances indicate that their carrying amount may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the
asset.
|
|
Construction
in progress
|
|
Construction
in progress is stated at cost less accumulated impairment losses. Cost
includes all construction expenditure and other direct costs, including
interest costs, attributable to such projects. Costs on
completed construction works are transferred to the appropriate asset
category. No depreciation is provided in respect of construction in
progress until it is completed and available for
use.
|
|
Prepaid
lease payments
|
|
Prepaid
lease payments are up-front payments to acquire fixed term interests in
lessee-occupied land. The premiums are stated at cost and are amortized
over the period of the lease on a straight-line basis to the condensed
consolidated statements of operations and other comprehensive
income.
|
|
Intangible
assets
|
|
Trademarks
|
|
The
initial cost of acquiring trademarks is capitalized. Trademarks with
indefinite useful lives are carried at cost less accumulated impairment
losses. Trademarks with finite useful lives are carried at cost less
accumulated amortization and accumulated impairment losses. Amortization
is provided on the straight-line basis over their estimated useful lives
of 10 years.
|
Fair
value of financial instruments
The
Company’s financial instruments include restricted bank balances, trade and
other receivables or payables, prepayments and borrowings. The management has
estimated that the carrying amount approximates their fair value due to their
short-term nature. The fair value of non-current financial instruments was not
materially different from their carrying value as of September 30, 2009 and
December 31, 2008.
F-32
Changda
International Holdings, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
2.
|
PRINCIPAL
ACCOUNTING POLICIES (CONTINUED)
|
|
Cash
equivalents
|
|
For
the purpose of the condensed consolidated statement of cash flows, cash
equivalents represent short-term highly liquid investments which are
readily convertible into known amounts of cash and which are subject to an
insignificant risk of changes in value, net of bank
overdrafts.
|
|
Revenue
recognition
|
|
Revenue
is recognized when it is probable that the economic benefits will flow to
the Changda International Group and when the revenue and costs, if
applicable, can be measured reliably and on the following
basis.
|
|
Sale
of goods is recognized on transfer of risks and rewards of ownership,
which generally coincides with the time when the goods are delivered to
customers and title is passed.
|
|
Foreign
currency translation
|
|
Items
included in the Changda International Group’s financial statements are
measured using the currency of the primary economic environment in which
the Changda International Group operates, that is the Chinese Yuan
Renminbi (“RMB”) (“functional
currency”).
|
|
Foreign
currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign
currency transaction gains and losses are recognized in current
operations, whilst translation adjustments are recognized in other
comprehensive income, with is a separate component of stockholders’
equity.
|
|
The
presentational currency is the United States Dollars, presented in
thousands.
|
|
Inventories
|
|
Inventories
are stated at the lower of cost and net realizable value. Cost, which
comprises all costs of purchase and, where applicable, cost of conversion
and other costs that have been incurred in bringing the inventories to
their present location and condition, is calculated using the weighted
average cost method. Net realizable value represents the estimated selling
price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the
sale.
|
Impairment
of long-lived assets
Long-lived
assets are reviewed at least annually for impairment whenever events or changes
in circumstances indicate that the carrying amount of assets may not be
recoverable. It is reasonably possible that these assets could become impaired
as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the carrying amount
of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, impairment is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets and recorded as a reduction of original costs. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell.
F-33
Changda
International Holdings, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
2.
|
PRINCIPAL
ACCOUNTING POLICIES (CONTINUED)
|
|
Provisions
|
|
Provisions
are recognized when the Changda International Group has a present legal or
constructive obligation as a result of past events, it is probable that an
outflow of resources embodying economic benefits will be required to
settle the obligation, and a reliable estimate of the amount of obligation
can be made. Expenditures for which a provision has been recognized are
charged against the related provision in the period in which the
expenditures are incurred. Provisions are reviewed at each balance sheet
date and adjusted to reflect the current best estimate. Where the effect
of the time value of money is material, the amount provided is the present
value of the expenditures expected to be required to settle the
obligation. Where the Changda International Group expects a provision to
be reimbursed, the reimbursement is recognized as a separate asset but
only when the reimbursement is virtually
certain.
