Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
___________
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2009
Commission
file number 001-15683
CHINA
GREEN MATERIAL TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
88-0381646
|
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
|
27F(Changqing
Building), 172 Zhongshan Road, Harbin City, China
|
150040
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
Registrant’s
telephone number, including area code:
00-86-451-82695957
|
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001
per share
Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15 (d) of the Act.
Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filero
|
Non-accelerated
filer o (Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x
The
aggregate market value of the registrant’s common stock held by non-affiliates
as of June 30, 2009 was approximately $7,807,523, based upon the closing price
of the common stock as quoted by the Over-the-Counter Bulletin Board (the “OTC
Bulletin Board”).
As of
April 9, 2010, there were 23,762,849 shares of the registrant’s common stock,
par value $0.001 per share, issued and outstanding.
CHINA
GREEN MATERIAL TECHNOLOGIES, INC.
FORM 10-K
ANNUAL REPORT
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2009
Table of
Contents
PART
I
ITEM
1.
|
BUSINESS
|
4 |
ITEM
1A.
|
RISK
FACTORS
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9 |
ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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17 |
ITEM
2.
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PROPERTIES
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17 |
ITEM
3.
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LEGAL
PROCEEDINGS
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18 |
ITEM
4.
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(REMOVED
AND RESERVED)
|
18 |
PART
II
ITEM
5.
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MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
19 |
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
20 |
ITEM
7.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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20 |
ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
25 |
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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25 |
ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
25 |
ITEM
9A(T).
|
CONTROLS AND PROCEDURES | 25 |
ITEM
9B.
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OTHER
INFORMATION
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26 |
PART
III
ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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26 |
ITEM
11.
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EXECUTIVE
COMPENSATION
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29 |
ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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30 |
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
31 |
ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
31 |
PART
IV
ITEM
15.
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EXHIBITS
|
33 |
Financial
Statements
|
|
Index
of Financial Statements
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F-1
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Report
of Independent Registered Public Accounting Firm
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F-2
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Consolidated
Balance Sheets
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F-3
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Consolidated
Statements of Operations and Comprehensive Income
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F-4
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Consolidated
Statements of Changes in Stockholders’ Equity
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F-5
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Consolidated
Statements of Cash Flows
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F-6
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Notes
to Consolidated Financial Statements
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F-7
to F-21
|
2
Certain financial information included
in this annual report has been derived from data originally prepared in Renminbi
(“RMB” or “Renminbi”), the currency of the People’s Republic of China (“China”
or “PRC”). For purposes of this annual report, U.S. dollar amounts are based on
conversion at year-end exchange rates of US$1.00 to RMB 6.82702 for assets and
liabilities, and a weighted-average of US$1.00 to RMB 6.8311 for revenue and
expenses in the fiscal year ended December 31, 2009. There is no
assurance that RMB amounts could have been or could be converted into U.S.
dollars at such rates.
As used herein, “China Green,” “we,”
“us,” “our” and the “Company” refers to China Green Material Technologies, Inc.
and its subsidiaries.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information
contained in this annual report contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These forward-looking statements are
contained principally in the sections titled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Business,” and are generally identifiable by use of the words “may,” “will,”
“should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project”
or the negative of these words or other variations on these words or comparable
terminology.
The
forward-looking statements herein represent our expectations, beliefs, plans,
intentions or strategies concerning future events, including, but not limited
to: our future financial performance; the continuation of historical trends; the
sufficiency of our cash balances for future needs; our future operations; our
sales and revenue levels and gross margins, costs and expenses; the relative
cost of our production methods as compared to our competitors; new product
introduction, entry and expansion into new markets and utilization of new sales
channels and sales agents; improvements in, and the relative quality of, our
technologies, including manufacturing practices, production processes and
production capacity and the ability of our competitors to copy such
technologies; the environment-friendly nature of our products; acquisition of
additional equipment and manufacturing facilities, the cost associated therewith
and sources of financing for such acquisitions; achieving status as an industry
leader; our competitive technological advantages over our competitors; brand
image, customer loyalty and expanding our client base; our ability to meet
market demands; government regulations and incentives related to biodegradable
products; the sufficiency of our resources in funding our operations; our
intention to engage in mergers and acquisitions, technology licensing and
cooperation arrangements; and our liquidity and capital
needs.
Our
forward-looking statements are based on assumptions that may be incorrect, and
there can be no assurance that any projections or other expectations included in
any forward-looking statements will come to pass. Moreover, our
forward-looking statements are subject to various known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from future results, performance or
achievements expressed or implied by any forward-looking statements. These
risks, uncertainties and other factors include but are not limited
to:
·
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Uncertainties
regarding the growth or sustainability of the market for biodegradable
materials.
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·
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The
risk that we may not be able to achieve or maintain a technological
advantage over any of our
competitors.
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·
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Risks
relating to protection of our intellectual
property.
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·
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Changes
in consumer preferences.
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·
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The
risks of limited management, labor and financial
resources.
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·
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Risk
of doing business in China, including currency value fluctuations,
restrictions on remitting income to the United States and risks of
diplomatic tensions between China and the United
States.
|
Except as required by applicable laws,
we undertake no obligation to update publicly any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
3
PART
I
ITEM
1. BUSINESS.
Business
Overview
We manufacture and sell starch-based
biodegradable, disposable containers, tableware and packaging
materials. In making the starch-based material for our products, we
use proprietary manufacturing methods that reduce processing time. We
market our products through our internal sales force located at our
manufacturing facility in Harbin City, China and in four branch sales offices in
Northeastern China. Since the formation of our Company, we have
sold our products in other foreign countries through our
distributors. In January 2009, we began to market and sell our
products in other countries directly. We continually attempt to
improve our products and production processes through research and
development.
History
We are a Nevada corporation
incorporated in December 1997 under the name Mount Merlot Estates,
Inc. At the time we acquired our current business in February 2007,
our corporate name was “Ubrandit.com.” On January 14, 2008, we
changed our name to “China Green Material Technologies,
Inc.” References herein to “we, “us” “our” or the “Company” refer to
China Green Material Technologies, Inc. and where applicable its direct and
indirect wholly owned subsidiaries. Our shares are quoted on the OTC
Bulletin Board of the National Association of Securities Dealers, Inc. (“NASD”),
under the symbol CAGM.OB, whereas before our name change in January 2008 our
shares were quoted under the symbol UBDT.OB.
On February 9, 2007, we acquired all of
the outstanding capital stock of Advanced Green Materials, Inc. (“AGM”), a
Nevada corporation, by merging a wholly owned subsidiary of ours into
AGM. Through AGM, we indirectly own all of the outstanding capital
stock of Harbin ChangFangYuan Hi-Tech Environment-Friendly Industrial Co., Ltd.
(“CHFY”), a corporation organized under the laws of the PRC. AGM has
substantially no operations and substantially no assets other than the shares of
CHFY. Through CHFY, we operate the business described in this annual
report on Form 10-K and in the financial statements included
herein. We sometimes refer to our acquisition of AGM and CHFY as our
“2007 Business Combination.” Immediately before our 2007 Business
Combination, we had no material assets and no material operations and therefore
we were considered a “shell company” (as defined by Rule 12b-2 of the Exchange
Act). As consideration for the acquisition of AGM and CHFY, we issued
to the former owners of AGM shares of our Series A Convertible Preferred Stock
that were convertible into approximately 98% of our outstanding common shares,
on an after-converted basis.
On January 14, 2008, concurrent with
our name change, we effected a 1-for-150 reverse split of our common
stock. In connection with the split, we issued additional shares to
certain shareholders so that, after the split, no shareholder owned fewer than
100 shares. The following month, on February 29, 2008, the holders of
all outstanding shares of Series A Convertible Preferred Stock converted their
preferred shares into a total of 18,150,000 shares of our common stock, and all
shares of Series A Convertible Preferred Stock were cancelled.
CHFY was incorporated in the
Heilongjiang Province of China on May 12, 1999. It was known as Harbin TianHao
Technology Co., Ltd., and changed its name to Harbin ChangFangYuan Hi-Tech
Industry Co., Ltd. on September 28, 2004, and further changed its name to Harbin
ChangFangYuan Hi-Tech Environment-Friendly Industrial Co., Ltd. on September 1,
2006. AGM acquired all of the outstanding capital stock of CHFY on
August 18, 2006.
4
Prior to May 2006, CHFY engaged only in
product development and the establishment of manufacturing facilities and
marketing relationships. CHFY’s business realized its first revenue
in May 2006.
Market
Opportunity
We believe that, because of concerns
over environmental safety, health and renewability of resources, there is an
increasing demand worldwide for products made from materials other than
oil-based plastics and paper products. We also believe that there is
a growing trend for government incentives and restrictions favoring the use of
alternatives to oil-based plastics and paper based products. For
example, the Chinese government has deemed environmental protection an important
national interest, and since 1996 has promulgated a series of laws aimed at
increasing the use of biodegradable materials, including mandates for the use of
recyclable materials in certain packaging and has severely limited the use of
disposable polystyrene bags, cutlery and tableware. Our goal is to
provide products that address the opportunities created by these
developments. Because our products are made from renewable
ingredients and are biodegradable, we believe they are environment friendly and
consistent with the “4R” environmental goals of “Reduce,” “Recycle,” “Reuse”,
and “Recover.” We focus our research and development efforts on improving our
current lines of disposable consumer goods in the catering, frozen food and home
and personal use areas, and on the development and introduction of new plastic
replacement products.
Our
Products
Our starch-based material is
potentially a substitute for the oil-based plastics used in a wide variety of
products. We currently manufacture and sell food packaging products
and disposable tableware consumer goods, and we are actively researching the
introduction of additional product lines. To the extent our material
or sheet manufacturing capacity exceeds our need for products, we may sell our
starch-based material to other manufacturers for their use.
Current
Products. We manufacture and sell biodegradable disposal
tableware to consumers and food packaging products to manufacturers of retail
frozen food items. We also manufacture and sell food and beverage
containers and utensils made from our biodegradable material, including cups,
plates and bowls. Within the area of food and beverage containers and
utensils, we produce a “Go Home without Dish Washing” series, which is a
traveling, picnic and outdoor series of tableware products.
Possible Future
Products. We believe our starch-based material may be suited
for additional uses and we are actively considering the introduction of
additional product lines including:
·
|
Trash
bags and shopping bags. We believe our starch-based material
would be an alternative to traditional plastic trash bags, helping to
reduce the use of non-degradable boxes and other
packages.
|
·
|
Packaging
materials. We are evaluating the use of our starch-based material as
an alternative to polystyrene (i.e., “Styrofoam”)
packaging materials, which are destructive to landfills, as well as in
packing bags, plastic bottles, packaging of electronic products, clothing,
liners and cushioning materials.
|
·
|
Agricultural
and gardening goods. Possible products in this area include
mulching film (including thin film and shrink film), seedling cups, turf
bags, earth bags, sand bags, civil construction film, netting and unwoven
cloth. Several products in this area would benefit from our
products because our starch-based material will decompose in the soil
within the first planting season, eliminating the labor costs of removal
and land-use fees required, and possibly providing nutrients for the
soil.
|
5
·
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Medical
goods. These products may include medical mattresses, diapers,
bandages, clamps, cotton sticks, gloves, and surgical suture lines and
fracture fixation materials, all made with our starch-based
material.
|
·
|
Other
goods. Other products made from our starch-based material could
include fiber and textile substitutes, toys, office supplies, building and
decoration materials, coat-hangers, handles, golf tees, teaching tools,
cards, pens and scientific research
tools.
|
Our
Starch-Based Material
We produce a starch-based material
using corn starch as the principal ingredient, and we manufacture all our
products using this starch-based material. Our starch-based material
is non-toxic, harmless, fire-resistant, heat-resistant and odor-free, can be
used in microwave ovens and retains its structural integrity at temperatures
between -40°C and +150°C.
Our starch-based material is produced
by adding bio-additives, such as polymer starch, cellulose and polyols, into
modified starch to synthesize propionolactones, which is a cyclic lactone
compound easily broken down with reagents such as water and alcohol. Such
material has good structural strength and plasticity. However, when exposed to
microorganisms such as those prevailing in urban garbage dumps, it can almost be
completely decomposed into carbon dioxide and water through enzymes secreted
by microorganisms. The decomposition process takes about 45 days after it is
initially exposed to high concentrations of microorganisms in experimental
conditions without any toxic effects to the atmosphere and soil. In contrast,
other degradable products and biodegradable materials produced by our
competitors typically take 80-180 days to decompose.
Our
Technology
We utilize “dry-powder blending”
technology in the production of the biodegradable, starch-based material used to
manufacture our products. At present, both in China and elsewhere,
the formulation of starch-based biodegradable products often involves the use of
liquid solvents to modify the property of starch through mixed liquid
polymerization. We believe that our dry-powder blending technology helps us to
reduce the time and, as a result, the cost to produce our material compared with
production methods using liquid solvents.
In September 2009, we acquired the
right to use technology that we currently apply in our dry-powder blending
process to produce our starch-based material. Our agreement with the
current owner of the technology provides us with a royalty-free right to use the
technology as long as it is owned by the current owner, a right of first refusal
on any proposed transfers of the technology by the current owner and an option
to purchase the technology for a purchase price of approximately $1,470,588
(equivalent to RMB15 million). This technology is the subject of a
patent application filed with and presently under review by the PRC State
Intellectual Property Office.
Also in September 2009, we acquired
ownership of certain technology in an alternative dry-powder blending process to
produce a starch-based material safe to eat and having improved tensile strength
so that it can be made into film. This technology is also the subject
of a patent application filed with and presently under review by the PRC State
Intellectual Property Office. We made an initial payment of
approximately $735,294 (equivalent to RMB5 million) for this technology, and
agreed to pay the remaining purchase price of approximately $1,464,768
(equivalent to RMB10 million) when the patent application is approved and a
patent certificate is issued with respect to this technology.
6
A “biodegradable” material is a
compound that will decompose into simple molecular material under natural
conditions through the activity of microorganisms (e.g., bacteria, fungus,
algae, etc.). Biodegradable materials are divided into two
categories: complete biodegradation materials and partial biodegradation
materials. With complete biodegradation materials, the biochemical
reactions caused by the microorganisms cause the physical properties of the
plastic structure to collapse.
We believe that our technology and
know-how, including the intellectual property which is the subject of our two
patent applications, allow us to produce, at a relatively low cost, a
starch-based material that can be completely broken down into carbon dioxide and
water by microorganisms (such as bacteria, fungi, algae, etc.) under natural
conditions.
We have developed proprietary know-how
relating to the production process for our starch-based
material. This know-how, when combined with our technical formulas,
enables us to produce a biodegradable material that distinguishes our end
products from those of our competitors in terms of speed of biodegradability and
lower price.
Research
and Development
We believe we have a strong research
and development program that has regularly improved our manufacturing processes
and helped us to maintain a technological advantage. Expenditures
related to our research and development activities were approximately $18,303 in
2008 and $11,084 in 2009. Our research and development goals are
to:
·
|
Continue
to make improvements on our processes to further lower the cost of
production of our starch-based
material,
|
·
|
Increase
the market applications for our starch-based
material,
|
·
|
And
develop and acquire additional technology and know-how in plant-based
resins as alternative to oil-based
materials.
|
In June 2008, we established a
cooperative relationship directly with Harbin Engineering
University. In this connection, we appointed Mr. Yingjie Qiao, a
professor at the University, as our Vice President and Technical
Director.
