Attached files
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Shareholders
of Top Favour Limited
We
have audited the accompanying consolidated balance sheets of Top Favour
Limited and Subsidiaries as of June 30, 2009 and 2008, and the related
consolidated statements of operations and comprehensive income (loss),
shareholders’ equity, and cash flows for each of the years in the
three-year period ended June 30, 2009. Top Favour Limited and
Subsidiaries’ management is responsible for these financial statements.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
The company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Top Favour Limited and
Subsidiaries as of June 30, 2009 and 2008, and the results of its
operations and its cash flows for each of the years in the three-year
period ended June 30, 2009 in conformity with accounting principles
generally accepted in the United States of America.
/s/
Frazer Frost, LLP (successor entity of Moore Stephens Wurth Frazer &
Torbet, LLP)
Brea,
California
November
18, 2009
-1-
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CONSOLIDATED
BALANCE SHEETS
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AS
OF JUNE 30, 2009 AND 2008
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ASSETS
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| June, 30 | ||||||||
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2009
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2008
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CURRENT
ASSETS
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Cash
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$ | 278,399 | $ | 4,705,129 | ||||
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Notes
receivable
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358,808 | - | ||||||
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Accounts
receivable, trade, net
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6,454,663 | 3,552,733 | ||||||
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Other
receivables
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225,288 | 996,190 | ||||||
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Inventories
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107,187 | 206,690 | ||||||
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Advances
to suppliers
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8,364,448 | 1,646,714 | ||||||
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Total
current assets
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15,788,793 | 11,107,456 | ||||||
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PROPERTY,
PLANT AND EQUIPMENT, net
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16,954,659 | 16,208,908 | ||||||
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OTHER
ASSETS
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||||||||
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Prepayment
for construction
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7,462,008 | - | ||||||
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Intangible
- Land use rights, net
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1,945,811 | 2,001,379 | ||||||
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Intangible
- Mineral rights, net
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5,233,992 | 8,014,599 | ||||||
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Other
assets
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102,550 | 102,130 | ||||||
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Total
other assets
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14,744,361 | 10,118,108 | ||||||
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Total
assets
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$ | 47,487,813 | $ | 37,434,472 | ||||
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LIABILITIES AND SHAREHOLDERS'
EQUITY
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CURRENT
LIABILITIES
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Accounts
payable, trade
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$ | 244,570 | $ | 3,576,790 | ||||
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Short
term loans - Bank
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2,219,475 | 3,896,989 | ||||||
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Short
term loans - Others
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1,098,750 | - | ||||||
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Due
to related parties
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259,033 | 2,092,983 | ||||||
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Due
to shareholders
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1,281,304 | 4,667,405 | ||||||
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Other
payables and accrued liabilities
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744,058 | 1,693,548 | ||||||
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Customer
deposits
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3,751,327 | 511,628 | ||||||
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Construction
payable
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- | 383,442 | ||||||
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Taxes
payable
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2,682,254 | 2,947,118 | ||||||
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Total
liabilities
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12,280,771 | 19,769,903 | ||||||
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COMMITMENTS
AND CONTINGENCIES
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SHAREHOLDERS'
EQUITY
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Common
share, $1.00 par value, 50,000 authorized,
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1,000
issued and outstanding as of June 30, 2009 and 2008
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1,000 | 1,000 | ||||||
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Additional
Paid-in capital
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3,544,077 | 3,044,803 | ||||||
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Contribution
receivables
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- | (1,000 | ) | |||||
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Statutory
reserves
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1,127,710 | 573,412 | ||||||
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Retained
earnings
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29,754,451 | 13,340,814 | ||||||
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Accumulated
other comprehensive income
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779,804 | 705,540 | ||||||
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Total
shareholders' equity
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35,207,042 | 17,664,569 | ||||||
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Total
liabilities and shareholders' equity
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$ | 47,487,813 | $ | 37,434,472 | ||||
The accompanying notes are an integral part of these consolidated financial statements
-2-
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TOP
FAVOUR LIMITED AND SUBSIDIARIES
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CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(LOSS)
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FOR
THE YEARS ENDED JUNE 30, 2009, 2008 AND 2007
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2009
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2008
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2007
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REVENUE
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$ | 51,395,992 | $ | 58,623,488 | $ | 30,078,701 | ||||||
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COST
OF GOOD SOLD
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27,523,329 | 27,751,480 | 22,179,203 | |||||||||
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GROSS
PROFIT
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23,872,663 | 30,872,008 | 7,899,498 | |||||||||
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OPERATING
EXPENSES:
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Selling
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732,902 | 1,631,856 | 1,613,496 | |||||||||
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General
and administrative
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1,905,987 | 2,269,540 | 2,717,161 | |||||||||
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Total
operating expenses
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2,638,889 | 3,901,396 | 4,330,657 | |||||||||
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INCOME
FROM OPERATIONS
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21,233,774 | 26,970,612 | 3,568,841 | |||||||||
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OTHER
INCOME (EXPENSE), NET
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Finance
expense, net
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(914,072 | ) | (1,122,569 | ) | (750,950 | ) | ||||||
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Other
income (expense), net
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139,823 | (137,063 | ) | (49,375 | ) | |||||||
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Total
other expense, net
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(774,249 | ) | (1,259,632 | ) | (800,325 | ) | ||||||
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INCOME
BEFORE INCOME TAXES
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20,459,525 | 25,710,980 | 2,768,516 | |||||||||
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PROVISION
FOR INCOME TAXES
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3,491,590 | 8,046,315 | 2,165,766 | |||||||||
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NET
INCOME
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16,967,935 | 17,664,665 | 602,750 | |||||||||
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OTHER
COMPREHENSIVE INCOME (LOSS)
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Foreign
currency translation adjustment
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74,264 | 909,318 | (144,792 | ) | ||||||||
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COMPREHENSIVE
INCOME
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$ | 17,042,199 | $ | 18,573,983 | $ | 457,958 | ||||||
The accompanying notes are an integral part of these consolidated financial
statements
-3-
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CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
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Accumulated
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Retained
Earnings
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other
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Common
Stock
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Paid-in
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Contribution
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Statutory
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comprehensive
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Shares
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Par