|
|
Government
grants
|
|
Government
grants are recognized at their fair value where there is reasonable
assurance that the grant will be received and all attaching conditions
will be complied with. When the grant relates to an expense item, it is
recognized as income over the years necessary to match the grant on a
systematic basis to the costs that it is intended to compensate. Where the
grant relates to an asset, the fair value is credited to a deferred income
account and is released to the condensed consolidated statements of
operations and other comprehensive income over the expected useful life of
the relevant asset by equal annual
instalments.
|
Operating
leases
Leases
where substantially all the rewards and risks of ownership of assets remain with
the leasing company are accounted for as operating leases. Rentals
payable and receivable under operating leases are recognized as expense and
revenue on the straight-line basis over the lease terms.
|
Retirement
benefits scheme
|
|
Payment
to the state-managed retirement benefits schemes is charged as expense as
it falls due.
|
|
Income
tax
|
|
The
charge for current income tax is based on the results for the period as
adjusted for items that are non-assessable or disallowed. It is calculated
using tax rates that have been enacted or substantively enacted by the
balance sheet date.
|
|
Deferred
tax is provided, using the liability method, on all temporary differences
at the balance sheet date between the tax bases of assets and liabilities
and their carrying amounts in the financial statements. However, if the
deferred tax arises from initial recognition of an asset or liability in a
transaction other than a business combination that at the time of the
transaction affects neither the accounting profit nor taxable profit or
loss, it is not accounted for.
|
|
The
deferred tax liabilities and assets are measured at the tax rates that are
expected to apply to the period when the asset is recovered or the
liability is settled, based on tax rates and tax laws that have been
enacted or substantively enacted at the balance sheet date. Deferred tax
assets are recognized to the extent that it is probable that future
taxable profit will be available against which the deductible temporary
differences, tax losses and credits can be
utilized.
|
F-34
Changda
International Holdings, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
2.
|
PRINCIPAL
ACCOUNTING POLICIES (CONTINUED)
|
Use
of estimates
The
preparation of the condensed consolidated financial statements in conformity
with USGAAP requires the management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reported periods. The
management evaluates these estimates and judgments on an ongoing basis and bases
their estimates on experience, current and expected future conditions,
third-party evaluations and various other assumptions that they believe are
reasonable under the circumstances. The results of these estimates form the
basis for making judgments about the carrying values of assets and liabilities
as well as identifying and assessing the accounting treatment with respect to
commitments and contingencies.
Actual
amounts could differ from those estimates. Estimates are used for, but not
limited to, the accounting for certain items such as allowance for doubtful
accounts, depreciation and amortization, inventory allowance, taxes and
contingencies.
Related
parties
Parties
are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operating decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence.
|
Critical
accounting estimates and judgments
|
|
Estimates
and judgments are currently evaluated and are based on historical
experience and other factors including expectations of future events that
are believed to be reasonable under the circumstances. Apart
from information disclosed elsewhere in these financial statements, the
following summarize the estimates and assumptions that have a significant
risk of causing a material adjustment to the carrying amounts of assets
and liabilities within the next financial
year.
|
|
Allowance
of bad and doubtful debts
|
|
The
provisioning policy for bad and doubtful debts of the Changda
International Group is based on the evaluation of collectability and
ageing analysis of the accounts receivables. A considerable
amount of judgment is required in assessing the ultimate realization of
these receivables, including the current creditworthiness and the past
collection history of each debtor. If the financial conditions
of these customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowance will be
required.
|
|
Allowance
for inventories
|
|
The
Changda International Group’s management reviews an ageing analysis of
inventories at each balance sheet date, and make allowance for obsolete
and slow-moving inventory items identified that are no longer recoverable
or suitable for use in production. The management estimates the net
realizable value for finished goods and work-in-progress based primarily
on the latest invoice prices and current market conditions. The Changda
International Group carries out an inventory review on a
product-by-product basis at each balance sheet date and makes allowances
for obsolete items.
|
F-35
Changda
International Holdings, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
Effective
1 July 2009, the Company adopted FASB Accounting Standards Codification (“ASC”)
Topic 105, “the FASB Accounting Standards Codification” (“Codification”)
(formerly Statement of Financial Accounting Standards (“SFAS”) No. 168).
