Attached files
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
report (Date of earliest event reported): February 12, 2010
ARTISTRY
PUBLICATIONS, INC.
(Exact
name of registrant as specified in Charter)
DELAWARE
|
333-146942
|
20-8285559
|
||
(State
or other jurisdiction of
incorporation
or organization)
|
(Commission
File No.)
|
(IRS
Employee Identification No.)
|
239
Jianxin Road , Jiangbei District,
Chongqing, PRC
400000
(Address
of Principal Executive Offices)
(86)
023-67755514
(Issuer
Telephone number)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
¨
|
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
¨
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
¨
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
|
¨
|
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
|
Forward
Looking Statements
This
Current Report on Form 8-K (“Form 8-K”) and other
reports filed by the Registrant from time to time with the Securities and
Exchange Commission (collectively the “Filings”) contain or
may contain forward looking statements and information that are based upon
beliefs of, and information currently available to, the Registrant’s management
as well as estimates and assumptions made by the Registrant’s management. When
used in the filings the words “anticipate”, “believe”, “estimate”, “expect”,
“future”, “intend”, “plan” or the negative of these terms and similar
expressions as they relate to the Registrant or the Registrant’s management
identify forward looking statements. Such statements reflect the current view of
the Registrant with respect to future events and are subject to risks,
uncertainties, assumptions and other factors (including the risks contained in
the section of this report entitled “Risk Factors”) relating to the Registrant’s
industry, the Registrant’s operations and results of operations and any
businesses that may be acquired by the Registrant. Should one or more of these
risks or uncertainties materialize, or should the underlying assumptions prove
incorrect, actual results may differ significantly from those anticipated,
believed, estimated, expected, intended or planned.
Although
the Registrant believes that the expectations reflected in the forward looking
statements are reasonable, the Registrant cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, the
Registrant does not intend to update any of the forward-looking statements to
conform these statements to actual results. The following discussion should be
read in conjunction with the Registrant’s pro forma financial statements and the
related notes filed with this Form 8-K.
In
this Form 8-K, references to “we,” “our,” “us,” “Artistry” the “Company” or the
“Registrant” refer to Artistry Publications, Inc., a Delaware
corporation.
Item 1.01
|
Entry
into a Material Definitive
Agreement
|
On February
12, 2010 (the “Closing”), Artistry
Publications, Inc., a Delaware corporation (“Artistry” or the
“Registrant”),
closed a reverse take-over transaction by which it acquired a private provider
of cemetery products and services in Chongqing, People’s Republic of China
(“PRC” or
“China”)
pursuant to a Share Exchange Agreement (the “Exchange Agreement”)
by and among the Company, Gold Industry Limited, a company incorporated in
Cayman Islands (“Gold
Industry”), and Holy Golden Industry Limited, a British Virgin Islands
company which, immediately prior to the closing of the transactions contemplated
by the Exchange Agreement, held 100% of Gold Industry’s issued and outstanding
share capital (the “Cayman
Shareholder”). Gold Industry is a holding company that,
through its wholly owned subsidiary, Gold Holy Industry Limited, a company
incorporated in Hong Kong Special Administrative Region (“Gold Holy”), and
Chongqing Ran Ji Industrial Co., Ltd., a company organized in the PRC and
wholly-owned by Gold Holy (“Ran Ji”), controls
Chongqing Foguang Tourism Development (Group) Co., Ltd., a company organized in
the PRC (“Foguang”), by a
series of contractual arrangements. Throughout this Form 8-K, Gold
Industry, Gold Holy, Ran Ji and Foguang are sometimes collectively referred to
as “Foguang Group.”
Prior to
the reverse take-over under the Exchange Agreement (“Exchange
Transaction”), we were a public reporting “shell company” as defined in
Rule 12b-2 of the Securities Exchange Act of 1934, as amended. As a result of
the reverse take-over transaction, the Cayman Shareholder became our controlling
shareholder and Gold Industry became our wholly-owned subsidiary, and we
acquired the business and operations of Foguang Group.
The
following is a brief description of the terms and conditions of the Exchange
Agreement and the transactions contemplated thereunder that are material to the
Company.
Exchange
Transaction
Under the
Exchange Agreement, the Company completed the acquisition of all of the issued
and outstanding shares of Gold Industry through the issuance of 8,800,000
restricted shares of Common Stock to the Cayman Shareholder of Gold
Industry. Immediately prior to the Exchange Agreement transaction,
the Company had 13,075,000 shares of Common Stock issued and outstanding, of
which 10,875,000 shares of Common Stock collectively owned by Helen Schwartz and
Ruth Shepley were cancelled immediately prior to the Closing pursuant to the
Exchange Agreement. Immediately after the issuance of the shares to
the Cayman Shareholder, the Company had 11,000,000 shares of Common Stock issued
and outstanding.
In
connection with the Exchange Transaction, and as more fully described in Item
5.02 below, Helen Schwartz, the Registrant’s sole executive officer
immediately prior to the Exchange Transaction, resigned, and the following
officers were appointed, effective at Closing: Yiyou Ran as President
and Chief Executive Officer and Michael Wang as Chief Financial Officer,
Treasurer and Secretary. Additionally, Ms. Schwartz, who was also the
Registrant’s sole director immediately prior to the Exchange Transaction,
resigned from the Registrant’s board of directors, and Mr. Ran, Mr. Wang,
Jianquan Chen and Tim Hudson were appointed to the Registrant’s board of
directors, effective at Closing, with Mr. Ran as chairman of the board of
directors.
-1-
The
foregoing description of the Exchange Agreement is qualified in its entirety by
the contents of such Exchange Agreement, which is attached as Exhibit 2.1 to
this Form 8-K.
Item 2.01
|
Completion
of Acquisition or Disposition of
Assets
|
On
February 12, 2010, Artistry acquired Gold Industry in a reverse take-over
transaction. As a result, we acquired and now control the businesses
and operations of Gold Industry and its subsidiary, Gold Holy, and its
affiliated PRC entities, Ran Ji and Foguang. Reference is made to
Item 1.01, which is incorporated herein, which summarizes the terms of the
reverse take-over transaction under the Exchange Agreement.
The
Exchange Agreement and the transactions contemplated thereunder were approved by
our board of directors, as well as Gold Industry directors and the Cayman
Shareholder. Except for the Exchange Agreement and the transactions
contemplated thereunder, neither we nor our officers and directors serving prior
to the consummation of the Exchange Transaction had any material relationship
with Gold Industry or the Cayman Shareholder.
Other
material terms and conditions of the Exchange Agreement are described under Item
1.01 above and such description is incorporated herein by
reference.
From and
after the Closing, our primary operations consist of the business and operations
of Foguang Group, which are conducted in the People’s Republic of China.
Therefore, we disclose information about the business, financial condition, and
management of Foguang Group in this Form 8-K.
DESCRIPTION
OF BUSINESS
Except as
otherwise indicated by the context, references to “we”, “us” or “our”
hereinafter in this Form 8-K are to the consolidated business of Foguang Group,
except that references to “our common stock”, “our shares of common stock” or
“our capital stock” or similar terms shall refer to the common stock of the
Registrant.
Overview
Foguang
Group is a private provider of cemetery products and services in Chongqing,
China. We are primarily focused on developing cemeteries and selling cemetery
plots, although we also provide park and garden development and construction
services. Our first cemetery development project is the Chongqing Guiyuan
Cemetery I (“Guiyuan I”), located in Changshou District of Chongqing on
approximately 66,660 square meters of land. The entire cemetery plots of Guiyuan
I have been sold, at an average price of RMB 30,000 ($4,412) per plot. We are
currently developing the Chongqing Guiyuan Cemetery II (“Guiyuan II”), our
second cemetery project in Changshou. Guiyuan II, in development since 2002,
occupies a land over 666,000 square meters, of which approximately 46,620 square
meters have been developed to date. We have also secured approximately 1,194,804
square meters of land surrounding Longqiao Lake, which portions of Guiyuan II
overlook. We are planning to develop this land as a park, with mausoleums and
temples, to complement and enhance Guiyuan II.
Both
Guiyuan I and Guiyuan II are among the most highly regarded facilities in our
market area in terms of a number of factors such as tradition, heritage,
reputation, physical size, volume of business, available inventory, name
recognition, aesthetics and potential for development or expansion. In 2006 and
2007, we were ranked amongst the top 50 private-owned enterprises in
Chongqing.
Gold
Industry is a holding company incorporated in Cayman Islands. Since
incorporation, Gold Industry has not conducted any substantive operations of its
own except for holding 100% equity interests of Gold Holy.
Gold Holy
is a holding company established in Hong Kong Special Administration Region on
September 29, 2009. Other than holding 100% equity interests of Ran
Ji, Gold Holy has no other separate operations of its own.
-2-
Ran Ji is
a shareholding limited company organized in the PRC on December 15,
2009. Ran Ji was formed by Gold Holy. Other than the
activities relating to its contractual arrangements with Foguang as described
below, Ran Ji has no other business operations.
Foguang
is a shareholding limited company organized in the PRC on October 10,
2002. Foguang holds the government licenses and approvals necessary
to operate the death care business in China. We do not own any equity
interests in Foguang, but control and receive the economic benefits of its
business operations through contractual arrangements. Through Ran Ji, we have
contractual arrangements with Foguang and its owners pursuant to which we
provide consulting and other general business operation services. Through these
contractual arrangements, we also have the ability to substantially influence
their daily operations and financial affairs, since we are able to appoint their
senior executives and approve all matters requiring approval of the equity
owners. As a result of these contractual arrangements, which enable us to
control Foguang and to receive, through Ran Ji, all of its profits, we are
considered the primary beneficiary of Foguang. Accordingly, we consolidate its
results, assets and liabilities in our financial statements.
For a
description of these contractual arrangements, see “Contractual Arrangements
with Foguang and its Owners.”
Contractual
Arrangements with Foguang and its Owners
On
December 15, 2009, Ran Ji entered into the following contractual arrangements
with Foguang and its owners:
Consulting Services
Agreement. Pursuant to the exclusive consulting services
agreement between Ran Ji and Foguang, Ran Ji has the exclusive right to provide
to Foguang general services related to the tourism development industry as well
as consulting services related to tourism project, cemetery management, funeral
ashes, planting of flowers, nursery stock and Chinese herbal, biomass research,
production and marketing of arts and crafts, and designing of landscape (the
“Services”). Ran Ji also sends employees to Foguang and Foguang bears the costs
and expenses for such employees. Under this agreement, Ran Ji owns
the intellectual property rights developed through the Services provided to
Foguang. Foguang pays a quarterly consulting service fee in Renminbi (“RMB”) to
Ran Ji that is equal to all of Foguang’s revenue for such
quarter. The consulting services agreement is in effect unless and
until terminated by written notice of either party in the event that: (a) the
other party causes a material breach of this agreement, provided that if the
breach does not relate to a financial obligation of the breaching party, that
party may attempt to remedy the breach within fourteen (14) days following the
receipt of the written notice; (b) the other party becomes bankrupt, insolvent,
is the subject of proceedings or arrangements for liquidation or dissolution,
ceases to carry on business, or becomes unable to pay its debts as they become
due; (c) Ran Ji terminates its operations; (d) Foguang’s business license or any
other license or approval for its business operations is terminated, cancelled
or revoked; or (e) circumstances arise which would materially and adversely
affect the performance or the objectives of the consulting services
agreement. Additionally, Ran Ji may terminate the consulting services
agreement without cause.
Operating
Agreement. Pursuant to the operating agreement among Ran Ji,
Foguang and the owners of Foguang who collectively hold 100% of the issued and
outstanding equity interests of Foguang (collectively the “Foguang Owners”), Ran
Ji provides guidance and instructions on Foguang’s daily operations, financial
management and employment issues. The Foguang Owners must designate
the candidates recommended by Ran Ji as their representatives on Foguang’s board
of directors. Ran Ji has the right to appoint senior executives of
Foguang. In addition, Ran Ji agrees to guarantee the performance of
Foguang under any agreements or arrangements relating to Foguang’s business
arrangements with any third party. Foguang, in return, agrees to
pledge its accounts receivable and all of its assets to Ran
Ji. Moreover, Foguang agrees that without the prior consent of Ran
Ji, Foguang will not engage in any transactions that could materially affect the
assets, liabilities, rights or operations of Foguang, including, without
limitation, incurrence or assumption of any indebtedness, sale or purchase of
any assets or rights, incurrence of any encumbrance on any of its assets or
intellectual property rights in favor of a third party or transfer of any
agreements relating to its business operation to any third party. The
term of this agreement is ten years from December 15, 2009, and may be extended
only upon Ran Ji’s written confirmation prior to the expiration of the
agreement, with the extended term to be mutually agreed upon by the
parties.
Equity Pledge
Agreement
Under the equity pledge agreement between the Foguang Owners and Ran Ji, the
Foguang Owners pledged all of their equity interests in Foguang to Ran Ji to
guarantee Foguang’s performance of its obligations under the consulting services
agreement. If Foguang or the Foguang Owners breach their respective
contractual obligations, Ran Ji, as pledgee, will be entitled to certain rights,
including, but not limited to, the right to sell the pledged equity interests,
the right to vote and control the pledged assets. The Foguang Owners
also agreed, that upon occurrence of any event of default, Ran Ji shall be
granted an exclusive, irrevocable power of attorney to take actions in the place
and instead of the Foguang Owners to carry out the security provisions of the
equity pledge agreement and take any action and execute any instrument that Ran
Ji may deem necessary or advisable to accomplish the purposes of the equity
pledge agreement. The Foguang Owners agreed not to dispose of the
pledged equity interests or take any actions that would prejudice Ran Ji’s
interest. The equity pledge agreement will expire in two years after
Foguang’s obligations under the exclusive consulting services agreement have
been fulfilled.
-3-
Option Agreement. Under the option
agreement between the Foguang Owners and Ran Ji, the Foguang Owners irrevocably
granted Ran Ji or its designated person an exclusive option to purchase, to the
extent permitted under Chinese law, all or part of the equity interests in
Foguang for the cost of the initial contributions to the registered capital or
the minimum amount of consideration permitted by applicable Chinese law. Ran Ji
or its designated person has sole discretion to decide when to exercise the
option, whether in part or in full. The term of this agreement is ten
years from December 15, 2009, and may be extended prior to its expiration by
written agreement of the parties.
Proxy Agreement. Pursuant to the
proxy agreement among Ran Ji, the Foguang Owners, and Foguang, the Foguang
Owners agreed to entrust all the rights to exercise their voting power to
designee(s) of Ran Ji. Such designee(s) shall have the right to
exercise the Foguang Owners’ voting and other rights, including the attendance
at and the voting of their shares at Foguang’s shareholders meetings (or by
written consent in lieu of meetings) in accordance with applicable laws and
Foguang’s Article of Association. This agreement may not be terminated without
the unanimous consent of all parties, except that Ran Ji may, by giving a thirty
(30) day prior written notice to the Foguang Owners, terminate the proxy
agreement, with or without cause.
Our
Current Corporate Structure
We
conduct substantially all of our business operations through
Foguang. Chinese law currently has limits on foreign ownership of
certain businesses which prohibit non-Chinese persons from having direct
ownership interests. To comply with these foreign ownership
restrictions, neither we nor our subsidiaries own any equity interests in
Foguang, but control and receive the economic benefits of its business
operations through contractual arrangements.
The
following diagram illustrates our corporate structure after the Exchange
Transaction with Artistry:
(1)
|
From
and after the Exchange Transaction, the management of Artistry includes:
Yiyou Ran as Chief Executive Officer, President and Chairman, Michael Wang
as Chief Financial Officer, Treasurer, Secretary and Director, and
Jianquan Chen and Tim Hudson as members of the board of
directors.
|
(2)
|
The
management of Gold Industry is comprised of Yiyou Ran, Jianquan Chen and
Yang Chen as its directors. Artistry is the sole shareholder of
Gold Industry.
|
-4-
(3)
|
The
management of Gold Holy is comprised of Yiyou Ran, Jianquan Chen and Yang
Chen as its directors.
|
(4)
|
The
management of Ran Ji is comprised of Yiyou Ran, Jianquan Chen and Yang
Chen as its directors.
|
(5)
|
Ran
Ji controls Foguang through contractual arrangements designed to mimic
equity ownership of Foguang by Ran Ji. These contracts include a
consulting services agreement, operating agreement, equity pledge
agreement, option agreement, and proxy
agreement.
|
(6)
|
The
management of Foguang is comprised of Yiyou Ran, Jianquan Chen and Yang
Chen as its directors.
|
Industry consolidation. Death
care businesses in China have traditionally been relatively small, family-owned
enterprises that have passed through successive generations within the family.
The decade of the 1990s witnessed a trend of family-owned firms consolidating
with larger organizations, but this trend slowed dramatically in 2000. As the
number of consolidators participating in the acquisition market declined, those
that remained generally applied significantly tighter pricing criteria, and many
potential sellers withdrew their businesses from the market rather than pursuing
transactions at lower prices. Our industry continues to be characterized by a
large number of locally-owned, independent operations, with approximately 70
percent of industry revenue being generated by independently-owned and/or
state-owned operations. We estimate that our industry, which consists of
approximately 10,000 funeral homes and 40,000 cemeteries in China, collectively
generates approximately $28 billion in annual revenue.
Importance of tradition; barriers to
entry. We believe it is difficult for new competitors to enter existing
markets successfully by opening new cemeteries. The barriers to entry are lower
on the funeral side. Entry into the cemetery market can be difficult due to
several factors. Because families tend to return to the same cemetery for
multiple generations to bury family members, it is difficult for new cemeteries
to attract families. Additionally, mature markets, including the areas where our
cemeteries are located, are often served by an adequate number of existing
cemeteries with sufficient land for additional plots, whereas land for new
cemetery development is often scarce and expensive. Regulatory complexities and
zoning restrictions also make entry into the cemetery market difficult. Finally,
development of a new cemetery usually requires a significant capital investment
that takes several years to produce a return.
Continuing need for products and
services; increasing number of deaths. There is an inevitable need for
our products and services. Deaths in China are expected to increase at a steady,
moderate pace over the long-term. According to official released figures from
Ministry of Environmental Protection of the PRC, the mortality rate of Chongqing
is 6.5% on average, and the population (urban residents) of the city is 6
million. Therefore, the expected deaths are about 200,000 per year.
