Attached files
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
(Amendment
No. 1)
(Mark
One)
|X| ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2008
or
|_| TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ________________ to ________________
Commission
file number 000-52430
China
Organic Agriculture, Inc.
(Exact
name of registrant as specified in its charter)
Florida
|
20-3505071
|
State
or other jurisdiction
|
(I.R.S.
Employer Identification No.)
|
of
incorporation or organization
|
Dalian
City, Zhongshan District, 105
Youhao
Road Manhattan Building #1, Suite 1511,
Dalian
City, Liaoning Province, P.R. China.
(Address
of principal executive offices) (Zip Code)
707-709-2321
Registrant's
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act: None
Title
of each class
|
Name
of each exchange on which
registered
|
Securities
registered pursuant to section 12(g) of the Act:
Common
Stock, no par value
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes |_| No |X|
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K |_|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting
company" in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer |_|
|
Accelerated
filer |_|
|
Non-accelerated
filer |_| (Do not check if a smaller reporting company)
|
Smaller
reporting company |X|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes |_|
No |X|
As of
June 30, 2008, the aggregate market value of the common stock of the registrant
held by non-affiliates (excluding shares held by directors, officers and others
holding more than 5% of the outstanding shares of the class) was $31,391,068
based upon a closing price of $0.64 as reported by Bloomberg
Finance.
As of
April 10, 2009, the registrant had outstanding 73,157,232 shares of common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
None
TABLE OF
CONTENTS
PART
I
|
Page No. |
Item
1. Business
|
1
|
Item
1A.Risk Factors
|
3
|
Item
2. Properties
|
11
|
Item
3. Legal Proceedings
|
11
|
Item
4. Submission of Matters to Vote of Security Holders
|
11
|
PART
II
|
|
Item
5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
|
12
|
Item
6. Selected Financial Data
|
13
|
Item
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
13
|
Item
8. Financial Statements and Supplementary Data
|
18
|
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
18
|
Item
9A. Controls and Procedures
|
18
|
PART
III
|
|
Item
10. Directors, Executive Officers and Corporate Governance
|
20
|
Item
11. Executive Compensation
|
21
|
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
22
|
Item
13. Certain Relationships and Related Transactions, and Director
Independence
|
22
|
Item
14. Principal Accountant Fees and Services
|
23
|
PART
IV
|
|
Item
15. Exhibits and Financial Statement Schedules
|
23
|
Special
Note Regarding Forward Looking Information
This
report contains forward-looking statements that reflect management's current
views and expectations with respect to our business, strategies, future results
and events, and financial performance. All statements made in this report other
than statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to future reserves,
cash flows, revenues, profitability, adequacy of funds from operations,
statements expressing general optimism about future operating results and
non-historical information, are forward-looking statements. In particular, the
words "believe," "expect," "intend," "anticipate," "estimate," "plan," "may,"
"will," variations of such words and similar expressions identify
forward-looking statements, but are not the exclusive means of identifying such
statements and their absence does not mean that the statement is not
forward-looking. Readers should not place undue reliance on forward-looking
statements which are based on management's current expectations and projections
about future events, are not guarantees of future performance, and are subject
to risks, uncertainties and assumptions. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in this report, particularly under the
caption "Risk Factors." Except as required under the federal securities laws, we
do not undertake any obligation to update the forward-looking statements in this
report.
Special
Note Regarding Unresolved Comments
The
Securities and Exchange Commission ("SEC") has requested that the Company file
amendments to certain of its previous filings to clarify or enhance certain of
the disclosures contained therein or to conform with the applicable filing
requirements. It remains the Company's desire to continue to have its
securities trade in the over-the-counter bulletin board and to eventually trade
on NASDAQ or another exchange. The Company intends to respond to the comments
raised by the Staff and, to the extent necessary, to amend or supplement reports
previously filed with the SEC.
This amendment is being filed in
response to comments received from the staff of the Division of Corporation
Finance of the SEC.
Introduction
In March
2007 we, then a publicly traded company with no operations, acquired through a
reverse merger all of the shares of China Organic Agriculture Limited ("COA").
COA is a holding company formed under the laws of the British Virgin Islands
that then owned all of the issued and outstanding stock of Jilin Songyuan City
ErMaPao Green Rice Limited ("ErMaPao"). ErMaPao is an operating company
organized under the laws of China in May 2002 engaged in growing, processing and
distributing rice. In addition to such activities, in early 2008 we
began to engage in the trading and wholesale distribution of rice and other
agricultural commodities.
In May
2007 we changed our name to China Organic Agriculture, Inc. As used in this
report, the terms "we," "our," "Company" and "China Organic" refer to China
Organic Agriculture, Inc. and its subsidiaries, and the terms "ton" and "tons"
refers to metric tons, in each case, unless otherwise stated or the context
requires otherwise. Since most of our business activities take place in China,
our functional currency is the Renminbi, which had an average exchange rate to
the US dollar of $0.1415 and $0.1317 during fiscal years 2008 and 2007,
respectively.
The
acquisition of COA was accounted for as a reverse acquisition. Consequently, our
financial statements included herein for dates and periods prior to the
consummation of the acquisition reflect the historical financial condition,
results of operations and cash flows of COA and its subsidiary, ErMaPao.
Effective September 30, 2008, we sold ErMaPao to Bothven Investments
Ltd. Consequently, in all financial statements contained herein,
ErMaPao is treated as a “Discontinued Operation.”
Operations
We
commenced active operations in China upon completion of the reverse merger in
March 2007 in which we acquired COA and its operating subsidiary,
ErMaPao. Through ErMaPao we engaged in growing, processing and
distributing rice. In addition to such activities, since early 2008
we have been engaged in the trading and wholesale distribution of rice and other
agricultural commodities purchased from third parties.
In
February 2008 we purchased the Bellisimo Vineyard, a 153 acre operating vineyard
in Sonoma County, California. Before we acquired the Bellisimo Vineyard, it was
providing Merlot, Chardonnay, and Cabernet Sauvignon grapes to local wineries
for both red and white wines. We may continue to sell grapes grown on the
Bellisimo Vineyard to local wineries or to wineries which make wines for resale
in China and elsewhere in Asia.
In June
2008 we formed a subsidiary under the laws of the British Virgin Islands to act
as the importer of record in connection with our efforts to distribute wines to
wholesalers in China and Asia. Management believes that demand in China is
growing for premium wines and we intend to seek to import wines from the United
States and other growing regions initially into China and then to other
destinations in Asia. We are in the early stages of seeking to become a wine
importer and this will be a new business for us. We have no
experience in the distribution of wines and there can be no assurance that we
will be able to successfully import wines into China.
In
October 2008, we acquired all of the outstanding shares of Princeton
International Investment Ltd. (“Princeton”), which owned, and was formed to
facilitate our acquisition of, 60% of the outstanding shares of Dalian Baoshui
District Huiming Industry Limited ("Dalian Huiming”). Dalian Huiming, founded in
2001, is headquartered in the Dalian Free Trade Zone, in Dalian City Liaoning
Province, China. Dalian Huiming is engaged in grain purchasing, international
and domestic trading, wholesale sales and food delivery logistic services.
Dalian Huiming’s activities are primarily focused on soybeans, corns and cereal
crops, which are major products of the provinces located in Northeastern China.
Most of Dalian Huiming's sales are to other distributors or industrial users of
agricultural products and it distributes its products in many regions of China,
including Liaoning Province, Jiling Province, Heilongjiang Province, Sichuan
Province, Fujian Province and the cities of Beijing and Shanghai.
ErMaPao
– Growing, Processing and Distribution of Rice
The
following is a short description of the business of ErMaPao. We
acquired ErMaPao in March 2007 and sold it effective September 30,
2008. Consequently, although it represented substantially all of our
operations during the time it was owned by us, its results are reported in our
financial statements as “Discontinued Operations” and, effective September 30,
2008, it was no longer part of our operations.
ErMaPao
operates in Songyuan City of Jilin Province. Since its formation,
ErMaPao has been dedicated to the production of "green" and "organic"
rice. While it was owned by us, ErMaPao’s rice was grown on 1,600
acres it controlled as a result of the grant of government land use rights and
in collaboration with family units who supplied ErMaPao with rice grown on
approximately 4,660 acres to which they, in the aggregate, had been granted land
use rights. ErMaPao established standards regarding the quality of the product
grown by the family units to ensure that high standards of quality were
maintained. ErMaPao supplied the family units with seed, tools and training.
Throughout the growth cycle, the family units were provided access to
agronomists who advised them on the avoidance of common cultivation problems and
on the maximization of yield. In 2007, approximately 15% of our revenue came
from sales of organic rice, and 85% of our revenues were the result of sales of
green rice. In 2008 approximately 20.8 % of our revenues were derived from sales
of rice by ErMaPao prior to September 30, 2008.
1
To be
certified as "green" rice, rice and the methods by which it is produced must
adhere to certain standards. Specifically to be certified grade green rice, the
production quality of the environment must comport with certain basic green food
production environmental quality standards established by the Administration of
Agricultural Quality, Supervision, Inspection and Quarantine of the People's
Republic of China and there may be limited use of synthetic fertilizers and
biotech production methods.
To be
certified "AA" grade green rice, the production quality and conditions must
comport with more stringent green food production environmental quality
standards. During the production process, no chemical pesticides, fertilizers,
food additives, feed additives, veterinary drugs or anything known to be harmful
to the environment or human health can be used. The AA grade is obtained through
the use of organic fertilizer such as green manure, biological or physical
methods of crop plantation, soil fertilization, and pest control.
Organic
rice is rice produced to the highest of the "green food production environment
quality standards."
The
Bellisimo Vineyard –Wine Operations
In
addition to its grape growing activities, there are seven buildings located on
the Bellisimo Vineyard, which we occasionally rent to third
parties. The rates for the main building run from approximately $900
to $1,300 per night depending upon the season. Although these rental activities
supplement the revenues derived from the Vineyard, they are not material to our
operations.
In
December 2008, the Company entered a joint venture with China-based Xinbin
Manchu Autonomy County East Star Wine Company Ltd. ("Xinbin"). The joint
venture, Bellisimo Ice Wine, is intended to enable the Company to market premium
table wines and specialty ice wines in China. The Company owns 60% of
Bellisimo Ice Wine.
The
Company did not sell Bellisimo wines in 2008.
Grain
Purchasing, Distribution and Logistic Services
Dalian
Huiming purchases agriculture products from independent suppliers and sells the
products to distributors and retailers. Although Dalian Huiming has
what it believes are valuable working relationships with its suppliers and
buyers its business constantly is subject to competition from other grain
traders and distributors.
Principal
Customers
During
2008, the Company’s principal customers, the proceeds from sales to each of
these customers and the percentages of the Company’s revenues represented by
each of these customers were as follows:
Customers
|
Revenues
|
Percentage
of Company’s Revenues
|
Shenzhen
Shen Jing Da Agriculture Ltd.
|
$
51,214,939
|
46%
|
Beijing
Golden Valley Trading Co. Ltd.
|
$
38,159,510
|
34%
|
Shanghai
Good Friend Trading Group, Co. Ltd
|
$
3,389,421
|
3%
|
Jing
Yun Da Investment Co. Ltd.
|
$
2,988,577
|
3%
|
Beijing
Li Da Long Trading Co. Ltd
|
$
2,793,493
|
2%
|
The
concentration of our sales to a limited number of customers leaves us vulnerable
to an adverse short-term impact on our revenues should one of these customers
cease doing business or reduce the amount of business it does with
us.
In 2007,
when our revenues were generated principally through ErMaPao, we sold a
substantial portion of our products to a limited number of customers. Our
principal customers during 2007 were:
Customers
|
Revenues
|
Percentage
of Company’s Revenues
|
Songyuan
Shunda Grain and Oil Company
|
$
5,046,893
|
11.3%
|
Songyuan
Grain and Oil
Company
|
$
4,399,670
|
9.9%
|
Changchun
Qinghai Grain and Oil Company
|
$
4,314,572
|
9.7%
|
Songyuan
Tonda Grain and Oil Company
|
$
3,739,177
|
8.4%
|
Since we
disposed of ErMaPao we no longer do business with any of the companies listed
above.
2
We obtain
supplies of grain from a limited number of companies. The purchase made from
each of these suppliers during 2008, and the percentages of our business
represented by each of these suppliers were as follows:
Suppliers
|
Purchases
|
Percentage
of Company’s Purchases
|
Jiling
Shen Kang Long Rice Co. Ltd
|
$72,048,373
|
84%
|
Heilongjiang
Wuchang Littlehill Grain Storage Co. Ltd
|
$2,588,401
|
3%
|
Heilongjiang
Bao Quan Lin Grain Transportation Co. Ltd
|
$2,225,176
|
3%
|
Heilongjiang
Ah City Second Grain Storage Co. Ltd
|
$1,732,673
|
2%
|
Heihe
Aihui Grain Storage Co. Ltd
|
$1,678,642
|
2%
|
The
limited numbers of companies from which we obtain inventories leaves us
vulnerable to an adverse short-term impact on our revenues should one of these
suppliers cease doing business or reduce the amount of business it does with
us.
Competition
The
competition for the purchases of grain in the open market is fierce and the
barriers to entry are low. The Company competes with many larger, nationalized
companies such as China Grain Co. Ltd. Many of these companies have larger
organizations and are substantially better capitalized than the
Company.
To date,
our sales primarily have been limited to customers within the PRC and we expect
that our sales will remain primarily domestic for the immediate future. The
markets for our products have been experiencing increased levels of demand as
China continues its recent rate of growth. Yet, as they expand, the markets for
our products remain highly competitive. Our marketing strategy involves
developing long term ongoing working relationships with suppliers and customers
which foster mutually advantageous relationships.
Employees
As of
November 30, 2009, we employed 193 full-time employees. Approximately 40% of our
employees are management and sales personnel and the balance are operational
employees. None of our employees is represented by a union.
You
should consider carefully each of the following business and investment risk
factors and all of the other information in this report. If any of the following
risks and uncertainties develops into actual events, the business, financial
condition or results of our operations could be materially adversely affected.
If that happens, the trading price of our shares of common stock could decline
significantly. The risk factors below contain forward-looking statements
regarding our business. Actual results could differ materially from those set
forth in the forward-looking statements. See "Special Note Regarding
Forward-Looking Information."
Risks
Relating to Our Business
Our
revenues depend in large part on our customer and supplier relationships, and
any loss, cancellation, reduction, or interruption in these relationships could
harm our business.
In
general, we depend on our suppliers and customers to trade the products we
carry. If these relationships were to be disrupted, sales to such customers
would become difficult or significantly reduced and thus our revenues and net
income could significantly decline. The Company is also subject to risks of
increased costs from obtaining supplies from suppliers due to production
circumstances beyond the Company’s control. We also face risks of decreasing
sale prices of the products we trade due to increased competition and or
termination of orders from customers. Our success will depend on our continued
ability to develop and manage relationships with significant customers and
suppliers. Any adverse change in our relationships with our customers and
suppliers may have a material adverse effect on our business. Although we have
expanded our distribution capacity, we expect that our customer concentration
will not change significantly in the near future. We cannot be sure that we will
be able to retain our largest customers and suppliers or that we will be able to
attract additional customers and suppliers, or that our customers and suppliers
will continue to buy and provide our products in amounts comparable to prior
years. The loss of one or more of our largest customers or suppliers, any
reduction or interruption in sales to these customers or supplies from our
suppliers, our inability to successfully develop relationships with additional
customers or suppliers or future adverse price moves that may occur, could
significantly harm our business.
3
Attracting
and retaining key personnel is an essential element of our future
success.
Our
future success depends to a significant extent upon the continued service of our
executive officers and other key management and technical personnel and on our
ability to continue to attract, retain and motivate executive and other key
employees, including those in managerial, technical, marketing and information
technology support positions. Experienced management, technical, marketing and
support personnel are in demand and competition for their talents is intense.
The loss of the services of one or more of our key employees or our failure to
attract, retain and motivate qualified personnel could have a material adverse
effect on our business, financial condition and results of
operations.
If we
lose the services of either our chairman or our chief executive officer, our
business may suffer.
We are
dependent on Mr. Jinsong Li, our Chairman and Chief Executive Officer. We are
also dependent on Mr. Weihong Xia, our Chief Financial Officer. The loss of the
services of either could materially harm our business because of the cost and
time necessary to recruit and train a replacement. Such a loss would also divert
management attention away from operational issues. We do not have key-man term
life insurance policy on Mr. Li or Mr. Xia.
Our
inability to successfully manage the growth of our business may have a material
adverse effect on our business, results of operations and financial
condition.
We expect
to experience growth in the number of employees and the scope of our operations
as a result of internal growth and acquisitions. Such activities could result in
increased responsibilities for management. Our future success will be highly
dependent upon our ability to manage successfully the expansion of our
operations. Our ability to manage and support our growth effectively will be
substantially dependent on our ability to implement adequate improvements to
financial, inventory, management controls, reporting, order entry systems and
other procedures, and hire sufficient numbers of qualified financial,
accounting, administrative, and management personnel.
Our
future success depends on our ability to address potential market opportunities
and to manage expenses to match our ability to finance operations. The need to
control our expenses will place a significant strain on our management and
operational resources. If we are unable to control our expenses effectively, our
business, results of operations and financial condition may be adversely
affected.
Our
management is comprised almost entirely of individuals residing in the PRC with
very limited English skills.
Our
management is comprised almost entirely of individuals born and raised in the
PRC. As a result of differences in culture, educational background and business
experiences, our management may analyze, evaluate and present business
opportunities and results of operations differently from the way they are
analyzed, evaluated and presented by management teams of public companies in
Europe and the United States. In addition, our management has very limited
skills in English. Consequently, it is possible that our management team will
emphasize or fail to emphasize aspects of our business that might customarily be
emphasized in a different manner by comparable public companies from different
geographical and political areas.
We will
face many of the difficulties that companies in the early stage may
face.
We have a
relatively limited operating history as an agricultural trading company, which
may make it difficult for you to assess our ability to identify merger or
acquisition candidates and our growth and earnings potential. Therefore, we may
face many of the difficulties that companies in the early stages of their
development in new and evolving markets often face. We may continue to face
these difficulties in the future, some of which may be beyond our control. If we
are unable to successfully address these problems, our future growth and
earnings will be negatively affected.
We cannot
accurately forecast our future revenues and operating results, which may
fluctuate.