Manufacturing
We produce our starch-based material
and the products we make from the material at our factory in Harbin City, the
capital city of Heilongjiang Province, China. Currently, our
production facility has United States FDA Registration, ISO 9001 quality
management system certification, ISO14001 environmental management system
certification and ISO22000 food safety management system certification, and to
our knowledge is the only starch-based biodegradable packaging material products
facility with the “China Environmental Labeling Product
Certificate.” From 2006 to 2008 we were recognized as a “Qualified
Products Tested by State Administration of Quality Supervision, Inspection and
Quarantine — National Quality Trustworthy Unit” by the National High-tech
Quality Supervising Committee, from 2006 to 2008 we received recognition for
“National Quality Trustworthy Product Assessed Qualified by the State” by the
National Light Industry Product Quality Guarantee Center, and in 2008 we were
recognized as an “Excellent Enterprise in the 3 • 15 Product Quality and Food
Safety Rating.”
Our present annual production capacity
is 16,500 tons of biodegradable material and approximately 8,800 tons of
finished goods. Because our capacity to produce finished goods is
substantially less than our capacity to make our starch-based material, during
2010 we intend to add finished goods production capacity through a new
manufacturing facility located in Harbin Economic Technological Development
Zone. We believe that we will have sufficient cash to pay for this
new facility from our existing resources, which include the $7.3 million of cash
and equivalents on hand at December 31, 2009, the $4.5 million of gross proceeds
of the private placement which closed in January 2010, and the cash generated
from collection of our accounts receivable and through our ongoing
operations. Therefore it will not be necessary for us to raise
additional funds in order to complete the facility.
7
Our production processes include starch
modification, high-speed mixing of ingredients, extrusion and pullout of sheet
materials, positive and negative pressure molding of finished products,
selection, disinfection, inspection and packaging. From time to time
depending on market demand, we sell our starch-based materials in sheet form to
other producers who desire a raw material that is fully biodegradable and
maintains structural integrity from -40°C to +150°C.
Suppliers
Our major suppliers of corn product are
Heilongjiang Longfeng Corn Development Co,. Ltd. and Heilongjiang Yanshou
Natural Pigment Co., Ltd. These two suppliers offer lower
transportation costs due to their close proximity to our production
facility. However, there are several other starch suppliers in
Heilongjiang and Jilin Provinces from whom we could obtain adequate supplies of
corn product at acceptable prices. Because our manufacturing facility
is located in a large corn producing area of China, we have local access to a
sufficient amount of raw materials. We have developed a raw-material
control network based on independent regional corn buyers to effectively manage
the price and quantity of our supply of corn.
Marketing
and Sales
In 2009, we had a sales and marketing
staff of 38 full-time employees located at our main facility in Harbin City and
in our four sales offices in the cities of Weihai, Dalian, Qingdao and Jinan in
Northeastern China. Within our Market and Sales Center at our main
office in Harbin, we focus on international sales, large industrial clients,
retailers and small accounts. Prior to January 2009, all of our
international sales were conducted through international sales agents, who then
sold to distributors in foreign countries. In January 2009, we began to seek out
foreign distributors directly. We have currently entered into Letters of Intent
with 7 distributors in Italy, the U.S., France, the U.K., Israel, Korea and
Japan. Our goal is to increase our market penetration within China
and to continue to expand our international sales.
We sell our finished goods to 118
distributors, besides chains and rail authorities. As of December 31,
2009, our largest distributors were Weihai Tianyuan Environmental-friendly
Products Co., Ltd. and Jinan Ai’Jiaren Environmental-friendly Products Trading
Co., Ltd., which accounted for 27% and 21% of our sales during 2009,
respectively. Our top five customers accounted for approximately 75%
of our total sales in 2009. Other customers include Supermarkets like
Taiwan RT-Mart, Tianjin Junya Supermarket, Qingdao JUSCO, Yantai Zhenhua
Supermarket, Jinan Yinzuo Supermarket, and Zhengzhou Synear Group, a frozen food
producer in China.
As of February 2010, our disposable
consumer goods, including cups, bowls, boxes and plates, were sold in 330
supermarkets in China. We continue to develop supply relationships
with the Harbin Railway Bureau, Jiamusi Railway Bureau and Hailar Railway
Bureau.
Brand
building
Our strategy is to use high-quality
production standards to achieve high quality products, thus creating brand
awareness and brand loyalty. We invest human, financial and material resources
into other brand-building efforts such as logo development and registration,
brand promotion and corporate identity planning. We intend to
continue to build brand image through mass media, in connection with product
distribution, and then transform the brand awareness into customer loyalty by
improving performance and optimizing service. At the same time, we
may adopt “brand bundling marketing,” in which we bundle our products together
with high-end brands to improve our brand image with targeted consumer
groups.
8
We have registered one trademark, the
“CHFY” brands, for food packaging products in the disposable consumer goods
industry including packing boxes and packing bowls used in the catering
industry, special lunch boxes and multi-functional lunch boxes used in railways,
locked packing boxes and food boxes, fruit trays and special trays used in
refrigerators and microwave ovens covering 14 categories and 115 series. We
market a “Go Home without Dish Washing” series, which is a traveling, picnic and
outdoor series of tableware products. We also produce a special tray
series used in refrigerators for 13 series of products. With a rich
variety of products, we believe the “Home” series can fundamentally meet the
demands of the market for tableware.
Competition
There are a large number of
manufacturers of biodegradable materials, both in China and
internationally. These competitors include Kaneka, located in Japan
and Tian'an Biological Material Co., Ltd, located in China. Many of
our competitors have substantially greater resources than we do. In
addition, several large international chemical companies have introduced both
bio-based resins, polymers and/or compostable synthetic-based resins, including
BASF and DuPont. We believe we will face increased competition in the
future as more competitors recognize the trend toward use of
environment-friendly and fully biodegradable products.
Employees
As of March 30, 2010 we had 153
employees, all of whom are located in China, including 23 administrative
officers, 72 production workers, 38 sales people, 12 technical personnel and 8
financial staff. We employ many highly educated and skilled senior
managers, including professors and individuals with masters and doctoral degrees
and overseas working experience. Ninety-nine percent of our
management has obtained at least a bachelor degree and the average age of our
employees is 33 years old.
ITEM
1A. RISK FACTORS.
Investing
in our common stock involves a high degree of risk. The risks we have
described are not the only ones facing our Company. Additional risks not
presently known to us or that we currently deem immaterial may also affect our
business operations. Any of these risks could materially and
adversely affect our business, results of operations and financial condition,
which in turn could materially and adversely affect the trading price of our
common stock. You should not invest in our securities unless you can
afford to lose all of your investment.
RISKS
RELATED TO OUR BUSINESS
There is no
assurance that the market for biodegradable materials will
grow.
The use of biodegradable tableware and
packaging materials instead of plastics may be considered a luxury in certain
segments of our target markets. In order for the market for
biodegradable materials to develop, it will be necessary for a portion of the
population in our target markets to become willing to pay the cost associated
with biodegradable materials, which may in some cases be higher than the cost
associated with non-biodegradable materials, in order to obtain the related
social benefits. At present our largest market is China. Although the economy of
China is growing, the average income of the Chinese population remains far below
that of European and American countries where biodegradable materials have
developed a clientele. The conversion of the Chinese population from standard
plastics to biodegradable materials will require the concerted efforts of the
biodegradable materials industry, provincial and national government, and
popular opinion. If a significant portion of the Chinese population is not
willing to pay the cost associated with biodegradable materials, the growth of
our business will be hindered.
9
There
is no assurance that our preferred Corporate Income Tax (“CIT”) rate of 15% will
be renewed after 2011.
The normal CIT rate in China is 25%.
Under the laws of the PRC, CHFY, as a wholly foreign-owned enterprise, is
subject to the corporate income tax exemption during its first and second
profitable years and is entitled to a 50% reduction in its income tax in the
subsequent three years. 2007 and 2008 were CHFY’s first and second
profitable years and, therefore, it was entitled to the income tax exemption
during these years. For three years commencing in 2009, CHFY became subject to
the corporation income taxes (“CIT”) in the PRC at a 15% tax rate. In 2011,
management will apply for a sustained lowered tax rate of 15% as a
High-Technology Status Enterprise. Recognition as a High-Technology
Status Enterprise is awarded by the Chinese authorities to companies that
consistently invest in the research and development of new technology and
products or own proprietary intellectual property rights in some key areas
supported by the Chinese government, such as environmental and sustainable
materials. However, there is no assurance that this application will be granted
by the provincial government. Additionally, changes in tax law could nullify
this incentive status.
We will be unable
to compete effectively unless we maintain the commercial viability of our
technology.
Our starch-based technology is just one
among many technologies competing to become the standard for biodegradable
consumer products. Because of the current international focus on
environmental protection, many well-financed companies are devoting
substantially more resources than us to the development of advanced systems for
producing “green” materials. Ultimately our success as a business
will depend on our ability to be offer products that incorporate commercially
viable technology. If new developments in the production of
biodegradable materials eclipse the advantages of our materials, we will be
unable to compete effectively, which will adversely affect our financial
condition and results of operations.
We may be unable
to protect our proprietary and technology rights.
Our success will depend in part on our
ability to protect our proprietary rights and technologies. We rely
on a combination of patents, trademark laws, trade secrets, confidentiality
provisions and other contractual provisions to protect our proprietary rights.
However, these measures afford only limited protection. If we fail to
adequately protect our proprietary rights our competitive prospects will be
adversely affected. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use trade secrets or other information that it regards as
proprietary.
Our means of protecting our proprietary
rights in the PRC may not be adequate. The system of laws and the enforcement of
existing laws in China may not be as certain in implementation and
interpretation as in the United States. The Chinese judiciary is
relatively inexperienced in enforcing corporate and commercial law, leading to a
higher than usual degree of uncertainty as to the outcome of any litigation. The
inability to enforce or obtain a remedy for theft of our proprietary information
may have a material adverse impact on our business operations, financial
condition and results of operations.
Litigation
or other proceedings or third-party claims of intellectual property infringement
could require us to spend significant time and money, could prevent us from
selling our products or could adversely impact the price of our common
stock.
Our commercial success depends in part
on our non-infringement of the patents or proprietary rights of third parties
and the ability to protect our own intellectual property. Third
parties may assert that we are employing their proprietary technology without
authorization even if we are not. As we enter new markets, if any,
competitors may assert that our products infringe their intellectual property
rights as part of a business strategy to impede our successful entry into those
markets. Third parties may have obtained and may in the future obtain
patents and claim that manufacture, use and/or sale of our technologies, methods
or products infringes these patents. We could incur substantial costs
and divert the attention of our management and technical personnel in defending
ourselves against these claims even if we are eventually successful in such
defense. Furthermore, parties making claims against us may be able to
obtain injunctive or other relief, which effectively could block our ability to
further develop, commercialize, manufacture, use and sell methods and products,
and could result in the award of substantial damages against us. In
the event of a successful claim of infringement against us, we may be required
to pay damages and obtain one or more licenses from third parties, or we may be
prohibited from making, using or selling certain methods and/or
products. We may not be able to obtain such a license at a reasonable
cost, or at all. In that event, we could encounter delays in product
introductions while we attempt to develop alternative methods or
products. Defense of any lawsuit or failure to obtain any of these
licenses on favorable terms could prevent us from commercializing products, and
the prohibition of sale of any of our products could materially affect our
ability to grow and to maintain profitability.
10
Our sales and
operating revenues could decline due to macro-economic and other factors outside
of our control, such as changes in consumer confidence and declines in
employment levels.
Changes in national, regional and local
economic conditions may result in reduced purchases of our products by consumers
and reduction in the prices we are able to charge for our products. These
economic conditions involve, among other things, conditions of supply and demand
in local markets and changes in consumer confidence and income, employment
levels, and government regulations. If these changes in economic conditions have
an adverse effect on consumer demand for and the pricing of our products, our
operating revenues and profitability would decline.
We are subject to
extensive government regulation which could cause us to incur significant
liabilities or restrict our business activities.
We are subject to certain Chinese
government statues, rules and regulations in the field of food packaging
materials. Regulatory requirements could cause us to incur
significant liabilities and operating expenses and could restrict business
activities. Our operating expenses may be increased by governmental
regulations such as new industry standards, and by the possible imposition of
new fees and taxes to pay for certain governmental services and improvements.
Any delay or refusal from government agencies to grant us necessary licenses,
permits and approvals could have an adverse effect on our
operations.
We may require
additional capital in the future, which may not be available on favorable terms
or at all.
Our future capital requirements will
depend on many factors, including industry and market conditions, our ability to
successfully implement our branding and marketing initiatives and expansion of
our production capabilities. We may need to raise additional funds in
order to grow our business and implement our business strategy. We anticipate
that any such additional funds would be raised through equity or debt
financings. In addition, we may enter into a revolving credit
facility or a term loan facility with one or more syndicates of
lenders. Any equity or debt financing, if available at all, may be on
terms that are not favorable to us. Even if we are able to raise
capital through equity or debt financings, as to which there can be no
assurance, the interest of existing stockholders in our Company may be diluted,
and the securities we issue may have rights, preferences and privileges that are
senior to those of our common stock or may otherwise materially and adversely
affect the holdings or rights of our existing stockholders. If we
cannot obtain adequate capital, we may not be able to fully implement our
business strategy, and our business, results of operations and financial
condition would be adversely affected. In addition, if we raise additional
capital through private placements or registered offerings, it is likely that
broker-dealers will be engaged. The activities of such broker-dealers
are highly regulated and we cannot assure that the activities of such
broker-dealers will not violate relevant regulations and generate liabilities
despite our expectation otherwise.
We depend on the
availability of additional human resources for future
growth.
If we are able to achieve significant
future growth in our sales volume, such growth may strain on our management and
operations and financial resources. If our operations continue to grow, we would
need to improve our management, operational and financial systems, procedures
and controls, and other resources infrastructure, and expand our workforce.
There can be no assurance that our existing or future management, operating and
financial systems, procedures and controls will be adequate to support a
significantly higher level of operations, or that we will be able to recruit,
retain and motivate our personnel to the extent needed to support such
operations. Further, there can be no assurance that we will be able to
establish, develop or maintain the business relationships beneficial to our
operations, or to implement any of the above activities in a timely
manner. Failure to manage growth effectively could have a material
adverse effect on our business and the results of our operations and financial
condition.
11
Intense
competition from existing and new entities may adversely affect our revenues and
profitability.
In general, our industry is new but
intensely competitive and highly fragmented. We compete with numerous companies,
many of whom are more established than we are and have significantly greater
financial, technical, marketing and other resources than we possess. These
competitors may be able to respond more quickly to new or changing opportunities
and customer requirements and may be able to undertake more extensive
promotional activities, offer more attractive terms to customers, and adopt more
aggressive pricing policies. We cannot assure you that we will be
able to compete effectively or successfully with current or future competitors
or that the competitive pressures we face will not harm our
business.