Furthermore, the average age of the population aged 50 and over is also
increasing every year. According to the National Population and
Family Planning Commission of the PRC, the Chinese population over 50 years
of age is expected to increase by approximately 3% per year, from
276.8 million in 2000 to 298.6 million in 2010. We believe the aging
of the population is particularly important because it expands our target market
for preneed sales, as persons over the age of 50 are the most likely group to
make preneed funeral and cemetery arrangements. It is also a Chinese belief that
purchasing a grave prior to one’s death is wishing for a healthier and longer
life, which attracts a large number of seniors.
Cremation. In
recent years, there has been a steady, gradual increase in the number of
families in China that have chosen cremation as an alternative to traditional
methods of burial. According to industry studies, cremations represented
approximately 57% of the Chinese burial market in 2006. That number is expected
to increase to 70% by 2010 and 95% by 2025. Cremation rates can vary
significantly based upon geographic, religious and cultural traditions.
Historically, direct cremation has been offered as a less costly alternative to
a traditional burial. However, with the population of China increasing and land
and resources becoming more scarce, the government is requiring more people be
cremated. In some of the larger cities such as Beijing, Tianjin, and
Shanghai, the cremation rate is close to 100%.
Our
Operation
Information
for each of our segments is presented below and in our financial statements set
forth herein.
-5-
Cemetery
Operations
We
conduct our cemetery operations only in Chongqing, China. As of March
31, 2009, we have two cemeteries, Guiyuan I and Guiyuan II. The cemetery
operations are managed by a team of experienced death care industry and sales
professionals. During the year ended March 31, 2009, cemetery revenues account
for approximately 96% of our total revenues.
Our
cemetery products and services include interment services, the rights to
interment in cemetery sites (including grave sites, mausoleum crypts and niches)
and related cemetery merchandise such as memorials and vaults. Cemetery
operations generate revenues through sales of interment rights and memorials,
installation fees, and fees for interment services.
Our
cemetery operating results are impacted by the success of our sales organization
because approximately 85% of our cemetery revenues was generated from sales of
interment rights during the year ended March 31, 2009. An additional
approximately 7% of our 2009 cemetery revenues was generated from deliveries of
merchandise and services previously sold on our contracts. We believe that
changes in the level of consumer confidence (a measure of whether consumers will
spend money on discretionary items) impact the amount of cemetery revenues and
are currently having a significant negative impact on our sales and the industry
as a whole. Cemetery revenues generated from at-need services are principally a
service business that provides burial plots. Given the high fixed cost structure
associated with cemetery operations, we believe the following are key factors
affecting our profitability:
•
|
demographic
trends in terms of population growth and average age, which impact death
rates and number of deaths;
|
||
•
|
establishing
and maintaining leading market share positions supported by strong local
heritage and relationships;
|
||
•
|
effectively
responding to increasing cremation trends by packaging complimentary
services and merchandise;
|
||
•
|
controlling
salary and merchandise costs; and
|
||
•
|
exercising
pricing leverage related to our at-need business to increase average
revenues per contract.
|
Park
Construction Services
The
Company also provides park and garden construction services. The
Company contracts with third parties such as parks and offices to develop parks
and provide landscaping services on a per contract basis. We only
perform such services when we have the capacity to do so as we are shifting our
focus to our cemetery operations. During the year ended March 31,
2009, park construction services revenues account for less than 4% of our total
revenues.
Our
Customers
Our
customers are individuals or families that would purchase graves for members for
their families that are presently living or deceased. According to
National Population and Family Planning Commission of the PRC, the current
annual death rate of Chongqing is 6.5% and it is predicted to go up to
approximately 7% in the next three years. In the meantime, the
population for the city keeps growing and the pace of urbanization has
quickened. For example, in 2008, the population of urban residents
has increased 500,600 compared to 2007. This will increase the market
demand of nearly 3,000 graves in our target market annually. The
cremation number of the city is about 45,000 each year, in which 60% to 70% of
the deceased’s relatives will purchase graves. Their demand also
constitutes our target market.
The
following is a breakdown of the grave types purchased by our current
customers:
Grave
Type
|
Price
|
Percentage
of Customer
|
Double
Graves
|
Below
$1,500
(Below
RMB 10,000)
|
15%
|
Double
Graves
|
Between
$1,500 and $4,500
(Between
RMB 10,000 and 30,000)
|
33%
|
Single
Graves
|
Between
$4,500 and $7,500
(Between
RMB 30,000 and 50,000)
|
38%
|
Single
Graves
|
Between
$7,500 and $15,000
(Between
RMB 50,000 and 100,000)
|
10%
|
Single
Graves
|
Between
$15,000 and $45,000
(Between
RMB 100,000 and 300,000)
|
2.5%
|
Single
Graves
|
Between
$45,000 and $75,000
(Between
RMB 300,000 and 500,000)
|
1%
|
Single
Graves
|
0.5%Over
$75,000
(Over
RMB 500,000)
|
0.5%
|
-6-
Our
Suppliers and Manufacturers
We
entered into a long term contract with a local manufacturer to manufacture
bluestone memorials for our cemetery operations. We provide the
manufacturer with our own design specifications and the manufacturer produces,
delivers and mounts the memorials to our burial vaults.
We also
entered into various project-based construction contracts with local contractors
to build our cemetery facilities. Some of the projects include
turning hillside into terraced fields, building roads, pathways and office
facilities, digging up burial vaults, and building a lake dam.
Our
Sales and Marketing
As of
December 31, 2009, we employed our sales and marketing force included 6
employees, who also oversaw 12 sales and 23 agents who are independent
contractors. We have made a strong commitment to the training of our employees
in order to ensure that our customers receive the highest quality customer
service. Our training program includes pre-employment training and on-employment
training of professional ethics and sales techniques. Each employee’s sales
performance will be evaluated by his supervisor on a yearly basis. Based on the
evaluation, the employee may be granted a year-end bonus, pay raise or
promotion.
We reward
our salespeople with incentives for generating new customers. Substantially all
of our sales force is compensated based on performance. Commissions are
augmented with various bonus and incentive packages to ensure a high quality,
motivated sales force. We pay commissions to our sales personnel based on a
percentage of the price of the products and services, which varies from 6% to
30%, of the total contract price. In addition, our sales personnel receive an
award varying from 1,000 RMB to 10,000 RMB for yearly sales of 1 million RMB or
more by the sales agents assigned to them. We pay our sales agent
based on a percentage of sales varying from 10% to 12% and we offer an extra 2%
or 3% award to yearly sales of 1.8 million RMB or
more.
We also
advertise on television from time to time. From February 4, 2009 to
March 20, 2009, we ran commercials on the local Changshou television during
prime commercial time after the news rebroadcast on national
television.
Research
and Development
The
Company currently does not conduct any research and development.
The
operating environment in the death care industry has been highly competitive.
Although we are the largest private provider of cemetery products and services
in Chongqing, we nevertheless face intense and crude competition from numerous
local funeral homes and cemetery firms. Our primary competitors in
Chongqing are:
Name
of Competitors
|
Description
of Competitors
|
Comparison
with Foguang
|
||
Chongqing
Long Tai Mountain Cemetery
|
This
is a cemetery found in 1994 and consists of over 41 acres.
|
This
cemetery has more demand than its land could supply and it is conveniently
located in downtown Chongqing.
|
||
Chongqing
Hua Yan Ta Yuan
|
This
is a Hong Kong based project and currently the only pagoda cemetery
project in China.
|
This
cemetery is limited to 40,000 tombs, all of which have been sold as of
November 2009.
|
||
Chongqing
Hua Xia Cemetery
|
This
cemetery is currently the most expensive and elaborate cemetery site in
China.
|
Cost
per tomb starts at 60,000 RMB (approximately US$10,000). The
cemetery is only 8.6 acres in size and has no land for further
expansion.
|
We have
observed new start-up competition in certain areas of Chongqing, which in any
one market may have impacted our profitability because of the high fixed cost
nature of cemeteries. Market share for cemeteries is largely a function of
reputation and heritage, although competitive pricing, professional service and
attractive, well-maintained and conveniently located facilities are also
important. Because of the importance of reputation and heritage, market share
increases are usually gained over a long period of time. The sale of cemetery
property has increasingly been used by many companies as a marketing tool to
build market share.
-7-
Intellectual
Properties and Licenses
Our
Company currently does not have any intellectual properties and
licenses.
Governmental
Regulations
Compliance
with Circular 106 and the 2006 M&A Regulations
On May
29, 2007, China’s State Administration of Foreign Exchange (“SAFE”) issued an
official notice known as “Circular 106”, which requires the owners of any
Chinese companies to obtain SAFE’s approval before establishing any offshore
holding company structure in so-called “round-trip” investment transactions for
foreign financing as well as subsequent acquisition matters in China. Likewise,
the “Provisions on Acquisition of Domestic Enterprises by Foreign Investors”,
issued jointly by Ministry of Commerce (“MOFCOM”), State-owned
Assets Supervision and Administration Commission, State Taxation Bureau, State
Administration for Industry and Commerce (“SAIC”), China
Securities Regulatory Commission and SAFE in August 2006, impose approval
requirements from MOFCOM for “round-trip” investment transactions, including
acquisitions in which equity was used as consideration.
Dividend
Distribution
The
principal laws, rules and regulations governing dividends paid by our PRC
operating subsidiary include the Company Law of the PRC (1993), as amended in
1999, 2004 and 2005 respectively, Wholly Foreign Owned Enterprise Law (1986), as
amended in 2000, and Wholly Foreign Owned Enterprise Law Implementation Rules
(1990), as amended in 2001. Under these laws and regulations, our PRC subsidiary
may pay dividends only out of its accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, our PRC
subsidiary is required to set aside at least 10% of its after-tax profit based
on PRC accounting standards each year to its statutory surplus reserve fund
until the accumulative amount of such reserve reaches 50% of its respective
registered capital. These reserves are not distributable as cash
dividends. The board of directors of a wholly foreign-owned
enterprise (“WFOE”) has the
discretion to allocate a portion of its after-tax profits to its staff welfare
and bonus funds. After the allocation of relevant welfare and funds, the
equity owners can distribute the rest of the after-tax profits provided that all
the losses of the previous fiscal year have been made up.
Taxation
The
applicable income tax laws, regulations, notices and decisions (collectively
referred to as “Applicable Foreign
Enterprises Tax Law”) related to foreign investment enterprises and their
investors mainly include the following:
·
|
Notice
Relating to Taxes Applicable to Foreign Investment Enterprises / Foreign
Enterprises and Foreign Nationals in Relation to Dividends and Gains
obtained from Holding and Transferring of Shares promulgated by State Tax
Bureau on July 21, 1993;
|
·
|
Amendments
to the Income Tax Law Applicable to Individuals of the PRC promulgated by
Standing Committee of the National People’s Congress (“NPC”) on
October 31, 1993;
|
·
|
Notice
on Relevant Policies Concerning Individual Income Tax issued by Ministry
of Finance and the State Tax Bureau on May 13,
1994;
|
·
|
Notice
on Reduction of Income Tax in Relation to Interests and Gains Derived by
Foreign Enterprises from the PRC, promulgated by the State Council on
November 18, 2000; and
|
·
|
Enterprise
Income Tax Law of the PRC (“New EIT Law”)
issued by NPC on March 16, 2007, which came into effect on January 1,
2008.
|
-8-
Income
Tax on Foreign Investment Enterprises
According
to the New EIT Law, PRC domestic enterprises and foreign investment enterprises
(including sino-foreign equity joint ventures, sino-foreign co-operative joint
ventures and WFOEs established in the territory of the PRC) are required to pay
a uniform income tax at a rate of 25% of their taxable income and the former tax
exemption, reduction and preferential treatments applicable to foreign
investment enterprises are revoked.
In 2009,
Foguang Group’s income tax was at a rate of 25%.
Value
Added Tax
The
Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the
State Council came into effect on January 1, 1994 and were amended in 2008.
Under these regulations and the Implementing Rules of the Provisional
Regulations of the PRC Concerning Value Added Tax, value added tax is imposed on
goods sold in or imported into the PRC and on processing, repair and replacement
services provided within the PRC.
Value
added tax payable in the PRC is charged on an aggregated basis at a rate of 13%
or 17% (depending on the type of goods involved) on the full price collected for
the goods sold or, in the case of taxable services provided, at a rate of 17% on
the charges for the taxable services provided but excluding, in respect of both
goods and services, any amount paid in respect of value added tax included in
the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and service in the same financial
year.
Business
Tax
According
to the Provisional Regulations of the PRC Concerning Business Tax promulgated by
the State Council on December 13, 1993 and came into effect on January 1, 1994,
which was revised by the State Council on November 10, 2008 and enforced from
January 1, 2009, business that provides services, assigns intangible assets or
sells immovable property became liable to business tax at a rate ranging from 3
to 5% of the charges of the services provided, intangible assets assigned or
immovable property sold, as the case may be.
Tax
on Dividends from PRC Enterprise with Foreign Investment
According
to the Applicable Foreign Enterprises Tax Law, income such as rental, royalty
and profits from the PRC derived by a foreign enterprise which has no
establishment in the PRC or has establishment but the income has no relationship
with such establishment is subject to a 10% withholding tax, subject to
reduction as provided by any applicable double taxation treaty, unless the
relevant income is specifically exempted from tax under the Applicable Foreign
Enterprises Tax Law. The profit derived by a foreign investor from a
PRC enterprise with foreign investment is exempted from PRC withholding tax
according to the Applicable Foreign Enterprises Tax Law.
WFOE
WFOEs are
governed by the Law of the PRC Concerning Enterprises with Sole Foreign
Investments, which was promulgated on April 12, 1986 and amended on October 31,
2000, and its Implementation Regulations promulgated on December 12, 1990 and
amended on April 12,2001 (together the “Foreign Enterprises
Law”).
(a) Procedures
for establishment of a WFOE
|
The
establishment of a WFOE will have to be approved by the MOFCOM (or its
delegated authorities). If two or more foreign investors
jointly apply for the establishment of a WFOE, a copy of the contract
between the parties must also be submitted to the MOFCOM (or its delegated
authorities) for its record. A WFOE must also obtain a business
license from the SAIC before it can commence
business.
|
(b) Nature
|
A
WFOE is a limited liability company under the Foreign Enterprises
Law. It is a legal person which may independently assume civil
obligations, enjoy civil rights and has the right to own, use and dispose
of property. It is required to have a registered capital
contributed by the foreign investor(s). The liability of the
foreign investor(s) is limited to the amount of registered capital
contributed. A foreign investor may make its contributions by
installments and the registered capital must be contributed within the
period as approved by the MOFCOM (or its delegated authorities) in
accordance with relevant
regulations.
|
-9-
(c) Profit
distribution
|
The
Foreign Enterprise Law provides that after payment of taxes, a WFOE must
make contributions to a reserve fund, an enterprise development fund and
an employee bonus and welfare fund. The allocation ratio for
the employee bonus and welfare fund may be determined by the
enterprise. However, at least 10% of the after tax profits must
be allocated to the reserve fund. If the cumulative total of allocated
reserve funds reaches 50% of an enterprise’s registered capital, the
enterprise will not be required to make any additional contribution. The
reserve fund may be used by a WFOE to make up its losses and with the
consent of the examination and approval authority, can also be used to
expand its production operations and to increase its capital. The
enterprise is prohibited from distributing dividends unless the losses (if
any) of previous years have been made up. The development fund is used for
expanding the capital base of the company by way of capitalization issues.
The employee bonus and welfare fund can only be used for the collective
benefit and facilities of the employees of the
WFOE.
|
Catalogue
for the Guidance of Foreign Investment Industries
China
issued the Catalogue for the Guidance of Foreign Investment Industries (“Guidance Catalogue”)
in 1995, which was amended in 2002, 2004 and 2007 respectively. The current
version of the Guidance Catalogue was promulgated by the MOFCOM and the National
Development and Reform Commission (“NDRC”) on October 31,
2007 and became effective as of December 1, 2007, which retains the
classification methodology and organizational structure used in the previous
versions without significant changes. The Guidance Catalogue divides foreign
investments into four categories:
(i)
Encouraged Category. There are various incentives and preferential treatments
for “encouraged” projects, mainly tax exemptions and rebates. Most foreign
investment projects in the “encouraged” sector are allowed to take the form of
WFOE;
(ii)
Permitted Category. Sectors not listed therein belong to the “permitted”
category and they are determined by the rule of exception. Therefore, unless the
items are transferred among the “encouraged”, “restricted” and “prohibited”
categories, any addition to or deletion from the “encourage”, “restricted” and
“prohibited” categories would consequently affect the scope of the “permitted”
category. Like those in the “encouraged” sector, foreign investment projects in
the “permitted” sector are allowed to take the form of WFOE. However, they are
generally not eligible for extra incentives and preferential
treatments;
(iii)
Restricted Category. There are stricter approvals or filing requirements for
“restricted” projects. Furthermore, foreign investment projects in the
“restricted” sectors may be required to take the form of Joint Venture. The
foreign investors may only hold a minority interest in the investment projects;
and
(iv)
Prohibited Category. Foreign investments are not allowed in these
sectors.
Foreign
Exchange Controls
Major
reforms have been introduced to the foreign exchange control system of the PRC
since 1993.
On
December 28, 1993, the People’s Bank of China (“PBOC”), with the
authorization of the State Council issued the Notice on Further Reform of the
Foreign Exchange Control System which came into effect on January 1, 1994. Other
new regulations and implementation measures include the Regulations on the
Foreign Exchange Settlement, Sale and Payments which were promulgated on June
20, 1996 and took effect on July 1, 1996 and which contain detailed provisions
regulating the settlement, sale and payment of foreign exchange by enterprises,
individuals, foreign organizations and visitors in the PRC and the regulations
of the PRC on Foreign Exchange Control which were promulgated on January 1, 1996
and took effect on April 1, 1996 and which contain detailed provisions in
relation to foreign exchange control.
The
foreign exchange earnings of all PRC enterprises, other than those foreign
investment enterprises (“FIE”), who are
allowed to retain a part of their regular foreign exchange earnings or
specifically exempted under the relevant regulations, are to be sold to
designated banks. Foreign exchange earnings obtained from borrowings from
foreign institutions or issues of shares or bonds denominated in foreign
currency need not be sold to designated banks, but must be kept in foreign
exchange bank accounts of designated banks unless specifically approved
otherwise.