Our short
operating history and the rapidly changing nature of the markets in which we
compete and the changes in the nature of our business as a result of the sale of
ErMaPao and acquisition of Dalian Huiming make it difficult to
accurately forecast our revenues and operating results. Furthermore, our
revenues and operating results may fluctuate in the future due to a number of
factors, including the following:
|
·
|
the
introduction of competitive products by different or
new competitors;
|
·
|
any
factor that might interrupt or otherwise reduce the conduct
of business by our
distributors;
|
·
|
reduced
demand for any given product;
|
·
|
difficulty
in keeping current with changing trading technologies or
procedures;
|
·
|
increased
or uneven expenses, whether related to sales and marketing or
administration;
|
·
|
interruptions
or reductions in the availability of grain to facilitate our trading
operations; and
|
·
|
costs
related to possible acquisitions of technology or
businesses.
|
4
Due to
these factors, forecasts may not be achieved, either because expected revenues
do not occur or because they occur at lower prices or the costs are less
favorable to us. In addition, these factors increase the chances that our
results could be lower than the expectations of investors and analysts. If so,
the market price of our stock would likely decline.
Risks
Related to Doing Business in the People's Republic of China
Our
business operations take place primarily in the PRC. Because Chinese laws,
regulations and policies are changing, our Chinese operations may face numerous
risks unique to businesses in the PRC, several of which are summarized
below.
-
Limitations on Chinese economic market reforms may discourage foreign investment
in Chinese businesses.
The value
of investments in Chinese businesses could be adversely affected by political,
economic and social uncertainties in China. The economic reforms in China in
recent years are regarded by China's central government as a way to introduce
economic market forces into China. Given the overriding desire of the central
government leadership to maintain stability in China amid rapid social and
economic changes in the country, the economic market reforms of recent years
could be slowed, or even reversed.
-Any
change in policy by the Chinese government could adversely affect investments in
Chinese businesses.
Changes
in policy could result in imposition of restrictions on currency conversion,
imports or the source of supplies, as well as new laws affecting joint ventures
and foreign-owned enterprises doing business in China. Although China has been
pursuing economic reforms, events such as a change in leadership or social
disruptions that may occur upon the proposed privatization of certain
state-owned industries could significantly affect the government's ability to
continue with its reform.
- We face
economic risks in doing business in China.
As a
developing nation, China's economy is more volatile than that of developed
Western industrial economies. It differs significantly from that of the U.S. or
a Western European country in such respects as structure, level of development,
capital reinvestment, legal recourse, resource allocation and self-sufficiency.
Only in recent years has the Chinese economy moved from what had been a command
economy through the 1970s to one that during the 1990s encouraged substantial
private economic activity. In 1993, the Constitution of China was amended to
reinforce such economic reforms. The trends of the 1990s indicate that future
policies of the Chinese government will emphasize greater utilization of market
forces. For example, in 1999 the Government announced plans to amend the Chinese
Constitution to recognize private property, although private business will
officially remain subordinate to state-owned companies, which are the mainstay
of the Chinese economy. However, we cannot assure you that, under some
circumstances, the government's pursuit of economic reforms will not be
restrained or curtailed. Actions by the central government of China could have a
significant adverse effect on economic conditions in the country as a whole and
on the economic prospects for our Chinese operations.
- The
Chinese legal and judicial system may negatively impact foreign
investors.
In 1982,
the National People's Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in China. However, China's system of laws is not yet comprehensive.
The legal and judicial systems in China are still under development, and
enforcement of existing laws is inconsistent. Many judges in China lack the
depth of legal training and experience that would be expected of a judge in a
more developed country. Because the Chinese judiciary is relatively
inexperienced in enforcing the laws that exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed
country. It may be impossible to obtain swift and equitable enforcement of laws
that do exist, or to obtain enforcement of the judgment of one court by a court
of another jurisdiction. China's legal system is based on written statutes; a
decision by one judge does not set a legal precedent that is required to be
followed by judges in other cases. In addition, the interpretation of Chinese
laws may shift to reflect domestic political changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. We cannot assure you that a change
in leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life will not affect the Chinese
government's ability to continue to support and pursue these reforms. Such a
shift could have a material adverse effect on our business and
prospects.
The
practical effect of the PRC's legal system on our business operations in China
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate articles and contracts
to Foreign Invested Enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are not
qualitatively different from the general corporation laws of the several states.
Similarly, the accounting laws and regulations of the PRC mandate accounting
practices which are not consistent with U.S. Generally Accepted Accounting
Principles.
5
China's
accounting laws require that an annual "statutory audit" be performed in
accordance with PRC's accounting standards and that the books of account of
Foreign Invested Enterprises are maintained in accordance with Chinese
accounting laws. Article 14 of the PRC Wholly Foreign-Owned Enterprise Law
requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal
reports and statements to designate financial and tax authorities, at the risk
of business license revocation. Second, while the enforcement of substantive
rights may appear less clear than United States procedures, Foreign Invested
Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered
companies, which enjoy the same status as other Chinese registered companies in
business-to-business dispute resolution. Generally, the Articles of Association
provide that all business disputes pertaining to Foreign Invested Enterprises
are to be resolved by the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award
rendered by this arbitration tribunal is, by the express terms of the respective
Articles of Association, enforceable in accordance with the "United Nations'
Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958)." Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.
Because
our principal assets are located outside of the United States and all of our
directors and executive officers reside outside of the United States, it may be
difficult for you to enforce your rights based on the United States Federal
securities laws against us and our officers and directors in the United States
or to enforce judgments of United States courts against us or them in the
PRC.
In
addition, our operating subsidiaries and the majority all of our assets are
located outside of the United States. You will find it difficult to enforce your
legal rights based on the civil liability provisions of the United States
Federal securities laws against us in the courts of either the United States or
the PRC and, even if civil judgments are obtained in courts of the United
States, to enforce such judgments in the courts of the PRC. In addition, it is
unclear if extradition treaties in effect between the United States and the PRC
would permit effective enforcement against us or our officers and directors of
criminal penalties, under the United States Federal securities laws or
otherwise.
-
Economic Reform Issues
Although
the Chinese government owns the majority of productive assets in China, during
the past several years the government has implemented economic reform measures
that emphasize decentralization and encourage private economic activity. Because
these economic reform measures may be inconsistent or ineffectual, we are unable
to assure you that:
·
|
We
will be able to capitalize on economic
reforms;
|
·
|
The
Chinese government will continue its pursuit of economic reform
policies;
|
·
|
The
economic policies, even if pursued, will be
successful;
|
·
|
Economic
policies will not be significantly altered from time to time;
and
|
·
|
Business
operations in China will not become subject to the risk of
nationalization.
|
Since
1979, the Chinese government has reformed its economic systems. Because many
reforms are unprecedented or experimental, they are expected to be refined and
improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation, or
in the disparities in per capita wealth between regions within China, could lead
to further readjustment of the reform measures. This refining and readjustment
process may negatively affect our operations.
Over the
last few years, China's economy has registered a high growth rate. Recently,
there have been indications that rates of inflation have increased. In response,
the Chinese government recently has taken measures to curb this excessively
expansive economy. These measures have included revaluations of the Chinese
currency, the Renminbi (RMB), restrictions on the availability of domestic
credit, and limited re-centralization of the approval process for purchases of
some foreign products. These austerity measures alone may not succeed in slowing
down the economy's excessive expansion or control inflation, and may result in
severe dislocations in the Chinese economy. The Chinese government may adopt
additional measures to further combat inflation, including the establishment of
freezes or restraints on certain projects or markets.
To date,
reforms to China's economic system have not adversely impacted our operations
and are not expected to adversely impact operations in the foreseeable future.
However, there can be no assurance that the reforms to China's economic system
will continue or that we will not be adversely affected by changes in China's
political, economic, and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations, measures which may
be introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import
restrictions.
6
Risks
Associated with Agricultural Trading
We are
subject to risks associated with our operations which may affect our
results.
The
agricultural industry in the PRC has issues that the agricultural industry does
not have within the United States. For instance:
·
|
In
China, insurance coverage is a relatively new concept compared to that of
the United States and for certain aspects of a business operation,
insurance coverage is restricted or expensive. Workers compensation for
employees in the PRC may be unavailable or, if available, insufficient to
adequately cover such employees.
|
We cannot
assure you that we will be able to adequately address any of these or other
limitations.
Our
earnings and, therefore our profitability, may be affected by price
volatility.
We
anticipate that the majority of our future revenues will be derived from the
trading of rice and other agricultural commodities and, as a result, our
earnings may be affected by the prices of these products. There are many factors
influencing the price of rice and other agricultural commodities including
expectations for inflation; global and regional demand and production; political
and economic conditions; and production costs. These factors are beyond our
control and are impossible for us to predict. As a result, price changes may
adversely affect our operating results.
Other
Industry-specific Risks
Extreme
event risks. Weather and climate are variable from day to day and season to
season. Extreme weather events could adversely impact our ability to trade grain
and, consequently adverse impact our results of operation.
Yield
risks. When temperature and precipitation are too high or low, crop yields
suffer. Anticipated crops may not materialize.
The
availability and price of the agricultural commodities the Company trades can be
affected by weather, disease, government programs, and various other factors
beyond the Company's control which could adversely affect the Company's
operating results.
The
availability and price of agricultural commodities are subject to wide
fluctuations due to unpredictable factors such as weather, plantings, government
(domestic and foreign) farm programs and policies, changes in global demand
resulting from population growth and changes in standards of living, and global
production of similar and competitive crops. These factors have historically
caused volatility in the agricultural commodities industry and, consequently,
could impact the Company's operating results. Reduced supplies of agricultural
commodities could also limit the Company's ability to trade agricultural
commodities in an efficient manner which could adversely affect the Company's
profitability. In addition, the availability and price of agricultural
commodities can be affected by other factors, such as plant disease, which can
result in crop failures and reduced harvests.
Government
policies and regulations, in general, and specifically affecting the
agricultural sector and related industries, could adversely affect the Company's
operating results.
Agricultural
production is subject to government policies and regulations. We are
subject to Law of PRC on Quality and Safety of Agriculture Products, The Law of
PRC on Promotion of Agricultural Mechanization and The Law of PRC on Land
Contract in Rural Areas, and other PRC laws applicable to business in China
generally. (Further information on these Laws is available at: http://english.agri.gov.cn/ga/plar/)
Governmental
policies affecting the agricultural industry, such as taxes, tariffs, duties,
subsidies, and import and export restrictions on agricultural commodities and
commodity products, can influence the planting of certain crops, the location
and size of crop production, whether unprocessed or processed commodity products
are traded, the volume and types of imports and exports, the availability and
competitiveness of feedstock as raw materials, and industry profitability. In
addition, international trade disputes can adversely affect agricultural
commodity trade flows by limiting or disrupting trade between countries or
regions. Future government policies may adversely affect the supply of, demand
for, and prices of the products that the Company trades, restrict the Company's
ability to do business in its existing and target markets, and could negatively
impact revenues and operating results.
The
Company is subject to food and feed industry risks which could adversely affect
the Company's operating results.
The
Company is subject to food industry risks which include, but are not limited to,
food spoilage or food contamination, shifting consumer preferences, federal,
state, and local food processing regulations, and customer product liability
claims. The liability which could result from these risks may not always be
covered or could exceed liability insurance related to product liability and
food safety matters maintained by the Company. The occurrence of any of the
matters described above could adversely affect the Company's revenues and
operating results.
7
The
Company is subject to risks associated with the outbreak of disease related to
food products related to rice. The outbreak of disease could adversely affect
demand for the Company's products. A decrease in demand for these products could
adversely affect the Company's revenues and operating results.
The
Company is subject to numerous wine import and export regulations and licensing
in the United States of America and the People’s Republic of China which could
adversely affect the Company’s plans to expand its wine production and
trading.
The
Company is required to comply with the numerous and broad reaching laws and
regulations administered by governmental agencies relating to, but not limited
to, the sourcing, transporting, storing, and processing of agricultural raw
materials as well as the transporting, storing and distributing of related
agricultural products including commercial activities conducted by Company
employees and third parties globally. Any failure to comply with applicable laws
and regulations could subject the Company to administrative penalties and
injunctive relief, civil remedies, including fines, injunctions, and recalls of
its products.
The
Company is exposed to potential business disruption, including but not limited
to transportation services, and other serious adverse impacts resulting from
natural disasters and severe weather conditions, and accidents which could
adversely affect the Company's operating results.
The
assets and operations of the Company are subject to damage and disruption from
various events which include, but are not limited to, natural disasters and
severe weather conditions, accidents, explosions, and fires.
The
potential effects of the conditions cited above include, but are not limited to,
extensive property damage, extended business interruption, personal injuries,
and damage to the environment. The Company's operations also rely on dependable
and efficient transportation services. A disruption in transportation services
could result in supply problems at the Company's processing plants and impair
the Company's ability to deliver processed products to its customers in a timely
manner.
Risks
Relating to our Common Stock and our Status as a Public Company
The price
of our common stock may be affected by a limited trading volume and may
fluctuate significantly.
At times
there has been a limited public market for our common stock and we cannot assure
you that an active trading market for our stock will always be available. The
absence of an active trading market may adversely affect our stockholders'
ability to sell our common stock in short time periods, or possibly at all. In
addition, we cannot assure you that you will be able to sell shares of common
stock that you have purchased without incurring a loss. The market price of our
common stock may not necessarily bear any relationship to our book value,
assets, past operating results, financial condition or any other established
criteria of value, and may not be indicative of the market price for the common
stock in the future. In addition, the market price for our common stock may be
volatile depending on a number of factors, including business performance,
industry dynamics, and news announcements or changes in general economic
conditions.
We have
not and do not anticipate paying any dividends on our common stock; because of
this the valuation of our securities could be adversely affected in the
market.
We have
paid no dividends on our common stock to date and it is not anticipated that any
dividends will be paid to holders of our common stock in the foreseeable future.
While our dividend policy will be based on the operating results and capital
needs of the business, it is anticipated that any earnings will be retained to
finance our future expansion and for the implementation of our business plan. As
an investor, you should take note of the fact that a lack of a dividend can
further affect the market value of our stock, and could significantly affect the
value of any investment in our Company.
Our
management is not familiar with the United States securities laws.
Our
management and the former owners of the businesses we acquire are generally
unfamiliar with the requirements of the United States securities laws and may
not appreciate the need to devote the resources necessary to comply with such
laws. A failure to adequately respond to applicable securities laws could lead
to investigations by the Securities and Exchange Commission and other regulatory
authorities that could be costly divert management's attention and disrupt our
business.
We will
continue to incur significant costs as a result of operating as a public
company, and our management will be required to devote substantial time to new
compliance requirements.
As a
public company we incur significant legal, accounting and other expenses under
the Sarbanes-Oxley Act of 2002, together with rules implemented by the
Securities and Exchange Commission and applicable market regulators. These rules
impose various requirements on public companies, including requiring certain
corporate governance practices. Our management and other personnel will need to
devote a substantial amount of time to these new compliance requirements.
Moreover, these rules and regulations will increase our legal and financial
compliance costs and will make some activities more time-consuming and
costly.
8
In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
effective internal controls for financial reporting and disclosure controls and
procedures. In particular it requires that the Company perform system and
process evaluations and testing of our internal controls over financial
reporting to allow management and our independent registered public accounting
firm to report on the effectiveness of our internal controls over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or
the subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Compliance with Section 404 may require that
we incur substantial accounting expenses and expend significant management
efforts. If we are not able to comply with the requirements of Section 404 in a
timely manner, or if our accountants later identify deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses, the
market price of our stock could decline and we could be subject to sanctions or
investigations by the SEC or other applicable regulatory
authorities.
Our Board
of Directors has the authority, without stockholder approval, to issue preferred
stock with terms that may not be beneficial to common stock holders and with the
ability to adversely affect stockholder voting power and perpetuate the board's
control over the Company.
Our
certificate of incorporation authorizes the issuance of up to 1,000,000,000
shares of common stock, no par value. Our Board of Directors by resolution may
authorize the issuance of up to 20,000,000 shares of preferred stock in one or
more series with such limitations and restrictions as it may determine, in its
sole discretion, with no further authorization by security holders required for
the issuance thereof. The Board may determine the specific terms of the
preferred stock, including: designations; preferences; conversions rights;
cumulative, relative; participating; and optional or other rights, including:
voting rights; qualifications; limitations; or restrictions of the preferred
stock.
The
issuance of preferred stock may adversely affect the voting power and other
rights of the holders of common stock. Preferred stock may be issued quickly
with terms calculated to discourage, make more difficult, delay or prevent a
change in control of our company or make removal of management more difficult.
As a result, the Board of Directors' ability to issue preferred stock may
discourage the potential hostile acquirer, possibly resulting in beneficial
negotiations. Negotiating with an unfriendly acquirer may result in terms more
favorable to us and our stockholders. Conversely, the issuance of preferred
stock may adversely affect any market price of, and the voting and other rights
of the holders of the common stock. We presently have no plans to issue any
preferred stock.
We may
issue shares of our capital stock or debt securities to complete an acquisition,
which would reduce the equity interest of our stockholders or subject our
company to risks upon default.
We may
issue our securities, such as additional shares of our common stock or share of
preferred stock, to acquire companies or assets. If we issue additional shares
of our common stock or shares of our preferred stock, the equity interest of our
existing stockholders may be reduced significantly, and the market price of our
common stock may decrease. The shares of preferred stock we issue are likely to
provide holders with dividend, liquidation and voting rights, and may include
participation rights, senior to, and more favorable than, the rights and powers
of holders of our common stock.
If we
issue debt securities as part of an acquisition, and we are unable to generate
sufficient operating revenues to pay the principal amount and accrued interest
on that debt, we may be forced to sell all or a significant portion of our
assets to satisfy our debt service obligations, unless we are able to refinance
or negotiate an extension of our payment obligation. Even if we are able to meet
our debt service obligations as they become due, the holders of that debt may
accelerate payment if we fail to comply with, and/or are unable to obtain
waivers of, covenants that require us to maintain certain financial ratios or
reserves or satisfy certain other financial restrictions. In addition, financial
and other covenants in the agreements we may enter into to secure debt financing
may restrict our ability to obtain additional financing and our flexibility in
operating our business.
Future
sales of our common stock, or the perception that such sales could occur, could
have an adverse effect on the market price of our common stock.
We have
approximately 73,157,232 shares of our common stock
outstanding. There are approximately 4,078 of holders of our common
stock. Future sales of our common stock, pursuant to a registration
statement or Rule 144 under the Securities Act, or the perception that such
sales could occur, could have an adverse effect on the market price of our
common stock. The number of our shares available for sale pursuant to
registration statements or Rule 144 is very large relative to the trading volume
of our shares. Any attempt to sell a substantial number of our shares could
severely depress the market price of our common stock. In addition, we may use
our capital stock in the future to finance acquisitions and to compensate
employees and management, which will further dilute the interests of our
existing shareholders and could also depress the trading price of our common
stock.