We also expect to encounter intense
competition from other entities seeking to pursue new business opportunities or
business combinations. Many of these entities are well-established and have
extensive experience in connection with identifying new prospective business
opportunities or in effecting business combinations. Many of these competitors
possess greater financial, technical, human and other resources than we do and
there can be no assurance that we will have the ability to compete successfully
for new opportunities or business combinations. Based upon limited
financial and personnel resources, we may lack sufficient resources as compared
to those of many of potential competitors.
Our success
depends on our management team and other key personnel, the loss of any of whom
could disrupt our business operations.
Our future success will depend in
substantial part on the continued service of our senior management, including
Mr. Zhonghao Su, our President and Chief Executive Officer, and Ms. Jing Zhu,
our Chief Financial Officer. The loss of the services of one or more of our key
personnel could impede implementation of our business plan and result in reduced
profitability. We do not carry key man life or other insurance in respect of any
of our officers or employees. Our future success will also depend on the
continued ability to attract, retain and motivate highly qualified technical
sales and marketing customer support personnel. Because of the rapid growth of
the economy in the PRC, competition for qualified personnel is intense. We
cannot guarantee that we will be able to retain our key personnel or that we
will be able to attract, assimilate or retain qualified personnel in the
future.
We have limited
business insurance coverage.
The insurance industry in China is at
an early stage of development. Insurance companies in China offer
limited business insurance products, and do not, to our knowledge, offer
business liability insurance. As a result, we do not have business
liability insurance coverage for our operations. Moreover, while business
disruption insurance is available, we have determined that the risks of
disruption in comparison to the cost of the insurance are such that we do not
require it at this time. Therefore, any business disruption, litigation or
natural disaster might result in substantial costs and diversion of our
resources.
Our
management may exercise broad discretion and judgment.
Any person who invests in our common
stock will do so without an opportunity to evaluate the specific merits or risks
of many potential new prospective business opportunities in which we may
engage. In these circumstances, investors will be entirely dependent
on the broad discretion and judgment of management in connection with the
selection of a prospective business. There can be no assurance that
determinations made by management will guarantee that we will achieve our
business objectives.
12
There
is no active market in our common stock and none may develop or be
sustained.
Our stock is currently quoted on the
OTC Bulletin Board under the symbol “CAGM.OB.” There is currently no active
trading market in our common stock and there is no assurance that an active
trading market will develop. In the event that an active trading
market commences, there can be no assurance as to the market price of the shares
of common stock, whether any trading market will provide liquidity to investors,
or whether any trading market will be sustained.
Our management may face potential
conflicts of interest.
Management is not required to commit
its full time to Company affairs. There may be a conflict of interest
in allocating their time in the event that management engages in similar
business efforts for other entities. Management will devote such
time, in its sole discretion, to conduct Company business, including the
evaluation of potential new business opportunities and the negotiation and
consummation of a business combination. As a result, the amount of time devoted
to Company business and affairs may vary significantly depending upon whether
our Company has identified a new prospective business opportunity or is engaged
in active negotiations related to the consummation of a business
combination.
State
blue sky regulations may restrict the transferability of our common
stock.
The holders of our Company’s shares of
common stock registered under the Exchange Act and those persons who desire to
purchase them in any trading market that might develop in the future, should be
aware that there may be state blue-sky law restrictions upon the ability of
investors to resell such securities. Accordingly, investors should consider the
secondary market for our Company’s securities to be a limited one.
Payment of dividends is
unlikely.
We intend to retain our earnings, if
any, to support operations and to finance the growth and development of our
business. Therefore, we do not expect to pay any dividends on our common stock
for the foreseeable future. The payment of dividends will be contingent upon
future revenues and earnings, if any, capital requirements and overall financial
conditions. The payment of any future dividends will be within the discretion of
our board of directors (the “Board of Directors” or “Board”).
We
may issue additional securities.
We may issue additional shares of
common stock in connection with a future financing. To the extent that
additional shares of common stock are issued, our stockholders would experience
dilution of their respective ownership interests in our shares. The issuance of
additional shares of common stock may adversely affect the market price of our
common stock, in the event that an active trading market commences, of which
there can be no assurance.
We
face general economic risks.
Our current and future business plans
are dependent, in large part, on the state of the general economy. Adverse
changes in economic conditions may adversely affect plans of operation. These
conditions and other factors beyond our control include, but are not limited to
regulatory changes.
13
Recent
market events and conditions may adversely affect our access to additional
capital.
Since 2006, U.S. credit markets have
experienced disruption due to a deterioration in residential property values,
defaults and delinquencies in the residential mortgage market (particularly,
sub-prime and non-prime mortgages) and a decline in the credit quality of
mortgage backed securities. These problems led to a slow-down in
residential housing market transactions, declining housing prices, delinquencies
in non-mortgage consumer credit and a general decline in consumer
confidence. These conditions caused a loss of confidence in the broader
U.S. and global credit and financial markets and resulting in the collapse of,
and government intervention in, major banks, financial institutions and insurers
and creating a climate of greater volatility, less liquidity, widening of credit
spreads, a lack of price transparency, increased credit losses and tighter
credit conditions. These disruptions in the current credit and
financial markets have had a significant material adverse impact on a number of
financial institutions and have limited access to capital and credit for many
companies. These disruptions could, among other things, make it more
difficult for us to obtain, or increase our cost of obtaining, capital and
financing for our operations. Our access to additional capital may not be
available on terms acceptable to us or at all.
General
economic conditions may adversely affect our financial condition and results of
operations.
The recent unprecedented events in
global financial markets have had a profound impact on the global economy.
Many industries are impacted by these market conditions. Some of the key
impacts of the current financial market turmoil include contraction in credit
markets resulting in a widening of credit risk, devaluations and high volatility
in global equity, commodity and foreign exchange markets, and a lack of market
liquidity. A continued or worsened slowdown in the financial markets or
other economic conditions, including but not limited to, consumer spending,
employment rates, business conditions, inflation, fuel and energy costs,
consumer debt levels, lack of available credit, the state of the financial
markets, interest rates, and tax rates may adversely affect our Company’s growth
and profitability. Specifically:
·
|
the
global credit/liquidity crisis could impact the cost and availability of
financing and our Company’s overall
liquidity;
|
·
|
volatile
energy prices, commodity and consumables prices and currency exchange
rates impact potential production costs;
and
|
·
|
the
devaluation and volatility of global stock markets impacts the valuation
of our Company’s equity securities.
|
These factors could have a material
adverse effect on our Company’s financial condition and results of
operations.
There
are risks related to doing business in China given an uncertain regulatory
environment.
Uncertainty in the state regulatory
environment in China such as in the field of corporate financial and investment
and fund raising activities may expose our Company to unexpected liability
exposure and possibly even penalties. We finance our operations through equity
and debt financings. China has an evolving regulatory environment as to what is
permitted and often new regulations are adopted to regulate certain areas where
there were no regulations before. As a result, our Company may be exposed to
unforeseen risks of violating rules that did not exist. Such risks apply to all
aspects of the operation of our Company. In case our Company is found to be in
such violation, we could be subjected to monetary and other unexpected
penalties. This may in turn have an impact on our results of
operation and the value of shares of our common stock.
The People’s
Republic of China’s Economic Policies could affect our
business.
Substantially all of our assets are
located in the PRC and substantially all of our revenue is derived from our
operations in the PRC. Accordingly, our results of operations and prospects are
subject, to a significant extent, to economic, political and legal developments
in the PRC. While the PRC’s economy has experienced significant
growth in the past 20 years, such growth has been uneven geographically and
among various sectors of the economy. The Chinese government has implemented
various measures to encourage economic growth and guide the allocation of
resources. Some of these measures benefit the overall economy of the PRC, but
some measures may have a negative effect on us. For example, our
operating results and financial condition may be adversely affected by the
government control over capital investments or changes in tax
regulations.
14
The economy of the PRC has been
changing from a planned economy to a more market-oriented economy. In
recent years the Chinese government has implemented measures emphasizing the
utilization of market forces for economic reform, the reduction of state
ownership of productive assets, and the establishment of corporate governance in
business enterprises; however, a substantial portion of productive assets in the
PRC are still owned by the Chinese government. In addition, the
Chinese government continues to play a significant role in regulating industry
development by imposing industrial policies. It also exercises significant
control over the PRC’s economic growth through the allocation of resources, the
control of payment of foreign currency-denominated obligations, the setting of
monetary policy and the provision of preferential treatment to particular
industries or companies.
Capital outflow
policies in the People’s Republic of China may hamper our ability to remit
income to the United States.
The PRC has adopted currency and
capital transfer regulations. These regulations may require us to comply with
complex regulations for the movement of capital. Although our directors believe
that it is currently in compliance with these regulations, should these
regulations or the interpretation of them by courts or regulatory agencies
change, we may not be able to remit all income earned and proceeds received in
connection with our operations or from the sale of our operating subsidiary to
our stockholders.
The fluctuation
of the Renminbi may materially and adversely affect your
investment.
The value of the Chinese Renminbi
against the U.S. dollar and other currencies may fluctuate and is affected by,
among other things, changes in the PRC’s political and economic conditions. Any
significant revaluation of the Renminbi may materially and adversely affect our
cash flows, revenues and financial condition. For example, to the extent that we
need to convert U.S. dollars we receive from any future offerings of our common
stock into Renminbi for our operations, appreciation of the Renminbi against the
U.S. dollar could have a material adverse effect on our business, financial
condition and results of operations. Conversely, if we decide to
convert our Renminbi into U.S. dollars for the purpose of making payments for
dividends on our shares of common stock or for other business purposes and the
U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the
Renminbi we convert would be reduced. Any significant devaluation of Renminbi
may reduce our operation costs in U.S. dollars but may also reduce our earnings
in U.S. dollars. In addition, the depreciation of significant U.S. dollar
denominated assets could result in a charge to our income statement and a
reduction in the value of these assets.
Since 1994, the PRC has pegged the
value of the Renminbi to the U.S. dollar. We do not believe that this policy has
had a material effect on our business. There can be no assurance that Renminbi
will not be subject to appreciation. We may not be able to hedge effectively
against Renminbi appreciation, so there can be no assurance that future
movements in the exchange rate of Renminbi and other currencies will not have an
adverse effect on our financial condition.
In addition, there can be no assurance
that we will be able to obtain sufficient foreign exchange to pay dividends or
satisfy other foreign exchange requirements in the future.
It
may be difficult to enforce judgments or bring actions outside the United States
against our Company and certain of our directors and officers.
It may be difficult to effect service
of process and enforcement of legal judgments upon our Company and our officers
and directors because some of them reside outside the United States. As our
operations are presently based in China and some of our key directors and
officers reside outside the United States, service of process on our key
directors and officers may be difficult to effect within the United States.
Also, substantially all of our assets are located outside the United States and
any judgment obtained in the United States against us may not be enforceable
outside the United States.
15
If
relations between the United States and China worsen, our stock price may
decrease and we may have difficulty accessing the U.S. capital
markets.
At various times during recent years,
the United States and China have had disagreements over political and economic
issues. Controversies may arise in the future between these two countries. Any
political or trade controversies between the United States and China could
adversely affect the market price of our common stock and our ability to access
U.S. capital markets. We may have difficulty establishing adequate management,
legal and financial controls in the PRC.
We
may experience difficulty in establishing business controls and procedures that
meet Western standards.
The PRC historically has not adopted a
Western style of management and financial reporting concepts and practices,
modern banking, computer or other control systems. We may have difficulty in
hiring and retaining a sufficient number of qualified employees to work in the
PRC. As a result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.
We may face
judicial corruption in the People’s Republic of China.
Another obstacle to foreign investment
in the PRC is corruption. There is no assurance that we will be able to obtain
recourse, if desired, through the PRC’s poorly developed and sometimes corrupt
judicial systems. There is no assurance of an established public trading market,
which would adversely affect the ability of investors in our Company to sell
their securities in the public markets. Although our common stock
trades on the OTC Bulletin Board, a regular trading market for the securities
may not be sustained in the future as the NASD has enacted recent changes that
limit quotations on the OTC Bulletin Board to securities of issuers that are
current in their reports filed with the Securities and Exchange Commission (the
“SEC”). The effect on the OTC Bulletin Board of these rule changes and other
proposed changes cannot be determined at this time. The OTC Bulletin Board is an
inter-dealer, over-the-counter market that provides significantly less liquidity
than the Nasdaq Stock Market. Quotes for stocks included on the OTC Bulletin
Board are not listed in the financial sections of newspapers as are those for
the Nasdaq Stock Market. Therefore, prices for securities traded solely on the
OTC Bulletin Board may be difficult to obtain and holders of common stock may be
unable to resell their securities at or near their original offering price or at
any price.
RISKS
RELATED TO THE MARKET FOR OUR STOCK
Our
common stock is quoted on the OTC Bulletin Board which may have an unfavorable
impact on our stock price and liquidity.
Our common stock is quoted on the OTC
Bulletin Board. The OTC Bulletin Board is a significantly more limited
market than the New York Stock Exchange or NASDAQ system. The quotation of
our shares on the OTC Bulletin Board may result in a less liquid market
available for existing and potential stockholders to trade shares of our common
stock, could depress the trading price of our common stock and could have a
long-term adverse impact on our ability to raise capital in the
future.
16
We
are subject to penny stock regulations and restrictions.
Our shares
are subject to rules applicable to “penny stock” which pertain to any equity
security with a market price less than $5.00 per share or an exercise price of
less than $5.00 per share. Penny stock rules require a broker-dealer,
prior to a transaction in a penny stock, to deliver a standardized risk
disclosure document prepared by the SEC, which specifies information about penny
stocks and the nature and significance of risks of the penny stock market. A
broker-dealer must also provide the customer with bid and offer quotations for
the penny stock, the compensation of the broker-dealer, and sales person in the
transaction, and monthly account statements indicating the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
require that, prior to a transaction in a penny stock not otherwise exempt from
those rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the trading activity in our shares.
Our
President and Chief Executive Officer holds a significant percentage of our
outstanding voting securities.
Zhonghao Su,
our President and Chief Executive Officer is the beneficial owner of
approximately 30.6% of our outstanding voting securities. As a result, he
possesses significant influence, giving him the ability to elect a majority of
our Board of Directors and to authorize or prevent significant corporate
transactions. His ownership and control may impede or delay any future
change in control through merger, consolidation, takeover or other business
combinations; and may discourage a potential acquirer from making a tender
offer.
Certain
provisions of our Articles of Incorporation may make it more difficult for a
third party to effect a change-in-control.
Our Articles
of Incorporation authorize the Board of Directors to issue up to 20,000,000
shares of preferred stock. The preferred stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by the
Board of Directors without further action by the stockholders. These terms
may include voting rights including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion rights and
redemption rights provisions. The issuance of any preferred stock could
diminish the rights of holders of our common stock, and therefore could reduce
the value of such common stock. In addition, specific rights granted to
future holders of preferred stock could be used to restrict our ability to merge
with, or sell assets to, a third party. The ability of the Board of
Directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent the stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Not
Applicable.
ITEM
2. PROPERTIES.
Part of the
initial capitalization of our business included the contribution of a factory
with 21,132 square meters of floor space. We currently own such factory,
but do not use it for our current business given its distant location from our
raw material sources. The factory is currently leased to a third party and the
proceeds are recorded as rental income on the income statement.