At
present, control of the purchase of foreign exchange is relaxed. Enterprises
within the PRC which require foreign exchange for their ordinary trading and
non-trading activities, import activities and repayment of foreign debts may
purchase foreign exchange from designated banks if the application is supported
by the relevant documents. Furthermore, FIEs may distribute profit to their
foreign investors with funds in their foreign exchange bank accounts kept with
designated banks. Should such foreign exchange be insufficient, enterprises may
purchase foreign exchange from designated banks upon the presentation of the
resolutions of the directors on the profit distribution plan of the particular
enterprise.
-10-
Although
the foreign exchange control over transactions under current accounts has
decreased, enterprises shall obtain approval from SAFE before they accept
foreign-currency loans, provide foreign currency guarantees, make investments in
foreign countries or carry out any other capital account transactions involving
the purchase of foreign currencies.
In
foreign exchange transactions, designated banks may freely determine applicable
exchange rates based on the rates publicized by PBOC and subject to certain
governmental restrictions.
On
October 21,
2005, SAFE issued the Notice of the State
Administration of Foreign Exchange on Exchange Control Issues Relating to
Financing and Reverse Investment by Persons Resident in the People’s Republic of
China Through Offshore Special Purpose Vehicles (“SAFE Notice No. 75”),
which became effective as of November 1, 2005. According to the SAFE Notice No.
75, prior registration with the local SAFE branch is required for PRC residents
to establish or to control an offshore company for the purposes of financing
that offshore company with assets or equity interests in an onshore enterprise
located in the PRC. An amendment to registration or filing with the local SAFE
branch by such PRC resident is also required for the injection of equity
interests or assets of an onshore enterprise in the offshore company or overseas
funds raised by such offshore company, or any other material change involving a
change in the capital of the offshore company.
Moreover,
the SAFE Notice No. 75 applies retroactively. As a result, PRC residents who
have established or acquired control of offshore companies that have made
onshore investments in the PRC in the past are required to complete the relevant
registration procedures with the local SAFE branch by March 31, 2006. Under the
relevant rules, failure to comply with the registration procedures set forth in
the SAFE Notice No. 75 may result in restrictions being imposed on the foreign
exchange activities of the relevant onshore company, including the increase of
its registered capital, the payment of dividends and other distributions to its
offshore parent or affiliate and the capital inflow from the offshore entity,
and may also subject relevant PRC residents to penalties under PRC foreign
exchange administration regulations. PRC residents who control our Company from
time to time are required to register with the SAFE in connection with their
investments in us.
PRC
Funeral Regulations and Compliance with Environmental Laws
Our
operations are subject to regulations and supervision under state, and local
laws, ordinances, and regulations, including extensive regulations concerning
cemetery construction, sales of funeral and cemetery products and services, and
various other aspects of our business.
We are
subject to the requirements of the Regulations on Funeral and Interment Control
promulgated by Decree No. 225 of the State Council of the PRC on July 21, 1997
and Rules of Chongqing on Funeral and Interment Control promulgated by the local
government on May 29, 1998. Pursuant to the laws and regulations, the type of
funeral equipment we use and the size of burial vaults we construct and sell to
our customers must comply with state unified specifications and
standards. In addition, any construction of cemetery or funeral home
must be approved by the Administration of Civil Affairs and the construction
must be limited away from a certain areas such as cultivated land, forest land,
urban parks, scenic spots, protected areas of water resources, railways and
highways.
We
believe that we are in substantial compliance with all such laws and
regulations.
Seasonality
The death
care business is relatively stable and predictable. However, we
generally experience fewer sales in the summer season due to the extreme hot
weather in Chongqing since less people are willing to conduct site visits in
extreme heat; even though these decreases have not historically had any
significant impact on our results of operations.
Employees
The
following table sets forth the number of our employees for each of our areas of
operations and as a percentage of our total workforce as of December 31,
2009:
-11-
|
Number of
Employees
|
%
of Employees
|
|||
Management
& Administration
|
11
|
25.58
|
%
|
||
Finance
|
5
|
11.62
|
%
|
||
Cemetery
Administration Office
|
8
|
18.60
|
%
|
||
Sales
& Marketing
|
6
|
13.95
|
%
|
||
Construction
Projects
|
8
|
18.60
|
%
|
||
Customer
Service
|
5
|
11.62
|
%
|
||
TOTAL
|
43
|
100.0
|
%
|
Our
employees are interviewed and hired by our management team and generally, we
offer training programs to new workers to better understand our corporate
regulations and professional ethics and improve their relevant skills during the
training period. We believe that our relationship with our employees is
good. Management expects that our access to reasonably priced and
competent labor will continue into the foreseeable future.
We are in
full compliance with Chinese labor laws and regulations and are committed to
providing safe and comfortable working conditions and accommodations for
our employees. We believe in the importance of maintaining our social
responsibilities, and we are committed to providing employees with a
safe, clean and comfortable working environment and accommodations. Our
employees are also entitled to time off during public holidays. We are in full
compliance with our obligations to provide pension benefits to our workers, as
mandated by the PRC government. We strictly comply with Chinese labor laws and
regulations, and offer reasonable wages, life insurance and medical insurance to
our workers.
Environmental
Matters
Our
operations are subject to certain PRC environmental regulations. We
believe that we are in substantial compliance with all such laws and
regulations. For more information on such environmental laws and
regulations, please refer to the section on “PRC Funeral Regulations and
Compliance with Environmental Law.”
CORPORATE
INFORMATION
The
principal executive office for the Company is located at 239 Jianxin Road,
Jiangbei District, Chongqing, PRC 400000. The Company’s main
telephone number is (86) 023-67755514 and its fax
number is (86) 023-67759771.
You
should carefully consider the risks described below together with all of the
other information included in this prospectus before making an investment
decision with regard to our securities. The statements contained in or
incorporated into this Form 8-K that are not historic facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied by
forward-looking statements. If any of the following events described in
these risk factors actually occurs, our business, financial condition
or results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.
Risks
Relating to Our Business and Industry
Declines
in the number of deaths in our markets can cause a decrease in revenues. Changes
in the number of deaths are not predictable from market to market or over the
short term, and reliable statistics on deaths in particular markets can be
difficult to obtain.
Declines
in the number of deaths could cause cemetery services, property and merchandise
to decline which could decrease revenues. Although the National Population and
Family Planning Commission of the P.R.C. estimates that the population of people
that are 50 years old or older are expected to increase by approximately 3% per
year, from 276.8 million in 2000 to 298.6 million in 2010, longer life spans
could reduce the rate of deaths. Changes in the number of deaths can vary among
local markets and from quarter to quarter, and variations in the number of
deaths in our markets or from quarter to quarter are not predictable. These
variations can cause revenues to fluctuate.
-12-
The death care industry continues to
be increasingly competitive.
In China,
the death care industry is characterized by a large number of locally owned and
independent operations. To compete successfully, our cemeteries must be
maintained in good condition and we must maintain good reputations and high
professional standards, as well as offer attractive products and services at
competitive prices. In addition, we must market the Company in such a manner as
to distinguish us from our competitors. We have historically experienced price
competition from independent cemetery operators. New market entrants tend to
attempt to build market share by offering lower cost alternatives. If we are
unable to successfully compete, our financial condition, results of operations,
and cash flows could be materially adversely affected.
Because
the cemetery business is a high fixed-cost business, positive or negative
changes in revenue can have a disproportionately large effect on cash flow and
profits.
The
cemetery business must incur many of the costs of operating and maintaining
facilities, land and equipment regardless of the level of sales in any given
period. For example, we must pay salaries, utilities, property taxes and
maintenance costs and maintain the grounds of cemeteries regardless of the
number of sales. Because we cannot decrease these costs significantly or rapidly
when we experience declines in sales, declines in sales can cause margins,
profits and cash flow to decline at a greater rate than the decline in
revenues.
Changes
or increases in, or failure to comply with, regulations applicable to our
business could increase costs or decrease cash flows.
The death
care industry is subject to extensive regulation and licensing requirements
under state and local laws. Any construction of cemetery must be
approved by the Administration of Civil Affairs and the construction must be
limited away from a certain areas such as cultivated land, forest land, urban
parks, scenic spots, protected areas of water resources, railways and highways.
Compliance with these regulations is burdensome, and we are always at risk of
not complying with the regulations.
In
addition, from time to time, governments and agencies propose to amend or add
regulations, which could increase costs or decrease cash flows. If additional
legislation or regulations are adopted by the regulatory authorities of the
jurisdictions in which we operate, these and other possible proposals could have
a material adverse effect on us, our financial condition, our results of
operations, our cash flows and our future prospects.
If we are not able to respond
effectively to changing consumer preferences, our market share, revenues and
profitability could decrease.
Future
market shares, revenues and profits will depend in part on our ability to
anticipate, identify and respond to changing consumer preferences. In past
years, we have implemented new product and service strategies based on results
of customer surveys that we conduct on a continuous basis. However, we may not
correctly anticipate or identify trends in consumer preferences, or we may
identify them later than our competitors do. In addition, any strategies we may
implement to address these trends may prove incorrect or
ineffective.
Our ability to generate sales depends
on a number of factors, including sales incentives and local and general
economic conditions.
Declines
in sales would reduce our revenues and could reduce our future market share. As
we have modified our sales strategies to local standards, we are continuing to
refine the mix of service and product offerings in our cemetery operations,
including changes in our sales commission and incentive structure. These changes
could cause us to experience declines in sales in the short-run.
In
addition, a weakening economy at the local or national level have could cause
customers to reduce discretionary spending, which could lead to a decline in our
cemetery sales, and decrease the amounts customers are willing to pay for
cemetery products and services. Declines in cemetery property sales and average
revenue per event would reduce our current revenues. Declines in cemetery
products and services could also reduce our future revenues and market
share.
Increased or unanticipated costs,
such as insurance, taxes or litigation, may have a negative impact on our
earnings and cash flow.
Costs
which result from external factors, such as insurance, taxes or legal fees, are
difficult to estimate. These costs may impair our ability to achieve earnings
growth in excess of revenue growth. Our 2010 plan assumes that we will be
successful in increasing earnings at a rate that is greater than revenue growth.
We can give no assurance that we will be successful in achieving such
increases.
-13-
The success of our business is
typically dependent upon one or a few key employees because of the localized and
personal nature of our business.
Death
care businesses have built local heritage and tradition through successive
generations, providing a foundation for ongoing business opportunities from
established client family relationships and related referrals. We believe these
relationships build trust in the community and are a key driver to market share.
Our businesses, which tend to serve small local markets, usually have one or a
few key employees that drive our relationships. We can give no assurance that we
can retain these employees or that these relationships will drive market
share.
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
Foguang,
which commenced business in 2002, has a limited operating history. Accordingly,
you should consider our future prospects in light of the risks and uncertainties
experienced by early-stage companies in China. Some of these risks
and uncertainties relate to our ability to:
·
|
maintain
our market position;
|
·
|
attract
additional customers and increase spending per
customer;
|
·
|
respond
to competitive market conditions;
|
·
|
respond
to changes in our regulatory
environment;
|
·
|
maintain
effective control of our costs and
expenses;
|
·
|
raise
sufficient capital to sustain and expand our business;
and
|
·
|
attract,
retain and motivate qualified
personnel.
|
If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
If
we fail to implement our business strategy, our financial performance and our
growth could be materially and adversely affected.
Our
future financial performance and success are dependent in large part upon our
ability to implement our business strategy successfully. Our strategic plan is
focused on cost management and the continued implementation of key revenue
initiatives, including strategic pricing, designed to generate future internal
growth in our core cemetery operations. We may not be able to implement our
business strategy successfully or achieve the anticipated benefits of our
business plan. Many of the factors necessary for the execution of our strategic
plan, such as the number of deaths and general economic conditions, are beyond
our control. If we are unable to do so, our long-term growth and profitability
may be adversely affected. Even if we are able to implement some or all of the
initiatives of our business plan successfully, our operating results may not
improve to the extent we anticipate, or at all. Implementation of our business
strategy could also be affected by a number of factors beyond our control, such
as increased competition, legal developments, government regulation, general
economic conditions or increased operating costs or expenses. In addition, to
the extent we have misjudged the nature and extent of industry trends or our
competition; we may have difficulty achieving our strategic objectives. Any
failure to implement our business strategy successfully may adversely affect our
business, financial condition and results of operations. In addition, we may
decide to alter or discontinue certain aspects of our business strategy at any
time.
-14-
We
may be unable to sustain our past growth or manage our future growth, which may
have a material adverse effect on our future operating results.
We have
experienced rapid growth since our inception, and have increased our net sales
from $5 million in 2002 to $18.3 million in 2009. We anticipate that
our future growth rate will depend upon various factors, including the strength
of our brand image, the market success of our current and future products, the
success or our growth strategies, competitive conditions and our ability to
manage our future growth. Future growth may place a significant
strain on our management and operations. As we continue to grow in our
operations, our operational, administrative, financial and legal procedures and
controls will need to be expanded. As a result, we may need to train and manage
an increasing number of employees, which could distract our management team from
our business. Our future success will depend substantially on the ability of our
management team to manage our anticipated growth. If we are unable to anticipate
or manage our growth effectively, our future operating results could be
adversely affected.
We
may acquire additional complementary businesses or technologies, which may
require us to incur substantial costs for which we may never realize the
anticipated benefits.
We may in
the future acquire complementary businesses or technologies, although we
currently have no commitments or agreements to do so. As a result of any
acquisitions we pursue, management’s attention and resources may be diverted
from our other businesses. An acquisition may also involve a significant
purchase price and significant transaction-related expenses.
Achieving
the benefits of any acquisition involves additional risks,
including:
•
|
difficulty
assimilating acquired operations, technologies and
personnel;
|
•
|
inability
to retain management and other key personnel of the acquired
business;
|
•
|
changes
in management or other key personnel that may harm relationships with the
acquired business’s customers and employees;
and
|
•
|
diversion
of management attention as a result of the integration
process.
|
We cannot
ensure that we will realize any of the anticipated benefits of any acquisition,
and if we fail to realize these anticipated benefits, our operating performance
could suffer.
Corporate
insiders or their affiliates may be able to exercise significant control matters
requiring a vote of our stockholders and their interests may differ from the
interests of our other stockholders.
Immediately
after the closing of the Exchange Transaction, our incoming officers, directors
and their affiliates as a group will beneficially own approximately 65.27% of
our then outstanding Common Stock. As a result, these stockholders
may be able to exercise significant control over matters requiring approval by
our stockholders. Matters that require the approval of our stockholders include
the election of directors and the approval of mergers or other business
combination transactions. Certain transactions are effectively not possible
without the approval of these officers, directors and their affiliates,
including, proxy contests, tender offers, open market purchase programs or other
transactions that can give our stockholders the opportunity to realize a premium
over the then-prevailing market prices for their shares of our common
stock.
We
will be required to evaluate our internal control over financial reporting under
Section 404 of the Sarbanes-Oxley Act.
Failure
to timely comply with the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002 (“Section
404”) or any adverse results from such evaluation could result in a loss
of investor confidence in our financial reports and have an adverse effect on
the trading price of our debt and equity securities.
We
currently are not an “accelerated filer” as defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended. Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to include an internal control report
with our Annual Report on Form 10-K. That report must include management’s
assessment of the effectiveness of our internal control over financial reporting
as of the end of the fiscal year. This report must also include
disclosure of any material weaknesses in internal control over financial
reporting that we have identified. Additionally, for the fiscal year
ended March 31, 2011, our independent registered public accounting firm will be
required to issue a report on management’s assessment of our internal control
over financial reporting and their evaluation of the operating effectiveness of
our internal control over financial reporting. Our assessment
requires us to make subjective judgments and our independent registered public
accounting firm may not agree with our assessment.
Achieving
compliance with Section 404 within the prescribed period may require us to incur
significant costs and expend significant time and management
resources. We cannot assure you that we will be able to fully comply
with Section 404 or that, we and our independent registered public accounting
firm would be able to conclude that our internal reported financial information,
which could have an adverse effect on the trading price of our securities, as
well as subject us to civil or criminal investigations and penalties. In
addition, our independent registered public accounting firm may not agree with
our management’s assessment or conclude that our internal control over financial
reporting is operating effectively. We will continue to consistently
improve our internal control over the financial reporting with our best efforts
and we plan to engage assistance from outside experts in doing so.
-15-
Our
operations and the operations of our suppliers and manufacturers are vulnerable
to interruption by fire, earthquake, hurricanes, power loss, telecommunications
failure and other events beyond our control. In the event of a major natural
disaster, we could experience business interruptions, destruction of facilities
and loss of life. In the event that a material business interruption occurs that
affects us or our suppliers or manufacturers, deliveries could be delayed and
our business and financial results could be harmed.
Risks
Related to Our Corporate Structure
We conduct our business
through Foguang by means of contractual arrangements. If the Chinese government
determines that these contractual arrangements do not comply with applicable
regulations, our business could be adversely affected. If the PRC regulatory
bodies determine that the agreements that establish the structure for operating
our business in China do not comply with PRC regulatory restrictions on foreign
investment, we could be subject to severe penalties. In addition, changes in
such Chinese laws and regulations may materially and adversely affect our
business.
There are
uncertainties regarding the interpretation and application of PRC laws, rules
and regulations, including but not limited to the laws, rules and regulations
governing the validity and enforcement of the contractual arrangements between
Ran Ji and Foguang. Although we have been advised by our PRC counsel, that based
on their understanding of the current PRC laws, rules and regulations, the
structure for operating our business in China (including our corporate structure
and contractual arrangements with Foguang and its owners) comply with all
applicable PRC laws, rules and regulations, and do not violate, breach,
contravene or otherwise conflict with any applicable PRC laws, rules or
regulations, we cannot assure you that the PRC regulatory authorities will not
determine that our corporate structure and contractual arrangements violate PRC
laws, rules or regulations. If the PRC regulatory authorities determine that our
contractual arrangements are in violation of applicable PRC laws, rules or
regulations, our contractual arrangements will become invalid or unenforceable.
In addition, new PRC laws, rules and regulations may be introduced from time to
time to impose additional requirements that may be applicable to our contractual
arrangements. For example, the PRC Property Rights Law that became effective on
October 1, 2007 may require us to register with the relevant government
authority the security interests on the equity interests in Foguang granted to
us under the equity pledge agreements that are part of the contractual
arrangements. If we are required to register such security interests, failure to
complete such registration in a timely manner may result in such equity pledge
agreements to be unenforceable against third party claims.
The
Chinese government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new Chinese laws or regulations on our businesses.