9
Item
2. Properties.
We do not
own any land in the PRC although, as a result of government land use grants,
prior to the sale of ErMaPao we controlled approximately 1,600 acres, and
indirectly we controlled the 4,660 acres used by the family farmers who grew the
grain we purchased and marketed. Prior to the sale of ErMaPao our
executive offices were located in China at Songyuan City in Jilin Province.
These offices and processing facilities are located on the approximately 1600
acres of land owned by the PRC that had been leased to the Company. The lease
for the land expires in 2032, and the annual rent for the land was RMB 994,795
or approximately US$140,112. The buildings on this land have approximately
20,000 square meters of usable space and are owned by ErMaPao. They consist
mainly of warehouses, shelters for farm equipment and supplies, and processing
buildings. As a result of the sale of ErMaPao, we no longer directly or
indirectly control any of the properties mentioned in this
paragraph.
Dalian
Huiming rents office space at 25 Tongxing Street Zhong Shan District, Dalian,
Liaoning. This space is approximately 337 sq. meters and the annual rent is
approximately $39,800. Through another subsidiary we rent space at
Manhattan Building #1, Suite 1511, Dalian City, Liaoning Province. This space is
approximately 300 sq. meters and the annual rent is approximately
$17,280.
The
Bellisimo Vineyard is a 153 acre operating vineyard in Sonoma County,
California. There are seven buildings located on the Bellisimo Vineyard which we
occasionally rent to third parties.
We
acquired the Bellisimo Vineyard for $14,750,000. A portion of the purchase
price, $8,515,000, was paid with funds provided by a commercial US lender which
was granted a first lien on the property. The balance of the purchase price was
financed with $6,216,000 loaned from a related party pursuant to an agreement
providing for 4% interest per annum over a five year term and internally
generated funds. During 2008 the 4% loan was swapped for equity as discussed in
the notes to our financial statements included herein. The $8,515,000 mortgage
is payable over twenty years with an interest rate, initially set at 7.70% per
year, that adjusts every four years.
Item 4.
Submission of Matters to a Vote of Security Holders.
We did
not submit any matter to a vote of our stockholders during the fourth quarter of
2008.
10
Market
for Our Common Stock
Our
common stock is traded in the over-the-counter market (the OTC Bulletin Board).
Prior to May 4, 2007, the date we changed our name from Industrial Electrical
Services. Inc. to China Organic Agriculture, Inc., our common stock was quoted
under the symbol "INEL.OB." From May 2007 to the present, our common stock has
been quoted under the symbol "CNOA.OB."
The
prices set forth below reflect the quarterly high and low bid price information
for shares of our common stock for the periods indicated. These quotations
reflect inter-dealer prices, without retail markup, markdown or commission, and
may not represent actual transactions.
High Low 2008 First Quarter $2.20 $0.83 Second Quarter $2.06 $0.63 Third Quarter $0.68 $0.17 Fourth Quarter $0.69 $0.17 2007 First Quarter $2.00 $0.51 Second Quarter $2.09 $1.01 Third Quarter $4.00 $1.15 Fourth Quarter $4.25 $1.50
As of
November 30, 2009, our common stock was held of record by approximately 4,000
stockholders, some of
whom may hold shares for beneficial owners and have not been polled to determine
the extent of beneficial ownership.
We have
never paid cash dividends on our common stock. Holders of our common stock are
entitled to receive dividends, if any, declared and paid from time to time by
the Board of Directors out of funds legally available. We intend to retain any
earnings for the operation and expansion of our business and do not anticipate
paying cash dividends in the foreseeable future. Any future determination as to
the payment of cash dividends will depend upon future earnings, results of
operations, capital requirements, our financial condition and other factors that
our Board of Directors may consider.
Our
Equity Compensation Plans
The
Company has not used shares of its common stock or options to purchase such
shares as a means of compensating its management, employees or directors.
Nevertheless, there is set forth below a table confirming that no securities or
options
were issued during 2008 or were outstanding as of the end of such
year.
Equity
Compensation Plan Information - December 31, 2008
Number of securities remaining available for Plan category Number of securities to be issued Weighted-average exercise price future issuance under equity compensation upon exercise of outstanding of outstanding options, warrants plans (excluding securities options, warrants and rights and rights reflected in column (a)) (a) (b) (c) ---------------------------------------------------------------------------------------------------------------------------------- Equity Compensation Plan Approved by Shareholders 0 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Equity Compensation Plan Not Approved by Shareholders 0 0 0
Although
the Company has not used its securities to compensate management and employees,
as discussed in Note 16 to the Financial Statements enclosed herein, the Company
has issued warrants to its investor relations firms and, as of the end of 2008,
there were outstanding an aggregate of 1,350,000 warrants to purchase shares of
its common stock of which 1,000,000 were exercisable at a price of $1.39 and
350,000 were exercisable at a price of $1.50.
11
Purchases
of Equity Securities by the Company and Affiliated Purchasers
During
the fourth quarter of our fiscal year ended December 31, 2008, neither we nor
any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Exchange
Act) purchased any shares of our common stock.
Recent
Sales of Unregistered Securities
We have
reported all sales of our unregistered equity securities that occurred during
2008 in our Reports on Form 10-Q or Form 8-K, as applicable.
Not
applicable.
Forward
Looking Statements
The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Annual Report
on Form 10-K. The following discussion contains forward-looking statements. Our
actual results may differ significantly from those projected in the
forward-looking statements. Factors that may cause future results to differ
materially from those projected include, but are not limited to, those discussed
in Item 1A. “Risk Factors and elsewhere in this Report.
Overview
On March
15, 2007, China Organic Agriculture Inc. ("CNOA" or the "Company"), through a
reverse merger, issued 27,448,776 shares of stock in exchange for all the
outstanding shares of China Organic Agriculture Limited ("COA")
which then owned ErMaPao, an operating company engaged in growing, processing
and distributing rice in China. Under accounting principles generally accepted
in the United States, the share exchange was considered to be a capital
transaction in substance, rather than a business combination. Thus the share
exchange was equivalent to the issuance of stock by COA for the net monetary
assets of CNOA, accompanied by a ecapitalization, and is accounted for as a
change in capital structure. Accordingly, the accounting for the share exchange
was identical to that resulting from a reverse acquisition, except no goodwill
was recorded. Under reverse takeover accounting, the comparative historical
financial statements issued after the acquisition of the legal acquirer, CNOA,
are those of the legal acquiree, COA, which is considered to be the accounting
acquirer, and thus represent a continuation of the financial statements of
COA. Share and per share amounts stated have been retroactively
adjusted to reflect the merger.
In
February 2008 we purchased the Bellisimo Vineyard, a 153 acre operating vineyard
in Sonoma County, California. Before we acquired the Bellisimo Vineyard, it was
providing Merlot, Chardonnay, and Cabernet Sauvignon grapes to wineries for both
red and white wines. We anticipate that we may sell some of the vineyard’s
production to distributors for resale in China. In addition to the growing
of grapes, we have also periodically rented to third parties seven residential
buildings located on the Bellisimo Vineyard. In June 2008, anticipating that we
might begin to import wines into China, we formed Far East Wine Holding Group
Ltd. (“FEW”) to act as our distributor of wines into China should we
choose to do so.
In early
2008, the Company also began to engage on a limited basis in the trading of rice
and other agricultural commodities.
Until the
September, 2008 sale of ErMaPao and the acquisition of 60% of the shares of
Dalian Huiming, the Company was mainly engaged in the business of the
production, processing, sale, trading and distribution of agricultural products
grown by or under the direction of ErMaPao. The Company’s products have been
sold principally within the People's Republic of China. As a result of the sale
of ErMaPao, the Company is primarily engaged in the acquisition, trading and
distribution of agricultural products, such as corn, soybean and rice, acquired
from third parties, which are then sold mainly to five regions in China. They
are Beijing, Shanghai, Zhejiang, Guangdong and Liaoning. ErMaPao is now treated
as a Discontinued Operation and is no longer reported as a separate
segment.
12
Result
of Operations – Annual Periods 2008 and 2007
The
following tables present certain information from the consolidated statement of
operations for the twelve months ended December 31, 2008 and December 31,
2007.
TWELVE
MONTHS ENDED
|
TWELVE
MONTHS ENDED
|
%
|
|||||||||
DECEMBER
31 2008
|
DECEMBER
31 2007
|
CHANGE
|
|||||||||
Sales
|
$
|
112,695,908
|
$
|
-
|
n/m
|
||||||
Cost
of sales
|
(87,329,141
|
)
|
-
|
n/m
|
|||||||
Gross
profit
|
25,366,767
|
-
|
|||||||||
Selling,
general and administrative
expenses
|
(1,755,344
|
)
|
-
|
n/m
|
|||||||
Income
from operations
|
23,611,423
|
-
|
n/m
|
||||||||
Other
income
|
827,577
|
-
|
n/m
|
||||||||
Interest
expense
|
(541,959
|
)
|
-
|
n/m
|
|||||||
-
|
n/m
|
||||||||||
Income
from continuing operations before
income
taxes
|
23,897,041
|
-
|
n/m
|
||||||||
Provision
for income taxes
|
(6,975,212
|
)
|
-
|
n/m
|
|||||||
Minority
interest
|
(1,328,623
|
)
|
-
|
n/m
|
|||||||
Net
income from continuing operations
|
15,593,206
|
-
|
n/m
|
||||||||
Net
income from discontinued operations
|
1,868,231
|
13,492,590
|
-86%
|
||||||||
Net
Income
|
$
|
17,461,437
|
$
|
13,492,590
|
29%
|
||||||
Basic
weighted average shares
|
58,515,437
|
46,662,749
|
25%
|
||||||||
Total
basic and diluted earnings per share
|
$
|
0.30
|
$
|
0.29
|
3%
|
||||||
Other
comprehensive income:
Net
Income
|
$
|
17,461,437
|
$
|
13,492,590
|
29%
|
||||||
Foreign
currency
|
|||||||||||
translation
adjustment
|
2,212,245
|
537,361
|
312%
|
||||||||
Comprehensive
income
|
$
|
19,673,682
|
$
|
14,029,951
|
40%
|
13
Business
Segment Information
We
operate in two business segments, agricultural commodities, which we acquire,
trade and supply to users; and the wine industry, for which we grow grapes and
intend to act as an importer into Asia where we may also distribute wines and
ice wines.
Year
ended December 31, 2008
|
||||||||||||||||
Agricultural
products
|
Wine
production
|
Others
(1)
|
Total
|
|||||||||||||
Sales,
net
|
$
|
112,695,908
|
$
|
-
|
$
|
-
|
$
|
112,695,908
|
||||||||
Cost
of sales
|
87,329,141
|
-
|
-
|
87,329,141
|
||||||||||||
Gross
Profit
|
25,366,767
|
-
|
-
|
25,366,767
|
||||||||||||
Other
operational income
|
-
|
585,666
|
-
|
585,666
|
||||||||||||
Segment
profit (loss)
|
24,900,541
|
(954,232
|
)
|
(49,268
|
)
|
23,897,041
|
||||||||||
Depreciation
and amortization
|
47,163
|
167,710
|
-
|
214,873
|
||||||||||||
Total
assets
|
56,385,100
|
15,341,073
|
-
|
71,726,173
|
||||||||||||
Expenditures
for long term assets
|
11,718,460
|
14,673,773
|
-
|
26,392,233
|
||||||||||||
Goodwill
|
|
1,602,134
|
-
|
-
|
1,602,134
|
(1)
|
Others
include corporate expenses such as the amortization of warrant
expense.
|
As
ErMaPao was the Company’s only operating segment in 2007, and it is now
classified as Discontinued Operation, no segment table for 2007 is
presented.
Sales
Sales for
the twelve months ending December 31, 2008 totaled
$112,695,908. During 2008, the Company's sales were generated by the
Company's Agricultural Products segment, reflecting the new initiative of
purchasing rice from other rice producers and then reselling this rice to
retailers and wholesalers. As the Agricultural Products operation was
established in 2008, there were no comparable sales in 2007.
Gross
Profit
The
Company's gross profit for the twelve months ending December 31, 2008 was
$25,366,767 (or 22.5% of revenue).
Selling,
General and Administrative Expense
Selling,
general and administrative expense for the twelve months ending December 31,
2008 totaled $1,755,344 or approximately 1.6% of sales.
Other
Income
Other
income includes licensing fee income, gain on debt conversion, net grape and
rental income.
Licensing
fee income of $500,000 is based on an agreement between the Company and Red Wine
Saga Company, Ltd. (“Red Wine”) effective October 1, 2008. In this
agreement, the Company gave Red Wine the authority to sell red wine in Asia
under the Bellisimo brand name. The agreement extends from October 1, 2008
through September 30, 2011. On June 3,
2009 the agreement was amended to eliminate the quarterly installments until
such time as the Company begins to deliver wine for sale under the Bellisimo
brand
On
September 4, 2008, the Company issued 18,282,353 shares, representing
approximately 25 %, of its outstanding common stock, to a shareholder of the
Company (Mr. Xirong Xu) in exchange for the surrender and cancellation of its
promissory note in the principal amount of $ 6,216,000 issued in connection with
the acquisition of the Bellisimo Vineyard. The conversion rate, $0.32 per share,
represented a slight premium to the 30 day average share price of the common
stock at the time of the conversion, resulting in a gain on debt conversion of
$365,647.
On
September 4, 2008, the Company issued 3,326,103 shares, representing
approximately 4.5%, of its outstanding common stock, to a shareholder of the
Company (First Capital Limited) in exchange for the surrender and cancellation
of its promissory note in the principal amount of $ 1,130,875. The indebtedness
evidenced by this note represents amounts advanced to pay accounts payable. The
conversion rate for this transaction, $0.32 per share, represented a slight
premium to the 30 day average share price of the common stock at the time of the
conversion, resulting in a gain on debt conversion of $66,522.
14
Mr.
Xirong Xu and First Capital Limited are accredited investors within the meaning
of Rule 501 (a) of Regulation D under the Securities Act. The shares were issued
pursuant to exemptions from the registration requirements of the Securities Act
provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder, and in the case of Xirong Xu, Regulation S under the
Securities Act.
Interest
Expense
Interest
expenses were $541,959 for fiscal year 2008. These expenses result from the debt
incurred to finance the February 2008 acquisition of the Bellisimo Vineyard,
which totaled about $14.7 million.
Provision
for Income Taxes
The
Company is subject to the income tax laws of the People's Republic of China
("PRC"). The Enterprise Income Tax, to which the Company is subject, is now at a
statutory rate of 25%. Until December 31, 2007, the Company enjoyed an exemption
from this tax because of its participation in both agricultural production and
in the PRC Urban Labor and Employment Services Program designed to encourage
companies to increase their employment of target groups.
Thus it
did not record an expense for income taxes nor did it paid income taxes in
2007.
According
to China's new tax policy, the Company is no longer able to benefit from this
tax exemption. For the twelve months ending December 31, 2008, the Company
accrued $6,975,212 in income taxes. The Company’s effective 2008 tax rate is
higher than the statutory rate as expenses incurred in the US, including those
pertaining to the Bellisimo Vineyard, are not deductible for PRC tax purposes,
and debt relief of $3,015,387 from controlling shareholder related to the
acquisition of Dalian Huiming was treated as being taxable to Dalian Huiming
under China Tax Law, but was not reflected as a gain in the consolidated
financial report.
Minority
Interest
As the
Company owns only 60% of Dalian Huiming, 40% of total net income from Dalian
Huiming was recorded as income attributed to minority interest.
Discontinued
Operations
The
Company discontinued reporting the operating results of ErMaPao as of September
30, 2008, the effective date of the sale of ErMaPao. The following table
summarizes the operating results of the discontinued operations for the periods
ended September 30, 2008 and 2007 respectively:
2008
|
2007
|
|||||||
Sales
|
$
|
4,536,142
|
$
|
28,804,210
|
||||
Cost
of sales
|
(2,977,670
|
)
|
(18,676,637
|
)
|
||||
Gross
profit
|
1,558,472
|
10,127,573
|
||||||
Operating
expenses
|
(314,713
|
)
|
(499,898
|
)
|
||||
Income
from discontinued operations before income tax
|
1,243,759
|
9,627,675
|
||||||
Income
tax
|
(309,722
|
)
|
-
|
|||||
Net
Income
|
$
|
934,037
|
$
|
9,627,675
|
ErMaPao
showed a significant decrease in sales of both green and organic rice in 2008.
The decline is due to the following reasons:
·
|
As
the government was no longer providing a tax exemption to ErMaPao, certain
orders were not accepted because of the reduced
margin.
|
·
|
Heavy
snows in early 2008 impacted rice sales in Northern China. Some suppliers
of ErMaPao could not deliver the goods per sales
orders.
|
·
|
The
increasing shipping cost due to the location of ErMaPao made many
long-term sales orders not worth to
pursue.
|
·
|
Increased
competition from other rice
producers.
|
15
Net
Income
Net
income from ErMaPao was $1,868,231 for the twelve months ending December 31,
2008, compared to net income for $13,492,590 for the twelve months ending
December 31, 2007. This decrease mainly was due to the reasons listed above. The
total net income of the Company was $17,461,437 for the twelve months ending
December 31, 2008, an increase of 29% compared to the same period in 2007. The
increase was primarily due to acquisition of Dalian Huiming.
Liquidity
and Capital Resources
At
December 31, 2008, cash and cash equivalents were $7,338,817 as compared to
$9,697,793 at December 31, 2007. Working capital as of December 31,
2008 was $41,018,283 (current assets of $54,402,799 less current liabilities of
$13,384,016) as compared to working capital of $14,241,857 as of December 31,
2007.
The
components of the $2,358,976 decrease of cash and cash equivalents during the
year ended December 31, 2008 are reflected below:
Twelve
months ended
December
31, 2008
|
Twelve
months ended
December
31, 2007
|
|||||||
Net
cash provided by operating activities
|
$
|
4,827,267
|
$
|
9,559,590
|
||||
Net
cash used by investing activities
|
(26,392,233
|
)
|
(852,041
|
)
|
||||
Net
cash provided by financing activities
|
17,937,377
|
364,865
|
||||||
Effects
of exchange rates on cash
|
1,268,613
|
309,318
|
||||||
Net
change in cash and cash equivalents
|
$
|
(2,358,976
|
)
|
$
|
9,381,732
|
Net
Cash Provided by Operating Activities
The cash
provided by operating activities for the twelve month period ended December 31,
2008 was $4,827,267. This is largely due to the Net income of $17,461,437,
partially offset by the increase in accounts receivables of $14,868,192, which
resulted from the increase in sales due to the expanded trading activities. The
level of cash provided by operating activities was $4,732,323 lower than that of
the prior year largely due to this increase in accounts receivable.