We lease a
standard plant which includes office space, employee living space, and factory
space in Harbin Development Zone and is located near our raw material collection
area. This location helps to minimize our shipping costs and
processing fees. In addition, we lease a portion of an office building covering
800 square meters in the center of Harbin City for purposes of sales and
administration. Given the increase in our production capacity, we also rent a
warehouse near the plant for storing inventory. For purposes of expanding our
sales, we also lease four sales offices in other districts of China. The rental
fees for our leased properties under the operating lease were $152,356 and
$207,886 for the years ended December 31, 2009 and 2008,
respectively. In the next few years, the rental costs may increase.
We will be able to renew such leases upon expiration of their
terms.
17
ITEM
3. LEGAL PROCEEDINGS.
None.
ITEM
4. (REMOVED AND RESERVED).
Not
applicable.
18
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Trading
Information
Our
common stock is currently quoted on the OTC Bulletin Board maintained by
the NASD under the symbol CAGM.OB. The transfer agent for our common stock
is Securities Transfer Corporation at 2591 Dallas Parkway, Suite 102, Frisco,
Texas 75034.
The
following table sets forth the high and low closing bid prices for our common
stock for the fiscal quarters indicated as reported on the OTC Bulletin
Board. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
High
|
Low
|
|||||||
2008
|
||||||||
First
Quarter ended March 31, 2008
|
6.75
|
1.01
|
||||||
Second
Quarter ended June 30, 2008
|
2.00
|
1.03
|
||||||
Third
Quarter ended September 30, 2008
|
1.75
|
0.25
|
||||||
Fourth
Quarter ended December 31, 2008
|
1.79
|
0.35
|
||||||
2009
|
||||||||
First
Quarter ended March 31, 2009
|
1.75
|
0.30
|
||||||
Second
Quarter ended June 30, 2009
|
1.65
|
0.10
|
||||||
Third
Quarter ended September 30, 2009
|
1.28
|
0.58
|
||||||
Fourth
Quarter ended December 31, 2009
|
2.99
|
1.05
|
Our
common stock is thinly traded and any reported sale prices may not be a true
market-based valuation of our common stock.
As of April 2, 2010, there were
approximately 2,486 owners of record of our common stock.
Trades in
our common stock may be subject to Rule 15g-9 under the Exchange Act, which
imposes requirements on broker-dealers who sell securities subject to the rule
to persons other than established customers and accredited investors. For
transactions covered by the rule, broker-dealers must make a special suitability
determination for purchasers of the securities and receive the purchaser’s
written agreement to the transaction before the sale.
Our
shares are subject to rules applicable to “penny stock” which pertain to any
equity security with a market price less than $5.00 per share or an exercise
price of less than $5.00 per share. Penny stock rules require a
broker-dealer, prior to a transaction in a penny stock, to deliver a
standardized risk disclosure document prepared by the SEC, which specifies
information about penny stocks and the nature and significance of risks of the
penny stock market. A broker-dealer must also provide the customer with bid and
offer quotations for the penny stock, the compensation of the broker-dealer, and
sales person in the transaction, and monthly account statements indicating the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules require that, prior to a transaction in a penny stock not
otherwise exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the trading activity in
our shares.
19
Dividend
Policy
We have not
paid or declared any cash dividends on our common stock within the past three
years and do not foresee doing so in the foreseeable future. We intend to
retain any future earnings for the operation and expansion of our business.
Any decision as to future payment of dividends will depend on the
available earnings, the capital requirements of our Company, our general
financial condition and other factors deemed pertinent by our Board of
Directors.
Sales
of Unregistered Securities
We did not
sell any unregistered securities during the fiscal year ended December 31,
2009.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
We did not
repurchase any of our equity securities that were registered under Section 12 of
the Exchange Act during the fiscal year ended December 31, 2009.
Concurrent
with our name change and symbol change, the 1 for 150 reverse split with the
record date of November 16, 2007 became effective on January 14, 2008. Holdings
of stockholders as of the record date who held less than 100 shares after the
reverse split were rounded up to 100 shares.
On February
29, 2008, our Company announced that the stockholders of the Series A
Convertible Preferred Stock had chosen to convert their preferred shares into
shares of our Company’s common stock. As a result, a total of
18,150,000 shares of common stock were issued in connection with the conversion,
and all Series A Convertible Preferred Stock has been cancelled.
ITEM
6. SELECTED FINANCIAL DATA.
Not
applicable.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Company
Overview
Historical
Background. We are a Nevada corporation incorporated in
December 1997. Until our 2007 Business Combination, we had no
material assets and no material operations. On February 9, 2007, we
acquired our operating subsidiary Harbin ChangFangYuan Hi-tech
Environment-Friendly Industrial Co., Ltd. (“CHFY”), a corporation organized and
conducting its business in China, for consideration consisting of shares of our
Series A Convertible Preferred Stock that subsequently were converted by the
holder into approximately 98% of our outstanding common shares, on an
after-converted basis. Through CHFY, we manufacture and sell
starch-based biodegradable, disposable containers, tableware and packaging
materials using our proprietary technology. CHFY’s business realized
its first revenue in May 2006, and from May until December 2006 the business had
sales of approximately $4.1 million, which were generated primarily by a
distributor, Weihai Qiancheng.
Currency. Our
business operates in China and accounts are denominated in Chinese Renminbi
(RMB), but we report our financial results in our SEC filings in U.S. dollars.
The conversion of our accounts from RMB to U.S. dollars results in
translation adjustments, which are reported as a line item after net income and
before comprehensive income. The net income is added to the retained earnings on
our balance sheet; while the translation adjustment is added to a line item on
our balance sheet labeled “accumulated other comprehensive income,” because it
is more reflective of changes in the relative values of U.S. and Chinese
currencies than of the success of our business. For the years ended
December 31, 2009 and 2008, we recorded unrealized expense of $20,380 and
unrealized gains of $1,506,545 on foreign currency translation,
respectively.
20
Results
of Operations for the Year Ended December 31, 2009
Compared
to the Year Ended December 31, 2008
The following table presents selected
items in our condensed consolidated statements of operations for the years ended
December 31, 2009 and 2008.
For
Year Ended
December
31, 2009
|
%
|
For
Year Ended
December
31, 2008
|
%
|
2009 vs 2008
Increase/
(decrease)
|
Percentage
increase (decrease)
|
||||||||||
(Unaudited)
|
(Unaudited)
|
||||||||||||||
Revenues
|
$
|
13,407,287
|
$
|
11,008,513
|
$
|
2,398,774
|
21.8%
|
||||||||
Cost
of Goods Sold
|
7,052,854
|
52.6%
|
5,680,584
|
51.6%
|
1,372,270
|
24.2%
|
|||||||||
Gross
Profit
|
6,354,433
|
47.4%
|
5,327,929
|
48.4%
|
1,026,504
|
19.3%
|
|||||||||
Operating
Expenses
|
|||||||||||||||
Selling
expenses
|
238,274
|
1.8%
|
269,930
|
2.5%
|
(31,656)
|
(11.7)%
|
|||||||||
Bad
debt expenses (recoveries)
|
5,954
|
-
|
(248,605)
|
(2.3)%
|
254,559
|
(102.4)%
|
|||||||||
General
and administrative expenses
|
786,633
|
5.9%
|
866,907
|
7.9%
|
(80,274)
|
(9.3)%
|
|||||||||
Total
Operating Expenses
|
1,030,861
|
7.7%
|
888,232
|
8.1%
|
142,629
|
16.1%
|
|||||||||
|
|||||||||||||||
Income
From Operations
|
5,323,572
|
39.7%
|
4,439,697
|
40.3%
|
883,875
|
19.9%
|
|||||||||
Other
Income (Expenses)
|
|||||||||||||||
Interest
income
|
5,635
|
-
|
5,624
|
11
|
0.2%
|
||||||||||
Other
income, net
|
24,624
|
0.2
%
|
19,156
|
0.2%
|
5,468
|
28.5%
|
|||||||||
Loss
on fixed and intangible assets disposal
|
(459,695)
|
(3.4)%
|
|
(78,670)
|
(0.7)%
|
(381,025)
|
484.3%
|
||||||||
Total
Other (Expenses) Income
|
(429,436)
|
(3.2)%
|
(53,890)
|
(0.5)%
|
(375,546)
|
696.9%
|
|||||||||
Income
Before Income Taxes
|
4,894,136
|
36.5%
|
4,385,807
|
39.8%
|
508,329
|
11.6%
|
|||||||||
Provision
for Income Taxes
|
738,810
|
5.5%
|
-
|
-
|
738,810
|
*
|
|||||||||
Net
Income
|
$
|
4,155,326
|
31.0%
|
$
|
4,385,807
|
39.8% |
$
|
(230,481)
|
(5.3)%
|
||||||
Foreign
currency translation adjustment
|
(20,380)
|
(0.2)%
|
1,506,545
|
13.7%
|
(1,526,925)
|
(101.4)%
|
|||||||||
Comprehensive
Income
|
$
|
4,134,946
|
30.8%
|
$
|
5,892,352
|
53.5%
|
$
|
(1,757,406)
|
(29.8)%
|
_______________
* Not meaningful.
21
Revenue Total
revenues were $13,407,287 for the year ended December 31, 2009 compared to
$11,008,513 for the year ended December 31, 2008, an increase of $2,398,774 or
21.8%. The increase in revenues resulted from a combination of
increased orders by existing and new clients as we continued to successfully
increase sales to our customers and expand our customer base. During
2009 we increased the number of customers and distributors to whom we sell our
products from 70 to 118 and expanded our internal sales team from 33 to
38.
Cost of
Goods Sold
Cost of goods sold for the year ended December 31, 2009 was $7,052,854,
as compared to $5,680,584 for the year ended December 31, 2008, an increase of
$1,372,270 or 24.2%. Gross margin was 47.4% for the year ended December 31, 2009
and 48.4% for the year ended December 31, 2008. The small decline in
gross profit percentage during 2009 compared with 2008 was due to increased
packaging costs resulting from the fact that in 2009 we sold our products to
several new customers who placed smaller orders than our customers in
2008. We intend to establish a new manufacturing facility during 2010
which we believe will improve our manufacturing equipment and practices and
reduce the costs to produce our products, thereby increasing our gross margins
across our product lines. We expect to bring this new facility on
line during 2010, although there is no assurance that we will be able to
complete the construction, the acquisition and installation of capital
equipment, and the move to the new facility on a timely basis. See “
– Liquidity and Capital Resources” for additional information relating to this
facility.
Selling
Expenses Selling
expenses were $238,274 for the year ended December 31, 2009, as compared to
$269,930 for the year ended December 31, 2008, a decrease of $31,656 or
11.7%. The decrease was mainly due to reductions in employee
compensation, traveling expenses, entertainment expenses, stores admission fees,
and branch office costs during the year ended December 31, 2009 as compared to
the year ended December 31, 2008.
Bad Debt
Expenses (Recoveries) The provision for bad debt expense
was $5,954 for the year ended December 31, 2009, as compared to net recoveries
of $248,605 for the year ended December 31, 2008, an increase of $254,559 or
102%. The increase was primarily due to a credit of $261,887 recorded
in 2008 to reverse a substantial amount of the bad debt expensed recorded in the
fourth quarter of 2007. During the fourth quarter of 2007 we
increased our provision for bad debts from 0.5% to 5.0% of accounts receivable
due to a high level of overdue accounts receivable from our major customer, the
distributor Weihai Qiancheng. However, after working with this
distributor during 2008, we were able to collect most of the applicable
receivable and determined that it was appropriate to reduce our allowance rate
from 5.0% back to 0.5% for 2008 and onward, and to reduce the balance of our
reserves for uncollectible accounts at December 31, 2008 by reversing a
substantial amount of the bad debt expense recorded in 2007.
General
and Administrative Expenses General and administrative
expenses were $786,633 for the year ended December 31, 2009, as compared to
$866,907 for the year ended December 31, 2008, a decrease of $80,274 or 9.3%.
The decrease was primarily due to reduced office rent in 2009 as a result of a
reduction in the amount of administrative space leased in Harbin City, mailing
expenses incurred in 2008 associated with the reverse stock split in 2008 which
were not incurred in 2009, employment expenses incurred in 2008 associated with
certain temporary financial management employees, and reduced professional fees
in 2009 as compared to 2008.
Total
Operating Expenses Total operating expenses were $1,030,861
for the year ended December 31, 2009 as compared to $888,232 for the year ended
December 31, 2008, an increase of $142,629 or 16.1%, which was attributable
primarily to the fact that the 2008 operating expenses amount included a
reduction of $261,887 to reverse a substantial amount of the bad debt expense
recorded in 2007. Excluding the effect of this reduction for 2007 bad
debt expense, total operating expenses would have been $1,150,119 for 2008 and
the 2009 total operating expenses of $1,030,861 would have reflected a decrease
of $119,258, or 10.4%, due to the reductions described above in selling expenses
and general and administrative expenses during 2009 compared to
2008.
22
Income
from Operations Income from operations was $5,323,572 for the
year ended December 31, 2009 as compared to $4,439,697 for the year ended
December 31, 2008, an increase of $883,875 or 19.9%. The increase was mainly due
to the overall increase in total revenues in 2009.
Other
Income (Expense) Total other expenses were $429,436 for the
year ended December 31, 2009 as compared to total other expenses of $53,890 for
the year ended December 31, 2008, an increase of $375,546, or
696.9%. The increase primarily resulted from a loss on fixed and
intangible assets disposal of $459,695 which was attributable mainly to a
$395,251 loss from the disposal of a patent during the third quarter of 2009 and
loss on disposal of certain fixed assets, as compared with a loss on fixed and
intangible assets disposal of $78,670 in 2008 which resulted from disposal of
certain fixed assets.
Income
Before Income Taxes Income before income taxes was $4,894,136
for the year ended December 31, 2009 as compared to $4,385,807 for the year
ended December 31, 2008, an increase of $508,329 or 11.6%, which was primarily
due to higher revenues during 2009, partially offset by the increased level of
loss on fixed and intangible assets disposal during 2009.
Income
Tax We generate our income in China through the
operations of our principal operating subsidiary CHFY. Under the laws
of the PRC, CHFY, as a wholly foreign owned enterprise, is entitled to an
exemption from corporate income tax (“CIT”) during its first and second
profitable years and a 50% reduction in its CIT in the subsequent three
years. Because 2007 and 2008 were CHFY’s first and second profitable
years, was exempt from CIT for those years. Commencing in 2009, CHFY became
subject to CIT in the PRC at a 15% tax rate. In 2012 and
subsequent years CHFY will pay income taxes at the rate of 25%. As a
result of the foregoing, the provision for income taxes was $738,810 for the year ended December 31,
2009 as compared to $0 for the year ended December 31, 2008.