We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future Chinese laws or regulations.
As a result, we may be subject to sanctions, including fines, and could be
required to restructure our operations or cease to provide certain services. Any
of these or similar actions could significantly disrupt our business operations
or restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
If Ran Ji
or Foguang are determined to be in violation of any existing or future PRC laws,
rules or regulations or fail to obtain or maintain any of the required
governmental permits or approvals, the relevant PRC regulatory authorities would
have broad discretion in dealing with such violations, including:
·
|
revoking
the business and operating licenses of our PRC consolidated
entities;
|
·
|
discontinuing
or restricting the operations of our PRC consolidated
entities;
|
·
|
imposing
conditions or requirements with which we or our PRC consolidated entities
may not be able to comply;
|
·
|
requiring
us or our PRC consolidated entities to restructure the relevant ownership
structure or operations;
|
-16-
·
|
restricting
or prohibiting our use of the proceeds from our initial public offering to
finance our business and operations in China;
or
|
·
|
imposing
fines.
|
The
imposition of any of these penalties would severely disrupt our ability to
conduct business and have a material adverse effect on our financial condition,
results of operations and prospects.
Our
contractual arrangements with Foguang and its owners may not be as effective in
providing control over these entities as direct ownership.
We have
no equity ownership interest in Foguang, and rely on contractual arrangements to
control and operate the company and its businesses. These contractual
arrangements may not be as effective in providing control over the company as
direct ownership. For example, Foguang could fail to take actions required for
our business despite its contractual obligation to do so. If Foguang fails to
perform under its agreements with us, we may have to rely on legal remedies
under Chinese law, which may not be effective. In addition, we cannot assure you
that the owners of Foguang will act in our best interests.
Because
we rely on the consulting services agreement with Foguang for our revenue, the
termination of this agreement will severely and detrimentally affect our
continuing business viability under our current corporate
structure.
We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between Ran Ji, our indirect wholly
owned subsidiary, and Foguang. As a result, we currently rely entirely for our
revenues on dividends payments from Ran Ji after it receives payments from
Foguang pursuant to the consulting services agreement which forms a part of the
contractual arrangements. The consulting services agreement may be terminated by
written notice of Ran Ji or Foguang in the event that: (a) Foguang causes a
material breach of the agreement, provided that if the breach does not relate to
a financial obligation of the breaching party, that party may attempt to remedy
the breach within 14 days following the receipt of the written notice; (b) one
party becomes bankrupt, insolvent, is the subject of proceedings or arrangements
for liquidation or dissolution, ceases to carry on business, or becomes unable
to pay its debts as they become due; (c) Ran Ji terminates its operations; or
(d) circumstances arise which would materially and adversely affect the
performance or the objectives of the agreement. Additionally, Ran Ji may
terminate the consulting services agreement without cause. Because neither we
nor our direct and indirect subsidiaries own equity interests of Foguang, the
termination of the consulting services agreement would sever our ability to
continue receiving payments from Foguang under our current holding company
structure. While we are currently not aware of any event or reason that may
cause the consulting services agreement to terminate, we cannot assure you that
such an event or reason will not occur in the future. In the event that the
consulting services agreement is terminated, this may have a severe and
detrimental effect on our continuing business viability under our current
corporate structure, which in turn may affect the value of your
investment.
We rely principally on dividends paid
by our consolidated operating entity to fund any cash and financing requirements
we may have, and any limitation on the ability of our consolidated PRC entities
to pay dividends to us could have a material adverse effect on our ability to
conduct our business.
We are a
holding company, and rely principally on dividends paid by our consolidated PRC
operating entity for cash requirements, including the funds necessary to service
any debt we may incur. In particular, we rely on earnings generated by Foguang,
which are passed on to us through Ran Ji. If any of our consolidated operating
subsidiaries incurs debt in its own name in the future, the instruments
governing the debt may restrict dividends or other distributions on its equity
interest to us. In addition, the PRC tax authorities may require us to adjust
our taxable income under the contractual arrangements Ran Ji currently have in
place with Foguang, in a manner that would materially and adversely affect our
ability to pay dividends and other distributions on our equity
interest.
Furthermore,
applicable PRC laws, rules and regulations permit payment of dividends by our
consolidated PRC entity only out of its retained earnings, if any, determined in
accordance with PRC accounting standards. Under PRC laws, rules and regulations,
our consolidated PRC entities are required to set aside at least 10.0% of their
after-tax profit based on PRC accounting standards each year to their statutory
surplus reserve fund until the accumulative amount of such reserves reach 50.0%
of their respective registered capital. As a result, our consolidated PRC entity
is restricted in its ability to transfer a portion of its net income to us
whether in the form of dividends, loans or advances. As of March 31, 2009, we
had retained earnings of $ 5,834,633. Our retained earnings are not
distributable as cash dividends. Any limitation on the ability of our
consolidated operating subsidiaries to pay dividends to us could materially and
adversely limit our ability to grow, make investments or acquisitions that could
be beneficial to our businesses, pay dividends or otherwise fund and conduct our
business.
-17-
Management
members of Foguang have potential conflicts of interest with us, which may
adversely affect our business and your ability for recourse.
Mr. Yiyou
Ran, our Chief Executive Officer and President, is also the Chairman of the
Board of Foguang. Mr. Jianquan Chen, who is our Deputy Director, is the General
Manager of Foguang. Conflicts of interests between their respective duties to
our company and Foguang may arise. As our directors and executive officer (in
the case of Mr. Ran), they have a duty of loyalty and care to us under U.S. and
Hong Kong law when there are any potential conflicts of interests between our
company and Foguang. We cannot assure you; however, that when conflicts of
interest arise, every one of them will act completely in our interests or that
conflicts of interests will be resolved in our favor. For example, they may
determine that it is in Foguang’s interests to sever the contractual
arrangements with Ran Ji; irrespective of the effect such action may have on us.
In addition, any one of them could violate his or her legal duties by diverting
business opportunities from us to others, thereby affecting the amount of
payment that Foguang is obligated to remit to us under the consulting services
agreement.
In the
event that you believe that your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against Foguang or
our officers or directors who are members of Foguang’s management, all of whom
reside within China. Even if you are successful in bringing an action, the laws
of China may render you unable to enforce a judgment against the assets of
Foguang and its management, all of which are located in China.
Risks
Related to Doing Business in China
Foguang
is subject to restrictions on making payments to us.
We are a
holding company incorporated in Delaware and do not have any assets or conduct
any business operations other than our indirect investments in Foguang. As a
result of our holding company structure, we rely entirely on payments from that
company under the contractual arrangements with our indirect wholly owned
subsidiary, Ran Ji. The Chinese government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies out
of China. We may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency. See “Government
control of currency conversion may affect the value of your investment.”
Furthermore, if our affiliated entity in China incurs debt on their own in the
future, the instruments governing the debt may restrict their ability to make
payments. If we are unable to receive all of the revenues from our operations
through these contractual arrangements, we may be unable to pay dividends on our
ordinary shares.
New labor laws in the PRC may
adversely affect our results of operations.
On
January 1, 2008, the PRC government promulgated the Labor Contract Law of
the PRC, or the New Labor Contract Law. The New Labor Contract Law
imposes greater liabilities on employers and significantly impacts the cost of
an employer’s decision to reduce its workforce. Further, it requires
certain terminations to be based upon seniority and not merit. In the event we
decide to significantly change or decrease our workforce, the New Labor Contract
Law could adversely affect our ability to enact such changes in a manner that is
most advantageous to our business or in a timely and cost effective manner, thus
materially and adversely affecting our financial condition and results of
operations.
Because
our assets are located overseas, shareholders may not receive distributions that
they would otherwise be entitled to if we were declared bankrupt or
insolvent.
All of
our assets are located in the PRC. Because our assets are located overseas, our
assets may be outside of the jurisdiction of U.S. courts to administer if we are
the subject of an insolvency or bankruptcy proceeding. As a result, if we
declared bankruptcy or insolvency, our shareholders may not receive the
distributions on liquidation that they would
otherwise be entitled to if our assets were to be located within the
U.S., under U.S. Bankruptcy law.
Adverse changes in economic and political
policies of the PRC government could have a material adverse effect on the
overall economic growth of China, which could adversely affect our
business.
All of
our business operations are currently conducted in the PRC, under the
jurisdiction of the PRC government. Accordingly, our results of
operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in
China. China’s economy differs from the economies of most developed
countries in many respects, including with respect to the amount of government
involvement, level of development, growth rate, and control of foreign exchange
and allocation of resources. While the PRC economy has experienced
significant growth in the past 20 years, growth has been uneven across different
regions and among various economic sectors of China. The PRC
government has implemented various measures to encourage economic development
and guide the allocation of resources. Some of these measures benefit
the overall PRC economy, but may also have a negative effect on
us. For example, our financial condition and results of operations
may be adversely affected by government control over capital investments or
changes in tax regulations that are applicable to us. Since early
2004, the PRC government has implemented certain measures to control the pace of
economic growth. Such measures may cause a decrease in the level of
economic activity in China, which in turn could adversely affect our results of
operations and financial condition.
-18-
Unprecedented
rapid economic growth in China may increase our costs of doing business, and may
negatively impact our profit margins and/or profitability.
Our
business depends in part upon the availability of relatively low-cost labor and
materials. Rising wages in China may increase our overall costs of
production. In addition, rising raw material costs, due to strong
demand and greater scarcity, may increase our overall costs of
production. If we are not able to pass these costs on to our
customers in the form of higher prices, our profit margins and/or profitability
could decline.
You may face difficulties in protecting
your interests, and your ability to protect your rights through the U.S. federal
courts may be limited, because our subsidiaries are incorporated in non-U.S.
jurisdictions, we conduct substantially all of our operations in China, and all
of our officers reside outside the United States.
Although
we are incorporated in Delaware, all of our business operations are conducted in
China by Foguang. Most of our officers and directors reside in China
and some or all of the assets of those persons are located outside of the United
States. As a result, it may be difficult or impossible for you to
bring an action against us or against these individuals in China in the event
that you believe that your rights have been infringed under the securities laws
or otherwise. Even if you are successful in bringing an action of
this kind, the laws of the PRC may render you unable to enforce a judgment
against our assets or the assets of our directors and officers.
As a
result of all of the above, our public shareholders may have more difficulty in
protecting their interests through actions against our management, directors or
major shareholders than would shareholders of a corporation doing business
entirely within the United States.
Governmental
control of currency conversion may affect the value of your
investment.
The
Chinese government imposes controls on the convertibility of RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive substantially all of our revenues in RMB. Under our current structure,
our income is primarily derived from payments from Foguang. Shortages in the
availability of foreign currency may restrict the ability of our Chinese
subsidiaries and our affiliated entity to remit sufficient foreign currency to
pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing Chinese foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be made
in foreign currencies without prior approval from China State Administration of
Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in foreign currencies.
The Chinese government may also at its discretion restrict access in the future
to foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies
to our stockholders.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while a significant
portion of our financial assets are denominated in U.S. dollars. We rely
entirely on fees paid to us by our affiliated entity in China. Any significant
fluctuation in the value of RMB may materially and adversely affect our cash
flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, our stock in U.S. dollars. For example, an appreciation of
RMB against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.
-19-
Dividends we receive from our
subsidiary located in the PRC may be subject to PRC withholding
tax.
The
recently enacted PRC Enterprise Income Tax Law, or the EIT Law, and the
implementation regulations for the EIT Law issued by the PRC State Council,
became effective as of January 1, 2008. The EIT Law provides that a maximum
income tax rate of 20% is applicable to dividends payable to non-PRC investors
that are “non-resident enterprises,” to the extent such dividends are derived
from sources within the PRC, and the State Council has reduced such rate to 10%
through the implementation regulations. We are a Delaware holding company and
substantially all of our income is derived from the operations of Foguang
located in the PRC, which is contractually obligated to pay its quarterly
profits to our WFOE. Therefore, dividends paid to us by our WFOE in China may be
subject to the 10% income tax if we are considered as a “non-resident
enterprise” under the EIT Law. If we are required under the EIT Law and its
implementation regulations to pay income tax for any dividends we receive from
our WFOE, it may have a material and adverse effect on our net income and
materially reduce the amount of dividends, if any, we may pay to our
shareholders.
We
face risks related to health epidemics and other outbreaks.
Our
business could be adversely affected by the effects of an epidemic outbreak,
such as the SARS epidemic in April 2004. Any prolonged recurrence of such
adverse public health developments in China may have a material adverse effect
on our business operations. For instance, health or other government regulations
adopted in response may require temporary closure of our stores or offices. Such
closures would severely disrupt our business operations and adversely affect our
results of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other
epidemic.
Risks
Related to an Investment in Our Securities
Our
stock is categorized as a penny stock. Trading of our stock may be
restricted by the SEC’s penny stock regulations which may limit a shareholder’s
ability to buy and sell our stock.
Our stock
is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally
defines “penny stock” to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules; the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock
rules. Consequently, these penny stock rules may affect the ability
of broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our common
stock.
FINRA sales
practice requirements may also limit a shareholder’s ability to buy and sell our
stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules
that require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable for
that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer’s financial status, tax status, investment
objectives and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low priced securities
will not be suitable for at least some customers. The FINRA requirements make it
more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
-20-
We
expect to experience volatility in our stock price, which could negatively
affect shareholders’ investments.
The
market price for shares of our common stock may be volatile and may fluctuate
based upon a number of factors, including, without limitation, business
performance, news announcements or changes in general market
conditions.
Other
factors, in addition to the those risks included in this section, that may have
a significant impact on the market price of our common stock include, but are
not limited to:
·
|
receipt
of substantial orders or order cancellations of
products;
|
·
|
quality
deficiencies in services or
products;
|
·
|
international
developments, such as technology mandates, political developments or
changes in economic
policies;
|
·
|
changes
in recommendations of securities
analysts;
|
·
|
shortfalls
in our backlog, revenues or earnings in any given period relative to the
levels expected by securities analysts or projected by
us;
|
·
|
government
regulations, including stock option accounting and tax
regulations;
|
·
|
energy
blackouts;
|
·
|
acts
of terrorism and war;
|
·
|
widespread
illness;
|
·
|
proprietary
rights or product or patent
litigation;
|
·
|
strategic
transactions, such as acquisitions and divestitures;
or
|
·
|
rumors
or allegations regarding our financial disclosures or
practices.
|
In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its
securities. Due to changes in the volatility of our common stock
price, we may be the target of securities litigation in the
future. Securities litigation could result in substantial costs and
divert management’s attention and resources.
To
date, we have not paid any cash dividends and no cash dividends will be paid in
the foreseeable future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay
dividends. Even if the funds are legally available for distribution,
we may nevertheless decide not to pay any dividends. We presently
intend to retain all earnings for our operations.
Our
common shares are not currently traded at high volume, and you may be unable to
sell at or near ask prices or at all if you need to sell or liquidate a
substantial number of shares at one time.
We cannot
predict the extent to which an active public market for its common stock will
develop or be sustained. However, we do not rule out the possibility
of applying for listing on the NYSE Alternext (fka American Stock Exchange) or
Nasdaq Capital Market or other markets.
Our
common shares are currently traded, but currently with low volume, based on
quotations on the “Over-the-Counter Bulletin Board”, meaning that the number of
persons interested in purchasing our common shares at or near bid prices at any
given time may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are a small
company which is still relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a
consequence, there may be periods of several days or more when trading activity
in our shares is minimal or non-existent, as compared to a seasoned issuer which
has a large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We cannot
give you any assurance that a broader or more active public trading market for
our common stock will develop or be sustained, or that trading levels will be
sustained.
-21-
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
“penny stocks” has suffered in recent years from patterns of fraud and
abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the
abuses that have occurred historically in the penny stock
market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
The occurrence of these patterns or practices could increase the future
volatility of our share price.
Our
corporate actions are substantially controlled by our principal shareholders and
affiliated entities.
Our
principal shareholders, who includes our officers and directors, and their
affiliated entities, own approximately 80% of our outstanding shares of common
stock. These shareholders, acting individually or as a group, could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition,
because of the percentage of ownership and voting concentration in these
principal shareholders and their affiliated entities, elections of our board of
directors will generally be within the control of these shareholders and their
affiliated entities. While all of our shareholders are entitled to vote on
matters submitted to our shareholders for approval, the concentration of shares
and voting control presently lies with these principal shareholders and their
affiliated entities. As such, it would be difficult for shareholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all of our
shareholders.
Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
proposed legislative initiatives following the Enron bankruptcy are likely to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting
rules. These and other potential changes could materially increase
the expenses we report under generally accepted accounting principles, and
adversely affect our operating results.
-22-
SUMMARY
CONSOLIDATED FINANCIAL DATA
You
should read the summary consolidated financial data set forth below in
conjunction with “Management’s Discussion and Analysis of Financial Condition or
Plan of Operations” and our predecessor’s financial statements and the related
notes included elsewhere in this Form 8-K. The financial data for the
years ended March 31, 2009 and 2008 were derived from our audited financial
statements, and for the three months and nine months ended December 31, 2009 and
2008 from our reviewed financial statements, included in this Form
8-K. The historical results are not necessarily indicative of the
results to be expected for any future period.
(Amounts
in USD)
Three
Months Ended
December
31,
|
Nine Months Ended
December
31,
|
Twelve Months
Ended March
31,
|
||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||
Income statement data:
|
||||||||||||||||||||||||
Revenues
|
11,403,585 | 1,969,952 | 26,467,501 | 11,186,413 | 18,313,720 | 22,121,639 | ||||||||||||||||||
Cost
of Goods Sold
|
5,339,808 | 1,014,616 | 12,110,391 | 6,407,734 | 9,938,853 | 12,694,927 | ||||||||||||||||||
Gross
Profit
|
6,063,777 | 955,336 | 14,357,110 | 4,778,679 | 8,374,867 | 9,426,712 | ||||||||||||||||||
Total
Operating Expenses
|
643,198 | 194,838 | 1,397,182 | 868,277 | 1,471,475 | 1,685,737 | ||||||||||||||||||
Income
from Operations
|
5,420,579 | 760,498 | 12,959,928 | 3,910,402 | 6,903,392 | 7,740,975 | ||||||||||||||||||
Total
Other Income
|
150,451 | 39,584 | 352,153 | 186,903 | 283,560 | 330,614 | ||||||||||||||||||
Earnings
Before Tax
|
5,571,030 | 800,082 | 13,312,081 | 4,097,305 | 7,186,952 | 8,071,589 | ||||||||||||||||||
Income
Tax
|
(1,414,552 | ) | (67,002 | ) | (3,267,843 | ) | (836,642 | ) | (1,689,693 | ) | (2,346,605 | ) | ||||||||||||
Net
Income
|
4,156,478 | 733,080 | 10,044,238 | 3,260,663 | 5,497,259 | 5,724,984 |
Footnotes
The
reverse take-over transaction under the Exchange Agreement is deemed to be a
reverse acquisition, where the Company (the legal acquirer) is considered the
accounting acquiree and Gold Industry (the legal acquiree) is considered the
accounting acquirer. Certain pro forma financial information for
the Exchange Transaction is included in Exhibit 99.2 of this Form
8-K.