Net
Cash Used by Investing Activities
In
February of 2008 the Company acquired the Bellisimo Vineyard for
$14,750,000.
Net cash
used by investing activities in twelve months ended December 31, 2008 was
$26,392,233 reflecting the cash used to purchase the Bellisimo Vineyard
($14,750,000) in February 2008 and Dalian Huiming ($10,642,609) in October
2008.
Net
Cash Provided by Financing Activities
On
September 4, 2008, the Company issued 18,282,353 shares, representing
approximately 25% of its outstanding common stock, to a shareholder of the
Company (Mr. Xirong Xu) in exchange for the surrender and cancellation of its
promissory note in the principal amount of $6,216,000 issued in connection with
the acquisition of the Bellisimo Vineyard on February 29, 2008. The conversion
rate for the transaction, $0.32 per share, represents a slight premium to the 30
day average share price of the common stock.
In
connection with the acquisition for $14,750,000 of the Bellisimo Vineyard on
February 29, 2008, we incurred debt in the amount of $8,515,000 for which we
granted the lender a first lien on the Vineyard. This debt bears interest at an
initial rate of 7.7% per annum and is repayable in varying monthly payments
over a period of 20 years. In addition, we received funding from a shareholder
of an additional $6,216,000 used to purchase the Vineyard, at 4% interest over a
five year term. As discussed in Note16 of the Notes to the Consolidated
Financial Statements included in this Report, this debt was cancelled in return
for the issuance to the debt holder of 18,282,353 shares of the Company’s stock
in September, 2008.
Additionally
during the year ended December 31, 2008, the Company received $2,800,000 from a
related party, Shenzhen Kaibite Network Technology Co., Ltd. which is a
subsidiary of one of the Company’s shareholders (First Capital
Limited). The amount is evidenced by a non-interest bearing
promissory note payable upon demand.
We
anticipate that our available funds and cash flows generated from operations
will be sufficient to meet our anticipated on-going operating needs for the next
twelve months. However, we may need to raise additional capital in order to fund
acquisitions and any substantive constructions. We would expect to raise those
funds through credit facilities obtained from lending institutions, the issuance
of equity, or a combination of both. However, there can be no guarantee that we
will be able to obtain such funding, whether through the issuance of debt or
equity, on terms satisfactory to management and our Board of
Directors.
16
Recent
Accounting Pronouncements
In
February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments." ("SFAS 155"). SFAS 155 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities,"
("SFAS 133") and SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). SFAS 155
allows financial instruments that have embedded derivatives to be accounted for
as a whole (eliminating the need to bifurcate the derivative from its host) if
the holder elects to account for the whole instrument on a fair value basis.
SFAS 155 also clarifies and amends certain other provisions of
SFAS 133 and SFAS 140. This statement is effective for all
financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. The Company does not believe that its adoption had a
material impact on its financial position, results of operations or cash
flows.
In March
2006, the FASB issued SFAS Statement No. 156, "Accounting for Servicing of
Financial Assets - an amendment to FASB Statement No. 140," ("SFAS 156"). SFAS
156 requires that an entity recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by entering
into a service contract under certain situations. The new standard is effective
for fiscal years beginning after September 15, 2006. The Company does not
believe that its adoption of this new standard had a material impact on its
financial position, results of operations or cash flows.
In
June 2008, the FASB ratified the consensus reached on Emerging Issues Task
Force (“EITF”) Issue No. 07-05, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF No. 07-05”).
EITF No. 07-05 clarifies the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock, which would qualify as a
scope exception under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. EITF No. 07-05 is effective for financial
statements issued for fiscal years beginning after December 15,
2008.
The
financial information required by this item is set forth beginning on page
F-1.
On March
28, 2007, we appointed the firm of Morgenstern, Svoboda & Baer,CPAs, P.C.
("New Auditor") as our independent auditor and dismissed the firm of Pender
Newkirk & Company LLP ("Former Auditor"), which had served as our
independent auditor until that date. The Former Auditor was our auditor prior to
the acquisition by our company of ErMaPao and China Organic Agriculture,
Ltd.
The
reports of the Former Auditor on our financial statements for the fiscal years
ended December 31, 2005 and December 31, 2006 did not contain an adverse
opinion, a disclaimer of opinion or any qualifications or modifications related
to uncertainty, limitation of audit scope or application of accounting
principles. During the fiscal years ending December 31, 2005 and December 31,
2006 and the period from December 31, 2006 to March 28, 2007, the Company did
not have any disagreements (within the meaning of Instruction 4 of Item 304 of
Regulation S-K) with the Former Auditor as to any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure and there have been no reportable events (as defined in Item 304 of
Regulation S-K).
Item
9A.(T) Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
We
maintain "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that
are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. We
conducted an evaluation (the "Evaluation"), under the supervision and with the
participation of our Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of the design and operation of our disclosure
controls and procedures ("Disclosure Controls") as of December 31, 2008 pursuant
to Rule 13a-15 of the Exchange Act. Based on this Evaluation, our CEO and CFO
concluded that our Disclosure Controls were not effective as of December 31,
2008. The primary deficiency in our disclosure controls and procedures is our
failure to adopt written policies and procedures to direct our personnel to
advise our management of events and information to enable them to make timely
decisions regarding required disclosure. This deficiency is due, in part, to the
lack of experience of our management personnel in China with the rules and
regulations of the Securities and Exchange Commission and, more generally,
western business procedures, and the failure of our personnel in China to timely
communicate with the Company's representatives in the United States. This
absence of procedures has resulted in a number of late filings and in the
receipt by the Company of a number of requests for amendments and additional
information from the Staff of the Securities and Exchange
Commission.
17
During
2008, the Company engaged within the US an individual familiar with the
requirements of US securities laws and accounting regulations. This individual
was engaged as a consultant, and coordinated between the Company's Chinese
representatives and its counsel and accountants in the United States. He also
provided us with procedures intended to heighten management's awareness of the
need to comply with US securities laws and thereby improve our disclosure
controls and procedures. In addition, we have engaged an individual in the US
familiar with public accounting and the controls and procedures needed by a
public company to advise us as we upgrade our internal controls. In December
2009 we engaged an individual to help establish a systematic approach we can
follow to establish appropriate controls and procedures throughout our
company. The Company is in the early stages of preparing an internal
control matrix to document its controls and procedures which it plans to utilize
to test the effectiveness of its controls and procedures. We have not
completed all steps necessary to insure that are disclosure controls and
procedures are effective. Our efforts to adopt and implement appropriate
disclosure controls and procedures are ongoing and are intended to ensure that
we have appropriate disclosure controls and procedures by the end of
2010.
As a
result of the deficiencies in certain of its filings under the Exchange Act
which we are in the process of rectifying, the Company is not considered to be
current in its Exchange Act reporting.
As a
result of its not being timely in its Exchange Act reporting, the Company will
not be permitted to register its securities on certain Forms of registration
statements until the Company is deemed timely in its Exchange Act reporting and
satisfies all other criteria necessary for such registration statements. Until
such time, the Company's shareholders will also be prevented from utilizing the
provisions of Rule 144 to facilitate the sale of the Company's restricted
stock.
Management's
Report on Internal Control Over Financial Reporting*
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in Exchange Act Rule 13a -15(f). The
Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Because
of the inherent limitations due to, for example, the potential for human error
or circumvention of controls, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting at December 31, 2008 based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation,
management concluded that the Company's internal controls over financial
reporting were not effective as of December 31, 2008. In addition to the
deficiencies discussed in the section concerning the “Evaluation of Disclosure
Controls and Procedures” above , material weaknesses identified were the result
of the lack of adequate staffing in the Company's accounting department, the
lack of familiarity of the Company's accounting staff with the procedures
necessary to design and maintain proper internal controls over financial
reporting and the inability to integrate the newly acquired business of Dalian
Huiming into the Company's financial operating system.
In
addition to the remedial measures we have adopted and plan to adopt relating to
disclosure controls and procedures discussed above in the section “Evaluation of
Disclosure Controls and Procedures,” we have started to create a structure in
which critical accounting policies and estimates are identified, and together
with other complex areas, are subject to multiple reviews by accounting
personnel. In addition, we plan to enhance and test our month-end and year-end
financial close process. We also intend to develop and implement policies and
procedures for the financial close and reporting process, such as identifying
the roles, responsibilities, methodologies, and review/approval process. We
believe these actions will remediate the material weaknesses by focusing
additional attention and resources in our internal accounting functions.
However, the material weaknesses will not be considered remediated until the
applicable remedial controls operate for a sufficient period of time and
management has concluded, through testing, that these controls are operating
effectively.
__
*The
foregoing report shall not be deemed to be filed for purposes of Section 18 of
the Exchange Act or otherwise subject to the liabilities of that
section.
This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.
Changes
in Internal Controls Over Financial Reporting
During
the fiscal quarter ended December 31, 2008, there were no changes in
our internal controls over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
18
Our
directors and executive officers at March 31, 2009 were:
Name
|
Age
|
Title
|
Jinsong
Li
|
38
|
Chief
Executive Officer and Chairman
|
Weihong
Xia
|
38
|
Chief
Financial Officer and Secretary
|
Guangwu
Zhang
|
76
|
Director
|
Shujie
Wu
|
39
|
Director
|
The
business experience of each director and executive officer of the Company is set
forth below.
Mr.
Jinsong Li was elected to the position of Chief Executive Officer in late
September 2008. He was formerly vice president of Beijing Jingwei Capital
Investment Co., Ltd, an investment firm focusing on agricultural companies,
where he managed investment projects valued at more than $100 million. Mr. Li
previously worked for more than 15 years in various executive roles at a
commercial trade company in Shantou and an agricultural products company in
Beijing. On October 15, 2008, Mr. Li was elected Chairman of the Company's Board
of Directors replacing Huizhi Xiao, who resigned as of that date.
Weihong
Xia holds a Masters Degree in Economics and is a certified public accountant. He
most recently served as Chief Financial Officer of Dongfang Tiandu Industrial
Investment Company, and as Executive Director and Chief Financial Officer of
Tianzifu International Investment Company. He joined the Company in Oct. 2008,
and became CFO in Nov. 2008. Mr. Xia resigned from the Company on January 15,
2010.
Guangwu
Zhang currently holds the position of Professor of Agriculture at Shandong
Agricultural University. As author of over 100 academic papers, he currently
holds several national appointments including Vice Committee Chairman of
Cultivation Research Committee of The Crop Science Society of China as well as
evaluator of the National Natural Science Foundation of China. He
joined the Company as a Non-managerial director in December 2008.
Shujie Wu
served from 2002 to 2004 as Chairman of Dongguan Shijin Market Investment
Company Limited. From 2003 to 2005, Mr. Wu served as Chairman of Guangzhou City
Weirong Investment Consulting Company Limited, and from 2005 to 2007 he served
as Managing Director of Jiayuanfen International Investments Company Limited. He
joined the Company as a Non-managerial director in April 2008.
19
Corporate
Governance: Board Committees and Independent Directors
We
currently have no committees serving the board of Directors. Guangwu Zhang is an
independent director under the standards for independent directors established
set forth in Regulation S-K. Our Board of Directors did not hold any meetings
during 2008, though it did act by Unanimous Written Consent.
Compensation
of Directors
The
following table sets forth a summary of compensation paid to the Company's
directors as of December 31, 2008:
Option All other Name Fees paid in cash awards compensation Total ----------------- ----------------- ------ ------------ ----- Shujie Wu $1,127 / month $ 0 N/A $13,524 Zhouzhe Jin $1,127 / month $ 0 N/A $13,524 Jingyong Ma $1,127 / month $ 0 N/A $13,524 Guangwu Zhang $0/ month $ 0 N/A $0
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors, executive
officers and beneficial owners of more than 10% of our common stock to file with
the SEC reports of their holdings of, and transactions in, our common stock.
Based solely upon our review of copies of such reports and written
representations from reporting persons that were provided to us, we believe that
our officers and directors complied with these reporting requirements with
respect to 2008. However, Mr. Xirong Xu, a holder of more than 10% of our common
stock, did not do so with regard to sales of such stock in the fourth quarter of
2008. Mr. Xu's sales were reported on Form 5, as later amended, on February 19,
2009.
Code of
Ethics
We have
not adopted a code of ethics to apply to our principal executive officer,
principal financial officer, principal accounting officer and controller, or
persons performing similar functions because, until recently, we have not been
an operating company. We expect to prepare a Code of Ethics in the near
future.
The
following table sets forth information with respect to the amounts awarded to,
earned by, or paid to, (i) each individual who served as our chief executive
officer for services provided in all capacities to us and our subsidiaries for
all, or a portion of, the fiscal years ended December 31, 2008. No other
individual who served as an executive officer of our company was awarded,
earned, or paid total compensation in excess of $100,000 for services provided
in all capacities to us and our subsidiaries in that year. Mr.
Jingsong Li became CEO on September 23, 2008. The Former CEO, Mr. Changqing
Xu, served 8 months in 2008.
Summary
Compensation Table
Change in pension value Non-equity and nonqualified Name and Stock Option incentive plan deferred compensation All other principal Year Salary Bonus awards awards compensation earnings compensation Total position ($) ($) ($) ($) ($) ($) ($) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) ----------------------------------------------------------------------------------------------------------------------- Jinsong Li CEO 2008 $9,198 N/A N/A N/A N/A N/A N/A $ 9,198 ----------------------------------------------------------------------------------------------------------------------- Changqing Xu CEO 2008 $24,788 N/A N/A N/A N/A N/A N/A $24,788 ----------------------------------------------------------------------------------------------------------------------- Changqing Xu CEO 2007 $8,000 N/A N/A N/A N/A N/A N/A $ 8,000 ----------------------------------------------------------------------------------------------------------------------- Weihong Xia CFO & 2008 N/A N/A N/A N/A N/A N/A N/A N/A Secretary
20
We have
not granted any equity-based compensation, awards or stock options to our chief
executive officer or any other executive officer, nor were any outstanding as of
December 31, 2008.
We have
not entered into an employment or consulting agreement with any of our executive
officers or directors. Except as disclosed below under the caption "Compensation
of Directors," we have not paid or accrued any fees to any of our directors for
serving as a member of our Board of Directors. We do not have any retirement,
pension, profit sharing or stock option plans or insurance or medical
reimbursement plans covering our officers and directors.
The
following table sets forth information known to us regarding beneficial
ownership of our common stock as of November 30, 2009 by (i) each person known
by us to own beneficially more than 5% of the outstanding common stock, (ii)
each of our directors and executive officers, (iii) any other "Named Executive
Officer" identified in the Executive Compensation section, below, and (iv) all
of our officers and directors as a group. Except as otherwise indicated, we
believe, based on information provided by each of the individuals named in the
table below, that such individuals have sole investment and voting power with
respect to such shares, subject to community property laws, where applicable.
Each executive officer and director may be contacted c/o the Company: Dalian
City Zhongshan District, Youhao Road, Manhattan Building #1 Suite 1511, Dalian
Liaoning, PRC.
Name and Address of Amount and Nature of Percent Beneficial Owner Beneficial Ownership of Class --------------------------------------------------------------------------------------- Xirong Xu 20,282,353 27.7 --------------------------------------------------------------------------------------- First Capital Limited P.O. Box 2804, Georgetown Grand Cayman, Ky1-1112 Cayman Islands Xirong Xu 3,326,103 4.5 --------------------------------------------------------------------------------------- Jinsong Li 500,000 * --------------------------------------------------------------------------------------- Weihong Xia 0 0 --------------------------------------------------------------------------------------- Shujie Wu 0 0 --------------------------------------------------------------------------------------- Guangwu Zhang 0 0 --------------------------------------------------------------------------------------- Officers and Directors as a group (4 persons) 500,000 * ____ * Less than one percent.
In connection with the acquisition by
the Company of China Organic Agriculture Limited ("COA"), a BVI holding company,
the Company issued to the shareholders of COA, Huizhi Xiao, Luxesource
International Limited, JK Friedman Capital Limited, Shenzhen Huaying Guaranty
and Investment Company Limited, First Capital Limited, Simple (Hong Kong)
Investment & Management Company Limited and China US Bridge Capital Limited,
an aggregate of 27,448,776 shares of the Company's common stock.
In April
2007, we received a loan from Shenzhen Dingyi Investment Consultants Limited, an
entity which was a shareholder in the Company, of an aggregate $2,063,797, which
was repaid by December 31, 2007.
In
February 2008, the Company received a loan from an individual shareholder, Mr.
Xirong Xu, for the total amount of $6,216,000. The interest rate was 4.00% and
both principal and interest were due in February 2013. On September 4, 2008,
China Organic Agriculture, Inc. (the "Company") issued 18,282,353 shares,
representing approximately 25%, of its outstanding common stock, to Xirong Xu in
exchange for the surrender and cancellation of its promissory note in the
principal amount of $ 6,216,000 issued in connection with the acquisition of the
Bellisimo Vineyard in February 2008. Mr. Xirong Xu is not a relative of the
Company's former CEO, Mr. Changqing Xu.
On
September 4, 2008, the Company issued 3,326,103 shares, representing
approximately 4.5%, of its outstanding common stock, to First Capital Limited in
exchange for the surrender and cancellation of the Company’s promissory note to
First Capital Limited in the principal amount of $ 1,130,875. The indebtedness
that had been represented by this note results from amounts advanced by First
Capital on behalf of the Company to pay accounts payable.
21
Mr.
Xirong Xu and First Capital Limited are accredited investors within the meaning
of Rule 501 (a) of Regulation D under the Securities Act. The shares were issued
pursuant to exemptions from the registration requirements of the Securities Act
provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated hereunder, and in the case of Mr. Xirong Xu, Regulation S under the
Securities Act.
Item 14.
Principal Accounting Fees and Services.