Value
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capital
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Receivable
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reserves
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Unrestricted
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(loss)
income
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Total
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BALANCE,
June 30, 2006
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1,000 | $ | 1,000 | $ | 853,022 | $ | (1,000 | ) | $ | 2,295 | $ | (4,355,484 | ) | $ | (58,986 | ) | $ | (3,559,153 | ) | |||||||||||||
| - | ||||||||||||||||||||||||||||||||
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Net
income
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602,750 | 602,750 | ||||||||||||||||||||||||||||||
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Adjustment
of statutory reserve
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105,301 | (105,301 | ) | - | ||||||||||||||||||||||||||||
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Shareholder
contribution by forfeited imputed interest
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702,884 | 702,884 | ||||||||||||||||||||||||||||||
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Foreign
currency translation adjustments
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(144,792 | ) | (144,792 | ) | ||||||||||||||||||||||||||||
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BALANCE,
June 30, 2007
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1,000 | $ | 1,000 | $ | 1,555,906 | $ | (1,000 | ) | $ | 107,596 | $ | (3,858,035 | ) | $ | (203,778 | ) | $ | (2,398,311 | ) | |||||||||||||
| - | ||||||||||||||||||||||||||||||||
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Net
income
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17,664,665 | 17,664,665 | ||||||||||||||||||||||||||||||
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Adjustment
of statutory reserve
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465,816 | (465,816 | ) | - | ||||||||||||||||||||||||||||
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Shareholder
contribution
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851,968 | 851,968 | ||||||||||||||||||||||||||||||
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Shareholder
contribution by forfeited imputed interest
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636,929 | 636,929 | ||||||||||||||||||||||||||||||
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Foreign
currency translation adjustments
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909,318 | 909,318 | ||||||||||||||||||||||||||||||
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BALANCE,
June 30, 2008
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1,000 | $ | 1,000 | $ | 3,044,803 | $ | (1,000 | ) | $ | 573,412 | $ | 13,340,814 | $ | 705,540 | $ | 17,664,569 | ||||||||||||||||
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Net
income
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16,967,935 | 16,967,935 | ||||||||||||||||||||||||||||||
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Adjustment
of Statutory reserve
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554,298 | (554,298 | ) | - | ||||||||||||||||||||||||||||
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Shareholder
cash contribution and by forfeited imputed interest
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499,274 | 1,000 | 500,274 | |||||||||||||||||||||||||||||
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Foreign
currency translation adjustments
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74,264 | 74,264 | ||||||||||||||||||||||||||||||
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BALANCE,
June 30, 2009
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1,000 | $ | 1,000 | $ | 3,544,077 | $ | - | $ | 1,127,710 | $ | 29,754,451 | $ | 779,804 | $ | 35,207,042 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
-4-
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TOP
FAVOUR LIMITED AND SUBSIDIARIES
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CONSOLIDATED
STATEMENTS OF CASH FLOWS
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FOR
THE YEARS ENDED JUNE 30, 2009, 2008 AND 2007
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2009
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2008
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2007
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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Net
income
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$ | 16,967,935 | $ | 17,664,665 | $ | 602,750 | ||||||
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Adjustments
to reconcile net income to cash
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provided
by operating activities:
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Depreciation
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2,013,441 | 1,259,811 | 1,031,563 | |||||||||
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Amortization
and depletion
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2,877,364 | 2,133,587 | 1,260,992 | |||||||||
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Bad
debt expense
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- | 200,356 | 535,345 | |||||||||
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Imputed
interest on shareholder and related party loans
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490,274 | 636,929 | 702,884 | |||||||||
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Capitalized
interest
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(35,914 | ) | (156,121 | ) | (158,890 | ) | ||||||
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Change
in operating assets and liabilities
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Notes
receivable
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(358,808 | ) | - | - | ||||||||
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Accounts
receivable, trade
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(2,887,319 | ) | (1,820,052 | ) | (1,412,025 | ) | ||||||
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Other
receivables
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774,999 | 589,411 | (645,240 | ) | ||||||||
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Inventories
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100,353 | 67,607 | 363,935 | |||||||||
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Advances
to suppliers
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(6,710,962 | ) | (1,397,012 | ) | 1,526,323 | |||||||
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Other
current assets
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- | 79,236 | 158,233 | |||||||||
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Accounts
payable, trade
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(3,346,930 | ) | (1,458,808 | ) | 2,545,876 | |||||||
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Other
payables and accrued liabilities
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(954,832 | ) | (4,601,657 | ) | (2,437,311 | ) | ||||||
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Customer
deposits
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3,237,596 | (2,225,952 | ) | 747,481 | ||||||||
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Taxes
payable
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(276,983 | ) | 2,088,249 | (175,421 | ) | |||||||
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Net
cash provided by operating activities
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11,890,214 | 13,060,249 | 4,646,495 | |||||||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Purchase
of property, plant and equipment
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(3,041,639 | ) | (2,648,102 | ) | (2,988,978 | ) | ||||||
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Purchase
of land use rights and mineral rights
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- | (5,822,908 | ) | (3,549,834 | ) | |||||||
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Prepayment
for construction
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(7,462,008 | ) | - | - | ||||||||
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Net
cash used in investing activities
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(10,503,647 | ) | (8,471,010 | ) | (6,538,812 | ) | ||||||
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CASH
FLOWS FROM FINANCING ACTIVITIES:
|
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Shareholder
contribution
|
10,000 | 851,968 | - | |||||||||
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Payments
on short-term loans Bank
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(1,693,540 | ) | (4,943,071 | ) | (1,525,552 | ) | ||||||
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Cash
proceeds from short term loans - Others
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1,098,750 | 5,232,220 | 3,568,587 | |||||||||
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(Payment)
proceeds of loans from shareholders
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(3,405,295 | ) | - | - | ||||||||
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(Payment)
proceeds of loans from related parties
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(1,842,557 | ) | (2,078,542 | ) | 136,855 | |||||||
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Net
cash used in(provided by) financing activities
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(5,832,642 | ) | (937,425 | ) | 2,179,890 | |||||||
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EFFECT
OF EXCHANGE RATE ON CASH
|
19,345 | 328,149 | 28,074 | |||||||||
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(DECREASE)
INCREASE IN CASH
|
(4,426,730 | ) | 3,979,963 | 315,647 | ||||||||
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CASH,
beginning of year
|
4,705,129 | 725,166 | 409,519 | |||||||||
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CASH,
end of year
|
$ | 278,399 | $ | 4,705,129 | $ | 725,166 | ||||||
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SUPPLEMENTAL
CASH FLOW INFORMATION:
|
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Cash
paid for income tax
|
$ | 3,451,585 | $ | 6,634,443 | $ | 1,902,383 | ||||||
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Cash
paid for interest expense
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$ | 286,194 | $ | 575,206 | $ | 278,909 | ||||||
The accompanying notes are an
integral part of these consolidated financial statements
-5-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Note
1 – Organization
Top
Favour Limited (“Top Favour”, “we”, or “the Company”) was incorporated in the
British Virgin Islands on July 2, 2008. Through its wholly-owned
subsidiary Pingdingshan Hongyuan Energy Science and Technology Development Co.,
Ltd. (“Hongyuan”Hongyuan), which was formed on March 18, 2009, and the variable
interest entity (“VIE”) - Henan Pingdingshan Hongli Coal & Coking Co., Ltd.
(“Hongli”), the Company produces and sells coal, coke, coal gas-generated
electricity, and other coking by-products in the People’s Republic of China
(“PRC” or China).