Net
Income and Comprehensive Income Our net income was $4,155,326
for the year ended December 31, 2009 as compared to net income of $4,385,807 for
the year ended December 31, 2008, a decrease of $230,481 or 5.3%. This decrease
was due primarily to the expiration in 2009 of the exemption from Chinese income
tax from which CHFY benefited during 2007 and 2008 and the loss on disposal of a
patent in 2009. Our comprehensive net income was $4,134,946 for the
year ended December 31, 2009 as compared to net income of $5,892,352 for the
year ended December 31, 2008, a decrease of $1,757,406 or 29.8%. This
decrease in comprehensive net income was primarily due to the fact that in 2008
we reported a $1,506,545 currency translation gain, whereas in 2009 we reported
a currency translation loss of $20,380.
Net
Income Per Share Basic net income per share is computed using
the weighted average number of the ordinary shares outstanding during the year.
Diluted net income per share is computed using the weighted average number of
ordinary shares and ordinary share equivalents outstanding during the
year. The following table sets forth the computation of basic and
diluted net income per share for the years ended December 31, 2009 and
2008:
Years
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Basis
and diluted net income per share calculation
|
|
|||||||
Numerator:
|
||||||||
-
Net income in computing basic and diluted net income per
share
|
$
|
4,155,326
|
$
|
4,385,807
|
||||
Denominator:
|
||||||||
Shares
used in computing basic and diluted net income per share
|
18,711,388
|
15,685,987
|
||||||
Basic
net income per share
|
$
|
0.22
|
$
|
0.28
|
||||
Diluted
net income per share
|
$
|
0.22
|
$
|
0.28
|
23
Liquidity and Capital
Resources
Our operations were initially
capitalized by the combination of cash contributed to CHFY and a manufacturing
facility and intellectual property contributed by our stockholders prior to
2008. Since that time we have funded operations primarily by
means of loans from our stockholders and management. During 2009 we repaid
approximately $1 million of loans to one of the stockholders, and, as a result,
as of December 31, 2009, we owed approximately $300,000 in related party
debt. These loans are non-interest bearing, unsecured, and due on
demand. Accordingly, we include them as current liabilities. We may
make further repayments of these loans from time to time without interfering
with the growth of our business.
As of December 31, 2009, we had working
capital of $13.7 million, including cash and equivalents of $7.3 million and net
accounts receivable of $6.5 million. Most of our receivables are owed
to us by our primary customers for products purchased from us during the year,
and we consider the receivables as collectible in the ordinary
course. We expect to collect substantially all of the December 31,
2009 balance of receivables during 2010.
We incurred positive cash in-flow from
our operations of approximately $4.7 million for the year ended December 31,
2009. This was primarily attributable to our net income of approximately $4.2
million for the year ended December 31, 2009.
During the year ended December 31,
2009, we had a substantially reduced level of cash used in investing
activities. This reduction was attributable to the fact that we
purchased additional production equipment during 2008 in order to increase our
production capacity.
We intend
to purchase a new manufacturing facility during 2010 located in Harbin Economic
Technological Development Zone, which we expect will substantially increase the
cash used in investing activities during 2010. We believe that we
will have sufficient cash to pay for this new facility from our existing
resources, which include the $7.3 million of cash and equivalents on hand at
December 31, 2009, the $4.5 million of gross proceeds of the private placement
which closed in January 2010, and the cash generated from collection of our
accounts receivable and through our ongoing operations. Therefore it
will not be necessary for us to raise additional funds in order to complete the
facility.
We had a decline in cash flows from
financing activities for the year ended December 31, 2009 as compared to the
year ended December 31, 2008, due to the fact that we repaid a net amount of
approximately $1 million in 2009 in loans provided by our stockholders and
officers in support our Company’s operations.
Our current resources are sufficient to
fund ongoing operations for the foreseeable future.
Application
of Critical Accounting Policies
In preparation of our financial
statements, we are required to formulate working policies regarding valuation of
our assets and liabilities and to develop estimates of those values. In
our preparation of the financial statements for the year ended December 31, 2008
there was one estimate made which was (a) subject to a high degree of
uncertainty, and (b) material to our results. Therefore, as detailed in
Note 3(c) to the financial statements, we recorded an allowance of $26,847 for
doubtful accounts. The basis for this determination was our expectation
that our main customers, which are the responsible for most of our accounts
receivable, will satisfy their obligations within a reasonable period of
time.
We made no material changes to our
critical accounting policies in connection with the preparation of our financial
statements for the year ended December 31, 2009.
Impact
of Accounting Pronouncements
There were certain recent accounting
pronouncements that may have a material effect on our Company’s financial
position or results of operations. All of them had been shown in paragraph (t)
“Recent Accounting Pronouncements” of Note 3 “Summary of Significant Accounting
Policies” in the “Notes of Consolidated Financial Statement” listed under the
Financial Statements Section which is attached hereto.
24
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition or results of
operations.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
applicable.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our
consolidated financial statements for the fiscal years ended December 31, 2009
and 2008 are attached hereto.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not
applicable.
ITEM
9A(T). CONTROLS AND PROCEDURES.
Evaluation
of disclosure controls and procedures
The term
“disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e))
refers to the controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms. Our Company’s management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of our
Company’s disclosure controls and procedures as of the end of the period covered
by this annual report (the “Evaluation Date”). Based on such evaluation, our
Company’s Chief Executive Officer and Chief Financial Officer have concluded
that, as of the Evaluation Date, such disclosure controls and procedures were
effective.
Management’s
Annual Report on Internal Control over Financial Reporting
We performed
an evaluation of the effectiveness of our internal control over financial
reporting that is designed by, or under the supervision of, our principal
executive and principal financial officers, and effected by our Board of
Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with United States
generally accepted accounting principles (“GAAP”) and includes those policies
and procedures that:
§
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of our
Company;
|
§
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that
receipts and expenditures of our Company are being made only in accordance
with authorizations of management and directors of our Company;
and
|
25
§
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our Company’s assets that
could have a material effect on the financial
statements.
|
Management of our Company is
responsible for establishing and maintaining adequate internal control over
financial reporting for our Company. Management has used the Internal Control –
Integrated Framework to evaluate the effectiveness of internal control over
financial reporting, which is a recognized and suitable framework issued by the
Committee of Sponsoring Organizations (“COSO”) of the Treadway
Commission.
Based on its evaluation, our
management, including our Chief Executive Officer and Chief Financial Officer,
has concluded that our Company’s internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f)) as of December 31, 2009 is
effective based on the COSO framework. Notwithstanding the foregoing, there can
be no assurance that our Company’s internal control over financial reporting
will detect or uncover all failures of persons within our Company to comply with
these procedures.
This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules
of the SEC that permit us to provide only management’s report in this annual
report.
Changes
in internal controls
Our Company’s management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated any changes in our Company’s internal control over financial reporting
that occurred during the fourth quarter of the year covered by this annual
report, and they have concluded that there was no change to our Company’s
internal control over financial reporting during such period that has materially
affected, or is reasonably likely to materially affect, our Company’s internal
control over financial reporting.
ITEM
9B. OTHER INFORMATION.
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
officers and directors of our Company are:
Name
|
Age
|
Position
with the Company
|
Board
Member Since
|
||||
Zhonghao
Su
|
44 |
Chief
Executive Officer, President and Director
|
2007 | ||||
Yang
Meng
|
32 |
Director
and Secretary of the Board
|
2007 | ||||
Jing
Zhu
|
39 |
Chief
Financial Officer and Director
|
2007 | ||||
Yang
Li
|
27 |
Corporate
Secretary
|
N/A | ||||
Yingjie
Qiao
|
44 |
Vice
President, Technological Development Director and Director
|
2008 | ||||
Zhongcheng
Kang
|
32
|
Vice
President and Marketing Director
|
N/A | ||||
Youwei
Xing
|
27 |
Vice
President and Investor Relations Director
|
N/A | ||||
Guiguo
Wu
|
41 |
Factory
Director, Vice President of Production and Director
|
2008 | ||||
26
Directors hold office upon election
until the next annual meeting of our Company’s stockholders and the election and
qualification of their successors. Officers hold office, subject to
removal at any time by our Board, until the meeting of directors immediately
following the annual meeting of stockholders and until their successors are
appointed and qualified.
Zhonghao Su. Mr. Su began to
organize the current business of our Company in 2004 and has served as Chief
Executive Officer of our operating subsidiary since that time. Mr. Su
has been our Chief Executive Officer and a member of the Board of Directors of
our Company since 2007. From 1998 to 2003, Mr. Su was associated with
the U.S. Ocean Group, an international trading company, as executive director of
U.S. Ocean Group China Resource Co. Ltd., a subsidiary of U.S. Ocean Group.
Prior to joining U.S. Ocean Group, Mr. Su had been employed by the China
Packaging Import & Export Trading Company, an international trading company,
serving as the administration manager, director of
international business, vice-president and general manager of the Qingdao
branch. In 1994, Mr. Su earned an Executive Master of Business Administration
from the Guanghua School of Management of Beijing University. The
foregoing experience and qualifications led to the conclusion that, in light of
our Company’s business and structure, Mr. Su should serve as a director for our
Company at the time of the filing of this annual report.
Yang Meng. Ms. Meng has
been a member of the Board of Directors of our Company since
2007. From 2007 through 2009, Ms. Meng served as the Secretary of our
Company. From 2005 to 2006, Ms. Meng was employed as counselor by the Harbin
Huawei Group, a soldering equipment company, advising on legal matters and
investment management. From 2001 to 2005, Ms. Meng was an officer of the
Harbin Xinzhongxin Electronic Co., Ltd., an electric application company, with
responsibilities for legal affairs and internal management. In 2001, Ms.
Meng earned a Bachelors degree with a concentration in International Economic
Law from the Heilongjiang University. The foregoing experience and
qualifications led to the conclusion that, in light of our Company’s business
and structure, Ms. Meng should serve as a director for our Company at the time
of the filing of this annual report.
Jing Zhu. Ms. Zhu was
employed as the Finance Manager of our operating subsidiary Company from 2004 to
2008, and also as our Finance Manager from 2007 until February 2008, when she
was appointed as our Chief Financial Officer. Ms. Zhu has been a member of the
Board of Directors of our Company since 2007. From 2000 to 2004, Ms.
Zhu was employed as finance manager by the Xintai Mechanical Engineering Co.
Ltd., a medicine manufacturing and sales company. From 1991 to 2000, Ms.
Zhu was employed as an accountant by the Harbin Gongbai Group, a spin equipment
supplier company. In 1993, Ms. Zhu earned a Bachelors degree with a
concentration in Accounting from the Heilongjiang Provincial Party
College. The foregoing experience and qualifications led to the
conclusion that, in light of our Company’s business and structure, Ms. Zhu
should serve as a director for our Company at the time of the filing of this
annual report.
Yang Li. Mr. Li was
appointed as the Secretary of our Company in January 2010. From 2006
to 2009, Mr. Li was employed as Chairman Secretary of Eastern Environment
Solutions Corp., a waste management company. In 2005, Mr. Li earned a Bachelor
degree with a concentration in English from Northeast Forestry
University.
Yingjie Qiao. Mr. Qiao
has served as the Vice President and Technological Development Director and as a
member of the Board of Directors of our Company since 2008. Mr. Qiao is also a
professor of materials science for the Chemical Institute of Harbin Engineering
University, a doctoral advisor, a member of the DPP Heilongjiang Provincial
Standing Committee, a member of the Teaching Steering Committee for Materials
Physics and Chemistry under the Ministry of Education and a director of the
Chemical Industry and Engineering Society of Heilongjiang. Since 2004, Mr. Qiao
has served as an evaluation expert for the National 863 Program, the Natural
Science Foundation of China and the Doctoral Fund of Ministry of Education.
Since 2005, he has also acted as an expert for the assessment of technical
projects under the Heilongjiang Science & Technology Department and the
Harbin Science & Technology Bureau. The foregoing experience and
qualifications led to the conclusion that, in light of our Company’s business
and structure, Mr. Qiao should serve as a director for our Company at the time
of the filing of this annual report.
27
Guiguo Wu. Mr. Wu has
been a member of the Board of Directors of our Company since 2008. Mr. Wu has
served as the Factory Director and Vice President of Production of our Company
since 2008. Mr. Wu joined our Company as a workshop director in 2006.
Mr. Wu served as the manager of the research and development department for
Heilongjiang Huadi Group, a kitchen equipment manufacturing company, from 2002
to 2005. Mr. Wu served as the production director for Harbin Xinda
Polymer Materials Co., Ltd., a high-polymer material company, from 2005 to 2006.
The foregoing experience and qualifications led to the conclusion that, in light
of our Company’s business and structure, Mr. Wu should serve as a director for
our Company at the time of the filing of this annual report.
Zhongcheng
Kang. Mr. Kang has served as a Vice President and Marketing
Director of our Company since 2008. From 2006 to 2008, Mr. Kang
served as the regional market director in China, marketing director and sales
manager for Sansui Electric Co., Ltd., a private consumer electronics company,
where for three consecutive years his marketing team assisted such company in
becoming a leader in sales for the Chinese home appliance market. Mr. Kang has
studied economics, marketing, psychology and philosophy, and has published more
than 20 articles in areas such as marketing strategy. In 2005, Mr. Kang earned a
Master of Business Administration from the Harbin Institute of
Technology. From 2001 to 2004, Mr. Kang served as marketing director
of Hangzhou Huari Electric Co., Ltd., an electric equipment
company.
Youwei Xing. Mr.
Xing has served as the Investor Relations Director of our operating subsidiary
since 2005 and of our Company since 2007, and has served as a Vice President of
our Company since 2007. From 2002 to 2005, Mr. Xing earned a Bachelor
degree with a concentration in Securities and Investment from Harbin University
of Commerce.
Audit Committee;
Compensation Committee
Our Board of Directors has not yet
appointed an Audit Committee or a Compensation Committee due to the relatively
small size of our Board. Our Board does not currently have any member who
qualifies as an audit committee financial expert, given that certain members of
our current management took control of our Company in December
2008. We are planning to establish an Audit Committee and a
Compensation Committee in 2010.
Pursuant to a Securities Purchase
Agreement dated as of January 11, 2010, by and among our Company and certain
accredited investors relating to the issuance and sale of 5,051,461 shares of
our common stock at a price of $0.90 per share (the “Securities Purchase
Agreement”), we have agreed to add members to our Board of Directors within 120
days of January 25, 2010, such that (i) a majority of our Board shall be
“independent” directors within the meaning of the rules of the Nasdaq Stock
Market and/or the NYSE Amex, and (ii) the Board will have established an audit
committee, compensation committee and nominating committee. We have also agreed
to appoint one person designated by ARC China, Inc. to our Board within 5
business days of such designation. Although we have not yet implemented such
changes with respect to our Board, we intend to satisfy these obligations
pursuant to the Securities Purchase Agreement.
Code of
Ethics
Our Company has adopted a code of
ethics to govern the conduct of our executive officers and
directors. A copy of our Code of Business Conduct & Ethics for
Members of the Board of Directors and Executive Officers is filed as Exhibit
14.1 to the Company's Current Report on Form 8-K filed on April 12, 2010 and is
incorporated herein by reference.