During
fiscal year 2008 and fiscal year 2007, the aggregate fees which we paid to or
were billed by Morgenstern, Svoboda & Baer CPAs, PC for professional
services were as follows:
Fiscal Year Ended December 31,
2008
2007
Audit
Fees
(1) $21,000 $122,522
Audit-Related
Fees
(2) $22,500 $
32,146
All Other
Fees
(3)
*
*
__
(1) Fees
for services to perform an audit or review in accordance with generally accepted
auditing standards and services that generally only our independent registered
public accounting firm can reasonably provide, such as the audit of our
consolidated financial statements, the review of the financial statements
included in our quarterly reports on Form 10-Q and for services that are
normally
provided by independent registered public accounting firms in connection with
statutory and regulatory engagements.
(2) Fees,
if any, for assurance and related services that are traditionally performed by
our independent registered public accounting firm, such as audit attest services
not required by statute or regulation, and consultation concerning financial
accounting and reporting standards.
(3) Fees
for tax compliance. Tax compliance generally involves preparation of original
and amended tax returns, claims for refunds and tax payment planning
services.
PART
IV
Exhibit
Index
Exhibit No. | Description |
3(I).1
|
Articles
of Incorporation (1)
|
3(I).2
|
Certificate
of Amendment to Articles of Incorporation (1)
|
3(II)
|
Bylaws
(1)
|
4.1
|
Warrant
Agreement between China Organic Agriculture, Inc. and Trilogy Capital
Partners, Inc.(1)
|
10.1
|
Agreement
between ErMaPao and Jilin University (translation) (1)
|
10.2
|
Agreement
between ErMaPao and Xinmiao Grain Depot (translation)
(1)
|
10.3
|
Agreement
between ErMaPao and Wukeshu Grain Depot (translation)
(1)
|
10.4
|
Agreement
between ErMaPao and Huaxing Foods Limited (translation)
(1)
|
10.5
|
Agreement
between ErMaPao and Songyuan City Grain and Oil Company (translation)
(1)
|
10.6
|
Agreement
between ErMaPao and Changchun City Qinghai Grain and Oil Company
(translation)(1)
|
10.7
|
Agreement
between ErMaPao and Shunda Grain and Oil Company (translation)
(1)
|
10.8
|
Agreement
between ErMaPao and Tongda Grain and Oil Company (translation)
(1)
|
10.9
|
Agreement
between ErMaPao and Nanjing Suguo Supermarket (translation)
(1)
|
10.10
|
Agreement
between ErMaPao and Hualian Hypermarket (translation)
(1)
|
10.11
|
Loan
Agreement between ErMaPao and Shenzhen Dingyi Investment Consultants
Ltd. (translation) (1)
|
10.20
|
Promissory
Note dated February 25, 2008 between China Organic Agriculture, Inc. and
Mr. Xi Rong Xu (Incorporated by reference herein from Exhibit 10.20
to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2007 ("2007 Form 10-K"))
|
10.21
|
Promissory
Note Secured By Deed of Trust in the initial principal amount of
$8,515,000(Incorporated by reference herein from Exhibit 10.21 to the
Registrant's 2007 Form 10-K)
|
10.22
|
Agreements
regarding the February 29, 2008 purchase of Bellisimo Vineyard
(Incorporated by reference herein from Exhibit 10.22 to the Registrant's
2007 Form 10-K)
|
21.1
|
Subsidiaries
(2)
|
31.1 |
Certification
of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002
|
31.2 |
Certification
of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002
|
32.1 |
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2 |
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
(1)
|
Incorporated
by reference herein as an exhibit to the Registrant’s Registration
Statement on Form 10 filed on February 13,
2008.
|
(2)
|
Previously
filed as an exhibit to this Report.
|
22
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CHINA
ORGANIC AGRICULTURE, INC.
|
|||
Dated:
January 27, 2010
|
By:
|
/s/ Jinsong Li | |
Jinsong
Li
Chief
Executive Officer
(principal
executive officer)
|
23
CHINA
ORGANIC AGRICULTURE, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2008
24
TABLE
OF CONTENTS
Item
1. Report of Independent Registered Public Accounting
Firm
|
F-1 |
Item
2. Consolidated Balance Sheets
|
F-2 |
Item
3. Consolidated Statements of Operations
|
F-3 |
Item
4. Consolidated Statements of Cash Flows
|
F-4 |
Item
5. Consolidated Statements of Stockholders’ Equity
|
F-6 |
Item
6. Notes to Consolidated Financial Statements
|
F-7 |
25
Board of
Directors and Stockholders of
China
Organic Agriculture, Inc.
We have
audited the accompanying consolidated balance sheets of China Organic
Agriculture, Inc. (“Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, shareholders’ equity and cash flows for
each of the years in the two-year period ended December 31, 2008. China Organic
Agriculture, Inc.’s management is responsible for these financial statements.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, and audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but no for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinions.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Organic Agriculture, Inc. as
of December 31, 2008 and 2007 and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America.
Morgenstern,
Svoboda & Baer, CPA’s PC
Certified
Public Accountants
April 6,
2009
Except
for Note 2, as to which the date is December 2, 2009 and Note 18 and 19, as to
which the date is December 22, 2009.
F-1
CHINA
ORGANIC AGRICULTURE, INC.
CONSOLIDATED
BALANCE SHEETS
12/31/2008
|
12/31/2007
|
|||||||
(Restated)
|
||||||||
Assets
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
7,338,817
|
$
|
9,697,793
|
||||
Accounts
receivable, net
|
26,448,294
|
1,924,080
|
||||||
Inventory
|
4,492,892
|
3,176,034
|
||||||
Acquisition
deposit
|
2,617,952
|
-
|
||||||
Consideration
receivable
|
8,700,000
|
-
|
||||||
Trade
deposit
|
2,832,507
|
42,420
|
||||||
Advances
|
1,846,041
|
-
|
||||||
Other
receivables and prepayments
|
126,296
|
312,590
|
||||||
Total
Current Assets
|
54,402,799
|
15,152,917
|
||||||
Goodwill
|
1,602,134
|
-
|
||||||
Property,
plant & equipment, net
|
14,521,452
|
1,505,783
|
||||||
Mortgage
costs – net
|
143,788
|
-
|
||||||
Intangible
asset, net
|
1,056,000
|
3,304,776
|
||||||
Total
Assets
|
$
|
71,726,173
|
$
|
19,963,476
|
||||
Liabilities
and Stockholders’ Equity
|
||||||||
Current
Liabilities
|
||||||||
Mortgage
payable – current
|
$
|
198,854
|
$
|
-
|
||||
Short
term loan
|
1,170,515
|
-
|
||||||
Accounts
payable and accrued expenses
|
5,048,054
|
170,528
|
||||||
Due
to related party
|
3,630,842
|
364,865
|
||||||
Taxes
payable
|
3,335,751
|
375,667
|
||||||
Total
Current Liabilities
|
13,384,016
|
911,060
|
||||||
Mortgage
payable-Long term
|
8,161,705
|
-
|
||||||
Total
Liabilities
|
21,545,721
|
911,060
|
||||||
Minority
interest
|
4,684,435
|
-
|
||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, par value, $0.001 per share
|
||||||||
20,000,000
shares authorized, none outstanding
|
-
|
-
|
||||||
Common
stock, no par value, 1,000,000,000
|
||||||||
shares authorized, 73,157,232 and 51,548,776
|
||||||||
issued and outstanding for the period as at
|
||||||||
December 31, 2008 and December 31, 2007,
|
||||||||
respectively
|
7,648,410
|
733,704
|
||||||
Additional
paid in capital
|
597,209
|
420,525
|
||||||
Statutory
reserves
|
1,423,933
|
824,168
|
||||||
Other
comprehensive income
|
2,814,743
|
602,498
|
||||||
Retained
earnings
|
33,011,722
|
16,471,521
|
||||||
Total
Stockholders' Equity
|
45,496,017
|
19,052,416
|
||||||
Total
Liabilities and Stockholders' Equity
|
$
|
71,726,173
|
$
|
19,963,476
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-2
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEAR
ENDED DECEMBER 31,
|
||||||||
2008
|
2007
|
|||||||
(Restated)
|
||||||||
Sales
|
$
|
112,695,908
|
$
|
-
|
||||
Cost
of sales
|
(87,329,141
|
)
|
-
|
|||||
Gross
profit
|
25,366,767
|
-
|
||||||
Selling,
general and administrative expenses
|
(1,755,344
|
)
|
-
|
|||||
Income
from operations
|
23,611,423
|
-
|
||||||
Gain
on debt conversion
|
432,169
|
-
|
||||||
Net
other income
|
395,408
|
-
|
||||||
Interest
expense
|
(541,959
|
)
|
-
|
|||||
-
|
||||||||
Income
from Continuing operations before income taxes
|
23,897,041
|
-
|
||||||
Provision
for income taxes
|
(6,975,212
|
)
|
-
|
|||||
Minority
interest
|
(1,328,623
|
)
|
-
|
|||||
Net
income from Continuing operations
|
15,593,206
|
-
|
||||||
Discontinued
operations, net of tax
|
||||||||
Income from ErMaPao, net of tax
|
934,037
|
13,492,590
|
||||||
Income due to disposal of ErMaPao, net of tax
|
934,194
|
-
|
||||||
Net
income from Discontinued operations
|
1,868,231
|
13,492,590
|
||||||
Net
Income
|
$
|
17,461,437
|
$
|
13,492,590
|
||||
Basic
weighted average shares
|
58,515,437
|
46,662,749
|
||||||
Diluted
weighted average shares
|
58,515,437
|
46,730,345
|
||||||
Earnings
per share of common stock:
|
||||||||
Basic
earnings per share
|
||||||||
Income
from Continuing operations
|
$
|
0.27
|
$
|
-
|
||||
Income
from Discontinued operations
|
0.03
|
0.29
|
||||||
Total
basic earnings per share
|
$
|
0.30
|
$
|
0.29
|
||||
Diluted
earnings per share
|
||||||||
Income
from Continuing operations
|
$
|
0.27
|
$
|
-
|
||||
Income
from Discontinued operations
|
0.03
|
0.29
|
||||||
Total
diluted earnings per share
|
$
|
0.30
|
$
|
0.29
|
||||
Other
comprehensive income:
|
||||||||
Net
income
|
$
|
17,461,437
|
$
|
13,492,590
|
||||
Foreign
currency
|
||||||||
Translation adjustment
|
2,212,245
|
537,361
|
||||||
Net
comprehensive income
|
$
|
19,673,682
|
$
|
14,029,951
|
The
accompanying notes are an integral part of these financial
statements.
F-3
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEAR
ENDED DECEMBER 31,
|
||||||||
2008
|
2007
|
|||||||
(Restated)
|
||||||||
$
|
15,593,206
|
$
|
13,492,590
|
|||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Net
income from Discontinued operations
|
1,868,231
|
-
|
||||||
Minority
interest
|
1,328,623
|
-
|
||||||
Gain
on sale of subsidiary
|
(934,194
|
)
|
-
|
|||||
Gain
of debt conversion
|
(432,169
|
)
|
-
|
|||||
Stock
based compensation
|
280,100
|
420,525
|
||||||
Depreciation
and amortization
|
323,529
|
207,430
|
||||||
Effect
of changes in assets and liabilities:
|
||||||||
Accounts
receivables
|
(14,868,192
|
)
|
(1,029,630
|
)
|
||||
Inventory
|
3,015,085
|
(2,616,994
|
)
|
|||||
Trade
deposit
|
(2,641,527
|
)
|
(40,982
|
)
|
||||
Other
receivables and prepayments
|
(1,817,931
|
)
|
(302,854
|
)
|
||||
Accounts
payable and accrued expenses
|
(24,828
|
)
|
(880,005
|
)
|
||||
Taxes
payable
|
3,137,334
|
309,510
|
||||||
Net
cash provided by operating activities
|
4,827,267
|
9,559,590
|
||||||
CASH
FLOWS USED BY INVESTING ACTIVITIES
|
||||||||
Acquisition
deposits
|
(10,111,621
|
)
|
-
|
|||||
Impact
of sale of ErMaPao on cash
|
(1,057,877
|
)
|
-
|
|||||
Purchase
of property & equipment
|
(15,222,735
|
)
|
(852,041
|
)
|
||||
Net
cash used by investing activities
|
(26,392,233
|
)
|
(852,041
|
)
|
||||
CASH
FLOWS PROVIDED BY FINANCING ACTIVITIES
|
||||||||
Mortgage
payable
|
8,515,000
|
-
|
||||||
Repayment
of Mortgage payable
|
(300,104
|
)
|
-
|
|||||
Due
to related parties
|
9,283,597
|
364,865
|
||||||
Due
from related parties
|
438,884
|
-
|
||||||
Net
cash provided by Financing Activities
|
17,937,377
|
364,865
|
||||||
Effect
of exchange rate changes on cash and cash equivalents
|
1,268,613
|
309,318
|
||||||
Net
change in cash and cash equivalents
|
(2,358,976
|
)
|
9,381,732
|
|||||
Cash
and cash equivalents, beginning balance
|
9,697,793
|
316,061
|
||||||
Cash
and cash equivalents, ending balance
|
$
|
7,338,817
|
$
|
9,697,793
|
The
accompanying notes are an integral part of these financial
statements.
F-4
CHINA
ORGANIC AGRICULTURE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEAR
ENDED DECEMBER 31,
|
||||||||
2008
|
2007
|
|||||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
Cash
paid during the period for:
|
||||||||
Income
tax payments
|
$
|
3,977,228
|
-
|
|||||
Interest
payments
|
$
|
551,377
|
-
|
|||||
Non
Cash Transactions:
|
||||||||
Debt
converted to equity
|
$
|
6,216,000
|
-
|
|||||
Sale
of ErMaPao:
|
||||||||
Selling
price
|
$
|
8,700,000
|
-
|
|||||
Book
Value of ErMaPao’s Assets:
|
||||||||
Cash
|
1,057,877
|
-
|
||||||
Other
Assets
|
6,707,929
|
-
|
||||||
Total
|
$
|
7,765,806
|
-
|
|||||
Purchase
of Dalian Huiming:
|
||||||||
Fair
value of net tangible assets acquired
|
$
|
7,940,475
|
-
|
|||||
Fair
value of intangible assets
|
1,100,000
|
-
|
||||||
Fair
value of Goodwill
|
1,602,134
|
-
|
||||||
Cash
paid for acquisition
|
$
|
10,642,609
|
-
|
The
accompanying notes are an integral part of these consolidated financial
statements
F-5
FOR
THE YEAR ENDED DECEMBER 31, 2008
Common Stock
|
Additional
Paid
|
Other | ||||||||||||||||||||||||||
Number
of
Shares
|
Amount
|
In
Capital
contribution
|
Statutory
Reserves
|
Comprehensive
Income
|
Retained
Earnings
|
Total
Equity
|
||||||||||||||||||||||
Balance
December 31, 2006
|
27,448,776
|
$
|
733,304
|
$
|
$
|
824,168
|
$
|
65,137
|
$
|
2,978,931
|
$
|
4,601,540
|
||||||||||||||||
Issuance
of Shares at Merger
|
24,100,000
|
400
|
400
|
|||||||||||||||||||||||||
Foreign
currency translation adjustments
|
537,361
|
537,361
|
||||||||||||||||||||||||||
Net
Income for the year ended 12/31/07
|
13,492,590
|
13,492,590
|
||||||||||||||||||||||||||
Stock
based compensation
|
420,525
|
420,525
|
||||||||||||||||||||||||||
Balance
December 31, 2007
|
51,548,776
|
733,704
|
420,525
|
824,168
|
602,498
|
16,471,521
|
19,052,416
|
|||||||||||||||||||||
Foreign
currency translation
adjustments
|
2,212,245
|
2,212,245
|
||||||||||||||||||||||||||
Debt
conversion
|
21,608,456
|
6,914,706
|
6,914,706
|
|||||||||||||||||||||||||
Acquisition
of Huiming
|
1,304
|
502,697
|
504,001
|
|||||||||||||||||||||||||
Reserves
accrued in Huiming
|
921,236
|
(921,236
|
)
|
-
|
||||||||||||||||||||||||
Additional
PIC from Xinbin
|
20,861
|
20,861
|
||||||||||||||||||||||||||
Net
income for the year ended
12/31/2008
|
17,461,437
|
17,461,437
|
||||||||||||||||||||||||||
Disposition
of ErMaPao
|
(824,168
|
)
|
(824,168
|
)
|
||||||||||||||||||||||||
Stock
based compensation
|
154,519
|
154,519
|
||||||||||||||||||||||||||
Balance
December 31, 2008
|
73,157,232
|
$
|
7,648,410
|
$
|
597,209
|
$
|
1,423,933
|
$
|
2,814,743
|
$
|
33,011,722
|
$
|
45,496,017
|
The
accompanying notes are an integral part of these consolidated financial
statements
F-6
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
1 - ORGANIZATION
China
Organic Agriculture, Inc. (“CNOA” or “Company”) (formerly Industrial Electric
Services, Inc. or “IESI”) was incorporated on August 5, 2005, in the state of
Florida. The Company has seven subsidiaries as at December 31, 2008. China
Organic Agriculture, Ltd. (“COA”) was incorporated on August 10, 2006 under the
laws of the British Virgin Islands. Far East Wine Holding Group Ltd.
(“FEW”) was incorporated on June 10, 2008 under the laws of the British Virgin
Islands. CNOA owns 100% of COA and FEW. Ankang Agriculture (Dalian) Co., Ltd.
(“Ankang Dalian”) was founded in January 2008 under the laws of the People’s
Republic of China. It is owned 100% by Hong Kong On Glory Investments
Co., Ltd. (“HK Ankang”), which is 100% owned by COA.
On
November 28, 2008, Xinbin Manchu Autonomous County Bellisimo Ice Wine Co., Ltd.
(“Ice Wine”) was incorporated under the laws of the People’s Republic of China.
Ankang Dalian holds 60% shareholding of Ice Wine.
On
October 31, 2008, the Company completed the acquisition 100% shareholding of
Princeton International Investment Ltd. (“Princeton”), which owned 60% of the
outstanding shares of Dalian Huiming Industry Ltd. (“Dalian Huiming”). Huiming
was incorporated on July 31, 2001 under the laws of the People’s Republic of
China, and Princeton was incorporated on April 14, 2008 under the laws of Hong
Kong.
On
September 25, 2008, the Company entered into a Share Purchase Agreement with
Bothven Investments Ltd. related to the sale of its subsidiary, Jilin Songyuan
City ErMaPao Green Rice Ltd. (“ErMaPao”) for US$8.7 million. The sale was
completed on October 7, 2008 with effective date of September 30,
2008.
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation and Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of CNOA and
its wholly-owned subsidiaries. These financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and all material intercompany transactions have been eliminated in
consolidation. In the opinion of management, the accompanying consolidated
financial statements reflect the adjustments considered necessary for a fair
presentation of the Company’s financial position as of December 31, 2008 and
2007, and its financial results for the periods then ended.