Henan
Pingdingshan Hongli Coal & Coking Co., Ltd. (“Hongli”) was incorporated as a
trading and holding Company on June 5, 1996 under the laws of the
PRC. In addition to operating the Baofeng Coking Factory (“Baofeng
Coking”), Hongli sells coals and coke to its customers, most of whom are energy
trading companies procuring coking coals for steel manufacturers and chemical
refineries in China. Hongli has a registered capital of RMB 8,080,000 and is
located in the city of Pingdingshan, Henan Province.
Baofeng
Coking is a division of Hongli and was established in May
2002. Hongli and Baofeng Coking are engaged in coal selling, coal
washing and coking, using raw coals produced by its affiliate or purchased from
other raw or washed coal vendors.
Baofeng
Hongchang Coal Co., Ltd. (“Hongchang Coal”) was formed in July 19, 2007 under the laws
of the PRC and is 100% owned by Hongli. Hongchang Coal owns the coal mining
rights over three underground coal mines and produces raw coal that is suitable
for coke producing and other industrial uses. Total
proven coal reserves for all three mines as of July 2007 were 2,475,000 metric
tons, of which the Company is permitted to extract (by means of paying for the
mining privilege to the government) up to 1,215,000 metric tons. The
majority of its products are internally sold to Baofeng Coking and
Hongli.
Baofeng
Hongguang Power Co., Ltd. (“Hongguang Power”) was formed on August 1,
2006, and is a 100% owned subsidiary of Hongli. Hongguang Power
operates its 2x3000-kilowatt (kw) power plant and provides electricity to
Baofeng Coking and the Chinese national power grid which is generated from the
coal gas emitted from the coking process of Baofeng Coking. Hongguang
is required to sell its surplus electricity to the national power grid by the
local government, in excess of power supplied to and consumed by Baofeng
Coking.
Hongli
and its operating subsidiaries hold the approved licenses necessary to operate
the coal mining, coal sales, coking and power plant businesses in China. PRC law
currently has limits on foreign ownership of these companies. To comply with
these foreign ownership restrictions and in order for Top Favour to obtain
control over Hongli’s PRC operating entities, on March 18, 2009, Top Favour,
through Hongyuan, entered into contractual arrangements with Hongli on March 18,
2009(“Contractual Arrangements”). Those Contractual Arrangements are comprised
of a series of agreements, including: (1) a Consulting Services Agreement,
through which Hongyuan has the right to advise, consult, manage and operate
Hongli and its subsidiaries (“Operating Companies”), collect, and own all of the
respective net profits of the Operating Companies; (2) an Operating Agreement,
through which Hongyuan has the right to recommend director candidates and
appoint the senior executives of the Operating Companies, approve any
transactions that may materially affect the assets, liabilities, rights or
operations of the Operating Companies, and guarantee the contractual performance
by the Operating Companies of any agreements with third parties, in exchange for
a pledge by the Operating Companies of their respective accounts receivable and
assets; (3) a Proxy Agreement, under which the shareholders of the Operating
Companies have vested their voting control over the Operating Companies to
Hongyuan and will only transfer their equity interests in the Operating
Companies to Hongyuan or its designee(s); (4) an Option Agreement, under which
the shareholders of the Operating Companies have granted Hongyuan the
irrevocable right and option to acquire all of its equity interests in the
Operating Companies, or, alternatively, all of the assets of the Operating
Companies; and (5) an Equity Pledge Agreement, under which the shareholders of
the Operating Companies have pledged all of their rights, title and interest in
the Operating Companies to Hongyuan
to guarantee the Operating Companies’ performance of their respective
obligations under the Consulting Services Agreement.
-6-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Since Top
Favour and Hongli are under common control, this has been accounted for as a
reorganization of entities and the consolidation of Top Favour and Hongli has
been accounted for at historical cost and prepared on the basis as if the
aforementioned exclusive agreements between Top Favour and Hongli had
become effective as of the beginning of the first period presented in the
accompanying consolidated financial statements. The Company’s
consolidated assets do not include any collateral for Hongli’s
obligations. The creditors of Hongli do not have recourse against Top
Favour and Hongyuan.
Note
2 – Summary of Significant Accounting Policies
Principles of
consolidation
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include the financial statements of the
Company, its wholly-owned subsidiary - Hongyuan and its VIEs – Hongli and its
subsidiaries. All significant inter-company transactions and balances between
the Company, its subsidiaries and VIEs are eliminated upon
consolidation.
In
accordance with Financial Accounting Standards Board interpretation of the
guidance, “Consolidation of
Variable Interest Entities”, VIEs are generally entities that lack
sufficient equity to finance their activities without additional financial
support from other parties or whose equity holders lack adequate decision making
ability. All VIEs with which the Company is involved must be evaluated to
determine the primary beneficiary of the risks and rewards of the VIE. The
primary beneficiary is required to consolidate the VIE for financial reporting
purposes. As a result of these contractual arrangements (Note 1), Top Favour is
obligated to absorb a majority of the risk of loss from Hongli’s activities and
Top Favour is enabled to receive a majority of its expected residual
returns, Top Favour accounts for Hongli as a VIE and is the primary
beneficiary.
Use of
estimates
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The more significant areas requiring the use of management
estimates and assumptions relate to coal reserves that are the basis for future
cash flow estimates and units-of-production depletion calculations; asset
impairments; valuation allowances for deferred income taxes; reserves for
contingencies and litigation and the fair value and accounting treatment of
certain financial instruments. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. Accordingly, actual results may differ significantly
from these estimates. In addition, different assumptions or conditions could
reasonably be expected to yield different results.
Management
has included all adjustments, consisting only of normal recurring
adjustments, considered necessary to give a
fair presentation of operating
results for the periods presented. Interim
results are not necessarily indicative the results of a full
year. The information included in the consolidated financial
statements should be read in conjunction with reports and statements filed with
the Securities and Exchange Commission.
-7-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Revenue
recognition
The
Company's revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Coal and coke sales are recognized at the date of shipment
to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. This
generally occurs when coal is loaded onto trains or trucks at one of the
Company’s loading facilities or at third party facilities.
Most of
the electricity generated by Hongguan Power is used internally by Baofeng
Coking. Supply of surplus electricity generated by Hongguang Power to
the national power grid is mandated by the local utilities board. The
value of the surplus electricity is calculated based on actual kilowatt-hours
produced and transmitted and at a fixed rate determined under
contract.
Coal and
coke sales represent the invoiced value of goods, net of a value-added tax
(VAT), sales discounts and actual returns at the time when products are sold to
the customer.
Shipping and handling
costs
Shipping
and handling costs related to costs of the raw materials purchased is included
in cost of revenues. Total shipping and handling costs related to
sales were recorded as selling expenses. For the years ended June 30, 2009, 2008
and 2007, shipping and handling costs related to sales were $202,849, $313,639
and $535,755, respectively.