Balance Sheet
Data
(Amounts
in USD)
At December
31, 2009
|
At
March 31,
2009
|
At
March 31,
2008
|
||||||||||
Consolidated
Balance Sheet Data:
|
(Unaudited)
|
|
|
|||||||||
Cash
|
$
|
4,608,455
|
$
|
1,392,961
|
$
|
1,719,620
|
||||||
Total
Current Assets
|
$
|
13,703,193
|
$
|
7,713,109
|
$
|
11,766,222
|
||||||
Total
Current Liabilities
|
$
|
4,152,734
|
$
|
3,777,072
|
$
|
5,787,182
|
||||||
Total
Shareholders’ Equity
|
$
|
29,869,475
|
$
|
19,774,555
|
$
|
13,765,547
|
-23-
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The
following discussion and analysis of the results of operations and financial
condition of Gold Industry for the fiscal years ended March 31, 2009, March 31,
2008 and for the three months ended December 31, 2009 and 2008
and nine months ended December 31, 2009 and 2008 should be read in
conjunction with the Selected Consolidated Financial Data, the Gold
Industry financial statements, and the notes to those financial statements
that are included elsewhere in this Form 8-K. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors, Cautionary Notice
Regarding Forward-Looking Statements and Business sections in this Form 8-K. We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking statements.
OVERVIEW
Gold
Industry Limited (“Gold
Industry”) was incorporated in the Cayman Islands on September 11, 2009.
Gold Industry owns 100% of the issued and outstanding capital stock of Gold Holy
Industry Limited (“Gold Holy”),
a company organized in Hong Kong Special Administrative Region on September 29,
2009. Gold Holy owns 100% of the issued and outstanding capital stock of
Chongqing Ran Ji Industry Co., Ltd. (“Ran Ji”), a wholly foreign owned
enterprise (“WFOE”) established
in the PRC. On December 15, 2009, Ran Ji entered into a series of contractual
agreements with Chongqing Foguang Tourism Development (Group) Co., Ltd. (“Foguang”), a company incorporated
under the laws of the PRC, and its five owners, in which Ran Ji effectively
assumed management of the business activities of Foguang and has the right to
appoint all executives and senior management and the members of the board of
directors of Foguang. The contractual arrangements are comprised of a series of
agreements, including a Consulting Services Agreement and Operating Agreement,
through which Ran Ji has the right to advise, consult and manage Foguang and its
business operations for quarterly consulting fee in the amount of Foguang’s
quarterly net profit. Additionally, Foguang’s shareholders have pledged their
rights, titles and equity interest in Foguang as security for Ran Ji to collect
the consulting fee from Foguang through an Equity Pledge Agreement. In order to
further reinforce Ran Ji’s rights to control and manage Foguang, Foguang’s
shareholders have granted Ran Ji the exclusive right to exercise their voting
rights pursuant to a Voting Rights Proxy Agreement, as well as the exclusive
right and option to acquire all of their equity interests in Foguang through an
Option Agreement.
As a
result of these contractual arrangements, which, through Ran Ji, obligates Gold
Industry to absorb a majority of the risk of loss from Foguang’s activities and
enable Gold Industry to receive a majority of Foguang’s expected residual
returns, we believe that Foguang is a variable interest entity (VIE) under FASB
Interpretation No. 46R, “Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51”, because the owners of Foguang do not have the
characteristics of a controlling financial interest and Gold Industry should be
considered the primary beneficiary of Foguang. Accordingly, Gold Industry
consolidates Foguang’s results, assets and liabilities in its financial
statements.
In the
following discussion, references to “we,” “our,” “us,” or the “Company” refer to
Gold Industry and its consolidated entities, Gold Holy, Ran Ji and Foguang,
collectively.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities and expenses.
On an ongoing basis, we evaluate our estimates and judgments, including those
related to accrued expenses, fair valuation of stock related to stock-based
compensation and income taxes. We based our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
REVENUE
RECOGNITION
The
Company recognizes revenue in accordance with US GAAP, which requires that four
basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred; (3) the selling
price is fixed and determinable; and (4) collectability is reasonably assured.
Determination of criteria (3) and (4) are based on management’s judgments
regarding the fixed nature of the selling prices of the products delivered and
the collectability of those amounts.
-24-
The
Company has two revenue sources including the following revenue recognition
policies:
The
Company recognizes revenue from the sale of cemetery plots when it is realized
or realizable and earnings process is complete. In general, the Company records
revenue when the cemetery plot successfully completed, title has passed to the
customer in accordance with the terms of the sale and consideration is given.
The costs associated with cemetery products revenue are the costs to convert the
land into the actual burial plots. Additionally direct selling costs incurred in
selling the cemetery plots are recorded in cost of goods sold.
Park
construction income is recognized when the Company is contracted to provides
services for third party clients. These services include the construction of
sidewalks, pagodas, landscaping and other structures for parks. These projects
are not associated with the Company’s sales of cemetery plots. Revenue is
recognized upon the completion of the park, and the project has been approved by
the customer and collection is assured. The costs associated with the park
construction income are raw material purchased for that specific project and
services performed by the Company recorded in cost of goods sold.
DEFERRED
REVENUE
The
Company recorded the deferred revenue related to land use rights that were
contributed to the Company by the People’s Republic of China under ASC Topic 958
FAS 116, "Accounting for Contributions Received and Contributions Made." As the
Company sells cemetery plots, a portion of the deferred revenue is recognized as
other income based on the number of cemetery plots that the Company sells during
the year.
ACCOUNTS
RECEIVABLE
Accounts
receivable are carried at original invoice amount less an estimate made for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis. Management’s judgment and estimates are made in connection with
establishing the allowance for doubtful accounts. Specifically, the Company
analyzes the aging of accounts receivable balances, historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in the customer payment terms. Significant changes in customer
concentration or payment terms, deterioration of customer credit-worthiness or
weakening in economic trends could have a significant impact on the
collectability of receivables and the Company’s operating results. If the
financial condition of the Company’s customers were to deteriorate, resulting in
an impairment of their ability to make payments, the Company will write off 100%
as bad debt.
INVENTORY
Inventory
consists of completed cemetery plots ready for sale. Inventory includes all
direct costs associated with land development and construction of cemetery
plots, including interest, costs of land use rights based on units of production
and other carrying costs incurred. Inventory is valued at the lower of cost or
market (determined on a weighted average cost basis) or net realizable value.
Management compares the cost of inventory with the net realizable value and an
allowance is made for impairment in the value of inventory if lower than
cost.
PROPERTY
AND EQUIPMENT
Property
and equipment are carried at cost. The cost of repairs and maintenance is
expensed as incurred; major replacements and improvements are capitalized. When
assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are included in
income in the year of disposition. Depreciation and amortization are
computed on the straight-line method over the following estimated useful lives
of the related assets.
INCOME
TAXES
The
Company accounts for income taxes in accordance with US GAAP. Deferred taxes are
provided on the liability method whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment. The
Company is governed by the Income Tax Law of the People’s Republic of China and
local income tax laws (the “PRC Income Tax Law”). Pursuant to the PRC Income Tax
Law, enterprises are subject to tax at a statutory rate of 25%. The local
government in the PRC has provided companies various incentives to encourage
economic development in the region. Such incentives include reduced tax rates
and other measures.
-25-
LAND
VALUATION
During
2005, the Company received land use rights which were contributed by People’s
Republic of China (“PRC”). The
land use rights include Chongqing Gui Yuan Cemetery located in Changshou, China.
Under PRC’s governmental regulations, the government owns all
land. However, PRC would not directly assign the land use rights to
the Company’s management rather it assigned the land use rights to the Company
as a contribution. Therefore, the Company received the land use rights without
giving the government any consideration in return for the rights. At
December 31, 2005, the Company has recorded the fair value of the land use
rights under ASC Topic 958 FAS 116, "Accounting for Contributions Received and
Contributions Made", and the deferred revenue.
The
Company uses two separate methods to determine the value of the
land. First, the company hired an outside company to perform an
independent valuation of the land. The company hired ChongQing HengJi Accounting
firm to perform a valuation report on August 10, 2005. The valuation
given by ChongQing HengJi Accounting firm was approximately
$13.2M. In addition, the company performed its own valuation based on
projected future sales. The company then attributed 10% of the total
sales to the land and discounted it 12%, leading to a valuation of approximately
$10.3 million.
The land
use rights are expensed based upon the number of cemetery plots capitalized in
inventory using the units of production method.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2008, the Financial Accounting Standards Board (“FASB”) issued an accounting standard
update that delayed the effective date of fair value measurements accounting for
all non-financial assets and non-financial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until the beginning of the first quarter of
2009. The Company adopted this accounting standard update effective
January 1, 2009. The adoption of this update to non-financial assets and
liabilities, as codified in ASC 820-10, did not have any impact on the Company’s
consolidated financial statements.
The
Company’s non-financial assets, such as goodwill, intangible assets, and
property, plant and equipment, are measured at fair value when there is an
indicator of impairment and recorded at fair value only when an impairment
charge is recognized. No impairment indicators were present during the three and
nine month periods ended September 30, 2009. When impairment
indicators are present, the Company utilizes various methods to determine the
fair value of its non-financial assets. For example, to value
property plant and equipment, we would use the cost method for determining fair
value; for goodwill we would use a combination of analyzing the Company’s market
capitalization based on the market price of the Company’s common stock and a
determination of discounted cash flows of the Company’s operations.
Effective
January 1, 2009, the Company adopted an accounting standard that requires
unvested share-based payments that entitle employees to receive nonrefundable
dividends to also be considered participating securities, as codified in ASC
260. The adoption of this accounting standard had no impact on the calculation
of our earnings per share because the Company has not issued participating
securities.
Effective
April 1, 2009, the Company adopted three accounting standard updates which
were intended to provide additional application guidance and enhanced
disclosures regarding fair value measurements and impairments of securities.
They also provide additional guidelines for estimating fair value in accordance
with fair value accounting. The first update, as codified in ASC 820-10-65,
provides additional guidelines for estimating fair value in accordance with fair
value accounting. The second accounting update, as codified in ASC 320-10-65,
changes accounting requirements for other-than-temporary-impairment for debt
securities by replacing the current requirement that a holder have the positive
intent and ability to hold an impaired security to recovery in order to conclude
an impairment was temporary with a requirement that an entity conclude it does
not intend to sell an impaired security and it will not be required to sell the
security before the recovery of its amortized cost basis. The third accounting
update, as codified in ASC 825-10-65, increases the frequency of fair value
disclosures. These updates were effective for fiscal years and interim periods
ended after June 15, 2009. The adoption of these accounting updates did not
have any impact on the Company’s consolidated financial statements.
-26-
Effective
April 1, 2009, the Company adopted a new accounting standard for subsequent
events, as codified in ASC 855-10. The update modifies the names of the two
types of subsequent events either as recognized subsequent events (previously
referred to in practice as Type I subsequent events) or non-recognized
subsequent events (previously referred to in practice as Type II subsequent
events). In addition, the standard modifies the definition of subsequent events
to refer to events or transactions that occur after the balance sheet date, but
before the financial statements are issued (for public entities) or available to
be issued (for nonpublic entities). It also requires the disclosure of the date
through which subsequent events have been evaluated. The update did not result
in significant changes in the practice of subsequent event disclosures, and
therefore the adoption did not have any impact on the Company’s consolidated
financial statements.
Effective
July 1, 2009, the Company adopted the “FASB Accounting Standards
Codification” and the Hierarchy of Generally Accepted Accounting Principles
(“ASC 105”). This standard
establishes only two levels of U.S. GAAP, authoritative and non-authoritative.
The FASB Accounting Standards Codification (the “Codification”) became the
source of authoritative, nongovernmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for
SEC registrants. All other non-grandfathered, non-SEC accounting literature not
included in the Codification became non-authoritative. The Company began using
the new guidelines and numbering system prescribed by the Codification when
referring to GAAP in the third quarter of 2009. As the Codification was not
intended to change or alter existing GAAP, it did not have any impact on the
Company’s consolidated financial statements.
In
October 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable
Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). It updates the existing
multiple-element revenue arrangements guidance currently included under ASC
605-25, which originated primarily from the guidance in EITF Issue No. 00-21,
“Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). The revised guidance
primarily provides two significant changes: 1) eliminates the need for objective
and reliable evidence of the fair value for the undelivered element in order for
a delivered item to be treated as a separate unit of accounting, and 2)
eliminates the residual method to allocate the arrangement consideration. In
addition, the guidance also expands the disclosure requirements for revenue
recognition. ASU 2009-13 will be effective for the first annual reporting period
beginning on or after June 15, 2010, with early adoption permitted provided
that the revised guidance is retroactively applied to the beginning of the year
of adoption. The Company is currently assessing the future impact of this new
accounting update to its consolidated financial statements.
In
October 2009, the FASB issued Update No. 2009-14, “Certain Revenue
Arrangements that Include Software Elements—a consensus of the FASB Emerging
Issues Task Force” (“ASU
2009-14”). ASU 2009-14 amends the scope of pre-existing
software revenue guidance by removing from the guidance non-software components
of tangible products and certain software components of tangible products. ASU
2009-14 will be effective for the first annual reporting period
beginning on or after June 15, 2010, with early adoption permitted provided
that the revised guidance is retroactively applied to the beginning of the year
of adoption. The Company is currently assessing the future impact of this new
accounting update to its consolidated financial statements.
In
December 2009, the FASB issued an accounting standard update for improvements to
financial reporting by enterprises involved with Variable Interest
Entities. The subsections clarify the application of the General
Subsections to certain legal entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the legal entity to finance its activities without additional
subordinated financial support [FIN 46(R), paragraph 1, sequence 55.1] or, as a
group, the holders of the equity investment at risk lack any one of the
following three characteristics: [FIN 46(R), paragraph 1, sequence
55.2]
a. The
power, through voting rights or similar rights, to direct the activities of a
legal entity that most significantly impact the entity’s economic performance
[FIN 46(R), paragraph 1, sequence 55.2.1]
b. The
obligation to absorb the expected losses of the legal entity [FIN 46(R),
paragraph 1, sequence 55.2.2]
c. The
right to receive the expected residual returns of the legal entity. [FIN 46(R),
paragraph 1, sequence 55.2.3]
The
amendments in this update to the Accounting Standards Codification are the
result of FASB Statement No. 167, Amendments to FASB Interpretation No.
46(R). The adoption of this update to improving the financial reporting by
enterprises involved with Variable Interest Entities, as codified in ASC 810,
did not have any impact on the Company’s consolidated financial
statements.
In
December 2009, the FASB issued an accounting standard update, Transfers and
Servicing (Topic 860) Accounting for Transfers of Financial Assets. The
amendments in this update to the Accounting Standards Codification are the
result of FASB Statement No. 166, Accounting for Transfers of
Financial Assets. The adoption of this update did not have any impact on
the Company’s consolidated financial statements.
-27-
In
January 2010, the FASB issued an accounting standard update, Fair Value
Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value
Measurements. The Update would affect all entities that are required to
make disclosures about recurring and nonrecurring fair value measurements.
The Board concluded that users will benefit from improved disclosures in this
Update and that the benefits of the increased transparency in financial
reporting will outweigh the costs of complying with the new requirements.
The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 30, 2010,
and for interim periods within those fiscal years. The adoption of this
update for improving disclosures about fair measurements, as codified in ASC 820
did not have any impact on the Company’s consolidated financial
statements.
In
January 2010, the FASB issued an accounting standard update to address
implementation issues related to the changes in ownership provisions in the
Consolidation—Overall Subtopic (Subtopic 810-10) of the FASB Accounting Standards
Codification™, originally issued as FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements. Subtopic 810-10 establishes the
accounting and reporting guidance for noncontrolling interests and changes in
ownership interests of a subsidiary. An entity is required to deconsolidate a
subsidiary when the entity ceases to have a controlling financial interest in
the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a
gain or loss on the transaction and measures any retained investment in the
subsidiary at fair value. The gain or loss includes any gain or loss associated
with the difference between the fair value of the retained investment in the
subsidiary and its carrying amount at the date the subsidiary is deconsolidated.
In contrast, an entity is required to account for a decrease in its ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction.
While
Subtopic 810-10 provides general guidance on accounting for the decreases in
ownership of a subsidiary, including a deconsolidation, some constituents raised
concerns that the guidance appears to conflict with the gain or loss treatment
or derecognition criteria of other U.S. generally accepted accounting principles
(GAAP), such as the guidance for sales of real estate, transfers of financial
assets, conveyances of oil and gas mineral rights, and transactions with equity
method investees.
Some
constituents also questioned whether the Board intended for the decrease in
ownership provisions of Subtopic 810-10 to apply to all entities because a
subsidiary is defined as an entity, including an unincorporated entity such as a
partnership or trust, in which another entity, known as its parent, holds a
controlling financial interest. Those constituents were concerned that such an
interpretation could result in the accounting for a transaction being driven by
its form rather than its substance. For example, different accounting might be
applied to a transaction involving the same underlying assets depending on
whether those assets were transferred in asset or entity form.” The amendments
in this update are effective beginning in the period that an entity adopts
Statement 160 (now included in Subtopic 810-10). If an entity has
previously adopted Statement 160 as of the date of the amendments in this update
are included in the
Accounting
Standards Codification, the amendments in this update are effective beginning in
the interim or annual reporting period ending on or after December 31,
2009. The amendments in this update should be applied retrospectively to
the first period that an entity adopted 160. The adoption of this update
for the changes in the accounting and reporting guidance for noncontrolling
interests and changes in ownership interests of a subsidiary, as codified in ASC
810-10, did not have any impact on the Company’s financial statements.