On March
15, 2007, CNOA, through a reverse merger, issued 27,448,776 shares of stock in
exchange for all the outstanding shares of COA. Under accounting principles
generally accepted in the United States, the share exchange is considered to be
a capital transaction in substance, rather than a business
combination. Thus the share exchange is equivalent to the issuance of
stock by COA for the net monetary assets of CNOA, accompanied by a
recapitalization, and is accounted for as a change in capital
structure. Accordingly, the accounting for the share exchange was
identical to that resulting from a reverse acquisition, except no goodwill was
recorded. Under reverse takeover accounting, the post reverse
acquisition comparative historical financial statements of the legal acquirer,
CNOA, are those of the legal acquiree, COA, which is considered to be the
accounting acquirer, and thus represent a continuation of the financial
statements of COA. Share and per share amounts stated have been
retroactively adjusted to reflect the merger.
F-7
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Translation
Adjustment
As of
December 31, 2008 and December 31, 2007, the accounts of China Organic
Agriculture, Inc. were maintained, and its financial statements were expressed,
in Chinese Yuan Renminbi (“RMB”). Such financial statements were translated into
U.S. Dollars in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 52, “Foreign Currency Translation” (“SFAS 52”), with the RMB as the
functional currency. According to SFAS 52, all assets and liabilities
were translated at the current exchange rate, stockholders’ equity is translated
at the historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, “Reporting
Comprehensive Income,” as a component of stockholders’ equity. Transaction gains
and losses are reflected in the income statement.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires 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 the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Risks and
Uncertainties
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC's economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
disease and other natural events that could impact rice cultivation, limited
operating history, foreign currency exchange rates and the volatility of public
markets.
Restatement
and Reclassification
The
Company has restated its consolidated financial statements of the period ended
December 31, 2008 to correct the following errors in the consolidated financial
statements previously filed:
The
Company incorrectly recorded a pre-tax and after-tax gain on debt conversion of
$3,015,387 in its audited consolidated statement of income for the year ended
December 31, 2008, initially included in its Annual Report on Form 10-K for the
year ended December 31, 2008 (“2008 Form 10-K”). The debt was
incurred by Dalian Huiming Industry Ltd. prior to the Company’s acquisition of
60% of the outstanding shares of Dalian Huiming and forgiven in December
2008. Based upon a review of its records and the literature
applicable to the transactions, the Company determined that the debt forgiveness
should have been considered as a reduction of the liabilities acquired at the
date of the acquisition. As a result, Income Before Income Taxes From
Continuing Operations and Net Income for the year ended December 31, 2008 should
have been reported as $3,015,387 less than originally reported. As a
result of this error, the Company’s Retained earnings and Stockholders’ equity
balances as of December 31, 2008 were overstated by $3,015,387.
Correspondingly the Goodwill originally recorded at the date of acquisition of
the shares in Dalian Huiming was overstated by $3,015,387. In addition,
the Company has determined that certain amounts in the consolidated Cash Flow
statements included in the 2008 Form 10-K related to the foregoing adjustment
were misstated.
F-8
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In
addition to the foregoing, the Company has determined that in computing its
earnings per share for the year ended December 31, 2008, it incorrectly
concluded that certain outstanding warrants were dilutive when in fact they were
not. As a consequence, the Company stated its diluted weighted
average share count as being 59,764,345 when it should have been 58,515,437, and
thus understated its total diluted earnings per share from continuing operations
and discontinued operations by one cent for the year ended December 31,
2008.
Certain
amounts in the 2007 financial statements were reclassified to conform to the
2008 presentation.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be
sought.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be
disclosed.
Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
Cash and
Cash Equivalents
Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Accounts
Receivable
The
Company maintains reserves it judges are required for potential credit losses on
accounts receivable. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Terms of the sales vary. Reserves are
recorded primarily on a specific identification basis. There were
reserves for doubtful accounts in the amounts of $12,143 and $0 as of December
31, 2008 and December 31, 2007, respectively.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. Management compares the cost of inventories with the market value and
allowances are made for writing down their inventories to market value, if
lower. As of December 31, 2008 and December 31, 2007 inventory consisted of
finished goods valued at $4,492,892 and $1,212,104 respectively. Raw material
inventories as of December 31, 2008 and December 31, 2007 are valued at $0 and
$1,963,930, respectively. Expenses that are included in inventory and in cost of
sales include the cost of purchased product, fees paid to the contractors, and
any processing fees and packaging costs that may have been incurred in the
preparation of the raw rice into the finished product.
F-9
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property,
Plant & Equipment
Property,
plant and equipment is stated at cost. Expenditures for maintenance and repairs
are charged to earnings as incurred while additions, renewals and betterments
are capitalized. When property, plant and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation of Property, plant and equipment is provided using the
straight-line method for substantially all assets with estimated lives
of:
Real
property
|
20-40
years
|
Machinery
& equipment
|
5-10
years
|
Transportation
equipment
|
5
years
|
Goodwill
Goodwill
represents the excess cost of a business acquisition over the fair value of the
net assets acquired. In accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets (“SFAS 142”), indefinite-life identifiable intangible
assets and goodwill are not amortized. Under the provisions of SFAS
142, the Company is required to perform an annual impairment test of our
goodwill. Goodwill impairment is determined using a two-step
process. The first step of the goodwill impairment test is used to
identify potential impairment by comparing the fair value of a reporting unit,
which we define as our business segments, with its net book value or carrying
amount including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired and the second step of the impairment test is
unnecessary. If the carrying amount of a reporting unit exceeds its
fair value, the second step of the goodwill impairment test compares the implied
fair value of the reporting unit’s goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit’s goodwill
exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess. The implied fair value
of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination. The fair value of the reporting
unit is allocated to all of the assets and liabilities of that unit including
any unrecognized intangible assets as if the reporting unit had been acquired in
a business combination and the fair value of the reporting unit was the purchase
price paid to acquire the reporting unit. See Note 12, Acquisition,
for additional information regarding goodwill.
Intangible
Assets
In
October 2005, the Company purchased land rights which expire in
2032. These intangible assets pertained to ErMaPao and were amortized
using the straight-line method over the term of the land rights. These rights
were transferred to new ownership with the sale of ErMaPao.
As the
result of the acquisition of Dalian Huiming as discussed in Note 12, an
intangible asset pertaining to Dalian Huiming’s existing customer relationships
was recognized and valued at $1,100,000. We evaluate the
recoverability of intangible assets periodically, taking into account events or
circumstances that could warrant revised estimates of useful lives or that
indicate that impairment exists. All of these intangible assets are subject to
amortization. No impairments of intangible assets have been identified during
any of the periods presented.
F-10
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived
Assets
The
Company has adopted SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company
periodically evaluates the carrying value of long-lived assets to be held and
used in accordance with SFAS 144. SFAS 144 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. Based on its review, the Company believes that, as of
December 31, 2008 and 2007, there were no significant impairments of its
long-lived assets.
Fair
Value of Financial Instruments
SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires that the
Company disclose estimated fair values of financial instruments. The carrying
amounts reported in the statements of financial position for current assets and
current liabilities that qualify as financial instruments are a reasonable
estimate of fair value.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin No. 104, “Revenue Recognition.” Revenue comprises the fair
value of the consideration received or receivable for the sale of goods and
services in the ordinary course of the Company’s activities. Revenue is shown
net of value-added tax, returns, rebates and discounts. Revenue from the sale of
goods is recognized upon the transfer of risks and rewards of ownership, which
generally coincides with the time when the goods are delivered to customers and
title has passed. The Company has no post-shipment obligations, price
protection, or “bill and hold” arrangements. The Company’s products are not
returnable. As of December 31, 2008 and December 31, 2007, there was no unearned
revenue recorded
Other
Income
Other
income for the year ended December 31, 2008 includes $500,000 based on an
agreement between the Company and Red Wine Saga Company, Ltd. (“Red Wine”)
effective October 1, 2008. In this agreement, the Company gave Red
Wine the authority to sell the Bellisimo brand red wine in Asia under the
Bellisimo brand name. The agreement extends from October 1, 2008 through
September 30, 2011 with. As discussed in Note 19, on June 3, 2009 the
agreement was amended to eliminate the quarterly installments until such time as
the Company begins to delivered wine for sale under the Bellisimo
brand.
Income
Taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. As of December 31, 2008 and December 2007, there were
no differences between the tax bases of the Company’s assets and liabilities and
their financial reported amounts.
F-11
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In July
2006, the FASB released FASB interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of SFAS No. 109,” (“FIN 48”). FIN
48 clarifies the accounting and reporting for uncertainties in income tax
law. This interpretation prescribes a comprehensive model for the
financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income tax
returns. This statement is effective for fiscal years beginning after
December 15, 2006. As a result of implementing FIN 48, there have
been no adjustments to the Company’s financial statements.
Basic and
Diluted Earnings per Share
Earnings
per share are calculated in accordance with the SFAS No. 128, “Earnings per
Share” (“SFAS 128”). The basic earnings per share are based upon the weighted
average number of common shares outstanding. Dilutive earnings per share are
based on the weighted average shares of the common stock outstanding adjusted
for the impact of potentially dilutive securities outstanding. The
dilutive impact of warrants outstanding is calculated using the treasury stock
method, which treats the warrants as if they were exercised at the date of
grant, adjusted for common stock assumed to be repurchased with the proceeds
realized upon the exercise of the warrants. The warrants outstanding for the
year ended December 31, 2008 were anti-dilutive and thus were not included in
the computation of earnings per share for that period.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are based upon the local currency. As a result, amounts
related to assets and liabilities reported on the statement of cash flows will
not necessarily agree with changes in the corresponding balances on the balance
sheet.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company controls credit risk related
to accounts receivable through credit approvals, credit limits and monitoring
procedures. The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk, establishes an
allowance, if required, for uncollectible accounts. As a consequence, the
Company believes that its accounts receivable credit risk exposure beyond such
allowance is limited.
Segment
Reporting
SFAS No.
131, “Disclosure about Segments of an Enterprise and Related Information,”
requires use of the management approach model for segment reporting. The
management approach model is based on how a company's management organizes
segments within the Company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. Based on this model, the Company has two
segments. Agriculture products comprise the agriculture products
trading segment and wine production is the segment that produces grapes to be
converted into wine. The ErMaPao rice growing and sales segment is
now classified as Discontinued Operation and as such is not reflected in the
2008 table, and since that was the Company’s sole operating unit in 2007, no
2007 segment report is presented.
F-12
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Year
ended December 31, 2008
|
||||||||||||||||
Agricultural
products
|
Wine
production
|
Others
(1)
|
Total
|
|||||||||||||
Sales,
net
|
$
|
112,695,908
|
-
|
-
|
112,695,908
|
|||||||||||
Cost
of sales
|
87,329,141
|
-
|
-
|
87,329,141
|
||||||||||||
Gross
Profit
|
25,366,767
|
-
|
-
|
25,366,767
|
||||||||||||
Other
operation income
|
-
|
585,666
|
-
|
585,666
|
||||||||||||
Segment
profit (loss)
|
24,900,541
|
(954,232
|
)
|
(49,268
|
)
|
23,897,041
|
||||||||||
Depreciation
and amortization
|
47,163
|
167,710
|
-
|
214,873
|
||||||||||||
Total
assets
|
56,385,100
|
15,341,073
|
-
|
71,726,173
|
||||||||||||
Expenditures
for long term assets
|
11,718,460
|
14,673,773
|
-
|
26,392,233
|
||||||||||||
Goodwill
|
$
|
1,602,134
|
-
|
-
|
1,602,134
|
(1)
|
Others
include corporate expenses such as the amortization of warrant
expense;
|
As
ErMaPao was the Company’s only operating segment in 2007, and it is now
classified as Discontinued Operation, no segment table for 2007 is
presented
F-13
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements
In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115.” This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This
Statement is expected to expand the use of fair value measurement, which is
consistent with the Board’s long-term measurement objectives for accounting for
financial instruments. This Statement is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007. The pronouncement has no effect on the Company’s financial
statements.
In
December 2007, the FASB issued SFAS No. 160, "Minority Interests in Consolidated
Financial Statements" ("SFAS 160"). This Statement amends ARB 51 to establish
accounting and reporting standards for the minority interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a minority interest
in a subsidiary is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements. SFAS 160 is
effective for the Company's fiscal year beginning January 1, 2009. Management is
currently evaluating the effect of this pronouncement on financial
statements.
In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), which is effective January 1,
2009. SFAS 161 requires enhanced disclosures about derivative instruments and
hedging activities to allow for a better understanding of their effects on an
entity’s financial position, financial performance, and cash flows. Among other
things, SFAS 161 requires disclosures of the fair values of derivative
instruments and associated gains and losses in a tabular formant. SFAS 161 is
not currently applicable to the Company since the Company does not have
derivative instruments or hedging activity.
On May 8,
2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (“SFAS 162”), which will provide framework for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities. With the issuance of SFAS 162, the GAAP hierarchy for
nongovernmental entities will move from auditing literature to accounting
literature. The Company is currently assessing the impact of SFAS 162 on
its financial position and results of operations.
In
June 2008, the FASB ratified the consensus reached on Emerging Issues Task
Force (“EITF”) Issue No. 07-05, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF No. 07-05”).
EITF No. 07-05 clarifies the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock, which would qualify as a
scope exception under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. EITF No. 07-05 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Based
on the Company’s evaluation of this issue, the adoption of this accounting
requirement has no effect on the Company’s financial statements.
F-14
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
3 – ACQUISITION DEPOSITS
The
Company has deposited approximately $2,617,952 with the Huanyatong Investment
Co., Ltd, (“Huanyatong”) in anticipation of further investment and acquisition
activity.
Note
4 – CONSIDERATION RECEIVABLE
Effective
September 30, 2008, the Company sold all of its shares of its subsidiary, Jilin
Songyuan City ErMaPao Green Rice Limited to Bothven Investments Limited
("Bothven"), for a non-interest bearing note receivable of $8,700,000. See Note
19 for discussion regarding the subsequent amendment and payments regarding this
note receivable.
NOTE
5 -- TRADE DEPOSIT AND ADVANCES
Trade
deposits represents amounts held by suppliers as deposits. As of December
31, 2008 and 2007 the Company had $2,832,507 and $42,420 respectively, recorded
as trade deposits.
The
Company has entered into a co-operation agreement with two unrelated
companies to assist those companies in their business development by
consulting as to their business operations and providing working capital
funding. As of December 31, 2008 and 2007, the Company has advanced these
companies $1,846,041 and $0, respectively.
Note
6– PROPERTY, PLANT & EQUIPMENT
As of
December 31, 2008 and December 31, 2007, Property, plant & equipment
consisted of the following:
12/31/2008
|
12/31/2007
|
|||||||
Construction
in progress
|
$
|
-
|
$
|
793,557
|
||||
Land
|
7,040,992
|
-
|
||||||
Real
property
|
7,489,233
|
579,989
|
||||||
Machinery
& equipment
|
155,850
|
285,959
|
||||||
Transportation
equipment
|
-
|
61,302
|
||||||
Total
|
14,686,075
|
1,720,807
|
||||||
Accumulated
depreciation
|
(164,623
|
)
|
(215,024
|
)
|
||||
Net
book value
|
$
|
14,521,452
|
$
|
1,505,783
|
F-15
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
6– PROPERTY, PLANT & EQUIPMENT (CONTINUED)
During
the years ending December 31, 2008 and December 31, 2007, depreciation expense
was $164,623 and $68,986, respectively. These 2008 and 2007 expenses included
$55,864 and $68,986, respectively, of costs which pertain to Discontinued
Operations.
On
February 29, 2008, the Company purchased the assets of the Bellisimo Vineyard, a
153-acre operating vineyard located in Sonoma County, California, for
$14,750,000. This purchase price was allocated to the following asset
categories:
Real
property
|
$
|
7,489,233
|
||
Land
|
7,040,992
|
|||
Machinery,
equipment & others
|
32,595
|
|||
Sub-total
|
$
|
14,562,820
|
||
Agency
expenses
|
187,180
|
|||
Total
|
$
|
14,750,000
|
Pursuant
to the criteria as set forth in EITF 98-3, Paragraph 6 and Article 11-01 of
Regulation S-X, Paragraph (d) (1) & (d) (2), the Company has determined to
treat this purchase as an acquisition of real estate.
F-16
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
7 – INTANGIBLE ASSETS
a)
|
Land
use rights
|
As of
December 31, 2008 and December 31, 2007, land use rights consisted of the
following:
12/31/2008
|
12/31/2007
|
|||||||
Purchased
land rights
|
$
|
-
|
$
|
3,613,293
|
||||
Accumulated amortization
|
-
|
(308,517
|
)
|
|||||
|
||||||||
Intangible
assets
|
$
|
-
|
$
|
3,304,776
|
The Land
use rights was included in the assets sold as part of the sale of ErMaPao, and
thus is not contained in the Company’s balance sheet as of December 31,
2008. The 2008 and 2007 expenses included $114,906 and $139,444 of costs
which pertain to Discontinued Operations.
b)
|
Identified
intangible assets
|
As of
December 31, 2008 and December 31, 2007, intangible assets pertaining to the
valuation attributed to the customer relationships, acquired as part of the
acquisition of Dalian Huiming, are as following:
12/31/2008
|
12/31/2007
|
|||||||
Customer
relationships
|
$
|
1,100,000
|
$
|
-
|
||||
Accumulated
amortization
|
(44,000
|
)
|
-
|
|||||
Intangible
assets
|
$
|
1,056,000
|
$
|
-
|
During
the years ending December 31, 2008 and December 31, 2007, amortization expense
was $44,000 and $0, respectively.
The
projected future amortization is as following:
2009
|
$176,000 | |||
2010
|
$176,000 | |||
2011
|
$176,000 | |||
2012
|
$176,000 | |||
2013
|
$176,000 | |||
Thereafter
|
$176,000 |
F-17
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
8 - COMPENSATED ABSENCES
Regulation
45 of local labor law entitles employees to annual vacation leave after one year
of service. In general, all leave must be utilized annually, with proper
notification. Any unutilized leave is cancelled.
Note
9 – DUE TO RELATED PARTIES
The
Company has become indebted to a shareholder for advances the shareholder made
to third parties on behalf of the Company. As of December 31, 2008 and December
31, 2007 the Company owed $830,842 and $364,865 respectively to such
shareholder. The amount is also evidenced by a non-interest bearing promissory
note payable upon demand.