Foreign currency translation
and other comprehensive income
The
reporting currency of the Company is the US dollar. The functional currency of
the Company and its subsidiaries is the Chinese Renminbi (RMB).
For the
subsidiaries whose functional currencies are other than the US dollar, all
assets and liabilities accounts were translated at the exchange rate on the
balance sheet date; shareholders’ equity is translated at the historical rates
and items in the statement of operations are translated at the average rate for
the year. Items in the cash flow statement are also translated at average
translation rates for the period, therefore, amounts reported on the statement
of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheet. Translation adjustments resulting from this
process are included in accumulated other comprehensive income in the statement
of shareholders’ equity. The resulting translation gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred.
The
balance sheet amounts with the exception of equity at June 30, 2009, 2008 and
2007 were translated at the rates of RMB 6.83, RMB 6.87 and RMB 7.62 to $1,
respectively. The average translation rates applied to income and
cash flow statement amounts for the years ended June 30, 2009, 2008 and 2007
were at RMB 6.83, RMB 7.29 and RMB 7.83 to $1, respectively.
Fair value of financial
instruments
Effective
January 1, 2008, the Company adopted the Financial Accounting Standard Board’s
(“FASB”) accounting standard regarding fair value of financial instruments and
related fair value measurements. Those accounting standards established a
three-level valuation hierarchy for disclosures of fair value measurement and
enhance disclosures requirements for fair value measures. The
carrying amounts reported in the accompanying consolidated balance sheets for
receivables, payables and short term loans qualify as financial instruments are
a reasonable estimate of fair value because of the short period of time between
the origination of such instruments, their expected realization and, if
applicable, the stated rate of interest is equivalent to rates currently
available. The three levels of valuation hierarchy are defined as
follows:
-8-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
|
Level
1
|
Inputs
to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
|
|
Level
2
|
Inputs
to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the
assets or liability, either directly or indirectly, for substantially the
full term of the financial instruments.
|
|
Level
3
|
Inputs
to the valuation methodology are unobservable and significant to the fair
value.
|
The
Company did not identify any assets and liabilities that are required to be
presented on the consolidated balance sheets at fair value in accordance the
accounting standard.
“The Fair
Value Option for Financial Assets and Financial Liabilities,” became effective
for the Company on July 1, 2008. The accounting standard provides the
Company with the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis with the difference between the carrying value before
election of the fair value option and the fair value recorded upon election as
an adjustment to beginning retained earnings. The Company chose not to elect the
fair value option.
Cash
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents for cash
flow statement purposes. Cash includes cash on hand and demand deposits in
accounts maintained with banks within the PRC and in Hong
Kong.
Accounts receivables,
trade
During
the normal course of business, the Company extends unsecured credit to its
customers. Management regularly reviews aging of receivables and changes in
payment trends by its customers, and records a reserve when management believes
collection of amounts due are at risk. Accounts considered uncollectible are
written off. For the years ended June 30, 2009, and 2008, the Company wrote off
uncollectible receivables amounting to $0, and $200,356 respectively. As
of June 30, 2009 and 2008, management did not reserve any allowance for
doubtful accounts. The Company regularly reviews the credit
worthiness of its customers and, based on the results of the credit review,
determines whether extended payment terms can be granted to or, in some cases,
partial prepayment is required from certain customers.
Inventories
Inventories
are stated at the lower of cost or market, using the weighted average cost
method. Inventories consist of raw materials and supplies; work in
process, and finished goods. Raw materials mainly consist of coal
(mined and purchased), rail, steel, wood and additives used in
coking. The cost of finished goods includes (1) direct costs of raw
materials, (2) direct labor, (3) indirect production costs, such as allocable
utilities cost, and (4) indirect labor related to the production activities,
such as assembly and packaging.
Advances to
suppliers
The
Company advances monies to certain suppliers for the purchase of raw materials
and construction contracts. These advances are interest-free and
unsecured.
-9-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Property, plant and
equipment, net
Property,
plant and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to earnings as incurred; while additions, renewals and
betterments that extend the useful life of property, plant and equipment are
capitalized. When items of plant and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Mine development costs are capitalized and amortized by the units of production
method over estimated total recoverable proven and probable reserves.
Depreciation of plant and equipment is provided using the straight-line method
for substantially all assets with estimated lives as follows:
|
Estimated Useful Life
|
|
|
Building
and plant
|
30-40
years
|
|
Machinery
and equipment
|
10-20
years
|
|
Other
equipment
|
5
years
|
|
Transportation
equipment
|
5-7
years
|
Construction-in-progress
includes direct costs of construction of mining tunnels improvements. Interest
incurred during the period of construction, if material, is capitalized.
All other interest is expensed as incurred. For the years ended June 30,
2009, 2008 and 2007, $35,914, $156,121 and $158,890 interest was capitalized
into construction for progress, respectively.
Construction-in-progress is not depreciated until such time the assets are
completed and put into service. Maintenance, repairs and minor renewals are
charged to expense as incurred. Major additions and betterment to property and
equipment are capitalized.
Land use rights,
net
Costs to
obtain land use rights are recorded based on the fair value at acquisition and
amortized over 36 years, the contractual period of the rights. Under
the FASB’s accounting standard regarding treatment of goodwill and other
intangible assets, all goodwill and certain intangible assets determined to have
indefinite lives are not amortized but tested for impairment at least annually.
Intangible assets other than goodwill will be amortized over their useful lives
and reviewed at least annually for impairment.
Intangible - mineral rights,
net
Mineral
rights are capitalized at fair value when acquired, including amounts associated
with any value beyond proven and probable reserves, and amortized to operations
as depletion expense using the units-of-production method over the estimated
proven and probable recoverable tons. The Company’s coal reserves are
controlled either through direct ownership which generally lasts until the
recoverable reserves are depleted.
Impairment of
long-lived
assets
The
Company evaluates long lived tangible and intangible assets for impairment, at
least annually, but more often whenever events or changes in circumstances
indicate that the carrying value may not be recoverable from its estimated
future cash flows, in accordance FASB’s accounting guidance regarding “Disposal
of Long-Lived Assets”. Recoverability is measured by comparing the
asset’s net book value to the related projected undiscounted cash flows from
these assets, considering a number of factors including past operating results,
budgets, economic projections, market trends and product development
cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. Based on its
review, the Company believes that, as of June 30, 2009 and 2008, there was no
impairment of long lived assets.
-10-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Income
taxes
Income
taxes are provided based on the liability method in respect of temporary
differences arising from differences between the carrying amount of assets and
liabilities in the financial statements and the corresponding tax basis used in
the computation of assessable tax profit. In principle, deferred tax
liabilities are recognized for all taxable temporary differences, and deferred
tax assets are recognized to the extent that it is probable that taxable profit
will be available against which deductible temporary differences can be
utilized. Deferred tax is calculated at the tax rates that are
expected to apply to the period when the asset is realized or the liability is
settled. Deferred tax is charged or credited in the income statement,
except when it relates to items credited or charged directly to equity, in which
case the deferred tax is also dealt with in equity.