Other
recent accounting pronouncements issued by the FASB, the American Institute of
Certified Public Accountants ("AICPA"), and the SEC did not or are
not believed by management to have a material impact on the Company's present
condensed consolidated financial statements.
RESULTS
OF OPERATIONS
Comparison
of Three Month Periods Ended December 31, 2009 and December 31,
2008.
Total
Net Revenues
Total
revenues for the three months ended December 31, 2009 were $11,403,585 as
compared to $1,969,952 for the three months ended December 31, 2008, an increase
of $9,433,633 or 478.88%. For the three months ended December 31, 2009 and 2008,
net revenues consisted of the following:
-28-
Cemetery
For the
three months ended December 31, 2009, cemetery revenues increased by $9,433,633
or 478.88%. The substantial increase in revenues is mainly attributable to the
reopening of the bridge which has led to increased access to our cemetery
site. This coupled with the increase in overall market conditions led
to the increase in sales.
Cost
of Sales
Cost of
sales includes raw materials, conversation costs, direct labor, manufacturing
costs, which includes an allocation of overhead expenses including labor,
utilities and depreciation directly related to product production and related
taxes. For the three months ended December 31, 2009, cost of sales amounted to
$5,339,808 or 46.83% of total net revenues as compared to $1,014,616 or 51.50%
of total net revenues for the three months ended December 31, 2008. The decrease
in cost of sales as a percentage of total net revenues was primarily due to
economies of scale that were achieved when selling a larger number of cemetery
plots.
Gross
Profit
Gross
profit for the three months ended December 31, 2009 was $6,063,777 or 53.17% of
total net revenues, as compared to $955,336 or 48.50% of total net revenues for
the three months ended December 31, 2008. The increase in gross profit was
attributable to economies of scale that were achieved when selling a larger
number of actual of cemetery plots. The increase in gross profit
margin as a percentage of revenue was primarily contributed to attributable to
the reopening of the bridge which has led to increased access to our cemetery
site.
Operating
Expenses
Total
operating expenses for the three months ended December 31, 2009 were $643,198,
an increase of $448,360 or 230.12% from $194,838 for the three months ended
December 31, 2008 of. This increase includes the following:
For the
three months ended December 31, 2009, advertising expenses amounted to $61,641
as compared to $19,238 for the three months ended December 31, 2008, an increase
of $42,403 or 220.41%. The increase in expenses is mainly attributable to the
increase in opportunity for sales, which came the reopening of the bridge which
has led to increased access to our cemetery site, and the increase in overall
market conditions. The Company believed that increasing advertisement would
increase sales.
For the
three months ended December 31, 2009, general and administrative expenses
amounted to $581,557 as compared to $175,600 for the three months ended December
31, 2008, an increase of $405,957 or 231.18%. The increase in expenses is mainly
attributable to the reopening of the bridge which has led to increased access to
our cemetery site. This coupled with the increase in overall market conditions
led to the increase in sales and to an increase in administrative expenses to
manage attendant paperwork.
Income
from Operations
We
reported income from operations of $5,420,579 for the three months ended
December 31, 2009 as compared to $760,498 for the three months ended December
31, 2008, an increase of $4,660,081 or approximately 612.77%. The substantial
increase in income is mainly attributable to the reopening of the bridge which
has led to increased access to our cemetery site. This coupled with
the increase in overall market conditions led to the increase in
sales.
Other
Income
For the
three months ended December 31, 2009, total other income amounted to $150,451 as
compared to $39,584 for the three months ended December 31, 2008, an increase of
$110,867 or 280.08%. This substantial increase is primarily attributable to the
following:
For the
three months ended December 31, 2009, other income amounted to $140,824 as
compared to $32,770 for the three months ended December 31, 2008, an increase of
$108,054 or 329.7% from the comparable period in 2009. This change is primarily
attributable to the increase in the number of cemetery plots sold.
For the
three months ended December 31, 2009, interest expense amounted to $58,759 as
compared to $58,417 for the three months ended December 31, 2008, an increase of
$342 or 0.6% from the comparable period in 2009. This change is primarily
attributable to the change in the foreign exchange rate between the RMB and the
US dollar, since the interest is paid in RMB and then converted.
-29-
For the
three months ended December 31, 2009, interest income amounted to $2,948 as
compared to $262 for the three months ended December 31, 2008, an increase of
$2,686 or 1,025.2% from the comparable period in 2009. This change is primarily
attributable to the increase in the amount of cash held during parts of the
three months by the company.
For the
three months ended December 31, 2009, rental income amounted to $65,438 as
compared to $64,969 for the three months ended December 31, 2008, a decrease of
$469 or 0.7% from the comparable period in 2009. This change is primarily
attributable to the change in the foreign exchange rate between the RMB and the
US dollar, since the income is paid in RMB and then converted.
Comparisons
of Nine Month Periods Ended December 31, 2009 and December 31, 2008
Total
Net Revenues
Total
revenues for the nine months ended December 31, 2009 were $26,467,501 as
compared to $11,186,413 for the nine months ended December 31, 2008, an increase
of $15,281,088 or approximately 136.60%. For the nine months ended
December 31, 2009 and 2008, net revenues consisted of the
following:
Nine
Months
Ended
December
31,
2009
|
Nine
Months
Ended
December
31,
2008
|
|||||||
Cemetery
|
$
|
26,467,501
|
$
|
10,529,201
|
||||
Park
and Nursery Garden Services
|
-
|
657,212
|
||||||
Total
net revenues
|
$
|
26,467,501
|
$
|
11,186,413
|
Cemetery
For the
nine months ended December 31, 2009, cemetery revenues increased by $15,938,300
or 151.37%. The increase in revenues is mainly attributable to the reopening of
the bridge which has led to increased access to our cemetery
site. This coupled with the increase in overall market conditions led
to the increase in sales.
Park
and Nursery Garden Services
For the
nine months ended December 31, 2009, there were no revenues for park and nursery
garden services compared to revenues of $657,212 for the nine months ended
December 31, 2008. The Company is shifting its focus to the development of its
cemetery business, and as a result, the Company did not dedicate resources on
its park and nursery garden business during fiscal year 2009. We do not expect
this trend to change during fiscal year 2010 as the Company will continue to
focus on developing its cemetery business.
Cost
of Sales
Cost of
sales includes raw materials, conversation costs, direct labor, manufacturing
costs, which includes an allocation of overhead expenses including labor,
utilities and depreciation directly related to production and related taxes. For
the nine months ended December 31, 2009, cost of sales amounted to $12,110,391or
approximately 45.76% of total net revenues as compared to cost of sales of
$6,407,734 or approximately 57.28% of total net revenues for the nine months
ended December 31, 2008. The decrease in cost of sales as a percentage of total
net revenues was primarily due to economies of scale that were achieved when
selling a larger number of cemetery plots as well as a contract signed with a
provider that was more favorable due to excess capacity at the
supplier.
Gross
Profit
Gross
profit for the nine months ended December 31, 2009 was $14,357,110 or 54.24% of
total net revenues, as compared to $4,778,679 or 42.72% of total net revenues
for the nine months ended December 31, 2008. The increase in gross profit margin
as a percentage of revenue was primarily attributable to the reopening of the
bridge which has led to increased access to our cemetery site. In addition, a
contract signed with a provider was more favorable due to excess capacity at the
supplier, thereby decreasing costs.
-30-
Operating
Expenses
Total
operating expenses for the nine months ended December 31, 2009 were $1,397,182,
an increase of $528,905 or 60.91% from total operating expenses in the nine
months ended December 31, 2008 of $868,277. This increase includes the
following:
For the
nine months ended December 31, 2009, advertising expenses amounted to $142,982
as compared to $84,024 for the nine months ended December 31, 2008, an increase
of $58,958 or 70.17%. We spent more on advertising expenses for the nine months
ended December 31, 2009 due to a more positive outlook in the economic markets
which led the Company to spend more on advertising in an effort to attract more
customers.
For the
nine months ended December 31, 2009, general and administrative expenses
amounted to $1,254,200 as compared to $784,253 for the nine months ended
December 31, 2008, an increase of $469,947 or 59.92%. The increase in expenses
is mainly attributable to an increase in sales which led to a higher cost for
the sales.
Income
from Operations
We
reported income from operations of $12,959,928 for the nine months ended
December 31, 2009 as compared to $3,910,402 for the nine months ended December
31, 2008, an increase of $9,049,526 or approximately 231.42%. The
substantial increase in income is mainly attributable to the reopening of the
bridge which has led to increased access to our cemetery site. This
coupled with the increase in overall market conditions led to the increase in
sales.
Other
Income
For the
nine months ended December 31, 2009, total other income amounted to $352,153 as
compared to $186,903 for the nine months ended December 31, 2008, an increase of
$165,250 or 88.41%. This substantial increase is primarily attributable to the
following:
For the
nine months ended December 31, 2009, other income amounted to $325,536 as
compared to $165,901 for the nine months ended December 31, 2008, an increase of
$159,635 or 96.2% from the comparable period in 2009. This change is primarily
attributable to the increase in the number of cemetery plots sold.
For the
nine months ended December 31, 2009, interest expense amounted to $177,559 as
compared to $174,533 for the nine months ended December 31, 2008, an increase of
$3,026 or 1.7% from the comparable period in 2009. This change is primarily
attributable to the change in the amount of outstanding debt held by the
company.
For the
nine months ended December 31, 2009, interest income amounted to $7,872 as
compared to $3,225 for the nine months ended December 31, 2008, an increase of
$4,647 or 144.1% from the comparable period in 2009. This change is primarily
attributable to the increase in the amount of cash held during parts of the nine
months by the company.
For the
nine months ended December 31, 2009, rental income amounted to $196,304 as
compared to $192,310 for the nine months ended December 31, 2008, an increase of
$3,994 or 2.1% from the comparable period in 2009. This change is primarily
attributable to the change in the foreign exchange rate between the RMB and the
US dollar, since the income is paid in RMB and then converted.
Comparison
of Years Ended March 31, 2009 and March 31, 2008
Total
Net Revenues
Total
revenues for the year ended March 31, 2009 were $18,313,720 as compared to
$22,121,639 for the year ended March 31, 2008, a decrease of $3,807,919 or
approximately 17.20%. For the years ended March 31, 2009 and 2008,
net revenues consisted of the following:
Year
Ended
March
31, 2009
|
Year
Ended
March
31, 2008
|
|||||||
Cemetery
|
$
|
17,674,785
|
$
|
19,878,718
|
||||
Park
and Nursery Garden Services
|
665,935
|
2,242,921
|
||||||
Total
net revenues
|
$
|
18,313,720
|
$
|
22,121,639
|
-31-
Cemetery
For the
year ended March 31, 2009, cemetery revenues decreased by $2,230,933 or 11.22%.
The decrease in revenues is mainly attributable to a lack of ability to reach
our cemetery site due to the construction of a new bridge. The old
bridge to the cemetery was taken out of service because of its unsuitability
after the construction of the Three Gorges Dam which caused the water level to
be too high. Construction of the new bridge was completed in May 2009
and traffic was able to reach the cemetery again thereafter. In
addition, we expect the bridge to be directly connected to the highway within
two years, which will allow easier access to the cemetery. We do not
anticipate access issues to be a problem in the future. We expect our
sales will continue hold steady for fiscal 2010.
Park
and Nursery Garden Services
For the
year ended March 31, 2009, the revenues for park and nursery garden services
decreased by $1,576,986. The decrease is attributable to the Company shifting
its focus to the development of the cemetery sector of its
business. The Company did not input as much of its resources on the
park and nursery garden sector in the fiscal year of 2009. We do not
expect this trend to change in the fiscal year of 2010 as the Company still
continues to focus on developing its cemetery sector.
Cost
of Sales
Cost of
sales includes raw materials, conversation costs, direct labor, manufacturing
costs, which includes an allocation of overhead expenses including labor,
utilities and depreciation directly related to product production and related
taxes. For the year ended March 31, 2009, cost of sales amounted to $9,938,853
or approximately 54.3% of total net revenues as compared to $12,694,927 or
approximately 57.4% of total net revenues for the year ended March 31, 2008. The
decrease in cost of sales as a percentage of total net revenues was primarily
due to more efficient production and control of costs.
Total
cost of sales decrease of $2,756,074 or 21.7% is attributable to
the following:
For the
year ended March 31, 2009, cemetery costs amounted to $9,445,153 as compared to
$10,974,241 for the year ended March 31, 2008, a decrease of $1,529,088 or
13.93% from the comparable period in fiscal 2008. This decrease is primarily
attributable to a decrease in the construction of cemeteries due to the
inability to reach the site for a three month period. Although the current
cemetery costs as a percentage of revenue have decreased due to economies of
scale and increased efficiency gained from experience, we cannot guarantee that
our cemetery expenses will continue to decrease.
For the
year ended March 31, 2009, park and nursery garden services costs amounted to
$493,700 as compared to $1,720,686 for the year ended March 31, 2008, a decrease
of $1,226,986 or 71.3%. The decrease in costs was primarily due to a decrease in
the amount of park and nursery garden service contracts executed by the
Company. We expect that the costs for the park and nursery garden
services will remain constant compared to the March 31, 2009 figures as the
Company plans to focus on expanding its cemetery business.
Gross
Profit
Gross
profit for the year ended March 31, 2009 was $8,374,867 or 45.7% of total net
revenues, as compared to $9,426,712 or 42.6% of total net revenues for the year
ended March 31, 2008. The decrease in gross profit was attributable to the
decrease in sales as a result of external factors. The increase in cost of sales
as a percentage of gross profit margin was primarily attributable to losing some
economies of scale.
Operating
Expenses
Total
operating expenses for the year ended March 31, 2009 were $1,471,475, a increase
of $214,262 or 12.71% from total operating expenses in the year ended March
31, 2008 of $1,166,191. This increase includes the following:
For the
year ended March 31, 2009, advertising expenses amounted to $426,415 as compared
to $519,546 for the year ended March 31, 2008, a decrease of $93,131 or 17.93%.
We did not spend as much on advertising expenses for the year ended March 31,
2009 due to the access issue. We felt that it was not necessary to
advertise as much since customers would not purchase the cemetery plots without
first conducting a visual inspection. We expect that the Company will increase
advertising expenses relative to March 31, 2009 figures as the Company expands
its business operations.
-32-
For the
year ended March 31, 2009, general and administrative expenses amounted to
$1,045,060 as compared to $1,166,191 for the year ended March 31, 2008, a
decrease of $121,131 or 10.39%. The decrease in expenses was mainly attributable
to cost cutting measures during the economic downturn, lower government fees in
hopes of stimulating the economy and a decrease in the number of employees. We
expect that the Company will increase the general and administrative expenses
relative to the March 31, 2009 numbers as the Company expands its
operations.
Income
from Operations
We
reported income from operations of $6,903,392 for the year ended March 31, 2009
as compared to income from operations of $7,740,975 for the year ended March 31,
2008, a decrease of $837,583 or approximately 10.82%.
Other
Income
For the
year ended March 31, 2009, total other income amounted to $283,560 as compared
to $330,614 for the year ended March 31, 2008, a decrease of $47,054 or 14.2%
from the comparable period in 2009. This change is primarily attributable the
following:
For the
year ended March 31, 2009, other income amounted to $255,893 as compared to
$296,364 for the year ended March 31, 2008, a decrease of $40,471 or 13.7% from
the comparable period in 2009. This change is primarily attributable to the
change in the number of cemetery plots sold.
For the
year ended March 31, 2009, interest expense amounted to $235,208 as compared to
$204,075 for the year ended March 31, 2008, an increase of $31,113 or 15.3% from
the comparable period in 2009. This change is primarily attributable to the
change in the amount of outstanding debt held by the company.For the year ended
March 31, 2009, interest income amounted to $6,361 as compared to $2,051 for the
year ended March 31, 2008, an increase of $4,310 or 210.1% from the comparable
period in 2009. This change is primarily attributable to the increase in the
amount of cash held during parts of the year by the company.
For the
year ended March 31, 2009, rental income amounted to $260,286 as compared to
$239,776 for the year ended March 31, 2008, an increase of $20,510 or 8.6% from
the comparable period in 2009. This change is primarily attributable to the
change in the foreign exchange rate between the RMB and the US dollar, since the
income is paid in RMB and then converted.
For the
year ended March 31, 2009, non-operating expense amounted to $3,772 as compared
to $3,502 for the year ended March 31, 2008, a decrease of $270 or 7.7% from the
comparable period in 2009. This change is primarily attributable to a decrease
in miscellaneous expenses.
Liquidity
and Capital Resources
Nine
Months Ended December 31, 2009
For the
nine months ended December 31, 2009, net cash provided by operating activities
was $3,213,593, as compared to $50,489 for the nine months ended December 31,
2008. The large increase was primarily attributable to the company selling its
inventory of prepared burial plots. The higher sales volume generated
cash.
For the
nine months ended December 31, 2009, no cash was used in or provided by
investing activities, as compared to $1,100,250 used for investing activities
(capital expenditures) of for the nine months ended December 31,
2008.
There was
no cash used in or provided by financing activities for the nine months ended
December 31, 2009 and 2008.
As of
December 31, 2009, we had cash of $4,608,455. Our total current assets were
$13,703,193 and our total current liabilities were $4,152,734.
Year
Ended March 31, 2009
For the
year ended March 31, 2009, net cash provided by operating activities was
$980,826, as compared to cash provided by operating activities of $237,063 for
the year ended March 31, 2008. The increase was primarily attributable to an
increase in accounts payable.
-33-
For the
year ended March 31, 2009, net cash used by investing activities was $1,479,650,
for investment in additional land for development, as compared to no cash used
in or provided by investing activities for the year March 31, 2008.
There was
no cash used in or provided by financing activities for the year ended March 31,
2009 and 2008.
As of
March 31, 2009, we had cash of $1,392,961. Our total current assets were
$7,713,109 and our total current liabilities were $3,777,072.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
The
following tables summarize our contractual obligations as of December 31, 2009,
and the effect these obligations are expected to have on our liquidity and cash
flows in future periods.