As of
December 31, 2008, the Company owed $2,800,000 to one related party, Shenzhen
Kaibite Network Technology Co., Ltd. which is a subsidiary of one of the
Company’s shareholders (First Capital Limited). The amount is evidenced by a
non-interest bearing promissory note payable upon demand.
On
February 25, 2008, the Company obtained funding from a shareholder (Mr. Xirong
Xu) in the amount of $6,216,000 connected with the acquisition of the Bellisimo
Vineyard on February 29 2008. The amount is also evidenced by a non-interest
bearing promissory note payable upon demand. On September 4, 2008, the Company
issued 18,282,353 shares, representing approximately 25 %, of its outstanding
common stock, to Mr. Xirong Xu in exchange for the surrender and cancellation of
this promissory note in the principal amount. The gain on debt
conversion is discussed in Note 16.
On
September 4, 2008, the Company issued 3,326,103 shares, representing
approximately 4.5%, of its outstanding common stock, to First Capital Limited in
exchange for the surrender and cancellation of its promissory note in the
principal amount of $ 1,130,875. The indebtedness evidenced by this note
represents amounts advanced by First Capital Limited to pay accounts payable on
behalf of the Company. The gain on debt conversion is discussed in Note
16.
F-18
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
10 – MORTGAGE PAYABLE
As
discussed in Note 6, in February 2008 the Company purchased the assets of the
Bellisimo Vineyard. This was in part financed by a mortgage funded by
Trans America Life insurance Company in the amount of $8,515,000. This mortgage
is amortized monthly over a 20 year term, with an interest rate initially set at
7.70%, with rate adjustments every four years. The long-term and short-term
amounts pertaining to this mortgage as of December 31, 2008 were $8,161,705 and
$198,854, respectively.
Projected
future payments are as follows:
2009
|
$198,854 | |||
2010
|
$214,717 | |||
2011
|
$231,847 | |||
2012
|
$250,343 | |||
2013
|
$270,314 | |||
Thereafter
|
$7,194,484 |
Note
11 - INCOME TAXES
The
Company is subject to the Income Tax Laws of the PRC. The tax provisions of
$6,975,212 for the year ended December 31 2008 pertain to PRC taxes. Pursuant to
the PRC Income Tax Laws, the Enterprise Income Tax (EIT) is now at a statutory
rate of 25%. Until December 31, 2007, the Company enjoyed an exemption from this
tax because of its involvement in agricultural production and in the PRC Urban
Labor and Employment Services Program. As of January 1, 2008, a new tax policy
became generally applicable to Chinese enterprises, and hence the Company became
liable for income tax on Chinese based income at 25%. The Company’s effective
2008 tax rate is higher than the statutory rate as expenses incurred in the US,
including those pertaining to the Bellisimo Vineyard, are not deductible for PRC
tax purposes, and debt relief of 3 million dollars from controlling shareholder
is taxable for Dalian Huiming under China Tax Law, but were not taken as gain in
the consolidated financial report.
Due to
the uncertainty surrounding the realization of the favorable U.S. tax attributes
in future tax returns; we continue to record a full valuation allowance against
our otherwise recognizable U.S. net deferred tax assets as of December 31,
2008.
F-19
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
12 – ACQUISITION
In
October 2008, the Company acquired 60% of the outstanding shares of Dalian
Huiming Industry Ltd. (“Dalian Huiming”) for a payment equivalent to
$10,642,609. With this acquisition the Company has focused on agriculture
products trading. The net purchase price reflects the valuation of net
identifiable assets and Goodwill acquired, less the noncontrolling interest that
continues to be held by a selling shareholder.
The
acquisition had been accounted for as a purchase business combination and the
results of operations from the acquisition date have been included in the
Company’s consolidated financial statements since October 1, 2008 in accordance
with GAAP. The allocation of the purchase price was as follows:
Cash
acquired
|
$
|
3,148,940
|
||
Accounts
receivable
|
8,806,935
|
|||
Inventory
|
5,419,932
|
|||
Loans
to related parties
|
438,884
|
|||
Property
plant & equipment, and Other assets
|
12,274
|
|||
Goodwill
|
1,602,134
|
|||
Identifiable
intangible asset- Customer relationships
|
1,100,000
|
|||
Total
Assets Acquired
|
20,529,099
|
|||
Less
Liabilities Assumed:
|
||||
Accounts
& Income taxes payable
|
4,100,530
|
|||
Loans
from related parties
|
1,329,255
|
|||
Notes
payable
|
1,173,313
|
|||
Noncontrolling
interest
|
3,283,392
|
|||
Total
Liabilities Assumed
|
9,886,490
|
|||
Net
Purchase
Price
|
$
|
10,642,609
|
The
excess of purchase price over the identifiable assets acquired and liabilities
assumed of $1,602,134 was recorded as Goodwill. Identifiable
intangible assets consisted of the value attributed to the Dalian Huiming’s
customer relationships of $1,100,000.
The
Goodwill resulted from this acquisition was due to the value attributed to
Dalian Huiming by the selling shareholders based on Dalian Huiming’s recent
levels and growth of net income. The computation of the acquired
Goodwill was as per the following:
Net
Consideration
|
$
|
10,642,609
|
||||||
Fair
value of net tangible assets acquired
|
7,940,475
|
|||||||
Fair
value of Identified intangible asset -Customer relationship (Note
7)
|
1,100,000
|
|||||||
9,040,475
|
||||||||
Goodwill
|
$
|
1,602,134
|
Goodwill
is not expected to be deductible for tax purposes in the PRC, the only
jurisdiction in which the Company is paying and expects to pay income
taxes.
F-20
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
12 – ACQUISITION (Continued)
As a
result of the completion of this acquisition in October 2008, the Company has
consolidated Dalian Huiming in its financial statements since October 1, 2008.
During 2008, Dalian Huiming contributed to the Company as
following:
October
1, 2008 to
December
31 2008
|
||||
Sales
|
$
|
14,354,843
|
||
Cost
of sales
|
(12,619,527
|
)
|
||
Gross
Profit
|
1,735,316
|
|||
G&A,
selling expenses and other operating expenses
|
(324,030
|
)
|
||
Profit
before income tax
|
1,411,286
|
|||
Income
tax *
|
(1,102,868
|
)
|
||
Net
Income
|
308,418
|
|||
Less
income attributed to noncontrolling interest
|
(123,367
|
)
|
||
Net
Income attributable to CNOA
|
$
|
185,051
|
||
Basic
and diluted weighted average shares
|
58,515,437
|
|||
Basic
and diluted Earnings Per Share
|
$
|
0.0032
|
* There was $ 753,847 of PRC
income taxes paid related to the debt relief from the original controlling
shareholder
F-21
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
13 - COMMITMENTS
The
Company leases facilities and equipment under operating leases that have
expired, but continue on a month to month basis. Rental expenses were
$41,460 for the year ended December 31, 2008. The Company has no future minimum
obligations as of December 31, 2008.
Note
14 - STATUTORY RESERVE
Upon
approval from the Board of Directors of Dalian Huiming, the statutory reserve
can be used to offset accumulated losses or to increase capital. As of December
31, 2008, the Company had allocated $1,423,933 to these non-distributable
reserve funds. Due to the sale of ErMaPao the Company also reduced the statutory
reserves by $824,168, the amount that pertained to the statutory reserve amount
of ErMaPao. As of December 31, 2007, the statutory reserve fund had exceeded 50%
of registered capital and thus no further allocation is required.
Note
15 – CONCENTRATIONS
The
Company had two customers who accounted for more than 80% of revenues during the
year ended December 31, 2008. Two customers accounted for more than 43% of the
Company’s accounts receivable at December 31, 2008.
Five
vendors accounted for almost 82% of accounts payable at December 31, 2008. Three
vendors accounted for almost 89% of the Company's purchases for the period
ending December 31, 2008.
Note
16 – GAIN ON DEBT CONVERSION
On
September 4, 2008, the Company issued 18,282,353 shares, representing
approximately 25%, of its outstanding common stock, to a shareholder of the
Company (Mr. Xirong Xu) in exchange for the surrender and cancellation of his
promissory note in the principal amount of $6,216,000 issued in connection with
the acquisition of the Bellisimo Vineyard on February 29, 2008. The conversion
rate for the transaction, $0.32 per share, represents a slight premium to the 30
day average share price of the common stock, and thus resulted in a gain as
follows:
Shares
and rate
|
||||||||
Carrying
value of the note
|
$
|
6,216,000
|
||||||
Common
stock-shares issued
|
18,282,353
|
|||||||
Common
stock-conversion rate
|
$
|
0.32
|
5,850,353
|
|||||
Gain
on debt conversion
|
$
|
365,647
|
On
September 4, 2008, the Company issued 3,326,103 shares, representing
approximately 4.5%, of its outstanding common stock, to a shareholder of the
Company (First Capital Limited) in exchange for the surrender and cancellation
of its promissory note in the principal amount of $1,130,875. The indebtedness
evidenced by this note represents amounts advanced to pay accounts payable. The
conversion rate for the transaction, $0.32 per share, represents a slight
premium to the 30 day average share price of the common stock, and thus resulted
in a gain as follows:
F-22
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
16 – GAIN ON DEBT CONVERSION (Continued)
Shares
and rate
|
||||||||
Carrying
value of the note
|
$
|
1,130,875
|
||||||
Common
stock-shares Issued
|
3,326,103
|
|||||||
Common
stock-conversion rate
|
$
|
0.32
|
1,064,353
|
|||||
Gain
on debt conversion
|
$
|
66,522
|
Mr.
Xirong Xu and First Capital Limited are accredited investors within the meaning
of Rule 501 (a) of Regulation D under the Securities Act. The shares were issued
pursuant to exemptions from the registration requirements of the Securities Act
provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder, and in the case of Mr. Xirong Xu, Regulation S under the
Securities Act.
Note
17 – STOCK WARRANTS, OPTIONS AND COMPENSATION
On
February 6, 2008, the Company committed to issue warrants to purchase 1,000,000
shares of the Company’s stock at a price of $1.39 to its investor relations firm
as part of a consulting agreement. The warrants were valued using the
Black-Scholes option-pricing model which assumed 135% volatility, a term of the
warrant of three years, a risk free rate of 3% and a dividend yield of 0%. These
warrants can be exercised through the third anniversary of the date of the
Agreement, and vest in 12 quarterly installments in equal amounts beginning in
the second quarter of 2008. Based on the EITF 96-18, this consulting expense for
these services is recognized on a straight line basis over the one year period
of the related consulting contract, and the related expense for the year ended
December 31, 2008 is $280,100.
Warrants
Outstanding as of December 31, 2008:
Total
Warrants
|
Exercise
Price ($)
|
Date
of Expiration
|
|||||||
Outstanding,
December 31, 2007
|
350,000
|
$
|
1.50
|
April-09
|
|||||
Granted
on February 6, 2008
|
1,000,000
|
1.39
|
February-11
|
||||||
Exercised
in 2007
|
-
|
||||||||
Outstanding,
December 31, 2008
|
1,350,000
|
$
|
1.39-$1.50
|
Note
18 – DISCONTINUED OPERATIONS
On
September 25, 2008, the Company entered into a Stock Transfer Agreement with
Bothven Investments Limited ("Bothven"), pursuant to which the Company agreed to
sell to Bothven all of the shares of its subsidiary, Jilin Songyuan City ErMaPao
Green Rice Limited, for a non-interest bearing note receivable from
Bothven in the amount of $8,700,000, as discussed in Note 4. The sale was
completed on October 7, 2008, with an effective date of September 30, 2008. See
Note 19 for the amended payment terms.
F-23
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
18 – DISCONTINUED OPERATIONS(Continued)
The gain
on the sale of ErMaPao was as follows:
Consideration
|
$
|
8,700,000
|
||
Net
book value of ErMaPao
|
(7,765,806
|
)
|
||
Gain
on disposal
|
$
|
934,194
|
The
following table summarized the operating results of the Discontinued Operations
for the years ended December 31, 2008 and 2007 respectively:
2008
|
2007
|
|||||||
Sales
|
$
|
4,536,142
|
$
|
44,500,003
|
||||
Cost
of sales
|
(2,977,670
|
)
|
(29,452,694
|
)
|
||||
Gross
profit
|
1,558,472
|
15,047,309
|
||||||
Operating
expenses
|
(314,713
|
)
|
(1,554,719
|
)
|
||||
Income
from discontinued operations before income tax
|
1,243,759
|
13,492,590
|
||||||
Income
tax
|
(309,722
|
)
|
-
|
|||||
Net
Income
|
$
|
934,037
|
$
|
13,492,590
|
The
Company reached the decision to sell ErMaPao based on the following
factors:
|
·
|
ErMaPao’s
sale revenue had dropped dramatically in the first half year of
2008.
|
|
·
|
There
was limited room to expand the green agriculture business in the area
where ErMaPao is located.
|
|
·
|
Until
December 31, 2007, the Company enjoyed an exemption from income tax
because of its involvement in agricultural production and in the PRC Urban
Labor and Employment Services Program. As of January 1, 2008, a new tax
policy became generally applicable to Chinese enterprises, and thus the
Company became liable for income taxes at the 25%
rate.
|
|
·
|
Pricing
competition among local growers was adversely impacting the gross
margins.
|
|
·
|
Increasing
transportation costs.
|
Per FASB
144, ErMaPao is presented as Discontinued Operations in the Statements of
Operations and Cash Flows.
Note
19 – SUBSEQUENT EVENTS
On March
18, 2009, Bothven signed the Extension Payment Agreement with the Company
wherein it was agreed that Bothven will pay the $8,700,000 due resulting from
its purchase of ErMaPao in three installments of 30% in July 2009, 30% in
September 2009 and 40% in October 2009. As of November 30, 2009, the Company
received entire amount due of $8,700,000 on the sale of ErMaPao.
On June
3rd 2009 the licensing agreement between Red Wine Saga Company, Ltd. and Far
East Wine Company Ltd was amended to eliminate the quarterly installments until
such time as the Company begins to deliver wine for sale under the Bellisimo
brand.
F-24
CHINA
ORGANIC AGRICULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
19 – SUBSEQUENT EVENTS (Continued)
As of
December 31, 2008, the Company owed $2,800,000 to one related party, Shenzhen
Kaibite Network Technology Co., Ltd. which is a subsidiary of one of the
Company’s shareholders (First Capital Limited). The amount is evidenced by a
non-interest bearing promissory note payable upon demand and was paid in second
quarter of 2009.
On December 21, 2009, China Organic Agriculture, Inc. (the “Company”),
through Ankang Agriculture Co., Ltd., an indirect wholly owned
subsidiary, entered into a stock purchase agreement to acquire 1,800,000
shares, representing approximately 60% of the capital stock, of Changbai
Eco-Beverage Co., Ltd. (“Changbai”) from Mr. Hongjun Ma for $10,250,403
(70 Million RMB).
F-25
DALIAN
HUIMING INDUSTRY LTD.
FINANCIAL
STATEMENTS
SEPTEMBER
30, 2008
F-26
TABLE
OF CONTENTS
Report of Independent Registered Public Accounting
Firm
|
F-28
|
Balance Sheets
|
F-29
|
Statements of Operations
|
F-30
|
Statements of Cash Flows
|
F-31
|
Statements of
Stockholders’ Equity
|
F-32
|
Notes to Financial
Statements
|
F-33
- F-42
|
F-27
MORGENSTERN,
SVOBODA & BAER, CPA's, P.C.
CERTIFIED
PUBLIC ACCOUNTANTS
40
Exchange Place, Suite 1820
New York,
NY 10005
TEL:
(212) 925-9490
FAX:
(212) 226-9134
E-MAIL:
MSBCPAS@GMAIL.COM
Report of
Independent Registered Public Accounting Firm
Board of
Directors and Stockholders of
Dalian
Huiming Industry Ltd.
We have
reviewed the accompanying balance sheet of Dalian Huiming Industry Ltd. as of
September 30, 2008, and the statement of income for the nine months then ended,
and the statement of cash flows and shareholders' equity for the nine months
then ended. These financial statements are the responsibility of the Company's
management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on
our reviews, we are not aware of any material modifications that should be made
to the accompanying interim financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
Morgenstern,
Svoboda & Baer CPA's P.C.
Certified
Public Accountants
New York,
N.Y.
October
31, 2008
F-28
DALIAN
HUIMING INDUSTRY LTD.
|
||||||||
9/30/2008
|
12/31/2007
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 3,148,940 | $ | 34,828 | ||||
Accounts
receivable, net
|
8,806,935 | 8,608,600 | ||||||
Other
receivable
|
8,213 | 389,427 | ||||||
Due
from related parties
|
438,884 | - | ||||||
Inventory
|
5,419,932 | 5,770,841 | ||||||
Trade
deposits
|
- | 988,484 | ||||||
Total
Current Assets
|
17,822,904 | 15,792,180 | ||||||
Property
& equipment, net
|
4,061 | 1,104 | ||||||
Total
Assets
|
$ | 17,826,965 | $ | 15,793,284 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Notes
payable
|
$ | 1,173,313 | $ | 1,165,182 | ||||
Accounts
payable and accrued expenses
|
3,186,291 | 5,017,807 | ||||||
Customer
deposits
|
- | 1,457,807 | ||||||
Income
tax payable
|
411,542 | 202,474 | ||||||
Due
to related parties
|
4,344,642 | 2,016,196 | ||||||
Other
payables
|
- | 468,814 | ||||||
Total
Current Liabilities
|
9,115,788 | 10,328,280 | ||||||
Stockholders'
Equity
|
||||||||
Registered
capital
|
1,865,040 | 1,865,040 | ||||||
Statutory
reserve
|
502,697 | 502,697 | ||||||
Other
comprehensive income
|
808,660 | 329,039 | ||||||
Retained
earnings
|
5,534,780 | 2,768,228 | ||||||
Total
Stockholders' Equity
|
8,711,177 | 5,465,004 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 17,826,965 | $ | 15,793,284 |
The
accompanying notes are an integral part of these financial
statements.