Effective
January 1, 2007, the Company adopted FASB’s accounting standard which
indicates a tax position is recognized as a benefit only if it is “more likely
than not” that the tax position would be sustained in a tax examination, with a
tax examination presumed to occur. The amount recognized is the largest
amount of tax benefit that has greater than 50% likelihood of being
realized on examination. For tax positions not meeting the “more likely than
not” test, no tax benefit is recorded. The adoption had no effect on the
Company’s financial statements.
Chinese income
taxes
The
Company’s subsidiary and VIEs are operating in the PRC and are governed by the
income tax laws of the PRC concerning Foreign Investment Enterprises and Foreign
Enterprises as well as various local income tax laws (“Income Tax
Laws”). Prior to January 1, 2008, Income Tax Laws of the PRC, the
Company’s subsidiaries and VIEs are generally subject to an income tax at an
effective rate of 33% (30% national income taxes plus 3% local income taxes) on
taxable income, which is based on the net income reported in the statutory
financial statements after appropriate tax adjustments. The statutory
rate has been changed to 25%, effective January 1, 2008.
Value added tax
(“VAT”)
Sales
revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company’s coals and cokes that is sold in the
PRC is subject to a Chinese value-added tax at a rate of 13% or 17% of the
gross sales price, respectively. This VAT may be offset by VAT paid
by the Company on raw materials and other materials included in the cost of
producing finished products. The Company recorded VAT payable
and VAT receivable net of payments in the consolidated financial
statements. The VAT tax return is filed to offset the payables
against the receivables.
Comprehensive
income
FASB’s
accounting standard regarding comprehensive income establishes requirements for
the reporting and display of comprehensive income, its components and
accumulated balances in a full set of general purpose financial statements. This
accounting standard defines comprehensive income to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, it also requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in financial statements that are presented
with the same prominence as other financial statements. The Company's only
current component of comprehensive income is the foreign currency translation
adjustment.
Related
parties
Parties
are considered to be related to the Company if the parties, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include
principal owners of the Company, its management, members of the immediate
families of such principal owners and management, and other parties with which
the Company may deal if one party
controls or can significantly influence the management or operating policies of
the other to an extent that one of the transacting parties might be prevented
from fully pursuing its own separate interests.
-11-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Recently issued accounting
pronouncements
In
January 2009, the FASB issued an accounting standard which amended the
impairment model by removing its exclusive reliance on “market participant”
estimates of future cash flows used in determining fair value. Changing the cash
flows used to analyze other-than-temporary impairment from the “market
participant” view to a holder’s estimate of whether there has been a “probable”
adverse change in estimated cash flows allows companies to apply reasonable
judgment in assessing whether another-than-temporary impairment has occurred.
The adoption of this accounting standard did not have a material impact on the
Company’s consolidated financial statements because all of the investments in
debt securities are classified as trading securities.
In April
2009, the FASB issued an Accounting Standard to determine fair value when the
volume and level of activity for the asset or liability have significantly
decreased and identify transactions that are not orderly. It also amends and
provides additional guidance for estimating fair value when the volume and level
of activity for the asset or liability have significantly decreased and also
includes guidance on identifying circumstances that indicate a transaction is
not orderly for fair value measurements. This new accounting standard shall be
applied prospectively with retrospective application not permitted and it shall
be effective for interim and annual periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15,
2009.
In April
2009, the FASB issued an accounting standard that makes the other-than-temporary
impairments guidance more operational and improves the presentation of
other-than-temporary impairments in the financial statements. This standard
replaced the existing requirement that the entity’s management assert it has
both the intent and ability to hold an impaired debt security until recovery
with a requirement that management assert it does not have the intent to sell
the security, and it is more likely than not it will not have to sell the
security before recovery of its cost basis. This standard provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result in a
change in the carrying amount of debt securities, it does require that the
portion of other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. The Company adopted this
accounting standard, but it did not have a material impact on its consolidated
financial statements.
In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The Company adopted this accounting
standard, but it did not have a material impact on the disclosures related to
its consolidated financial statements.
In May
2009, the FASB issued an accounting standard to provide guidance on management’s
assessment of subsequent events. The new standard clarifies that management must
evaluate, as of each reporting period, events or transactions that occur after
the balance sheet date through the date that the financial statements are issued
or are available to be issued. Management must perform its assessment for both
interim
and annual financial reporting periods. This new guidance does not significantly
change the Company’s practice for evaluating such event and it is effective
prospectively for interim and annual periods ending after June 15, 2009 and
requires disclosure of the date subsequent events are evaluated
through. The adoption of this new accounting standard did not have an
impact on the Company’s results of operations or financial
condition.
-12-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within this accounting
standard. Further, this accounting standard requires a company to perform a
qualitative analysis when determining whether or not it must consolidate a VIE.
It also requires a company to continuously reassess whether it must consolidate
a VIE. Additionally, it requires enhanced disclosures about a company’s
involvement with VIEs and any significant change in risk exposure due to that
involvement, as well as how its involvement with VIEs impacts the company’s
financial statements. Finally, a company will be required to disclose
significant judgments and assumptions used to determine whether or not to
consolidate a VIE. This accounting standard is effective for financial
statements issued for fiscal years beginning after November 15, 2009, and the
Company does not expect this standard to have a material effect on its
consolidated financial statements.
Note
3 – Segment Reporting
The
FASB’s accounting standard regarding Disclosure about Segments of an Enterprise
and Related Information requires use of the "management approach" model for
segment reporting. The management approach model is based on the way a company's
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other manner
in which management disaggregates a company.
As of and
for the years ended June 30, 2009, 2008 and 2007, the Company’s chief operating
decision maker, our CEO, has identified all activities of the Company’s
subsidiaries, including coal mining, coking and the sales of all products as a
result of these business activities, were conducted within one single reporting
segment. All of the Company’s products are sold within the
PRC. Major products and respective revenues are as summarized as
follows:
|
Years
ended June 30,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Coke
|
$ | 30,534,755 | $ | 55,103,692 | $ | 23,831,668 | ||||||
|
Coal
tar
|
1,171,510 | 2,987,334 | 1,463,183 | |||||||||
|
Raw
coal
|
13,151,325 | 372,312 | 1,877,489 | |||||||||
|
Washed
Coal
|
6,538,402 | 160,150 | 2,906,361 | |||||||||
|
Total
|
$ | 51,395,992 | $ | 58,623,488 | $ | 30,078,701 | ||||||
Note
4 – Concentration and Credit Risk
The
Company’s operations are all carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC’s economy. The Company’s operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks associated
with, among others, the political, economic and legal environments and foreign
currency exchange. The Company’s results may be adversely affected by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
-13-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Financial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains balances at financial institutions located in the
PRC and HongKong. Balances at financial institutions or state owned banks within
the PRC are not covered by insurance. As of June 30, 2009 and 2008, the Company
had deposits which were not covered by insurance for $5,679 and $4,575,184,
respectively. The Company has not experienced any losses in such
accounts.