Payments Due by
Period
|
||||||||||||||||||||
Total
|
Less than 1
year
|
1-3
Years
|
3-5
Years
|
5 Years
+
|
||||||||||||||||
In
Thousands
|
||||||||||||||||||||
Contractual Obligations :
|
||||||||||||||||||||
Bank
Indebtedness
|
$ | - | $ | 2,471 | $ | - | $ | - | $ | - | ||||||||||
Other
Indebtedness
|
$ | - | $ | 23 | $ | 89 | $ | 89 | $ | 207 | ||||||||||
Capital
Obligations
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Purchase
Obligations
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Total
Contractual Obligations:
|
$ | - | $ | 2,494 | $ | 89 | $ | 89 | $ | 207 |
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
RELATED
PARTY TRANSACTIONS
For a
description of our related party transactions, see the section of this Form 8-K
entitled “Certain Relationships and Related Transactions.”
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not
use derivative financial instruments in our investment portfolio and has no
foreign exchange contracts. Our financial instruments consist of cash and cash
equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly liquid instruments purchased with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents. However, in order to manage the foreign exchange risks, we may
engage in hedging activities to manage our financial exposure related to
currency exchange fluctuation. In these hedging activities, we might use
fixed-price, forward, futures, financial swaps and option contracts traded in
the over-the-counter markets or on exchanges, as well as long-term structured
transactions when feasible.
-34-
Interest Rates. Our exposure
to market risk for changes in interest rates relates primarily to our short-term
investments and short-term obligations; thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities. At March
31, 2009, we had approximately $1,392,961 in cash and cash equivalents. A
hypothetical 5% increase or decrease in interest rates would not have a material
impact on our earnings or loss, or the fair market value or cash flows of these
instruments.
Foreign Exchange Rates. A
substantial portion of our sales is denominated in Euros, Renminbi (“RMB”) or other
currencies. As a result, changes in the relative values of U.S. Dollars, Euros,
RMB and other currencies affect our reported levels of revenues and
profitability as the results are translated into U.S. Dollars for reporting
purposes. In particular, fluctuations in currency exchange rates could have a
significant impact on our financial stability due to a mismatch among various
foreign currency-denominated sales and costs. Fluctuations in exchange rates,
particularly among the U.S. dollar, RMB and Euro, affect our gross and net
profit margins and could result in foreign exchange and operating
losses.
Our
exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency of
our operating business. Our results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in our statement of
shareholders’ equity. We recorded net foreign currency gains of $1,978,746 and
$511,749 in fiscal 2008 and 2009 respectively. We have not used any forward
contracts, currency options or borrowings to hedge our exposure to foreign
currency exchange risk. We cannot predict the impact of future exchange rate
fluctuations on our results of operations and may incur net foreign currency
losses in the future. As our sales denominated in foreign currencies, such as
RMB and Euros, continue to grow, we will consider using arrangements to hedge
our exposure to foreign currency exchange risk.
Our
financial statements are expressed in U.S. dollars but the functional
currency of our operating subsidiary is RMB. The value of your investment in our
stock will be affected by the foreign exchange rate between U.S. dollars
and RMB. To the extent we hold assets denominated in U.S. dollars,
including the net proceeds to us from this offering, any appreciation of the RMB
against the U.S. dollar could result in a change to our statement of
operations and a reduction in the value of our U.S. dollar denominated
assets. On the other hand, a decline in the value of RMB against the
U.S. dollar could reduce the U.S. dollar equivalent amounts of our
financial results, the value of your investment in our company and the dividends
we may pay in the future, if any, all of which may have a material adverse
effect on the price of our stock.
Chongqing
offices and facilities
Our
offices and our facilities are located in Chongqing, China. The table below
provides a general description of our facilities:
Location
|
Principal
Activities
|
Area
(sq. meters)
|
Lease
Expiration Date
|
|||
LongQiao
Village and QianFo Village, JiangNan Town, ChangShou District, Chongqing,
PRC 401258
|
Commercial
and residential use
|
339,444.20
square meters
|
N/A
(property owned by the Company)
|
|||
The
Agricultural Land of LongQiao Lake Village Group 6, JiangNan Town,
ChangShou District, Chongqing, PRC 401258
|
Business
operation
|
133,334
square meters
|
December
31, 2027
|
|||
The
Wasteland and Timberland of LongQiao Lake Village Group 6, JiangNan Town,
ChangShou District, Chongqing, PRC 401258
|
Business
Operation
|
213,312
square meters
|
December
31, 2055
|
|||
-35-
The
House Sites of LongQiao Lake Group 6, Jiangnan Town, ChangShou District,
Chongqing, PRC 401258
|
Comprehensive
development
|
27,997.2
square meters
|
June
9, 2029 (renewable up to 100 years)
|
|||
|
||||||
239
Jianxin Road , Jiangbei District, Chongqing, PRC 400000
|
Office
|
1,053
square meters
|
December
31, 2012
|
|||
|
||||||
1
Huigong Road, 4th
Floor, Room 1-1, Nan’an District, Chongqing, PRC 400000
|
Business
Operation
|
630.36
square meters
|
January
6, 2035
|
|||
1
Huigong Road, 4th
Floor, Room 1-2, Nan’an District, Chongqing, PRC 400000
|
Business
Operation
|
876.63
square meters
|
January
6, 2035
|
|||
1
Huigong Road, 4th
Floor, Room 1-3, Nan’an District, Chongqing, PRC 400000
|
Business
Operation
|
431.16
square meters
|
January
6, 2035
|
|||
Fuli
Bowling House, San Dong Qiao, Feng Cheng Town, ChangShou District,
Chongqing, PRC 401220
|
Business
Operation
|
N/A
|
N/A
|
The
Company leases its offices for business operation in Chongqing province under
property lease agreements for agricultural land that expires on December 31,
2027 and non-agricultural land that expires on December 31, 2055. The
Company also leases a facility for comprehensive development in Chongqing
province under a property lease agreement that expires on June 9, 2108 with an
option to renew the lease for up to one hundred years. Minimum future
commitments under the lease agreements payable as of March 31, 2009 are as
follows:
Year
Ended March 31
|
Amount
|
|||
2010
|
$
|
22,679
|
||
2011
|
$
|
22,679
|
||
2012
|
$
|
22,679
|
||
2013
|
$
|
22,679
|
||
2014
|
$
|
22,679
|
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
Security
Ownership Prior To Change Of Control
The
following table sets forth information regarding the beneficial ownership of our
common stock as of February 12, 2010, for each of the following persons, prior
to the transactions contemplated by the Exchange Agreement:
·
|
each
of our directors and named officers prior to the Closing of the Exchange
Transaction;
|
·
|
all
such directors and executive officers as a group;
and
|
·
|
each
person who is known by us to own beneficially five percent or more of our
common stock prior to the change of control
transaction.
|
-36-
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the
persons and entities named in the table have sole voting and sole investment
power with respect to the shares set forth opposite the shareholder’s
name. The percentage of class beneficially owned set forth below is
based on 13,075,000 shares of common stock issued and outstanding as of February
12, 2010, immediately prior to the Closing of the Exchange Transaction.
Named
executive officers and directors:
|
Number
of
Shares
beneficially
owned
|
Percentage of
class beneficially
owned
|
|||||
Helen
S. Schwartz, President, CEO, CFO and sole Director (1)
|
10,000,000
|
76.48
|
%
|
||||
All
directors and executive officers as a group (one persons)
|
10,000,000
|
76.48
|
%
|
||||
5%
Shareholders:
|
|||||||
Helen
Shepley (2)
|
875,000
|
6.69 | % |
(1) Ms.
Schwartz’s address is 240 Doone Road, Fairless Hills, PA 19030.
(2) Ms.
Shepley’s address is 16807 Southern Oaks Drive, Houston, TX 77068.
Security
Ownership After Change Of Control
The
following table sets forth information regarding the beneficial ownership of our
common stock as of February 12, 2010, for each of the following persons, after
giving effect to the transaction under the Exchange Agreement:
·
|
each
of our directors and executive officers that took office effective at the
Closing of the Exchange
Transaction;
|
·
|
all
such directors and named executive officers as a group;
and
|
·
|
each
person who is known by us to own beneficially five percent or more of our
common stock after the change of control
transaction.
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the
persons and entities named in the table have sole voting and sole investment
power with respect to the shares set forth opposite the shareholder’s
name. Unless otherwise indicated, the address of each beneficial
owner listed below is 239 Jianxin Road, Jiangbei District, Chongqing, PRC
400000. The percentage of class beneficially owned set forth below is
based on 11,000,000 shares of common stock outstanding on February 12, 2010,
immediately after the Closing of the Exchange Transaction.
Named
executive officers and directors:
|
Number
of
Shares
beneficially
owned
|
Percentage of
class beneficially
owned
|
||||||
Yiyou
Ran (1)
|
8,800,000
|
(1)
|
80.00
|
%
|
||||
Michael
Wang (2)
|
30,000
|
*
|
%
|
|||||
Jianquan
Chen (1)
|
8,800,000
|
(1)
|
80.00
|
%
|
||||
Tim
Hudson (3)
|
0
|
0
|
%
|
|||||
All
directors and executive officers as a group (5 persons)
|
8,830,000
|
80.27
|
%
|
|||||
5%
Shareholders:
|
||||||||
Holy
Golden Industry Limited (1)
|
8,800,000
|
(1)
|
80.00
|
%
|
* Less
than 1%.
(1)
|
The
address of Holy Golden Industry Limited (“Holy Golden”) is Scotia Centre,
4th Floor, P.O. Box 2804, George Town, Grand Cayman KY 1-1112, Cayman
Islands. The shareholders of Holy Goldenare Yiyou Ran (24.00%),
Jianquan Chen (27.9%), Chaoyang Fu (16.74%), Yang Chen (24.36%) and
Mingsheng Liu (7.00%), with Yiyou Ran, Jianquan Chen and Yang Chen also as
its directors. As such they are deemed to have or share
investment control over Holy Golden’s portfolio. The number of
shares of common stock reported herein as beneficially owned by Mr. Ran
and Mr. Chen are held by Holy Golden, which they in turn own indirectly
through their respective ownership of Holy
Golden.
|
-37-
(2)
|
Mr.
Wang’s address is: 2500 Citywest Boulevard, Suite 304, Houston, Texas
77402.
|
|
(3) | Dr. Hudson’s address is: 3007 North Ben Wilson, Victoria, Texas 77901. |
DIRECTORS
AND EXECUTIVE OFFICERS
Directors and Executive Officers
Prior To Change Of Control
Our
officers and directors prior to the Closing of the Exchange Transaction, and
information concerning them, are as follows:
Name
|
Age
|
Position
|
||
Helen
S. Schwartz
|
51
|
President,
Chief Executive Officer, Chief Financial Officer, sole
Director
|
Biographical
Information
Helen S.
Schwartz. Helen Schwartz is a professional photographer
specializing in Historic Landscape photography with an emphasis on American
History. Her educational background includes a degree from the Antonelli School
of Photography. Although currently specializing in Historic
Landscapes, Helen began her professional career photographing musical
performers, children’s ballet, portraiture and various editorial functions such
as weddings and Bat Mitzvah. Much of her theatre work has been published both
domestically and internationally. Helen founded her company, Artistry
in Photography 5 years ago and she immediately entered her work into the
prestigious Juried Cape May Art Show and won an award there against 15 other
professional photographers. Since then, she has exhibited her work locally and
nationally.
Directors
and Executive Officers After Change Of Control
Pursuant
to the Exchange Agreement, Helen S. Schwartz resigned as our
President, Chief Executive Officer, Chief Financial Officer and sole Director,
and the following persons were appointed in her place, effective as of the
Closing of the Exchange Transaction:
Name
|
Age
|
Position
|
||
Yiyou
Ran *
|
35
|
President,
Chief Executive Officer and Chairman of the Board
|
||
Michael
Wang *
|
31
|
Chief
Financial Officer, Treasurer, Secretary and Director
|
||
Jianquan
Chen
|
46
|
Director
|
||
Tim
Hudson
|
55
|
Director
|
* Denotes
an executive officer.
Biographical
Information
The
following is a brief account of the education and business experience of these
directors and executive officers during at least the past five years, indicating
the person's principal occupation during the period, and the name and principal
business of the organization by which he or she was employed.
Yiyou Ran received a bachelor
degree in Atmosphere Quality Assessment from Chengdu Institute of Meteorology in
1983 and a master degree in Economic Management from Southwestern University of
Finance and Economics in 1997. Mr. Ran established Chongqing Fo Guang Tourism
Development Co., Ltd. in October 2002 and serve as the legal representative and
Chairman of the Company. Mr. Ran is a member of the Association of Industry and
Commerce of ChangShou and the President of the Chamber of Industry and Commerce
of Jiangnan Town. Mr. Ran was given the honor as “Non-Public
Ownership System Public Figure, Excellent Socialism Constructor” in 2006 by the
United Front Work Department of the CPC and the Association of Industry and
Commerce of Changshou District in Chongqing.
-38-
Michael Wang graduated from
University of Texas in 2001 with a master degree in Accounting and received a
M.B.A from the Tuck School of Business in 2007. Licensed as a CPA in the state
of Texas, Mr. Wang formerly worked as an auditor at Ernst and Young and started
his career as a financial analyst at Arthur Anderson. Mr. Wang formerly worked
as the Chief Financial Officer of Snif Labs Inc., a RFID technology company
based in Massachusetts and served as a special consultant to the CEO of JTec
Inc., a software company based in Beijing.
Jianquan Chen graduated from
Wuhan University of Electric Engineering in 1996 with a major in Construction
Engineering. Mr. Chen formerly worked as the Vice President of the Chamber of
Industry and Commerce of Jiangnan Town and served as the chief engineer of
Chongqing Shenglin Architectural Engineering Co., Ltd. Currently, Mr. Chen
serves as the Vice President, Deputy Chairman, Deputy General Manager and the
Senior Engineer of Chongqing Fo Guang Tourism Development (Group) Co.,
Ltd.
Tim Hudson is currently
President of the University of Houston, Victoria. Previously, Dr. Hudson served
as provost and founding dean of the College of International and Continuing
Education at the University of Southern Mississippi. Prior to that,
he served as an analyst for the U. S. Department of State. Dr. Hudson
received his Ph.D. in Geography from Clark University in Worcester,
Massachusetts.
Family
Relationships
There are
no family relationships between or among any of our directors and executive
officers serving prior to the Exchange Transaction and the directors and
executive officers appointed in connection with the Exchange
Agreement.
Involvement
in Certain Legal Proceedings
There are
no orders, judgments, or decrees of any governmental agency or administrator, or
of any court of competent jurisdiction, revoking or suspending for cause any
license, permit or other authority to engage in the securities business or in
the sale of a particular security or temporarily or permanently restraining any
of our incoming officers or directors from engaging in or continuing any
conduct, practice or employment in connection with the purchase or sale of
securities, or convicting such person of any felony or misdemeanor involving a
security, or any aspect of the securities business or of theft or of any felony.
Nor are any of the officers or directors of any corporation or entity affiliated
with us so enjoined.
Board
of Directors
Our board
of directors is currently composed of four members. All members of
our board of directors serve in this capacity until their terms expire or until
their successors are duly elected and qualified. Our bylaws provide
that the authorized number of directors will be not less than one.
In
connection with the Exchange Transaction, Yiyou Ran has been appointed to
our board of directors as Chairman. In this capacity Mr. Ran will be
responsible for meeting with our Chief Financial Officer to review financial and
operating results, reviewing agendas and minutes of board and committee
meetings, and presiding at the meetings of the board of directors.
Board
Committees; Director Independence
As of
this date, our board of directors has not appointed an audit committee or
compensation committee; however, we are not currently required to have such
committees. The functions ordinarily handled by these committees are
currently handled by our entire board of directors. Our board of
directors intends, however, to review our governance structure and institute
board committees as necessary and advisable in the future, to facilitate the
management of our business.
As
of the date of this report, we have 1 independent director and 3
non-independent directors on our board of directors.
Code
of Ethics
The
Company has formally adopted a written financial code of ethics to be applied to
the Company’s Chief Executive Officer, Chief Financial Officer and finance
department personnel. The Chief Executive Officer, Chief Financial
Officer and finance department personnel have a special role both to adhere to
the principles of integrity and also to ensure that a culture exists throughout
Artistry as a whole that ensures the fair and timely reporting of our financial
results and conditions.
-39-
Compensation
Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors and the board
of directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
EXECUTIVE
COMPENSATION
Director
Compensation
Currently,
we do not pay any compensation to members of our board of directors for their
service on the board. However, we intend to review and consider
future proposals regarding board compensation.
Executive
Compensation
Former
Executive Officers
The following summary
compensation table indicates the cash and non-cash compensation earned during
the fiscal year ended August 31, 2009 by the former Chief Executive Officer,
Chief Financial Officer and each of our other two highest paid executives of our
predecessor, if any, of Artistry whose total compensation exceeded $100,000
during the fiscal year ended August 31, 2009.
Name and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
Earnings
($)
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Helen
S. Schwartz Outgoing CEO, CFO President and director (1)
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
(1) |
Helen
Schwartz is our founding principal and sole officer and
director.
|
(2)
|
Current
Executive Officers
The
following summary compensation table indicates the cash and non-cash
compensation earned from Foguang during the fiscal year ended March 31,
2009 by our current Chief Executive Officer, Chief Financial Officer and
each of the other two highest paid executives, if any, whose total
compensation exceeded $100,000 during the fiscal year ended March 31,
2009.
|
SUMMARY
COMPENSATION TABLE
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compen-
sation
($)
|
Nonquali-fied
Deferred Compen-sation Earnings
($)
|
All
Other Compen-sation
($)
|
Total
($)
|
|||||||||||||||||||
Yiyou
Ran, CEO (1)
|
2009
|
220,558
|
0
|
0
|
|
0
|
0
|
0
|
0
|
220,558
|
|
|||||||||||||||||
Michael
Wang, CFO (2)
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
-40-
(1)
|
Mr.
Ran is our current Chief Executive Officer and took his office
concurrently with Ms. Schwartz’s resignation at the closing of the
Exchange Transaction. Mr. Ran received his compensation for the
fiscal year ended March 31, 2009 from Foguang, which was paid in RMB. For
reporting purposes, the amount has been converted to U.S. dollars at the
conversion rate of RMB 6.84 to one U.S.
dollar.
|
(2)
|
Mr.
Wang is our current Chief Financial Officer and took his office
concurrently with Ms. Schwartz’s resignation at the closing of the
Exchange Transaction.
|
None of
our executive officers received, nor do we have any arrangements to pay out, any
bonus, stock awards, option awards, non-equity incentive plan compensation, or
non-qualified deferred compensation.
Director
Compensation
Currently,
we do not pay any compensation to our directors for their service on the board
of directors. However, we intend to review and consider future
proposals regarding director compensation.