28
Section
16(a) Beneficial Ownership Reporting Compliance
Pursuant to
Section 16(a) of the Exchange Act and the rules issued thereunder, our directors
and executive officers and any persons holding more than 10% of our common stock
are required to file with the SEC reports of their initial ownership of our
common stock and any changes in ownership of such common stock. Copies of such
reports are required to be furnished to us. We are not aware of any instances
during the fiscal year ended December 31, 2009 where an executive officer,
director or any owner of more than 10% of the outstanding shares of our common
stock failed to comply with the reporting requirements of Section 16(a) of the
Exchange Act, except
that Zhonghao Su, our Chief Executive Officer, filed a Form 4 on September 17,
2009 with respect to certain transactions in our common stock which occurred
during 2008.
ITEM
11. EXECUTIVE COMPENSATION.
Cash
Compensation
The following
table shows the total compensation paid or earned for the years ended December
31, 2009 and 2008 by Zhonghao Su, our Chief Executive Officer. No other
executive officer of our Company earned compensation in excess of $100,000 for
the year ended December 31, 2009.
Summary
Compensation Table for 2009
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation
($)
|
Non-qualified
Deferred Compen-sation Earnings
($)
|
All
Other Compensation ($)
|
Total
($)
|
||||||||||||||||||||||||||
Zhonghao
Su
Chief
Executive Officer
|
2009
|
$ | 35,154 | - | - | - | - | - | - | $ | 35,154 | ||||||||||||||||||||||||
2008
|
$ | 35,062 | - | - | - | - | - | - | $ | 35,062 |
Base
Salaries
The Board is
responsible for determining the appropriate level of compensation for each of
our executive officers. Salaries for all executive officers for a given year are
determined at the first Board meeting in January of each year. While Mr. Su does not
participate in any discussions or voting related to his salary, he recommends
salary levels for our Company’s other executive officers to the Board, which
makes the ultimate determination of the salaries for such
individuals.
In making
recommendations regarding salary levels, the Board consults the salary levels of
the industry. In addition, the Board takes into account the
performance of an individual over the previous year in determining the current
year’s salary level.
Employment
Agreements
Our Company
has entered into a standard employment agreement with each of our executive
officers. Each agreement has a term of one year. Except for the salary, the
terms of the agreements are substantially identical, and reflect employment
standards common in China as a result of law or customary business
practices.
Outstanding
Equity Awards
Our Company
has not granted equity awards to any of our executive officers.
29
Employee Benefit
Plans
Under the 2007 Stock Incentive Plan
(the “2007 Plan”), our Company may grant awards of up to 750,000 shares of
restricted stock to our executive officers and directors, subject to certain
adjustments pursuant to the terms of the 2007 Plan. We have not
granted any such awards under the 2007 Plan. Our Company has no other
employee benefit plans and does not offer termination benefits.
Director
Compensation
Due to the small size of our Company,
none of the members of our Board of Directors received remuneration for service
on the Board during 2009.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The
following table sets forth certain information regarding the beneficial
ownership of our common stock by (i) each person who, to our knowledge, owns
more than 5% of our common stock, (ii) each of our directors and executive
officers, and (iii) all of our executive officers and directors as a
group. Unless otherwise indicated in the footnotes to the following
table, each person named in the table has sole voting and investment power and
that person’s address is: c/o Harbin ChangFangYuan Hi-Tech Environment-Friendly
Industrial Co. Ltd., 172 Zhongshan Road, 27th
Floor, Harbin, Heilongjiang, P.R. China.
Name
of Beneficial Owner
|
Number
of
Shares
Beneficially
Owned(1)
|
Percentage
Beneficially
Owned(1)
|
||||||
Zhonghao
Su (2)
|
7,278,298
|
30.63
|
%
|
|||||
Yang
Meng
|
--
|
--
|
||||||
Jing
Zhu
|
--
|
--
|
||||||
Yang
Li
|
--
|
--
|
||||||
Yingjie
Qiao
|
--
|
--
|
||||||
Guiguo
Wu
|
--
|
--
|
||||||
Zhongcheng
Kang
|
--
|
--
|
||||||
Youwei
Xing
|
--
|
--
|
||||||
Directors
and Executive Officers as a Group (8 persons)
|
7,278,298
|
30.63
|
%
|
|||||
Benyi
Xing
#9
Grp Qinggangluwei Qingnian Road
Lvyuan
Dist
Changchun
City, China
|
3,750,000
|
15.78
|
%
|
______________
(1)
|
Based
on 23,762,849 shares of
our common stock issued and outstanding as of April 9,
2010.
|
(2)
|
Includes
1,800,000 shares of common stock transferred from Mr. Yumin Liu to
Mr. Su, for no consideration (the "Transferred
Shares"), pursuant to a stock transfer agreement dated as of March
25, 2010 and amended as of April 12, 2010. Mr.
Su agreed that he will hold the Transferred Shares for purposes
of giving him additional voting power and that he will not sell,
grant any security interest in, pledge, or otherwise dispose of or enter
into any transaction which will result in the disposition of any of
the Transferred Shares. The term of such transfer is for three years
and Mr. Su will return all of the Transferred Shares to Mr.
Yumin Liu at the end of the
term.
|
Securities
Authorized for Issuance under Equity Compensation Plans
The
information set forth in the table below regarding equity compensation plans
(which include individual compensation arrangements) was determined as of
December 31, 2009.
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans
|
|||
Equity
compensation plans approved by security holders
|
0
|
750,000
shares of restricted stock
|
|||
Equity
compensation plans not approved by security holders
|
0
|
0
|
|||
Total
|
0
|
750,000
shares of restricted stock
|
30
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Related
Party Transactions
In 2005, we
funded operations primarily by means of loans from our stockholders and
management. As of December 31, 2009 and 2008, we owed $300,792 and
$1,294,838, respectively, to certain members of our management and stockholders,
including Mr. Zhonghao Su and Ms. Meijuan He. The largest aggregate
amount of principal outstanding during the fiscal years ended December 31, 2009
and 2008 were $300,792 and $1,294,838, respectively. The amount of
the indebtedness outstanding as of March 28, 2010 was $300,792. The
amount of principal paid during the fiscal years ended December 31, 2009 and
2008 were $1,025,338 and $40,928, respectively. No interest is
payable in connection with such indebtedness.
Compensation
Arrangements
See
“Executive Compensation,” above for information about employment agreements and
other compensation arrangements between our Company and our executive officers
and directors.
Director
Independence
None of the
members of our Board of Directors is independent, as “independent” is defined in
the rules of the NASDAQ National Market System.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The
following table presents the fees for professional audit services rendered by MS
Group CPA LLC for the audit of our Company’s consolidated financial statements
for the fiscal years ended December 31, 2009 and 2008, and fees billed for
other services rendered by MS Group CPA LLC during those
periods. Unless otherwise indicated, our Company paid all amounts in
the following table to MS Group CPA LLC. All services reflected in the following
table for 2009 and 2008 were pre-approved in accordance with the policy of our
Board of Directors.
Year
Ended December 31,
|
2009
|
2008
|
||||||||
Audit
Fees (1)
|
$
|
60,000
|
$
|
60,000
|
||||||
Audit
Related Fees (2)
|
—
|
|
—
|
|||||||
Tax
Fees
(3)
|
—
|
—
|
||||||||
All
Other Fees
|
—
|
—
|
||||||||
Total
|
$
|
60,000
|
$
|
60,000
|
||||||
(1)
|
Audit
fees consist of audit and review services, report on internal control over
financial reporting and review of documents filed with the
SEC.
|
|||||||||
(2)
|
Audit
related fees consist of pre-approved consultation concerning financial
accounting and reporting standards, and the accounting for acquisitions
and dispositions carried out by the Company.
|
|||||||||
(3)
|
Tax
fees consist of preparation of Federal and State income tax returns and
consultation regarding tax compliance issues.
|
|||||||||
31
Our Board of
Directors has determined that the provision by MS Group CPA LLC of the non-audit
services referred to above is compatible with the maintenance of that firm’s
independence.
Pre-Approval
Policies and Procedures
Our Board of
Directors has instituted a policy to pre-approve audit and non-audit services
(i.e., audit-related services, tax services, and all other
services). Mr. Zhonghao Su is given limited delegated authority from
time to time by our Board to pre-approve permitted non-audit
services. Pre-approval is obtained prior to the commencement of the
services. Our Board also considers on a continuing basis whether the
provision of non-audit services is compatible with maintaining the independence
of the external auditor.
32
PART
IV
ITEM
15. EXHIBITS.
Exhibit
Number
|
Description
of Exhibit
|
||
2.1
|
Agreement
and Plan of Merger dated February 8, 2007 by and among Advanced Green
Materials, Inc., AGM Acquisition Corp. and Ubrandit.com (incorporated by
reference to Exhibit 10-a to the Company’s Current Report on Form 8-K
filed on February 9, 2007).
|
||
3.2
|
Amended
and Restated By-laws (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K filed on April 12,
2010).
|
||
4.1
|
Certificate
of Designation of Series A Convertible Preferred Stock (incorporated by
reference to Exhibit 3-a to the Company’s Current Report on Form 8-K filed
on February 9, 2007).
|
||
10.1^
|
Form
of Employment Agreement between CHFY and the executive employees
(incorporated by reference to Exhibit 10-b to the Company’s Current Report
on Form 8-K filed on February 9, 2007).
|
||
10.2
|
Securities
Purchase Agreement, dated as of January 11, 2010, by and among China Green
Material Technologies, Inc. and the purchasers identified on the signature
pages thereto (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed on January 15, 2010).
|
||
10.3
|
Form
of IR Warrant (incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K filed on January 15, 2010).
|
||
10.4
|
Agency
Agreement, dated as of January 12, 2010, by and among China Green Material
Technologies, Inc., ARC China, Inc. and Gar Wood Securities, LLC
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K filed on January 29, 2010).
|
||
10.5
|
2007
Stock Incentive Plan (incorporated by reference to Exhibit 2 to the
Company’s Information Statement on Schedule 14C filed on November 13,
2007).
|
||
14.1
|
Code
of Business Conduct & Ethics for Members of the Board of Directors and
Executive Officers (incorporated by reference to Exhibit 14.1 to the
Company's Current Report on Form 8-K filed on April 12,
2010).
|
||
*
Filed/furnished herewith.
^
Indicates a management contract or compensatory plan or
arrangement.
33
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
China
Green Material Technologies, Inc.
|
|||
April
12, 2010
|
By:
|
/s/
Zhonghao Su
|
|
Zhonghao
Su
Chief
Executive Officer
|
Pursuant
to the requirements of the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE
|
TITLE
|
DATE
|
||
/s/ Zhonghao Su |
Chief
Executive Officer and Director
|
April
12, 2010
|
||
Zhonghao
Su
|
(principal
executive officer)
|
|||
/s/ Jing Zhu |
Chief
Financial Officer and Director
|
April
12, 2010
|
||
Jing
Zhu
|
(principal
financial and accounting officer)
|
|||
/s/ Yang Meng |
Director
|
April
12, 2010
|
||
Yang
Meng
|
||||
/s/ Guiguo Wu |
Director
|
April
12, 2010
|
||
Guiguo
Wu
|
||||
/s/ Yingjie Qiao |
Director
|
April
12, 2010
|
||
Yingjie
Qiao
|
||||
34
CONTENTS
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Financial Statements:
|
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations and Comprehensive Income
|
F-4
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
to F-21
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and stockholders of
China
Green Material Technologies Inc.
We have
audited the accompanying consolidated balance sheets of China Green Material
Technologies, Inc. and its subsidiaries (“the Company”) as of December 31, 2009
and 2008 and the related consolidated statements of operations and comprehensive
income, changes in stockholders’ equity, and cash flows for the years ended
December 31, 2009 and 2008. The financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits include 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 consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Green Material
Technologies, Inc. and its subsidiaries as of December 31, 2009 and 2008 and the
results of their operations and their cash flows for the years ended December
31, 2009 and 2008 in conformity with accounting principles generally accepted in
the United States of America.
MS
Group CPA LLC
|
|
/s/
MS Group CPA LLC
|
|
Edison,
New Jersey
|
|
March
27, 2010
|
F-2
CHINA
GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
AS
OF DECEMBERT 31, 2009 AND 2008
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
Assets:
|
||||||||
Cash and equivalents - non restricted | $ | 7,321,276 | $ | 4,243,140 | ||||
Cash - restricted | 3,443 | 1,904 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $32,786 | ||||||||
and $26,847, respectively | 6,524,510 | 5,354,334 | ||||||
Inventories | 456,970 | 351,413 | ||||||
Other receivable | 19,210 | 201 | ||||||
Deferred income taxes assets | 4,918 | - | ||||||
Prepaid expenses | 29,436 | 14,988 | ||||||
Other current assets | 628,149 | 472,413 | ||||||
Total
Current Assets
|
14,987,912 | 10,438,393 | ||||||
Property
and Equipment, Net
|
10,394,584 | 11,692,455 | ||||||
Intangible
Assets, Net
|
5,060,559 | 5,585,576 | ||||||
Know-how
Right, Net
|
2,160,533 | - | ||||||
Investment
- At Cost
|
310,419 | 310,807 | ||||||
Total
Assets
|
32,914,007 | 28,027,231 | ||||||
Liabilities and Stockholders'
Equity
|
||||||||
Current
Liabilities:
|
||||||||
Accounts payable and accrued expenses | 159,079 | 178,138 | ||||||
Customer deposits | 4,213 | 14,524 | ||||||
Payroll payable | 143,707 | 63,501 | ||||||
Due to stockholders/officers, net | 300,792 | 1,294,838 | ||||||
Taxes payable | 430,408 | 73,653 | ||||||
Contingent liabilities | 1,464,768 | - | ||||||
Other current liabilities | 4,354 | 130,837 | ||||||
Total
Current Liabilities
|
2,507,321 | 1,755,491 | ||||||
Total Liabilities
|
2,507,321 | 1,755,491 | ||||||
Stockholders'
Equity
|
||||||||
Common stock, $0.001 par value, 100,000,000 shares authorized, | ||||||||
18,711,388 shares issued and outstanding | 18,711 | 18,711 | ||||||
Additional paid-in capital | 17,895,324 | 17,895,324 | ||||||
Reserve funds | 1,152,569 | 732,532 | ||||||
Retained earnings | 7,709,729 | 3,974,440 | ||||||
Accumulated other comprehensive income | 3,630,353 | 3,650,733 | ||||||
Total
Stockholders’ Equity
|
30,406,686 | 26,271,740 | ||||||
Total
Liabilities and Stockholders’ Equity
|
$ | 32,914,007 | $ | 28,027,231 |
See notes to consolidated
financial statements.