Codification will become the source of authoritative US GAAP recognized by the
FASB to be applied by nongovernmental entities. Once the Codification is in
effect, all of its content will carry the same level of authority. The adoption
of this Statement does not have a material effect on the Company's financial
statements. However, because the Codification completely replaces existing
standards, it will affect the way US GAAP is referenced within the unaudited
condensed consolidated financial statements and accounting
policies.
In
June 2009, the FASB issued the following new accounting
standards:
-
|
SFAS
No. 166, “Accounting for
Transfers of Financial Assets - an amendment of FASB Statement No.
140” (“SFAS 166”). SFAS 166 amends the de-recognition accounting
and disclosure guidance relating to SFAS 140. SFAS 166 eliminates the
exemption from consolidation for qualifying special-purpose entity
“(QSPE”), it also requires a transferor to evaluate all existing QSPE to
determine whether it must be consolidated in accordance with SFAS
167.
|
-
|
SFAS
No. 167, “Amendments to
FASB Interpretation No. 46(R)” (“SFAS 167”), which amends FASB
Interpretation No. 46 (revised December 2003) to address the elimination
of the concept of a qualifying special purpose entity. SFAS 167 also
replaces the quantitative-based risks and rewards calculation for
determining which enterprise has a controlling financial interest in a
variable interest entity with an approach focused on identifying which
enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to
receive benefits from the entity. Additionally, SFAS 167 provides more
timely and useful information about an enterprise’s involvement with a
variable interest entity.
|
In
August 2009, the FASB issued ASC Topic 820, “Measuring Liabilities at Fair
Value”, with respect to the fair value measurement of liabilities. ASC
Topic 820 provides clarification that in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following
techniques: (1) the quoted price of the identical liability when traded as
an asset, (2) the quoted prices for similar liabilities or similar
liabilities when traded as assets, and (3) another valuation technique
(e.g., a market approach or income approach) including a technique based on the
amount an entity would pay to transfer the identical liability, or a technique
based on the amount an entity would receive to enter into an identical
liability.
SFAS 166
and SFAS 167 will be effective for periods beginning after November 15,
2009 and ASC Topic 820 will be effective for periods beginning after October 1,
2009 with early adoption permitted. The Company has not elected to early adopt
these standards and is evaluating the impact that these standards will have on
the consolidated financial statements.
F-36
Changda
International Holdings, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
4.
|
STOCKHOLDERS’
EQUITY
|
|
Common
stock
|
|
As
of September 30, 2009, the Company has 100,000,000 shares of common stock
with a par value of $0.001 per share authorized and 56,694,164 shares
issued and outstanding.
|
|
Between
July 29, 2009 and September 22, 2009, a total of 164,200 shares were
issued.
|
5.
|
INCOME
TAXES
|
Changda
International Group’s principal subsidiaries in the PRC are subject to income
taxes on an entity basis on income arising in or derived from the tax
jurisdictions in which each entity domiciles and operates.
In 2006,
the local government of economic development area has granted a special tax
exemption to Changda Fertilizer. In this connection, Changda Fertilizer is
entitled to receive the whole amount of Enterprise Income Tax (“EIT”) payable
for its first two profitable years of operation starting from 2006 and followed
by an entitlement to receive 50% of EIT payable for the following three years.
The exemption is not applicable upon the successful listing of any holding
company vehicle in overseas stock market.
For
accounting purpose, taxation for the years has been estimated based on the
assessable profit for the period at a rate of 25% according to the newly
effective EIT Law of the PRC in 2008 (“new EIT Law”). The respective tax
liability has been recognized as tax liability and the related receivable from
the local government of economic development area has been recognized as
government grant receivable in respect of taxation, as reported in the balance
sheet.