For the
years ended June 30, 2009, 2008 and 2007, all of the Company’s sales were
generated in the PRC. In addition, all accounts receivable at June 30, 2009,
2008 and 2007 were generated in the PRC. Four major customers accounted
individually for 29.00%, 13.24%, 12.22% and 10.78% of the Company’s total
revenue for the year ended June 30, 2009, respectively. The Company held
accounts receivable with those four customers with 36.24%, 56.31%, 0% and 0% of
the total account receivables at June 30, 2009, respectively. For the year ended
June 30, 2008, the Company had four major customers that accounted individually
37.61%, 19.56%, 17.36% and 13.90% of the Company’s total revenue and held
accounts receivable with 18.99%, 19.56%, 16.48% and 10.54% of the total accounts
receivable at June 30, 2008, respectively. There were four major customers that
accounted individually 30.51%, 12.51%, 11.67% and 9.26% of the Company’s total
revenue for the year ended June 30, 2007, respectively.
For the
years ended June 30, 2009 and 2008, all of the Company’s purchases were
generated in the PRC as well as accounts payable. The Company had three major
vendors that collectively accounted for 15.27%, 15.23% and 10.11% of the
Company’s total purchases for the year ended June 30, 2009 with which the
Company held no accounts payable as of June 30, 2009. The Company had two major
vendors that collectively accounted for 15.15%, and 12.68% of the Company’s
total purchases for the year ended June 30, 2008 with which the Company held no
accounts payable as of June 30, 2008. The Company had
two major vendors that collectively accounted for 18.11%, and 12.16% of the
Company’s total purchases for the year ended June 30, 2007 with which the
Company held no accounts payable as of June 30, 2007.
Three
major products under the coking segment accounted for approximately 59.41%, 25.59% and 12.72%
of the Company’s total revenue for the year ended June 30, 2009. One major
product accounted for approximately 94% and 79% of the Company’s total revenue
for the years ended June 30, 2008 and 2007, respectively.
Note
5 – Notes Receivable
Notes
receivable represent trade accounts receivable due from various customers
where a customers’ bank has guaranteed payment of the receivable. This
amount is non-interest bearing and is normally paid within three to six months.
The Company is allowed to submit their request for payment to the customer’s
bank earlier than the scheduled payment date. However, the early request
will result in an interest charge and a processing fee. Notes
receivable totaled $358,808, and $0 as of June 30, 2009 and 2008,
respectively.
Note
6 – Inventories
Inventory
as of June 30, 2009 and 2008 consisted of the following:
|
2009
|
2008
|
|||||||
|
Raw
material
|
$ | 28,150 | $ | 123,362 | ||||
|
Supplemental
material
|
3,844 | 38,457 | ||||||
|
Finished
goods
|
75,193 | 44,871 | ||||||
|
Total
|
$ | 107,187 | $ | 206,690 | ||||
-14-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Note
7 – Advances to suppliers
Advances
to suppliers are monies deposited or advanced to unrelated vendors for future
inventory purchases, which consist mainly raw coal purchases. Most of
the Company’s vendors require a certain amount of money to be deposited with
them as a guarantee that the Company will fulfill their purchases on a
timely basis and with favorable pricing.
Advances
to suppliers as of June 30, 2009 and 2008 consisted of the
following:
|
June
30, 2009
|
June
30, 2008
|
|||||||
|
Advances
for raw coal procurement
|
$ | 8,364,448 | $ | 1,634,056 | ||||
|
Others
|
- | 12,658 | ||||||
|
Total
|
$ | 8,364,448 | $ | 1,646,714 | ||||
Note
8 – Property, Plant and Equipment, net
Property,
plant and equipment as of June 30, 2009 and 2008 consisted of the
following:
|
June
30, 2009
|
June
30, 2008
|
|||||||
|
Buildings
and improvements
|
$ | 10,020,060 | $ | 9,971,523 | ||||
|
Mine
development cost
|
5,004,179 | 2,243,480 | ||||||
|
Machinery
and equipment
|
5,619,835 | 5,392,818 | ||||||
|
Other
Equipment
|
392,019 | 363,524 | ||||||
|
Total
|
21,036,093 | 17,971,345 | ||||||
|
Less
accumulated depreciation
|
(6,534,598 | ) | (4,502,641 | ) | ||||
|
Construction-in-progress
|
2,453,164 | 2,710,204 | ||||||
|
Total,
net
|
$ | 16,954,659 | $ | 16,178,908 | ||||
Depreciation
expense for the years ended June 30, 2009, 2008 and 2007 amounted to
$2,013,441, $1,259,811, and $1,031,563, respectively.
Construction-in-progress is
related to Hongchang coal’s mining tunnel improvement project costing
approximately $5.42 million. As of June 30, 2009, the Company had paid
approximately $2.42 million. This project was completed in August
2009.
Note
9 – Intangible – Land Use Rights, net
Land use
rights, net consisted of the following as of June 30, 2009 and
2008:
|
June
30, 2009
|
June
30, 2008
|
|||||||
|
Land
use rights
|
$ | 2,296,695 | $ | 2,287,289 | ||||
|
Accumulated
amortization
|
(350,884 | ) | (285,910 | ) | ||||
|
Total,
net
|
$ | 1,945,811 | $ | 2,001,379 | ||||
Amortization
expense for the years ended June 30, 2009, 2008 and 2007 amounted to $63,798,
$59,961 and $55,779, respectively.
-15-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Amortization
expense for the next five years and thereafter is as follows:
|
Year
ended June 30,
|
||||
|
2010
|
$ | 63,798 | ||
|
2011
|
63,798 | |||
|
2012
|
63,798 | |||
|
2013
|
63,798 | |||
|
2014
|
63,798 | |||
|
2015
and thereafter
|
1,626,821 | |||
|
Total
|
$ | 1,945,811 | ||
Note
10 – Intangible - Mineral Rights, net
Mineral
rights, net consisted of the following as of June 30, 2009 and
2008:
|
June
30, 2009
|
June
30, 2008
|
|||||||
|
Mineral
rights
|
$ | 13,101,831 | $ | 13,048,171 | ||||
|
Accumulated
depletion
|
(7,867,839 | ) | (5,033,572 | ) | ||||
|
Total,
net
|
$ | 5,233,992 | $ | 8,014,599 | ||||
Depletion
expense for the years ended June 30, 2009, 2008 and 2007 amounted to $2,813,566,
$2,073,626 and $1,205,213, respectively, which were charged to cost of
revenue.