F-3
CHINA
GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
For
The Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 13,407,287 | $ | 11,008,513 | ||||
Cost
of Goods Sold
|
7,052,854 | 5,680,584 | ||||||
Gross
Profit
|
6,354,433 | 5,327,929 | ||||||
Operating
Expenses
|
||||||||
Selling expenses | 238,274 | 269,930 | ||||||
Bad debt expenses (recoveries) | 5,954 | (248,605 | ) | |||||
General and administrative expenses | 786,633 | 866,907 | ||||||
Total
Operating Expenses
|
1,030,861 | 888,232 | ||||||
Income
From Operations
|
5,323,572 | 4,439,697 | ||||||
Other
Income (Expenses)
|
||||||||
Interest income | 5,635 | 5,624 | ||||||
Other income, net | 24,624 | 19,156 | ||||||
Loss on fixed and intangible assets disposal | (459,695 | ) | (78,670 | ) | ||||
Total
Other Expenses
|
(429,436 | ) | (53,890 | ) | ||||
Income
Before Income Taxes
|
4,894,136 | 4,385,807 | ||||||
Provision
for Income Taxes
|
738,810 | - | ||||||
Net
Income
|
$ | 4,155,326 | $ | 4,385,807 | ||||
Foreign
Currency Translation Adjustment
|
(20,380 | ) | 1,506,545 | |||||
Comprehensive
Income
|
$ | 4,134,946 | $ | 5,892,352 | ||||
Net
Income Per Common Share -Basic and Diluted
|
||||||||
-Basic
|
$ | 0.22 | $ | 0.28 | ||||
-Diluted
|
$ | 0.22 | $ | 0.28 | ||||
Weight Common Shares
Outstanding -Basic and Diluted
|
||||||||
-Basic
|
18,711,388 | 15,685,987 | ||||||
-Diluted
|
18,711,388 | 15,685,987 |
See notes to consolidated
financial statements.
F-4
CHINA
GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
||||||||||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||||||||||
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||||||||||
Series
A Preferred Stock
|
Common
Stock
|
Paid-in
|
Retained
|
Reserve
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||||||||||||||
No
of Shares
|
Amount
|
No
of Shares
|
Amount
|
Capital
|
Earnings
|
Funds
|
Income
|
Equity
|
||||||||||||||||||||||||||||
Balance
as of
December
31, 2007
|
272,250 | $ | 272 | 46,592,790 | $ | 46,593 | $ | 17,867,170 | $ | 253,464 | $ | 67,701 | $ | 2,144,188 | $ | 20,379,388 | ||||||||||||||||||||
Net
income
|
- | - | - | - | - | 4,385,807 | - | - | 4,385,807 | |||||||||||||||||||||||||||
Retained
earnings distribution
|
- | - | - | - | - | (664,831 | ) | 664,831 | - | - | ||||||||||||||||||||||||||
Reverse
split of common
|
||||||||||||||||||||||||||||||||||||
stock
on
January 14, 2008
|
- | - | (46,031,402 | ) | (46,032 | ) | 46,032 | - | - | - | - | |||||||||||||||||||||||||
Converted
preferred stock
|
- | |||||||||||||||||||||||||||||||||||
to
common stock on
February
29, 2008
|
(272,250 | ) | (272 | ) | 18,150,000 | 18,150 | (17,878 | ) | - | - | - | |||||||||||||||||||||||||
- | ||||||||||||||||||||||||||||||||||||
Foreign
currency translation
|
- | - | - | - | - | - | - | 1,506,545 | 1,506,545 | |||||||||||||||||||||||||||
Balance
as of
December
31, 2008
|
- | $ | - | 18,711,388 | $ | 18,711 | $ | 17,895,324 | $ | 3,974,440 | $ | 732,532 | $ | 3,650,733 | $ | 26,271,740 | ||||||||||||||||||||
Net
income
|
- | - | - | - | - | 4,155,326 | - | - | 4,155,326 | |||||||||||||||||||||||||||
- | ||||||||||||||||||||||||||||||||||||
Retained
earnings distribution
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
(420,037 | ) | 420,037 | - | |||||||||||||||||||||||||||||||||
Foreign
currency translation
|
- | - | - | - | - | - | - | (20,380 | ) | (20,380 | ) | |||||||||||||||||||||||||
Balance
as of
December
31, 2009
|
- | $ | - | 18,711,388 | $ | 18,711 | $ | 17,895,324 | $ | 7,709,729 | $ | 1,152,569 | $ | 3,630,353 | $ | 30,406,686 |
See notes to consolidated financial statements.
F-5
CHINA
GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
For
The Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows From Operating Activities:
|
||||||||
Net Income
|
$ | 4,155,326 | $ | 4,385,807 | ||||
Adjustments to Reconcile Net Income to Net Cash
|
||||||||
Provided by Operating Activities
|
||||||||
Depreciation and amortization
|
1,283,521 | 1,257,819 | ||||||
Amortization know-how right
|
36,597 | - | ||||||
Deferred income taxes benefits
|
(4,915 | ) | - | |||||
Bad debt expenses
|
5,954 | (236,778 | ) | |||||
Loss on disposal of fixed assets
|
64,444 | 78,670 | ||||||
Loss on disposal of intangible assets
|
395,251 | - | ||||||
Changes in operating assets and liabilities
|
||||||||
Accounts receivable
|
(1,180,460 | ) | 204,829 | |||||
Inventories
|
(105,859 | ) | (185,520 | ) | ||||
Other receivable
|
(19,021 | ) | 5,130 | |||||
Prepaid expenses
|
(14,467 | ) | 43,936 | |||||
Other current assets
|
(156,153 | ) | 697,361 | |||||
Accounts payable and accrued expenses
|
(18,954 | ) | 18,449 | |||||
Customer deposits
|
(10,308 | ) | 14,524 | |||||
Payroll payable
|
80,301 | 23,581 | ||||||
Tax payable
|
357,040 | (48,206 | ) | |||||
Other current liabilities
|
(126,480 | ) | 108,057 | |||||
Net
Cash Provided by Operating Activities
|
4,741,817 | 6,367,659 | ||||||
Cash
Flows From Investing Activities:
|
||||||||
Purchase of property and equipment | (91,736 | ) | (2,380,850 | ) | ||||
Deposit for purchase of know-how right | (732,384 | ) | - | |||||
Proceeds from sold the property and equipment | 158,832 | 1,442 | ||||||
Net
Cash Used in Investing Activities
|
(665,288 | ) | (2,379,408 | ) | ||||
Cash
Flows From Financing Activities:
|
||||||||
Repayments of stockholders/officers loans
|
(1,025,338 | ) | (40,928 | ) | ||||
Proceeds from stockholders/officers loans
|
29,645 | 45,209 | ||||||
Net
Cash ( Used in) Provided by Financing Activities
|
(995,693 | ) | 4,281 | |||||
Net
Increase in Cash and Equivalents
|
3,080,837 | 3,992,532 | ||||||
Effect
of Exchange Rate Changes on Cash and Equivalents
|
(1,161 | ) | 151,176 | |||||
Cash
and Equivalents at Beginning of Period
|
4,245,044 | 101,336 | ||||||
Cash
and Equivalents at End of Period
|
$ | 7,324,719 | $ | 4,245,044 | ||||
SUPPLEMENT
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||
Cash paid for Interest
|
$ | - | $ | - | ||||
Cash paid for Income taxes
|
$ | 534,610 | $ | - | ||||
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND
|
||||||||
FINANCING ACTIVITIES
|
||||||||
Incurred contingent liabilities for purchase of know-how
right
|
$ | 1,464,768 | $ | - |
See notes to consolidated financial statements.
F-6
CHINA
GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
1.
Organization and Principal Activities
China Green Material Technologies, Inc. is a
Nevada corporation incorporated in December 1997 under the name Mount Merlot
Estates, Inc. At the time we acquired its current business in February 2007, our corporate name was “Ubrandit.com.” On January 14, 2008, we changed our name to “China
Green Material Technologies, Inc.” References in these Notes to the
“Company” refer to China Green Material Technologies, Inc. and where applicable
its direct and indirect wholly owned subsidiaries. The Company’s shares
are quoted on the Over-the-Counter Bulletin Board of the National Association of
Securities Dealers, Inc., under the symbol CAGM.OB, whereas before its name
change in January
2008 the Company’s shares
were quoted under the symbol UBDT.OB.
On
February 9, 2007, the Company acquired all of the outstanding capital stock of
Advanced Green Materials, Inc. (“AGM”), a Nevada corporation, by merging a
wholly owned subsidiary of the Company into AGM. Through AGM, the Company
indirectly owns all of the outstanding capital stock of ChangFangYuan Hi-tech
Environment-Friendly Industrial Co., Ltd. (“CHFY”), a corporation organized
under the laws of the People Republic of China (“China” or the “PRC”). AGM
has substantially no operations and substantially no assets other than the
shares of CHFY. Through CHFY, the Company operates the business described
in this annual report on Form 10-K and in the financial statements included
herein. The Company’s acquisition of AMG and CHFY is sometimes
herein referred to as the “2007 Business Combination.” Immediately before
the 2007 Business Combination, the Company had no material assets and no
material operations and therefore it was considered a “shell company” (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934). As
consideration for the acquisition of AGM and CHFY, the Company issued to the
former owners of AGM shares of the Company’s Series A Convertible Preferred
Stock that were convertible into approximately 98% of the Company’s outstanding
common shares, on an after-converted basis.
On
January 14, 2008, concurrent with our name change, the Company effected a
1-for-150 reverse split of its common stock. In connection with the split,
the Company issued additional shares to certain shareholders so that, after the
split, no shareholder owned fewer than 100 shares. The following month, on
February 29, 2008, the holders of all outstanding shares of Series A Convertible
Preferred Stock converted their preferred shares into a total of 18,150,000
shares of the Company’s common stock, and all shares of Series A Convertible
Preferred Stock were cancelled.
CHFY was
incorporated in the Heilongjiang Province of China on May 12, 1999. It was known
as Harbin TianHao Technology Co., Ltd., and changed its name to Harbin
ChangFangYuan Hi-Tech Industrial Co., Ltd. on September 28, 2004, and further
changed its name to Harbin ChangFangYuan Hi-Tech Environment-Friendly Industry
Co., Ltd. on September 1, 2006. AGM acquired all of the outstanding
capital stock of CHFY on August 18, 2006.
Prior to
May 2006, CHFY engaged only in product development and the establishment of
manufacturing facilities and marketing relationships. CHFY’s business
realized its first revenue in May 2006.
2.
Basis of Presentation
The
accompanying consolidated financial statements present the financial position,
results of operations and cash flows of the Company and all entities in which
the Company has a controlling voting interest. The consolidated financial
statements also include the accounts of any variable interest entities in which
the Company is considered to be the primary beneficiary and such entities are
required to be consolidated in accordance with accounting principles generally
accepted in the United States (“US GAAP”). These consolidated financial
statements include the financial statements of China Green Material
Technologies, Inc. and its subsidiaries. All significant intercompany
transactions and balances are eliminated in consolidation.
F-7
The
accompanying consolidated financial statements are prepared in accordance with
US GAAP. This basis of accounting differs from that used in the statutory
accounts of some of the Company’s subsidiaries, which were prepared in
accordance with the accounting principles and relevant financial regulations
applicable to enterprises with foreign investment in the PRC (“PRC GAAP”).
Necessary adjustments were made to the subsidiaries’ statutory accounts to
conform to US GAAP to be included in these consolidated financial
statements.
3.
Summary of Significant Accounting Policies
a.
Use of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Estimates, by their nature, are based on judgment and available information.
Accordingly, actual results could differ from those estimates.
b.
Cash and Equivalents
The
Company considers all highly liquid temporary cash investments with an original
maturity of three months or less when purchased, to be cash
equivalents.
c.
Accounts Receivable
Accounts
receivables are recognized and carried at original invoice amount less allowance
for any uncollectible amounts. The Company provides an allowance for doubtful
accounts equal to the estimated losses that will be incurred in the collection
of all receivables. The estimated losses are based on a review of the current
status of the existing receivables. The balance of the allowance for doubtful
accounts as of December 31, 2009 and 2008 were $32,786 and $26,847,
respectively.
d.
Inventories
The
Company value inventories, consisting of finished goods, work in progress, raw
materials, and packaging material and others, at the lower of cost or market.
Cost is determined on the weighted average cost method. Cost of raw materials is
determined on a first-in, first-out basis (“FIFO”). Finished goods are
determined on a weight average basis and are comprised of direct materials,
direct labor, and an appropriate proportion of overhead.
e.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Expenditures for major additions and betterments are capitalized. Maintenance
and repairs are charged to operations as incurred. Depreciation of property and
equipment is computed by the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the lesser of the
lease term or the useful lives of the assets. Upon sale or retirement of plant
and equipment, the related cost and accumulated depreciation are removed from
the accounts and any gain or loss is reflected in the Company’s Consolidated
Statements of Operations.
f.
Impairment of Long-Lived Assets
The
Company evaluates the recoverability of its other long-lived assets, including
amortizing intangible assets, if circumstances indicate impairment may have
occurred pursuant to ASC 360. This analysis is performed by comparing the
respective carrying values of the assets to the current and expected future cash
flows, on an undiscounted basis, to be generated from such assets. If such
analysis indicates that the carrying value of these assets is not recoverable,
the carrying value of such assets is reduced to fair value through a charge to
the Company’s Consolidated Statements of Operations.
F-8
g.
Intangible Assets
At
December 31, 2009 intangible assets consist of a land use right, while at
December 31, 2008 intangible assets also included a patent which was disposed of
during 2009. With the adoption of ASC 350, intangible assets with a definite
life are amortized on a straight-line basis. The land use right is being
amortized over its estimated life of 50 years, and prior to its disposal the
patent right was being amortized over its estimated life 20 years. During 2009
the Company determined it would not use the patent right and accordingly
disposed of the patent right and occurred a loss on the disposition of $395,251
which was recognized during the quarter ended September 30, 2009.
Intangible
assets with a definite life are tested for impairment whenever events or
circumstances indicate that a carrying amount of an asset (asset group) may not
be recoverable. An impairment loss would be recognized when the carrying amount
of an asset exceeds the estimated undiscounted cash flows used in determining
the fair value of the asset. The amount of the impairment loss to be recorded is
calculated by the excess of the asset’s carrying value over its fair value. Fair
value is generally determined using a discounted cash flow analysis. Costs
related to internally develop intangible assets are expensed as
incurred.
h.
Revenue Recognition
Revenue
includes sales of products and services. Products revenue represents the
invoiced value of goods sold recognized upon the delivery of goods to customers,
net of allowance for estimated returns, when both title and risk of loss
transfer to the customer, provided that no significant obligations remain.
Deferred revenue represents the undelivered portion of invoiced value of goods
sold to customers. Service income is recognized when services are provided.
Revenue from service contracts, for which the Company is obligated to perform,
is recorded as deferred revenue and subsequently recognized over the term of the
contract or when the service is completed. Sales transactions not meeting all
the conditions of the full accrual method are accounted for using the deposit
method of accounting. Under the deposit method, all costs are capitalized as
incurred, and payments received from the buyer are recorded as customer
deposits. Revenue does not include value added taxes (“VAT”) for the sales
revenue from PRC subsidiaries. Before paid to the government, the amounts of VAT
are recorded as a short term liabilities. There are no sales incurred for the
period from May 12, 1999 (date of inception) to April 30, 2006.
i.
Rental income recognition
Rental
income from operating leases related to our unused factory facilities with
21,132 square meters of floor space is recognized on a straight-line basis over
the lease period. The Company recognized $439,168 (equivalent to RMB3 million)
and $431,805(equivalent to RMB3 million) rental income for the years ended
December 31, 2009 and 2008, respectively.
j.
Advertising and Marketing Costs
Advertising
and marketing costs, except for costs associated with direct-response
advertising and marketing, are charged to operations when incurred. The costs of
direct-response advertising are capitalized and amortized over the period during
which future benefits are expected to be received. Advertising and marketing
expense were $88,596 and $88,755 for the years ended December 31, 2009 and 2008,
respectively.
k.