Starting
from January 1, 2009, the special tax exemption previously granted to Changda
Fertilizer ceased to effect since it became a subsidiary of the Company which is
listed in the US stock market. Changda Fertilizer is subject to EIT at a rate of
25% thereafter.
During
the year ended December 31, 2007, Changda Chemical became a WOFE and is subject
to Foreign Enterprise Income Tax. The local government of economic development
area has confirmed that the Company is still entitled to receive the tax
concession granted for the whole year.
In
practice, the amounts entitled to be received have been reported as an exemption
in the respective tax returns submitted by Changda Chemical to the tax bureau
and no assessment of tax payable had been raised by the local tax
bureau.
For
accounting purpose, taxation for the year ended December 31, 2007 has been
estimated based on the assessable profit at a rate of 33%. The respective tax
liability has been recognized and the related receivable from the local
government of economic development area has been recognized as government grant
receivable in respect of taxation, as reported in the balance
sheet.
On
December 29, 2008, Changda Chemical was approved as a high-tech enterprise.
Pursuant to the newly effective Enterprise Income Tax Law of the PRC, tax rate
for an approved high-tech enterprise is 15%. Taxation has been estimated based
on the assessable profit for the year at a rate of 15% thereafter.
F-37
Changda
International Holdings, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
6.
|
RELATED
PARTY TRANSACTIONS
|
|
In
addition to the transactions / information disclosed elsewhere in these
condensed consolidated financial statements, during the periods and at
balance sheet date, Chandga International Group had the following
transactions and balances with related
parties.
|
(a)
|
Relationship of related
parties
|
Party
|
Existing relationship with Changda International
Group
|
Mr.
Zhu Qing Ran
|
Chairman
and Chief Executive Officer (“CEO”)
|
Mr.
Zhu Xiao Ran
|
Former
director and former stockholder of Changda Fertilizer
|
Mr.
Zhu Cai Ran
|
Family
member of the directors of the Company
|
Geo
Genesis Group Inc.
|
Stockholder
of the Company
|
Changle
Hengrui Trading Co. Ltd (“Changle”)
|
Major
stockholder is a management personnel of Changda International Group and
other stockholder is a family member of the directors of the
Company
|
(b)
|
Summary of related party
transactions
|
Period
ended
September
30,
2009
|
Year
ended
December
31,
2008
|
|||||||
US$’000
|
US$’000
|
|||||||
Purchases
from a related company
|
||||||||
“Changle”
|
- | 93 | ||||||
Key
management personnel, including directors:
|
||||||||
Short-term
employee benefits
|
33 | 116 |
|
(c)
|
Summary
of related party balances
|
September
30,
2009
|
December
31,
2008
|
|||||||
US$’000
|
US$’000
|
|||||||
Loans:
|
||||||||
Loans
from directors and his family members (included in other short-term
borrowings)
|
1,891 | 2,633 | ||||||
Current
portion
|
1,891 | 1,629 | ||||||
Non-current
portion
|
- | 1,004 | ||||||
1,891 | 2,633 |
F-38
Changda
International Holdings, Inc.
Notes
to Unaudited Condensed Consolidated Financial Statements
6.
|
RELATED
PARTY TRANSACTIONS (CONTINUED)
|
|
(c)
|
Summary
of related party balances
(continued)
|
September
30,
2009
|
December
31,
2008
|
|||||||
US$’000
|
US$’000
|
|||||||
Due
from (included in other receivables):
|
||||||||
Chairman and CEO
|
||||||||
Mr.
Zhu Qing Ran
|
64 | 33 | ||||||
Related parties
Close family members of key management
personnel
|
||||||||
Mr.
Zhu Xiao Ran
|
4 | - | ||||||
Mr.