Note
11 – Short-term Loans
Short-term loans
represent amounts due to various banks and individuals and are due either on
demand or normally within one year. These loans generally can be renewed with
the banks or the individual creditors.
As of
June 30, 2009 and 2008, the Company had short-term bank loans amounting to
$2,219,475 and $3,896,989, respectively. Of the bank loan balance at June 30,
2009, $483,450 was guaranteed by a third party, and the remaining balance was
guaranteed by Hongguang Power. The Company also borrowed a loan a short-term
loan from a third party for $1,098,750 with maturity date of November 5,
2009.
Weighted
average interest rates were 8.89%, 8.74%, and 8.07% for the years ended June 30,
2009, 2008 and 2007, respectively. Total interest expense on short
term loans for the years ended June 30, 2009, 2008 and 2007 amounted to
$308,618, $374,554, and $146,408, respectively, after $35,914, $156,121 and
$158,891 were capitalized into construction-in-progress.
Note
12– Construction payable
Construction
payables consisted of the payable to various contractors incurred in connection
wiht the Company’s completed construction projects for the coal mines and the
power plant. These payables for the construction projects bear no interest and
are generally collateralized generally by the construction works as mechanic’s
liens.
-16-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Note
13 – Taxes
Income
Tax
Effective
January 1, 2008, the New Enterprise Income Tax ("EIT") law replaced the existing
laws for Domestic Enterprises ("DES") and Foreign Invested Enterprises ("FIEs")
in the PRC. The new standard EIT rate of 25% has replaced the 33% rate
previously applicable to both DES and FIEs. Companies established before March
16, 2007 will continue to enjoy tax holiday treatment approved by local
government for a grace period of the next 5 years or until the tax holiday term
is completed, whichever is sooner. Pursuant to the PRC tax law, net operating
loss can be carried forward 5 years to offset future taxable
income.
The PRC
does not allow consolidation or group filing for corporate income tax purposes.
Income and losses from members of the same consolidated group (for financial
reporting purposes) are not allowed to offset one another. Therefore, total
taxable income (loss) subject to actual PRC corporate tax within the
consolidated group does not necessarily equal to the consolidated net income
before income tax of the consolidated group. The PRC tax administration system
does not necessarily retroactively recognize or allow accounting adjustments
that are discovered and posted after the income tax returns are filed as
additional taxable income or deductions for the tax year to which such
post-filing accounting adjustments relate. The Company considers any US GAAP
adjustments to its financial statements made after the statutory tax returns are
filed to be permanent differences for the purpose of reconciling differences of
income tax provision and actual PRC income tax liabilities.
The
provision for income taxes consists of the following for the years ended June
30, 2009 and 2008:
|
June
30, 2009
|
June
30, 2008
|
June
30, 2007
|
||||||||||
|
BVI
current income tax expense
|
$ | - | $ | - | $ | - | ||||||
|
PRC
current income tax expense
|
3,491,590 | 8,046,315 | 2,165,766 | |||||||||
|
Total
provision for income taxes
|
$ | 3,491,590 | $ | 8,046,315 | $ | 2,165,766 | ||||||
The
following table reconciles the statutory rates to the Company’s effective tax
rate for the years ended June 30, 2009, 2008 and 2007:
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
BVI
income tax
|
0 | % | 0 | % | 0 | % | ||||||||||||||||||
|
PRC
income tax
|
25 | % | 30.3 | % | (1 | ) | 33 | % | ||||||||||||||||
|
China
income tax exemption
|
(10.94 | %) | (2 | ) | 0 | % | 0 | % | ||||||||||||||||
|
Other
item
|
3.01 | % | (3 | ) | 1.7 | % | (3 | ) | 45.2 | % | (3 | ) | ||||||||||||
|
Effective
rate
|
17.07 | % | 32 | % | 78.2 | % | ||||||||||||||||||
(1) For
the years ended June 30, 2008, the Company was subject to 33% and 25% income tax
rates for the first six months and later three months, respectively due to the
new EIT was effective on January 1, 2008.
(2) The
-10.94% represents $2,570,980 of tax exemption received by Baofeng entity during
fiscal year 2009.
(3) The
3.01%, 1.70% and 45.20% represent operating losses incurred by Hongchang, and
Hongguang for the years ended at June 30, 2009, 2008 and 2007 respectively.
Management believes the losses may not be recovered through future
operations.
-17-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
Value Added
Tax
The
Company incurred VAT on sales and VAT on purchases the in PRC amounting to
$9,285,223 and $3,272,861 for the year ended June 30, 2009, $11,282,203 and
$3,503,238 for the year ended June 30, 2008, and $5,667,876
and $2,689,252 for the year ended June 30,
2007, respectively.
Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
Taxes
Payable
Taxes
payable as of June 30, 2009 and 2008 consisted of the following:
|
June
30, 2009
|
June
30, 2008
|
|||||||
|
VAT
|
$ | 502,867 | $ | 760,459 | ||||
|
Income
tax
|
1,906,975 | 1,990,387 | ||||||
|
Others
|
272,412 | 196,272 | ||||||
|
Total
taxes payable
|
$ | 2,682,254 | $ | 2,947,118 | ||||
Note
14 – Commitments and Contingencies
Lease
Commitment
The
Company leases its office space in downtown Pingdingshan under an operating
lease with a one year term, which expires on June 30, 2010. The
lease is generally renewable upon expiration and requires an upfront payment of
the annual rent in the amount of $6,328 upon execution of the lease.
Purchase
Commitment
Hongli
entered into an agreement with the Henan Province Pingdingshan Municipal Bureau
of Land and Resources on December 9, 2008 to acquire the land use rights over
some 1,270,000 square meters of industrial zoning vacant land in the Baofeng
County. The total acquisition cost amounts to $21,954,490 (or RMB 149,860,000)
for a 50 year land use right. Under the agreement, the Company
committed to pay $13,185,000 (or RMB 90,000,000) the first installment by June
30, 2009 and $8,769,490 (or RMB 59,860,000) by September 30, 2009. The
Pingdingshan Municipal Bureau of Land and Resources granted an extension to the
company in November 2009, and permitted the company to pay up the entire amount
for the acquisition by the end of the June 30, 2010. The Company acquired the
land as a part of a business expansion plan under which a new coking factory and
related facilities will be situated. Under the agreement, the Company
agreed to commence the construction project before March 16, 2009 with possible
extension rights, and complete the construction of coking factory by March 16,
2011, with a possible extension upon approval by the Henan Province Pingdingshan
Municipal Bureau of Land and Resources. As of June 30, 2009, this Company has
not commenced construction yet.
Note
15 – Statutory Reserves
The laws and regulations of the PRC
require that before foreign invested enterprises can legally distribute
profits, they must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations, in proportions determined at the
discretion of the board of directors, after fulfillment of the statutory
reserves. The statutory reserves include the statutory surplus reserve fund and
the common welfare fund.