Potential
Payments Upon Termination or Change-in-Control
SEC
regulations state that we must disclose information regarding agreements, plans
or arrangements that provide for payments or benefits to our executive officers
in connection with any termination of employment or change in control of the
company. We currently have no employment agreements with any of our executive
officers, nor any compensatory plans or arrangements resulting from the
resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer's
responsibilities following a change-in-control. As a result, we have omitted
this table.
Employment
Agreements
We
currently have no employment agreements with any of our executive
officers.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
AND
DIRECTOR INDEPENDENCE
Agreement
and Plan of Share Exchange
On
February 12, 2010, the Registrant executed the Exchange Agreement with Gold
Industry and the Cayman Shareholder. Gold Industry owns 100% of Ran Ji, which is
a WFOE under the laws of the PRC.
On the
Closing Date of the Exchange Agreement, the Registrant issued 8,800,000 shares
of its common stock to the Cayman Shareholder in exchange for 100% of the issued
and outstanding common stock of Gold Industry. After the Closing, the
Registrant has a total of 11,000,000 shares of common stock outstanding, with
the Cayman Shareholder owning approximately 80% of the Registrant’s total issued
and outstanding common shares.
As a
result of the Exchange, the Cayman Shareholder became the Registrant’s
controlling shareholder and Gold Industry became its wholly owned subsidiary. In
connection therewith, the Registrant acquired the business and operations of
Foguang, and its principal business activities are conducted through Foguang in
China.
Gold
Industry
Gold
Industry owns 100% of the issued and outstanding capital stock of Gold Holy,
which in turn owns 100% of the issued and outstanding capital stock of Ran Ji.
On December 15, 2009, Ran Ji entered into a series of contractual agreements
with Foguang, and its five owners, in which Ran Ji effectively assumed
management of the business activities of Foguang and has the right to appoint
all executives and senior management and the members of the board of directors
of Foguang. The contractual arrangements are comprised of a series of
agreements, including a Consulting Services Agreement and Operating Agreement,
through which Ran Ji has the right to advise, consult and manage Foguang and its
business operations for quarterly consulting fee in the amount of Foguang’s
quarterly net profit. Additionally, Foguang’s shareholders have pledged their
rights, titles and equity interest in Foguang as security for Ran Ji to collect
the consulting fee from Foguang through an Equity Pledge Agreement. In order to
further reinforce Ran Ji’s rights to control and manage Foguang, Foguang’s
shareholders have granted Ran Ji the exclusive right and option to acquire all
of their equity interests in Foguang through an Option Agreement.
-41-
The
management of Gold Industry is comprised of three directors, Yiyou Ran, Jianquan
Chen and Yang Chen, who are also the management members of Gold Holy as its
directors, and of Ran Ji, with Mr. Ran as chairman, Mr. Jianquan Chen as
director and general manager, and Mr. Yang Chen as director.
LEGAL
PROCEEDINGS
Currently
there are no legal proceedings pending or threatened against
us. However, from time to time, we may become involved in various
lawsuits and legal proceedings which arise in the ordinary course of
business. Litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to time that may
harm our business.
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY
AND
RELATED SHAREHOLDER MATTERS
Market
Information
Since
inception, there has been no trading in the Company’s shares although it is
currently listed on Over-The-Counter Bulletin Board under the symbol
“APBS.OB.”
Holders
As of
February 12, 2010, there were approximately 40 shareholders of record of our
common stock based upon the shareholders’ listing provided by our transfer
agent. Our transfer agent is American Registrar & Transfer
Co. The transfer agent’s address is 342 East 900 South, Salt Lake
City, UT 84111 and its phone number is (801) 363-9065.
Dividends
We have
never paid cash dividends on our common stock. We intend to keep
future earnings, if any, to finance the expansion of our business, and we do not
anticipate that any cash dividends will be paid in the foreseeable
future. Our future payment of dividends will depend on our earnings,
capital requirements, expansion plans, financial condition and other relevant
factors that our board of directors may deem relevant. Our retained
earnings deficit currently limits our ability to pay dividends.
RECENT
SALES OF UNREGISTERED SECURITIES
Reference
is made to Item 3.02 of this Form 8-K for a description of recent sales of
unregistered securities, which is hereby incorporated by reference.
DESCRIPTION
OF SECURITIES
The
following information describes our capital stock and provisions of our articles
of incorporation and our bylaws, all as in effect upon the Closing of the
Exchange Transaction. This description is only a
summary. You should also refer to our articles of incorporation,
bylaws and articles of amendment which have been incorporated by reference or
filed with the Securities and Exchange Commission as exhibits to this Form
8-K.
General
Our
authorized capital stock consists of 100,000,000 shares of common stock at a par
value of $0.001 per share and 20,000,000 shares of preferred stock at a par
value of $0.001 per share.
-42-
Common
Stock
Holders
of our common stock are entitled to one vote per share on all matters submitted
to a vote of the stockholders, including the election of directors. Generally,
all matters to be voted on by stockholders must be approved by a majority of the
votes entitled to be cast by all shares of our common stock that are present in
person or represented by proxy. Holders of our common stock representing fifty
percent (50%) of our capital stock issued, outstanding, and entitled to vote,
represented in person or by proxy, are necessary to constitute a quorum at any
meeting of our stockholders. A vote by the holders of a majority of our
outstanding shares is required to effectuate certain fundamental corporate
changes such as liquidation, merger or an amendment to our certificate of
incorporation. Our certificate of incorporation does not provide for cumulative
voting in the election of directors.
The holders of shares of our common
stock will be entitled to such cash dividends as may be declared from time to
time by our board of directors from funds available
therefore. Upon
liquidation, dissolution, or winding up, the holders of shares of our common
stock will be entitled to receive pro rata all assets available for distribution
to such holders after distribution of assets to the holders of Series A
Preferred. In
the event of any merger or consolidation with or into another company in
connection with which shares of our common stock are converted into or
exchangeable for shares of stock, other securities, or property (including
cash), all holders of our common stock will be entitled to receive the same kind
and amount of shares of stock and other securities and property (including
cash).Holders of our common stock have no pre-emptive rights and no conversion
rights, and there are no redemption provisions applicable to our common
stock.
Preferred
Stock
Our board
of directors, without further stockholder approval, may issue preferred stock in
one or more classes or series as the board may determine from time to
time. Each such class or series shall be distinctly
designated. All shares of any one class or series of the preferred
stock shall be alike in every particular, except that there may be different
dates from which dividends thereon, if any, shall be cumulative, if made
cumulative. The voting powers, designations, preferences,
limitations, restrictions and relative rights thereof, if any, may differ from
those of any and all other series outstanding at any time. Our board
of directors has express authority to fix (by resolutions adopted prior to the
issuance of any shares of each particular class or series of preferred stock)
the number of shares, voting powers, designations, preferences, limitations,
restrictions and relative rights of each such class or series. The
rights granted to the holders of any series of preferred stock could adversely
affect the voting power of the holders of common stock and issuance of preferred
stock may delay, defer or prevent a change in our control.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Section 145
of the Delaware General Corporation Law authorizes a court to award, or a
corporation’s board of directors to grant, indemnity to directors and officers
in terms sufficiently broad to permit indemnification for liabilities, including
reimbursement for expenses incurred, arising under the Securities Act. Pursuant
to the provisions of Section 145, a corporation may indemnify its directors,
officers, employees, and agents as follows:
“(a) A
corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b)
A corporation shall have power to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by the person in connection with the
defense or settlement of such action or suit if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
-43-
(c) To
the extent that a present or former director or officer of a corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of this section, or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
(d) Any
indemnification under subsections (a) and (b) of this section (unless ordered by
a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the present or former
director, officer, employee or agent is proper in the circumstances because the
person has met the applicable standard of conduct set forth in subsections (a)
and (b) of this section. Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the
stockholders.
(e)
Expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the corporation
as authorized in this section. Such expenses (including attorneys' fees)
incurred by former directors and officers or other employees and agents may be
so paid upon such terms and conditions, if any, as the corporation deems
appropriate.
(f) The
indemnification and advancement of expenses provided by, or granted pursuant to,
the other subsections of this section shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person's official capacity and
as to action in another capacity while holding such office.
(g) A
corporation shall have power to purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against such person and incurred
by such person in any such capacity, or arising out of such person's status as
such, whether or not the corporation would have the power to indemnify such
person against such liability under this section.
(h) For
purposes of this section, references to "the corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its separate
existence had continued.
(i) For
purposes of this section, references to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to any employee benefit plan; and references
to "serving at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee or agent with respect
to an employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner such person reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The
indemnification and advancement of expenses provided by, or granted pursuant to,
this section shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
-44-
(k) The
Court of Chancery is hereby vested with exclusive jurisdiction to hear and
determine all actions for advancement of expenses or indemnification brought
under this section or under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).”
Charter
Provisions and Other Arrangements of the Registrant
The
Registrant currently has not adopted any indemnification provisions in its
certificate of incorporation or bylaws for its officers and
directors.
Item 3.02
Unregistered Sales of
Equity Securities
As more
fully described in Items 1.01 and 2.01 above, in connection with the Exchange
Agreement, at the Closing, the Registrant issued 8,800,000 shares of its
common stock to the Cayman Shareholder in exchange for 100% of the capital stock
of Gold Industry. Reference is made to the disclosures set forth under Items
1.01 and 2.01 of this Form 8-K, which disclosures are incorporated herein by
reference. The issuance of the common stock to the Cayman Shareholder
pursuant to the Exchange Agreement was exempt from registration pursuant to
Regulation D and Regulation S under the Securities Act. The
Registrant made this determination based on the representations of the Cayman
Stockholder, which included, in pertinent part, that such shareholder was an
“accredited investor” as that term is defined in Regulation D under the
Securities Act, or were not a "U.S. person" as that term is defined in Rule
902(k) of Regulation S under the Securities Act, and that such shareholder was
acquiring the common stock for investment purposes for its own account and not
as nominee or agent, and not with a view to the resale or distribution thereof,
and that such shareholder understood that the shares of common stock may not be
sold or otherwise disposed of without registration under the Securities Act or
an applicable exemption therefrom.
Item 5.01
Changes in Control of
Registrant.
As more
fully described in Items 1.01 and 2.01 above, on February 12, 2010, in a reverse
take-over transaction, the Registrant acquired a death care business engaged in
selling cemetery products and services in China, by executing the Exchange
Agreement by and among the Company, Gold Industry and the Cayman Shareholder.
Gold Industry owns 100% of the equity in Gold Holy and Gold Holy owns 100% of
the equity in Ran Ji. In turn, Ran Ji controls Foguang through a
series of contractual arrangements.
Under the
Exchange Agreement, on the Closing Date, the Registrant acquired all of the
issued and outstanding shares of Gold Industry through the issuance of 8,800,000
restricted shares of its common stock to the Cayman
Shareholder. Immediately prior to the Exchange Transaction, the
Registrant had 13,075,000 shares of common stock issued and outstanding, of
which 10,875,000 shares collectively owned by Helen Schwartz and Ruth Shepley
were cancelled immediately prior to the Exchange
Transaction. Immediately after the issuance of the shares to the
Cayman Shareholder, the Registrant had 11,000,000 shares of common stock issued
and outstanding. As a result of this Exchange Transaction, the Cayman
Shareholder became the Registrant’s controlling shareholder, and Gold Industry
became the Registrant’s wholly-owned subsidiary.
In
connection with this change in control, and as explained more fully in Item 5.02
below, Helen Schwartz resigned as the Registrant’s Chief Executive Officer,
Chief Financial Officer and director, and new officers and directors were
appointed, effective as of the Closing of the Exchange Transaction.
Item
5.02
|
Departure
of Directors or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain
Officers.
|
As more
fully described in Items 1.01, 2.01 and 5.01 above, on February 12, 2010, in a
reverse take-over transaction, the Registrant acquired a private provider of
cemetery products and services in China, by executing the Exchange Agreement by
and among the Company, Gold Industry and the Cayman Shareholder. The
Closing of this transaction occurred on February 12, 2010. Reference
is made to the disclosures set forth under Items 1.01, 2.01 and 5.01 of this
Form 8-K, which disclosures are incorporated herein by reference.
Resignation
of Directors
Effective
February 12, 2010, Helen Schwartz (the “Resigning Director”)
resigned as a member of the Registrant’s board of directors in connection with
the Exchange Transaction.
-45-
Resignation
of Officers
Effective
February 12, 2010, Helen Schwartz resigned as the Registrant President, Chief
Executive Officer and Chief Financial Officer in connection with the Exchange
Transaction.
Appointment
of Officers
Effective
February 12, 2010, the following persons were appointed as the Registrant’s
executive officers (individually, a “New Officer” and
collectively, the “New
Officers”) in connection with the Exchange Transaction:
Name
|
Age
|
Position
|
||
Yiyou
Ran
|
35
|
President
and Chief Executive Officer
|
||
Michael
Wang
|
31
|
Chief
Financial Officer, Treasurer and
Secretary
|
Appointment
of Directors
Effective
February 12, 2010, the following persons were appointed to the Registrant’s
board of directors (individually, a “New Director” and
collectively, the “New
Directors”) in connection with the Exchange Transaction:
Name
|
Age
|
Position
|
||
Yiyou
Ran
|
35
|
Chairman
of the Board
|
||
Michael
Wang
|
31
|
Director
|
||
Jianquan
Chen
|
46
|
Director
|
||
Tim
Hudson
|
55
|
Director
|
There are
no family relationships among any of the New Officers and New
Directors. None of the New Officers currently has an employment
agreement with the Registrant. None of the New Directors has been
named or, at the time of this Form 8-K, is expected to be named to any committee
of the board of directors. Other than the Exchange Transaction, there
are no transactions, since the beginning of the last fiscal year, or any
currently proposed transaction, in which the Registrant was or is to be a
participant and the amount involved exceeds the lesser of $120,000 or one
percent of the average of the Registrant’s total assets at year-end for the last
three completed fiscal years, and in which any of the New Officers or New
Directors had or will have a direct or indirect material
interest. Other than the Exchange Transaction, there is no material
plan, contract or arrangement (whether or not written) to which any of the New
Officers or New Directors is a party or in which any New Officer or New Director
participates that is entered into or material amendment in connection with our
appointment of the New Officers and New Directors, or any grant or award to any
New Officer or New Director or modification thereto, under any such plan,
contract or arrangement in connection with our appointment of the New Officers
and New Directors.
Descriptions
of the New Officers and New Directors can be found in Item 2.01 above, in
the section titled “Directors and Executive Officers - Directors and Officers
after Change of Control.”
Item
5.03 Amendments to Articles of Incorporation or Bylaws; Change in
Fiscal Year.
On
February 12, 2010 and pursuant to the Exchange Agreement, the Registrant changed
its fiscal year end from August 31 to March 31 to conform to the fiscal year end
of Foguang Group.
Item 5.06 Change in Shell Company
Status.
Reference
is made to the reverse take-over transaction under the Exchange Agreement, as
described in Item 1.01, which is incorporated herein by
reference. From and after the Closing of the Exchange Transaction,
the Registrant’s primary operations consist of the business and operations of
Foguang Group, which are conducted by Foguang in China. Accordingly,
the Registrant is disclosing information about Foguang Group’s business,
financial condition, and management in this Form 8-K.
Item 9.01 Financial Statement and
Exhibits.
Reference
is made to the reverse take-over transaction under the Exchange Agreement, as
described in Item 1.01, which is incorporated herein by reference. As
a result of the closing of the Exchange Transaction, the Registrant’s primary
operations consist of the business and operations of Foguang Group, which are
conducted by Foguang in China. In the Exchange Transaction, Artistry
is the accounting acquiree and Gold Industry is the accounting
acquirer. Accordingly, the Registrant is presenting the financial
statements of Foguang Group and its subsidiaries.
-46-
(a)
Financial Statements of the Business Acquired
The
audited consolidated financial statements of Gold Industry for the years ended
March 31, 2009 and 2008 and the unaudited consolidated financial statements for
the three and nine months ended December 31, 2009 and 2008, including the notes
to such financial statements, are incorporated herein by reference to Exhibit
99.1 of this Form 8-K.
(b)
Pro Forma Financial Information
Incorporated
by reference to Exhibit 99.2 attached hereto.
(d)
Exhibits
INDEX TO
EXHIBITS
Exhibit
|
Description
|
2.1
|
Share
Exchange Agreement by and among Artistry and Your Out Doors LLC. (“YOD”)
and the members of YOD dated March 12, 2009 (2)
|
2.2
|
Share
Exchange Agreement by and among Artistry Publications, Inc. , Gold
Industry Limited and the shareholders of Gold Industry dated February 12,
2010 *
|
3.1
|
Articles
of Incorporation of Artistry(1)
|
3.2
|
By-Laws
of Artistry (1)
|
10.1
|
Consulting
Service Agreement*
|
10.2
|
Operating
Agreement*
|
10.3
|
Equity
Pledge Agreement*
|
10.4
|
Option
Agreement*
|
10.5
|
Voting
Rights Proxy Agreement*
|
10.6
|
Rural
Land Lease Agreement*
|
10.7
|
Jiangbei
Office Lease Agreement*
|
10.8
|
Nan’an
Office Lease Agreement*
|
10.9
|
Bowling
House Lease Agreement*
|
14.1
|
Code
of Ethics of Artistry (3)
|
99.1
|
Audited consolidated
financial statements of Gold Industry for the years ended March 31, 2009
and 2008, and unaudited consolidated financial statements for the three
and nine months ended December 31, 2009 and 2008, and
accompanying notes to consolidated financial
statements*
|
99.2
|
Unaudited
pro forma consolidated financial statements of the Company and Foguang
Group as of December 31,
2009 and for the year ended March 31, 2009 and three and nine months
ended December 31, 2009*
|
*
|
Filed
herewith.
|
(1)
(2)
(3)
|
Filed
as an Exhibit to Form SB-2 filed with the SEC on October 26,
2007.
Filed
as an Exhibit to Form 8-K filed with the SEC on March 20,
2009.
Filed
as an Exhibit to Form 10-K filed with the SEC on December 1,
2008.
|
-47-
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ARTISTRY
PUBLICATIONS, INC.
|
||
By:
|
/s/
Yiyou Ran
|
|
Yiyou
Ran
|
||
Chief
Executive Officer
|
Dated: February
18, 2010
-48-