Zhu Cai Ran
|
1 | - | ||||||
5 | - | |||||||
Stockholder
|
||||||||
Geo
Genesis Group Inc.
|
47 | 15 |
The loan
from a director of US$1,004,231 is unsecured, interest-free and has a fixed
repayment term of 2 years. All other amounts due from/to related parties and
directors are unsecured, interest-free and have no fixed repayment
term.
|
(d)
|
Guarantee
|
A bank
loan of Changda Fertilizer amounted to US$2,191,000 is secured by a guarantee
issued by the Chairman and CEO of the Company.
7.
|
CAPITAL
COMMITMENTS
|
As of
September 30, 2009, Changda International Group had capital commitments
amounting to US$19,700,000.
8.
|
PLEDGE
OF ASSETS
|
Changda
International Group has pledged prepaid lease payments with a net book value of
approximately US$1,732,000 and buildings under property, plant and equipment
with a net book value of approximately US$3,631,000 to secure general banking
facilities granted to Changda Chemical and Changda Fertilizer.
9.
|
SUBSEQUENT
EVENTS REVIEW
|
|
The
Company has evaluated subsequent events up to November
16, 2009 which is the date that these unaudited condensed
consolidated financial statements were approved and authorized for issue
by the directors.
|
F-39
$
CHANGDA
INTERNATIONAL HOLDINGS INC.
[________] Units
_________________
PROSPECTUS
_________________
,
2010
Until ,
2010, all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
No
dealer, salespersons or any other person is authorized to give any information
or make any representations in connection with this offering other than those
contained in this prospectus and, if given or made, the information or
representations must not be relied upon as having been authorized by us. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities offered by this prospectus, or an offer to sell or a
solicitation of an offer to buy any securities by anyone in any jurisdiction in
which the offer or solicitation is not authorized or is unlawful. The delivery
of this prospectus will not, under any circumstances create any implication that
the information is correct as of any time subsequent to the date of this
prospectus.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth an estimate of the costs and expenses payable by us
in connection with the offering described in this registration statement. All of
the amounts shown are estimates except the Securities and Exchange Commission
Registration Fee:
Securities
and Exchange Commission Registration Fee
|
$
|
2,213.87
|
||
FINRA
Filing Fees
|
$
|
*
|
||
Printing
Fees
|
$
|
*
|
||
Accounting
Fees and Expenses
|
$
|
*
|
||
Legal
Fees and Expenses
|
$
|
*
|
||
Miscellaneous
|
$
|
*
|
||
Total
|
$
|
*
|
*
To be filed by Amendment
Item
14. Indemnification of Directors and Officers
Under our
Articles of Incorporation and Bylaws of the corporation, we may indemnify an
officer or director who is made a party to any proceeding, including a law suit,
because of his position, if he acted in good faith and in a manner he reasonably
believed to be in our best interest. We may advance expenses incurred in
defending a proceeding. To the extent that the office or director is successful
on the merits in a proceeding as to which he is to be indemnified, we must
indemnify him against all expenses incurred, including attorney's fees. With
respect to a derivative action, indemnity may be made only for expenses actually
and reasonably incurred in defending the proceeding, and if the officer or
director is judged liable, only by a court order. The indemnification is
intended to be to the fullest extent permitted by the laws of the State of
Nevada.
Regarding
indemnification for liabilities arising under the Securities Act of 1933, which
may be permitted to directors or officers under Nevada law, we are informed
that, in the opinion of the Securities and Exchange Commission, indemnification
is against public policy, as expressed in the Act and is, therefore,
unenforceable.
Item
15. Recent Sales of Unregistered Securities
On
October 8, 2009. in connection with his appointment as a director of the
Company, David Cohen was granted 3,000 shares of common stock of the Company,
par value $0.001 per share, and two-year warrants to purchase 3,000 shares of
common stock with an exercise price of $1.50 per share.
On
October 1, 2009, in connection with his appointment as a director of the
Company, Craig Marshak was granted 8,334 shares of common stock of the Company,
par value $0.001 per share.
On
February 13, 2009, the Company entered into and closed a Share Exchange
Agreement with the shareholders of Changda International, Ltd., a company
organized under the laws of Marshall Islands pursuant to which the Company
acquired 100% of the outstanding securities of Changda International in exchange
for 47,729,964 shares (pre-reverse split) of the Company’s common stock (the
“Changda Acquisition”).