-18-
TOP
FAVOUR LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30,
2009
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC Company Law, to the statutory surplus reserve fund until
such reserve balance reaches 50% of the Company’s registered capital. The
transfer must be made before distribution of any dividends to shareholders. The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholdings or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of registered
capital.
The
common welfare fund is no longer required after 2006 in accordance with PRC
Company Law.
For the
year ended June 30, 2009, the Company’s subsidiary Hongli’s statutory surplus
reserve has reached 50% of the entity’s registered capital and Hongguang and
Hongguang did not make any contribution to the statutory reserve resulting from
their net operating losses.
Hongchang
coal is required by the PRC government to reserve a certain amount for
mine maintenance based on the actual quantity of coal
exploited.
The
component of statutory reserves and the future contributions required pursuant
to PRC Company Law are as follows as of June 30, 2009, 2008 and
2007:
|
June
30, 2009
|
June
30, 2008
|
June
30, 2007
|
50%
of registered capital
|
Future
contributions required as of June 30, 2009
|
||||||||||||||||
|
Hongli
|
$ | 548,204 | $ | 548,204 | $ | 107,596 | $ | 548,204 | $ | - | ||||||||||
|
Hongguang
|
- | - | - | 1,514,590 | 1,514,590 | |||||||||||||||
|
Hongchang
|
25,208 | 25,208 | - | 206,535 | 181,327 | |||||||||||||||
|
Statutory
surplus reserve
|
573,412 | 573,412 | 107,596 | 2,269,329 | 1,695,917 | |||||||||||||||
|
Reserve
for coal mine maintenance
|
554,298 | - | - | - | - | |||||||||||||||
|
Total
Statutory reserve
|
$ | 1,127,710 | $ | 573,412 | $ | 107,596 | $ | 2,269,329 | $ | 1,695,917 | ||||||||||
Note
16 – Related Party Transactions
The
Company has loans from Mr. Jianhua Lv, a majority shareholder, President and CEO
of the Company, and Mr. Liuchang Yang, Director and Vice President of Hongli.
Mr. Lv and Mr. Yang provided the funds for the Company’s acquisitions of the
coal mine, and Baofeng Coking, and to fund construction of the power plant.
These loans are unsecured, payable on demand and bear no interest.
The
Company imputed the interest on loans from related parties based on the
prevailing rate which was 8.89%, 8.74% and 8.07% for the years ended June 30,
2009, 2008 and 2007, respectively. The imputed interest on the loans from the
related parties amounted to $450,054, $431,123 and $474,596 for the years ended
June 30, 2009, 2008 and 2007, respectively. Imputed interest was
transferred to additional paid-in capital. The
imputed interest on the loans from Mr. Yang amounted to $40,220, $205,806 and
$228,289 for the years ended June 30, 2009, 2008 and 2007, respectively.
The
payables to Mr. Lv, and Mr. Yang as of June 30, 2009 and 2008 are as
follows:
|
Due
to
|
June
30, 2009
|
June
30, 2008
|
Term
|
Manner
of Settlement
|
||||||
|
Mr.
Jianhua Lv
|
$ | 1,281,304 | $ | 4,667,405 |
Short
term
|
Cash
|
||||
|
Mr.
Liuchang Yang
|
259,033 | 2,092,983 |
Short
term
|
Cash
|
||||||
|
Total
|
$ | 2,202,050 | $ | 6,760,388 | ||||||
-19-
Note
17 – Subsequent Events
Transfer
of share ownership in Top Favour
On July
6, 2009, Top Favour issued 9,000 new ordinary shares to seventeen parties.
Mr. Jianhua Lv transferred his 1,000 shares to Honour Express Limited, a British
Virgin Islands international business company which is solely owned by Mr.
Shaohua Tan, a Singapore citizen. As a result of the share issuance
and share transfer, Top Favour has 10,000 ordinary shares outstanding,
51.03% of which is held by Honour Express Limited.
Mr.
Shaohua Tan and Mr. Jianhua Lv further entered into a Call Option Agreement
(“Incentive Option Agreement”). To provide incentive to Mr. Lv in
connection with the development of Top Favour business, it was agreed that
Mr. Lv shall receive 100% shares of Honour Express within the next three years,
subject to certain contingencies as set forth in the Incentive Option
Agreement.
Under the
Incentive Option Agreement, Mr. Lv shall serve as CEO and Chairman of Top Favour
(or its successor) for not less than a 5 year period; and in anticipation of Mr.
Lv’s continuous contributions to the Hongli Companies including Top Favour,
Hongyuan, Hongli and its subsidiaries, if the companies meet certain revenue
thresholds, Mr. Lv shall have the right and option to acquire the shares of
Honor Express Limited at nominal price (the “Option”).
In
addition, the Incentive Option Agreement also provides that Mr. Tan shall not
dispose any of the shares of Honor Express without Mr. Lv’s
consent.
Share
Exchange Agreement
On July
17, 2009, the Company entered into a Share Exchange Agreement among
Ableauctions, Top Favour, and the shareholders of Top Favour (the “Share
Exchange Agreement”), and Ableauctions.com, Inc. (“Ableauctions”), a Florida
corporation, the common stock of which is quoted on NYSE Amex. Under
the Share Exchange Agreement, Ableauctions and the Company agreed to enter into
a transaction in which Ableauctions will acquire all of the equity interest of
the Company (the “Acquisition”). The Share Exchange Agreement
provides that, among other things, upon the closing of the share exchange
transaction:
|
|
(1)
|
the
Company’s shareholders will transfer 100% of the issued and outstanding
capital stock of Top Favour to
Ableauctions;
|
|
|
(2)
|
as
consideration for the acquisition of the Top Favour equity
interests, Ableauctions will issue common stock to Top Favour’s
shareholders; immediately after the closing of the Share Exchange
Agreement, the former shareholders of Top Favour and the former
shareholders of Ableauctions will own approximately 97% and 3% of the
outstanding shares of Ableauctions,
respectively.
|
|
|
(3)
|
Ableauctions
will adopt a plan of liquidation reasonably acceptable to Top Favour,
under which it shall establish a liquidating trust for purposes of
discharging outstanding liabilities and distributing remaining assets of
Ableauctions to its shareholders as of a certain record date prior to the
closing; at the closing, Ableauctions will have no material liabilities,
contingent or otherwise, and no material
assets.
|
The plan
of share exchange under the Share Exchange Agreement is subject to approval by
the shareholders of both companies. Upon the closing of the share
exchange transaction, the Acquisition will be treated as a reverse acquisition
with which results in the legal acquirer, the Ableauctions, being treated as
being acquired by Top Favour under the acquisition method.
The
Company has performed an evaluation of subsequent events through is the date the
financial statements were issued. No material subsequent events have occurred
since June 30, 2009 that should be recorded or disclosed to keep the
consolidated financial statements from being misleading.
-20-