F-29
DALIAN
HUIMING INDUSTRY LTD.
|
||||||||
FOR
THE NINE MONTHS ENDING SEPTEMBER 30,
|
||||||||
2008
|
2007
|
|||||||
Sales,
net
|
$ | 33,884,929 | $ | 30,538,725 | ||||
Cost
of sales
|
29,548,411 | 26,174,640 | ||||||
Gross
profit
|
4,336,518 | 4,364,085 | ||||||
General
and administrative expenses
|
506,277 | 771,478 | ||||||
Income
from operations
|
3,830,241 | 3,592,607 | ||||||
Other
(Income) Expense
|
||||||||
Interest
(income)
|
(25,511 | ) | (2,723 | ) | ||||
Interest
expense
|
136,819 | 260,447 | ||||||
Other
expense
|
30,197 | 15,663 | ||||||
Total
Other (Income) Expense
|
141,505 | 273,387 | ||||||
Income
before income taxes
|
3,688,736 | 3,319,220 | ||||||
Provision
for income taxes
|
922,184 | 1,095,343 | ||||||
Net
income
|
$ | 2,766,552 | $ | 2,223,878 | ||||
Statement
of Comprehensive Income
|
||||||||
Net
income
|
$ | 2,766,552 | 2,223,878 | |||||
Foreign
currency translation adjustment
|
479,621 | 234,776 | ||||||
Comprehensive
income
|
$ | 3,246,173 | $ | 2,458,654 |
The
accompanying notes are an integral part of these financial
statements.
F-30
DALIAN
HUIMING INDUSTRY LTD.
|
||||||||
STATEMENTS
OF CASH FLOWS (Unaudited)
|
||||||||
FOR
THE NINE MONTHS ENDING SEPTEMBER 30,
|
||||||||
2008
|
2007
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
Income
|
$ | 2,766,552 | $ | 2,223,878 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
|
738 | 770 | ||||||
Provision
for bad debts
|
(26,467 | ) | (7,091 | ) | ||||
Accounts
receivables
|
(823,846 | ) | 4,494,621 | |||||
Inventory
|
728,890 | 979,890 | ||||||
Trade
deposits
|
1,021,864 | - | ||||||
Other
receivable and advances
|
(7,936 | ) | 1,749,535 | |||||
Due
from related parties
|
(6,773 | ) | - | |||||
Accounts
payable and accrued expenses
|
(788,742 | ) | (4,394,745 | ) | ||||
Customer
deposits
|
(1,507,036 | ) | - | |||||
Due
to related parties
|
2,113,583 | - | ||||||
Other
payables
|
(484,646 | ) | (1,978,930 | ) | ||||
Income
taxes payable
|
188,327 | 335,354 | ||||||
Total
Adjustments
|
407,956 | 1,179,404 | ||||||
Net
cash provided by operating activities
|
3,174,508 | 3,403,281 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase
of property & equipment
|
(3,695 | ) | (1,961 | ) | ||||
Net
cash used by investing activities
|
(3,695 | ) | (1,961 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
/(repayments) of notes payable, net
|
(70,855 | ) | 1,330,212 | |||||
Net
cash provided / (used) by financing activities
|
(70,855 | ) | 1,330,212 | |||||
Effect
of exchange rate changes on cash and cash equivalents
|
14,154 | 161,696 | ||||||
Net
change in cash and cash equivalents
|
3,114,112 | 4,893,228 | ||||||
Cash
and cash equivalents, beginning balance
|
34,828 | 736,032 | ||||||
Cash
and cash equivalents, ending balance
|
$ | 3,148,940 | $ | 5,629,260 | ||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
Cash
paid during the year for:
|
||||||||
Income
tax payments
|
$ | 733,918 | $ | 759,989 | ||||
Interest
payments
|
$ | 136,819 | $ | 270,619 | ||||
Other
non-cash transactions
|
||||||||
Transfer
of assets to related party
|
$ | 1,185,475 | $ | - | ||||
Transfer of
liabilities to related party
|
(1,305,547 | ) | - | |||||
Assumption
of net liabilities by related party
|
(120,072 | ) | - |
The
accompanying notes are an integral part of these financial
statements.
F-31
DALIAN
HUIMING INDUSTRY LTD.
|
||||||||||||||||||||
STATEMENT
OF STOCKHOLDERS' EQUITY
|
||||||||||||||||||||
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
|
||||||||||||||||||||
Registered
Capital
|
Other
Comprehensive Income
|
Statutory
Reserve
|
Retained
Earnings
|
Total
Stockholders' Equity
|
||||||||||||||||
Balance
December 31, 2007
|
$ | 1,865,040 | $ | 329,039 | $ | 502,697 | $ | 2,768,228 | $ | 5,465,004 | ||||||||||
Foreign
currency translation adjustments
|
479,621 | 479,621 | ||||||||||||||||||
Transfer
to statutory reserve
|
||||||||||||||||||||
Net
Income for nine months ended September 30, 2008
|
2,766,552 | 2,766,552 | ||||||||||||||||||
Balance
September 30, 2008
|
$ | 1,865,040 | $ | 808,660 | $ | 502,697 | $ | 5,534,780 | $ | 8,711,177 |
The
accompanying notes are an integral part of these financial
statements
F-32
DALIAN
HUIMING INDUSTRY LTD.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Note
1 - ORGANIZATION
Dalian
Huiming Industry LTD. (the “Company”) obtained its business license on July 31,
2001. It changed its registration name from Dalian F.T.Z. Huiming
Trade Co., LTD on May 8, 2008. The Company is in the business of
international and domestic trade in the purchase and wholesale distribution of
grain, principally, corn, soybeans and wheat. As of September 30,
2008, the owners are Mr. Peng Huang (46.7%), Mr. Xinbo Huang (3.9%), and Reilong
Group (49.4%).
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company's functional currency is the Chinese Renminbi, however the
accompanying consolidated financial statements have been translated and
presented in United States Dollars.
Translation
Adjustment
As of
September 30, 2008, the accounts of the Company were maintained, and its
financial statements were expressed, in Chinese Yuan Renminbi (“CNY”). Such
financial statements were translated into U.S. Dollars (“USD”) in accordance
with Statement of Financial Accounts Standards No. 52, “Foreign Currency
Translation” (“SFAS No. 52”), with the CNY as the functional currency. According
to SFAS No. 52, all assets and liabilities were translated at the current
exchange rate, stockholders equity are translated at the historical rates and
income statement items are translated at the average exchange rate for the
period. The resulting translation adjustments are reported under other
comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive
Income,” as a component of shareholders’ equity. Transaction gains and losses
are reflected in the income statement.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires 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 the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-33
DALIAN
HUIMING INDUSTRY LTD.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Risks and
Uncertainties
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, by the general state of
the PRC's economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be
sought.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be
disclosed.
Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
Cash and Cash
Equivalents
Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
F-34
DALIAN
HUIMING INDUSTRY LTD.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful accounts
amounted to $0 and $25,063 at September 30, 2008 and December 31, 2007
respectively.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. The Management compares the cost of inventories with the market value
and allowance is made for writing down their inventories to market value, if
lower. As of September 30, 2008 and December 31, 2007, inventory consisted of
finished goods valued at $5,419,932 and $5,770,841.
Property, Plant &
Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:
Office
Equipment
|
5
years
|
As of
September 30, 2008 and December 31, 2007, Property, Plant & Equipment
consist of the following:
September 30, 2008
|
December 31, 2007
|
|||||||
Office
equipment
|
$ | 5,792 | $ | 2,096 | ||||
Accumulated
depreciation
|
(1,731 | ) | (992 | ) | ||||
$ | 4,061 | $ | 1,104 |
For the
nine months ending September 30, 2008 and 2007, depreciation expenses were $738
and $770 respectively.
F-35
DALIAN
HUIMING INDUSTRY LTD.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived
Assets
Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No. 144”), which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The Company periodically evaluates the
carrying value of long-lived assets to be held and used in accordance with SFAS
144. SFAS 144 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined in
a similar manner, except that fair market values are reduced for the cost of
disposal. Based on its review, the Company believes that, as of September 30,
2008, there were no significant impairments of its long-lived
assets.
Fair Value of Financial
Instruments
Statement
of Financial Accounting Standard No. 107, “Disclosures about Fair Value of
Financial Instruments,” requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104, “Revenue Recognition.” Sales revenue is recognized at the
date of shipment to customers when a formal arrangement exists, the price is
fixed or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectibility is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition
are satisfied are recorded as unearned revenue.
Stock-Based
Compensation
In
October 1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based
Compensation.” SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and
related interpretations with proforma disclosure of what net income and earnings
per share would have been had the Company adopted the new fair value method. The
Company uses the intrinsic value method prescribed by APB 25 and has opted for
the disclosure provisions of SFAS No.123.
F-36
DALIAN
HUIMING INDUSTRY LTD.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
Costs
Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred.
Income
Taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
Basic and Diluted Earnings
per Share
Earnings
per share are calculated in accordance with the Statement of Financial
Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”). SFAS No.
128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per
share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
Statement of Cash
Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are based upon the local currencies. As a result, amounts
related to assets and liabilities reported on the statement of cash flows will
not necessarily agree with changes in the corresponding balances on the balance
sheet.
F-37
DALIAN
HUIMING INDUSTRY LTD.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, most of which are in China. The Company controls credit risk related to
accounts receivable through credit approvals, credit limits and monitoring
procedures. The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk, establishes an
allowance, if required, for uncollectible accounts. As a consequence, the
Company believes that its accounts receivable credit risk exposure beyond such
allowance is limited.
Segment
Reporting
Statement
of Financial Accounting Standards No. 131, “Disclosure about Segments of an
Enterprise and Related Information,” requires use of the “management approach”
model for segment reporting. The management approach model is based on the way a
company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
Recent Accounting
Pronouncements
In June
2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement 109” (“FIN No. 48”). FIN
No. 48 clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. It also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition, and clearly scopes income taxes
out of SFAS No. 5, “Accounting for Contingencies.” FIN No. 48 is
effective for fiscal years beginning after December 15, 2006. The
Company believes this will not have a material impact on its financial position,
results of operations or cash flows.
In
September, 2006, FASB issued SFAS No. 157, “Fair Value
Measurements.” This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(“GAAP”), and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute.
Accordingly,
this Statement does not require any new fair value
measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The management
is currently evaluating the effect of this pronouncement on financial
statements.
F-38
DALIAN
HUIMING INDUSTRY LTD.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In
September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158 improves financial
reporting by requiring an employer to recognize the over-funded or under-funded
status of a defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income of a business entity or changes in unrestricted net
assets of a not-for-profit organization. This Statement also improves
financial reporting by requiring an employer to measure the funded status of a
plan as of the date of its year-end statement of financial position, with
limited exceptions. An employer with publicly traded equity securities is
required to initially recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures as of the end of the
fiscal year ending after December 15, 2006. An employer without
publicly traded equity securities is required to recognize the funded status of
a defined benefit postretirement plan and to provide the required disclosures as
of the end of the fiscal year ending after June 15, 2007. However, an
employer without publicly traded equity securities is required to disclose the
following information in the notes to financial statements for a fiscal year
ending after December 15, 2006, but before June 16, 2007, unless it has applied
the recognition provisions of this Statement in preparing those financial
statements.
|
a.
|
A
brief description of the provisions of this
Statement
|
|
b.
|
The
date that adoption is required
|
|
c.
|
The
date the employer plans to adopt the recognition provisions of this
Statement, if earlier.
|
The
requirement to measure plan assets and benefit obligations as of the date of the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The Company believes
that the adoption of these standards will have no material impact on its
financial statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 (“SAB 108”). SAB 108 was issued to provide
interpretive guidance on how the effects of the carryover reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The provisions of SAB 108 are effective for the Company for its December 31,
2006 year-end. The adoption of SAB 108 had no impact on the Company’s
financial statements.
In
February, 2007, FASB issued SFAS No. 159, ‘The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115.” This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This Statement is
expected to expand the use of fair value measurement, which is consistent with
the Board’s long-term measurement objectives for accounting for financial
instruments. This Statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. The
management is currently evaluating the effect of this pronouncement on financial
statements.
In
December, 2007, FASB issued SFAS No. 160, “Non-Controlling Interests in
Consolidated Financial Statements.” This Statement amends ARB 51 to
establish accounting and reporting standards for the non-controlling (minority)
interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS No.
160 is effective for the Company’s fiscal year beginning October 1,
2009. Management is currently evaluating the effect of this
pronouncement on financial statements.
F-39
DALIAN
HUIMING INDUSTRY LTD.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March,
2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities.” The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. The new standard also improves transparency
about the location and amounts of derivative instruments in an entity’s
financial statements; how derivative instruments and related hedged items are
accounted for under Statement 133; and how derivative instruments and related
hedged items affect its financial position, financial performance, and cash
flows. Management is currently evaluating the effect of this
pronouncement on financial statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement will provide a framework for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles (GAAP) for nongovernmental entities. With the issuance of
SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from
auditing literature to accounting literature. SFAS No. 162 was superseded by the
Generally Accepted Accounting Principles Topic of the FASB Accounting Standards
Codification (“ASC 105”). The Company is currently assessing the impact of SFAS
No. 162 on its financial position and results of operations.
Note
3- NOTES
PAYABLE
The
following summarizes the notes payable as of September 30, 2008 and December 31,
2007:
09/30/08
|
12/31/2007
|
|
Huaxia
Bank
|
$1,173,313
|
-
|
Term
of note calls for interest at 8.964% with loan period from 5/12/08 –
4/20/09 collateralized by soybeans
|
||
Changtu
Jinjia Grain Depot Co., LTD
|
-
|
$1,165,182
|
Term
of note calls for interest at 5.31% with principal due 6 months from March
2007
|
||
Total Short Term Notes
|
$1,173,313
|
$1,165,182
|
Note
4 - COMPENSATED
ABSENCES
Regulation
45 of the local labor law of the People’s Republic of China (“PRC”) entitles
employees to annual vacation leave after 1 year of service. In general, all
leave must be utilized annually, with proper notification. Any
unutilized leave is cancelled.
F-40
DALIAN
HUIMING INDUSTRY LTD.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Note
5 - INCOME
TAXES
Pursuant
to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) is at a statutory
rate of 25%. The statutory rate was 33% in 2007, which was comprised of 30%
national income tax and 3% local income tax.
The
following is a reconciliation of income tax expense:
|
||||||||
09/30/2008
|
International
|
Total
|
||||||
Current
|
$ | 922,184 | $ | 922,184 | ||||
Deferred
|
- | - | ||||||
Total
|
$ | 922,184 | $ | 922,184 | ||||
09/30/2007
|
||||||||
Current
|
$ | 1,095,343 | $ | 1,095,343 | ||||
Deferred
|
||||||||
Total
|
$ | 1,,095,343 | $ | 1,095,343 |
In June
2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement 109” (“FIN No. 48”). FIN
No. 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It also provides guidance on
derecognition, classification, treatment of interest and penalties, and
disclosure of such positions. Effective January 1, 2007, the Company adopted the
provisions of FIN No. 48, as required. As a result of implementing
FIN No. 48, there has been no adjustment to the Company’s financial statements
and the adoption of FIN No. 48 did not have a material effect on the Company’s
financial statements for the period ending September 30, 2008.
Note
6 – COMMITMENTS &
CONTINGENCIES
The
Company has two leases for office space and office management that run from
December 1, 2007 through December 31, 2008. The remaining lease obligation is
$3,702. For the nine months ending September 30, 2008 and 2007, rent
expenses were $20,399 and $0.
The
Company had guarantee arrangements for two parties through two PRC
banks. These guarantees extend through June 2009. The
value of the sponsion at September 30, 2008 totaled $3,794,201.
Note
7 - STATUTORY
RESERVE
In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprises income, after the payment of the PRC income taxes, shall be
allocated to the statutory surplus reserves and statutory public welfare fund.
Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent
of the profit after tax to the surplus reserve fund and additional 5-10 percent
to the public affair fund. The public welfare fund reserve was limited to 50
percent of the registered capital. Effective January 1, 2006, there
is now only one fund requirement. The reserve is 10 percent of income after tax,
not to exceed 50 percent of registered capital.
Statutory
Reserve funds are restricted for set off against losses, expansion of production
and operation or increase in register capital of the respective company.
Statutory public welfare fund is restricted to the capital expenditures for the
collective welfare of employees. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation. As of September
30, 2008, the Company had allocated $502,697 to these non-distributable reserve
funds.
F-41
DALIAN
HUIMING INDUSTRY LTD.
NOTES
TO FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Note
8 - OTHER
COMPREHENSIVE INCOME
Balances
of related after-tax components comprising accumulated other comprehensive
income, included in stockholders’ equity, at September 30, 2008 and 2007, are as
follows:
Nine
Months Ended September 30,
|
||||||||
2008
|
2007
|
|||||||
Balance
at December 31, 2007 and 2006
|
$ | 329,039 | $ | 61,310 | ||||
Foreign
currency translation adjustment
|
479,621 | 234,776 | ||||||
Balance
at September 30, 2008 and 2007
|
$ | 808,660 | $ | 296,086 |
Note
9 – MAJOR CUSTOMERS
AND CREDIT RISK
Two
customers accounted for more than 10% of the Company’s accounts receivable and
at September 30, 2008, they accounted for 56% of accounts
receivable. Five vendors accounted for more than 10% of the Company’s
accounts payable and at September 30, 2008, they comprised 87% of accounts
payable.
One
customer accounted for more than 10% of the Company’s accounts receivable and at
September 30, 2007, the customer accounted for 27% of accounts
receivable. One vendor accounted for more than 10% of the Company’s
accounts payable and at September 30, 2007, they comprised 65% of accounts
payable.
Three
customers accounted for more then 50% of the Company’s sales for the nine months
ending September 30, 2008. A fourth customer, a related party,
accounted for an additional 9% of sales. For the nine months ending
September 30, 2008, four vendors accounted for more than 82% of
purchases.
Note
10 – RELATED
PARTIES
The
Company’s financial statements reflect balances to related
parties. At September 30, 2008, the balance due to related parties
was $4,344,642. The balance due from a related party was $438,884.
In
February 2008, the Company entered into an agreement to transfer certain assets
totaling $1,185,475 and certain liabilities totaling $1,305,547 over to the
related parties. The net effect should have been a payment by the
Company to related parties of $120,072. As of September 30, 2008, the Company
has completed this transfer.
The
Company had guarantee arrangements for one related party through a PRC bank. The
value of the sponsion at September 30, 2008 totaled $3,794,201. These guarantees
extend through June 2009.
Note
11 – SUBSEQUENT
EVENTS
On
September 29, 2008, the shareholders of all of the outstanding capital stock of
the Company entered into a Share Purchase Agreement with China Organic
Agriculture, Inc. In consideration of an aggregate of $10,600,000, each of the
shareholders will assign to China Organic Agriculture, Inc 60% of his or its
shares of the Company, which in the aggregate will represent 60% of the shares
then outstanding. The closing occurred on October 31, 2008.
F-42