On
January 15, 2009, Darryl Mills, our major shareholder and affiliate consummated
an Affiliate Stock Purchase Agreement with Allhomely International, Limited.
Pursuant to such agreement, Allhomely International Limited acquired a total
2,000,000 restricted shares (pre-reverse split) of our common
stock. Also on January 15, 2009, John Spencer, Derrick Waldman,
and Louis Waldman, shareholders and affiliates of the Company, consummated a
Restricted Stock Purchase Agreement with Allhomely International
Limited. Pursuant to such agreement, Allhomely
International Limited acquired a total 2,200,000 restricted shares (pre-reverse
split) of our common stock.As the result, ,Allhomely International Limited
acquired a total 4,200,000 shares (pre-reverse split) of our common
stock, resulting in a change of control.
II-1
Item
16. Exhibits and Financial Statement Schedules
1.1
|
Underwriting
Agreement**
|
||||
2.1
|
Share
Purchase Agreement between John Spencer, Derrick Waldman, Louis Waldman
and Allhomely International, Limited2
|
||||
2.2
|
Share
Exchange Agreement, dated February 13, 2009, between Company
and Changda International Limited3
|
||||
3.1
|
Articles
of Incorporation1
|
||||
3.2
|
Bylaws1
|
||||
4.1
|
Warrant,
dated October 8, 2009 issued to David Cohen**
|
||||
4.2
|
Form
of Class A Warrant**
|
||||
5.1
|
Opinion
of Sichenzia Ross Friedman Ference LLP **
|
||||
10.1
|
Affiliate
Stock Purchase Agreement between Darryl Mills and Allhomely International,
Limited.
2
|
||||
10.2
|
Employment
Agreement, dated December 8, 2008, by and between Weifang Changda
Fertilizer Co., Ltd and QingRan Zhu*
|
||||
10.3
|
Employment
Agreement, dated December 8, 2008, by and between Weifang Changda Chemical
Co., Ltd., Ltd and HuaRan Zhu*
|
||||
16.1
|
Letter
from Moore & Associates, Chartered to the Securities and Exchange
Commission Dated on March 12, 20094
|
||||
16.2
|
Letter
from Mazars LLP, dated December 3, 20095
|
||||
23.1
|
Consent
of Sichenzia Ross Friedman Ference LLP (included in Exhibit
5.1)**
|
||||
23.2
|
Consent
of Mazars CPA Limited*
|
||||
* Filed
herewith.
** To
be filed as an amendment
|
|||||
1
|
Filed
as an exhibit to the Company’s Registration Statement on Form SB-2 which
was filed with the Commission on November 6, 2007 and incorporated herein
by reference.
|
||||
2
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K which was filed
with the Commission on January 20, 2009 and incorporated herein by
reference.
|
||||
3
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K which was filed
with the Commission on February 20, 2009 and incorporated herein by
reference.
|
||||
4
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K/A which was
filed with the Commission on March 23, 2009 and incorporated herein by
reference.
|
||||
5
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K which was filed
with the Commission on December 10, 2009 and incorporated herein by
reference.
|
II-2
Item 17.
Undertakings
(a) The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. to
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the “Securities Act”);
ii. to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission (the “Commission”)
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum aggregate offering price
set forth in the “Calculation of Registration Fee” table in the effective
registration statement.
iii. to
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering.
(3) To
remove from registration by means of a post-effective amendment any of the
securities that remain unsold at the end of the offering.
(4) For
determining liability of the undersigned registrant under the Securities Act to
any purchaser in the initial distribution of the securities, the undersigned
registrant undertakes that in a primary offering of securities of the
undersigned registrant pursuant to this registration statement, regardless of
the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
i. Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
ii. Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
iii. The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
iv. Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(b)
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers, and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) (1)
For determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant under Rule 424(b)(1), or (4), or 497(h) under the Securities Act as
part of this registration statement as of the time the Commission declared it
effective.
(2) For
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those
securities.
II-3
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing this Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, in the City of Weifang, Shangdong Province, P.R. China
on December 31, 2009
.
CHANGDA
INTERNATIONAL HOLDINGS, INC.
|
|
/s/ QingRan
Zhu
|
|
QingRan
Zhu
|
|
Chief
Executive Officer
|
Each
person whose signature appears below constitutes and appoints QingRan Zhu as his
true and lawful attorneys-in-fact and agents, each acting alone, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to the Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and all post-effective amendments thereto, and to file the
same, with all exhibits thereto, and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the
requirements of the Securities Act of 1933, this registration statement has been
signed below by the following persons in the capacities and on the date
indicated.
Name
|
Title
|
Date
|
||
/s/ QingRan
Zhu
|
Chief
Executive Officer and Director (Principal Executive
Officer)
|
December
31, 2009
|
||
QingRan
Zhu
|
||||
/s/ Leodegario Quinto
Camacho
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
December
31, 2009
|
||
Leodegario
Quinto Camacho
|
||||
/s/ Jan
Pannemann
|
Executive
Vice President
|
December
31, 2009
|
||
Jan
Pannemann
|
||||
/s/ HuaRan
Zhu
|
Director
|
December
31, 2009
|
||
HuaRan
Zhu
|
||||
/s/ Craig
Marshak
|
Director
|
December
31, 2009
|
||
Craig
Marshak
|
||||
/s/ Carsten
Aschoff
|
Director
|
December
31, 2009
|
||
Carsten
Aschoff
|
||||
/s/ David
Cohen
|
Director
|
December
31, 2009
|
||
David
Cohen
|
||||
II-4
EXHIBIT
INDEX
1.1
|
Underwriting
Agreement**
|
||||
2.1
|
Share
Purchase Agreement between John Spencer, Derrick Waldman, Louis Waldman
and Allhomely International, Limited2
|
||||
2.2
|
Share
Exchange Agreement, dated February 13, 2009, between Company
and Changda International Limited3
|
||||
3.1
|
Articles
of Incorporation1
|
||||
3.2
|
Bylaws1
|
||||
4.1
|
Warrant,
dated October 8, 2009 issued to David Cohen**
|
||||
4.2
|
Form
of Class A Warrant**
|
||||
5.1
|
Opinion
of Sichenzia Ross Friedman Ference LLP **
|
||||
10.1
|
Affiliate
Stock Purchase Agreement between Darryl Mills and Allhomely International,
Limited.
2
|
||||
10.2
|
Employment
Agreement, dated December 8, 2008, by and between Weifang Changda
Fertilizer Co., Ltd and QingRan Zhu*
|
||||
10.3
|
Employment
Agreement, dated December 8, 2008, by and between Weifang Changda Chemical
Co., Ltd., Ltd and HuaRan Zhu*
|
||||
16.1
|
Letter
from Moore & Associates, Chartered to the Securities and Exchange
Commission Dated on March 12, 20094
|
||||
16.2
|
Letter
from Mazars LLP, dated December 3, 20095
|
||||
23.1
|
Consent
of Sichenzia Ross Friedman Ference LLP (included in Exhibit
5.1)**
|
||||
23.2
|
Consent
of Mazars CPA Limited*
|
||||
* Filed
herewith.
** To
be filed as an amendment
|
|||||
1
|
Filed
as an exhibit to the Company’s Registration Statement on Form SB-2 which
was filed with the Commission on November 6, 2007 and incorporated herein
by reference.
|
||||
2
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K which was filed
with the Commission on January 20, 2009 and incorporated herein by
reference.
|
||||
3
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K which was filed
with the Commission on February 20, 2009 and incorporated herein by
reference.
|
||||
4
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K/A which was
filed with the Commission on March 23, 2009 and incorporated herein by
reference.
|
||||
5
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K which was filed
with the Commission on December 10, 2009 and incorporated herein by
reference.
|
II-5