Employee Welfare Benefit
The
Company has established an employee welfare plan in accordance with Chinese law
and regulations. The Company makes annual pre-tax contributions of 14% of all
employees’ salaries. Starting from the date on which the China subsidiary became
foreign fully owned company in August 2006, the Company’s China subsidiary
expenses were recorded all employee welfare benefit as incurred. The total
expense for the above amounted to $8,971 and $11,648 for the years ended
December 31, 2009 and 2008, respectively.
F-9
l.
Research and development costs
Research
and development costs are charged to operations when incurred and are included
in operating expenses. The amounts charged in 2009 and 2008 were
$11,084 and $18,303 respectively.
m.
Income Taxes
The
Company will file federal consolidated income tax returns with its US subsidiary
and state franchise tax returns individually for the State of Nevada. The
Company’s PRC subsidiary files income tax returns under the Income Tax law of
the People’s Republic of China concerning Foreign Investment Enterprises and
Foreign Enterprises and local income tax laws.
The
Company follows the method of accounting for income taxes prescribed by ASC
740 –”Accounting for Income Taxes”, which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are based on the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
n.
Comprehensive Income
ASC 220,
“Reporting Comprehensive Income”, established standards for the reporting and
display of comprehensive income, its components and accumulated balances in a
full set of general purpose financial statements. ASC 220 defines comprehensive
income to include all changes in equity except those resulting from investments
by owners and distributions to owners. Among other disclosures, ASC 220 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is presented with the same prominence as other financiacl
statements. The Company’s only current component of comprehensive income is the
foreign currency translation adjustment.
o.
Foreign Currency Translation
The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company subsidiary are local currencies, primarily the Chinese currency
Yuan (“P.R.C.” Renminbi). The financial statements are translated into U.S.
dollars using period-end rates of exchange for assets and liabilities and
average rates of exchange for the period for revenues and expenses. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in other comprehensive
income or loss.
p.
Basic and diluted net income per share
The
Company accounts for net income per common share in accordance with ASC 260,
“Earnings per Share” (“EPS”). ASC 260 requires the disclosure of the
potential dilution effect of exercising or converting securities or other
contracts involving the issuance of common stock. Basic net income per share is
determined based on the weighted average number of common shares outstanding for
the period. Diluted net income per share is determined based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised into common stock.
F-10
q.
Concentration of Credit Risk
The
Company’s financial instruments consist primarily of cash and equivalents, which
are invested in money market accounts and accounts receivable. The Company
considers the book value of these instruments to be indicative of their
respective fair value. The Company places its temporary cash investments with
high credit quality institutions to limit its risk exposure. Most of the
Company’s sales are credit sales which are primarily to customers whose ability
to pay is dependent upon the industry economics prevailing in their respective
areas; however, concentrations of credit risk with respect to trade accounts
receivable is limited due to generally short payment terms. The Company also
performs ongoing credit evaluations of its customers to help further reduce
credit risk.
r.
Fair Value of Financial Instruments
The
carrying amounts reported in the balance sheet for cash and equivalents,
accounts receivable, inventories, other receivable, prepaid expenses, other
current assets, accounts payable and accrued expenses, customers deposits,
payroll payable, due to stockholders or officers, taxes payable, and other
current liabilities approximate fair value based on the short-term maturity of
these instruments.
s.
Segment Reporting
ASC 280,
“Disclosure about Segments of
an Enterprise and Related Information”, requires disclosure of reportable
segments used by management for making operating decisions and assessing
performance. Reportable segments are categorized by products and services,
geography, legal structure, management structure, or any other manner in which
management disaggregates a company. ASC 280 has no effect on the Company’s
financial statements as substantially all of the Company’s operations and
managements are conducted as a single operating segment.
t.
Recent Accounting Pronouncements
In
November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing
(Topic 860) – Accounting
for Transfers of Financial Assets,” which requires more information about
transfers of financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transfer of financial
assets. It eliminates the concept of a “qualifying special-purpose entity,”
changes the requirements for derecognizing financial assets, and requires
additional disclosures. The provisions are effective January 1, 2010, for a
calendar year-end entity, with early application not being
permitted. Adoption of these provisions is not expected to have a material
impact on the Company’s consolidated financial statements.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13,
“Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Task Force)” which amends ASC 605-25, “Revenue Recognition:
Multiple-Element Arrangements.” ASU No. 2009-13 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how to allocate consideration to each unit of
accounting in the arrangement. This ASU replaces all references to fair value as
the measurement criteria with the term selling price and establishes a hierarchy
for determining the selling price of a deliverable. ASU No. 2009-13 also
eliminates the use of the residual value method for determining the allocation
of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded
disclosures. This ASU will become effective for us for revenue arrangements
entered into or materially modified on or after April 1, 2011. Earlier
application is permitted with required transition disclosures based on the
period of adoption. The Company is currently evaluating the application date and
the impact of this standard on its consolidated financial
statements.
F-11
In
September 2009, the FASB issued certain amendments as codified in ASC 605-25,
“Revenue Recognition;
Multiple-Element Arrangements.” These amendments provide
clarification on whether multiple deliverables exist,
how the arrangement should be separated, and the consideration
allocated. An entity is required to allocate revenue in an arrangement
using estimated selling prices of deliverables in the absence of vendor-specific
objective evidence or third-party evidence of selling price. These amendments
also eliminate the use of the residual method and require an entity to allocate
revenue using the relative selling price method. The amendments
significantly expand the disclosure requirements for multiple-deliverable
revenue arrangements. These provisions are to be applied on a prospective
basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with earlier application
permitted. The Company is currently evaluating the impact of these
amendments to its consolidated financial statements.
In August
2009, the FASB issued an update of ASC Topic 820, “Measuring Liabilities at Fair
Value”. The new guidance provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using prescribed
techniques. The Company adopted the new guidance in the third quarter of 2009
and it did not materially affect the Company’s financial position and results of
operations.
In
June 2009, the FASB issued ASC 105, the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162. The FASB Accounting Standards
Codification TM (“Codification”) will become the source of authoritative U.S.
generally accepted accounting principles (“GAAP”) recognized by FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date of ASC 105, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. ASC 105 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. Adoption of ASC 105 is not expected to have a material impact on the
Company’s results of operations or financial position.
In
June 2009, the FASB issued ASC 810, “Amendments to FASB Interpretation
No. 46(R)”, which improves financial reporting by enterprises involved with
variable interest entities. ASC 810 addresses (1) the effects on certain
provisions of FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities , as a result of the elimination of
the qualifying special-purpose entity concept in SFAS 166 and (2) concerns
about the application of certain key provisions of FIN 46(R), including those in
which the accounting and disclosures under the Interpretation do not always
provide timely and useful information about an enterprise’s involvement in a
variable interest entity. ASC 810 shall be effective as of the beginning of each
reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within the first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. Adoption of ASC 810 is not expected to have a
material impact on the Company’s results of operations or financial
position.
In
May 2009, the FASB issued ASC 855, “Subsequent Events”, which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. An entity should apply the requirements of ASC 855 to
interim or annual financial periods ending after June 15, 2009. Adoption of
ASC 855 did not have a material impact on the Company’s results of operations or
financial position.
4.
Cash – restricted
Commencing
from 2008, in accordance with the relevant Harbin local ax regulations, the
Company is subjected to the labor union fees at 2% of total payroll. The general
union of city government will return the inherent 40% back to the company, and
requires that the returned amount should be deposited into a special bank
account that is restricted to be used only for employees’ welfare purpose by the
labor union department of the Company. As of December 31, 2009 and 2008, the
amounts of cash - restricted were $3,443 and $1,904, respectively.
F-12
5.
Accounts Receivable
The
Company generally provides its major customers with short term credit pursuant
to which the customers are required to make payment between three months and six
months after delivery, depending on the customer’s payment
history. The Company’s accounts receivable balance increased during
2009 as a result of the increase in sales during 2009 to both existing and new
customers. As of December 31, 2009 the accounts receivable balance
was $6,557,296 (equivalent to RMB 44,776,796), none of which was outstanding
more than six months.
The
Company maintains a reserve for uncollectible accounts of 0.5% of accounts
receivable. In order to increase the reserve to the necessary 0.5%
levels at December 31, 2009 and December 31, 2008, the Company recognized a
provision for bad debts equal to $5,954 and $13,282,
respectively. During the fourth quarter of 2007, the Company
increased the amount of its reserve from 0.5% to 5.0% of accounts receivable due
to a high level of overdue accounts receivable from its major customer, the
distributor Weihai Qiancheng. However, after working with this
distributor during 2008, CHFY was able to collect most of the applicable
receivable and determined that it was appropriate to reduce allowance rate from
5.0% back to 0.5% commencing in 2008. Accordingly, the provision for bad debts
for 2008 included a credit of $261,887 to reverse the amount of the 2007
provision that was determined not to be necessary, with the result that the net
provision in 2008 was a credit amount equal to $248,605.
The
accounts receivable amounts included in the consolidated balance sheets for the
years ended December 31, 2009 and 2008 were as follows:
As
of December 31,
|
||||||||
Distributors
|
2009
|
2008
|
||||||
Weihai
Tianyuan Environmental Protection Products Co., Ltd.
|
$ | 2,457,451 | $ | 1,980,213 | ||||
JiNan
Aijiaren Environmental Protection Products Co., Ltd.
|
2,238,165 | 1,118,358 | ||||||
Dalian
Green land Trading Co., Ltd.
|
890,579 | - | ||||||
JiNan
Shanglu Economy and Trade Co., Ltd
|
303,887 | - | ||||||
NanChang
Jiangfeng Environment Science and Technology Co.,
Ltd
|
285,908 | 1,286,311 | ||||||
QingDao
Home health Commercial and Trade co.,Ltd
|
240,222 | 911,687 | ||||||
Subtotal
|
6,416,213 | 5,296,569 | ||||||
Other
customers
|
141,083 | 84,612 | ||||||
Total
|
6,557,296 | 5,381,181 | ||||||
Less:
Allowance for doubtful accounts
|
32,786 | 26,847 | ||||||
Account
receivables, net
|
$ | 6,524,510 | $ | 5,354,334 |
The total
amounts sold to the distributors were $10,460,409 and $7,840,220 for the year
ended December 31, 2009 and 2008, respectively. The ratios sold to the
distributors were represented 78% and 71% of total sales in the year ended
December 31, 2009 and 2008.
Accounts
receivable aging as of December 31, 2009 and 2008 consisted of the
following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Less
than 30 days
|
$ | 1,104,671 | $ | 451,638 | ||||
31days-90
days
|
2,073,652 | 932,643 | ||||||
91days-180
days
|
3,378,973 | 2,785,221 | ||||||
181days-365
days
|
- | 1,211,595 | ||||||
More
than 365 days
|
- | 84 | ||||||
Total
|
$ | 6,557,296 | $ | 5,381,181 |
F-13
The
Company’s accounts receivable with ages of less than 91 days represented 48% and
26% of the total receivables as of December 31, 2009 and 2008,
respectively. None of the Company’s accounts receivable was
outstanding more than six months as of December 31, 2009.
6.
Inventories
Inventories
on December 31, 2009 and 2008 consisted of the following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 357,156 | $ | 203,488 | ||||
Work
in process
|
12,297 | 7,402 | ||||||
Finished
goods
|
66,072 | 112,232 | ||||||
Packaging
and other
|
21,445 | 28,291 | ||||||
Total
|
$ | 456,970 | $ | 351,413 |
7.
Other Current Assets
As of
December 31, 2009 and 2008, other current assets consist of
following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Rent
receivable
|
$ | 549,288 | $ | 329,791 | ||||
Employee
travel and operation fee advance
|
63,791 | 127,542 | ||||||
Security
deposit
|
15,070 | 15,080 | ||||||
Total
|
$ | 628,149 | $ | 472,413 |
8.
Property and Equipment, Net
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is
determined using the straight-line method over the estimated useful lives listed
below:
Estimated
Life
|
||||
Building
|
20
years
|
|||
Equipment
and machinery
|
5
to 10 years
|
|||
Vehicles
|
5
years
|
|||
Office
equipments
|
5
years
|
|||
Leasehold
improvements
|
lower
of term of lease or 5
years
|
F-14
Repairs
and maintenance expenditures which do not extend the useful lives of the related
assets are expended as incurred, whereas significant renewals and betterments
are capitalized. The Company incurred and capitalized significant repairs and
maintenance expenditures of $0 and $173,698 in the years ended December 31, 2009
and 2008, respectively.
As of
December 31, 2009 and 2008, property and equipment at cost, less accumulated
depreciation, consisted of the following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Building
|
$ | 5,484,256 | $ | 5,487,890 | ||||
Equipment
and machinery
|
8,477,728 | 8,710,356 | ||||||
Vehicles
|
44,601 | 59,414 | ||||||
Office
equipments
|
121,086 | 112,797 | ||||||
Leasehold
improvements
|
173,583 | 173,698 | ||||||
Subtotal
|
14,301,254 | 14,544,155 | ||||||
Less:
Accumulated depreciation
|
3,906,670 | 2,851,700 | ||||||
Total
|
$ | 10,394,584 | $ | 11,692,455 |
For the
years ended December 31, 2009 and 2008, depreciation expenses amounted to
$1,157,764 and $1,126,398, respectively.
9.
Intangible Assets, Net
Intangible
assets are recorded at their cash equivalent cost in accordance with the cost
principle. Cost is defined as the sum of all expenditures made to acquire the
rights and privileges. Intangible assets have a limited life because the rights
or privileges that give them value terminate or simply disappear. Therefore, the
acquisition cost of an intangible asset must be written off over its estimated
economic life.
The
Company acquired the land use right and patent rights at September 9, 2005. All
intangible assets were contributed by unrelated parties in exchange for shares
of the Company’s common stock. The Company did not use the land use right and
patent right until January 1, 2006 and May 19, 2006, respectively. Accordingly,
the Company began to amortize these rights from date it began use of them. The
patent right is no longer used since its disposal in September 2009. The Company
disposed of this patent right and incurred $395,251 loss on such disposal during
the quarter ended September 30, 2009.
The
intangible assets at cost less amortization consisted of the following as of
December 31, 2009 and 2008:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Land
use right
|
$ | 5,500,608 | $ | 5,504,252 | ||||
Patent
|
- | 474,899 | ||||||
Subtotal
|
5,500,608 | 5,979,151 | ||||||
Less:
Accumulated amortization
|
440,049 | 393,575 | ||||||
Total
|
$ | 5,060,559 | $ | 5,585,576 |
For the
years ended December 31, 2009 and 2008, amortization expenses for intangible
assets amounted to $125,757 and $131,421, respectively.
F-15
The
amortization expense for the next five years is as follows:
For
the Year Ending December 31,
|
Amount | |||
2010
|
$ | 109,947 | ||
2011
|
$ | 109,947 | ||
2012
|
$ | 109,947 | ||
2013
|
$ | 109,947 | ||
2014
|
$ | 109,947 |
10.
Know-how Right and Contingent Liabilities
On
September 17, 2009, in order to acquire technology for use in the manufacture of
the Company’s starch-based material, the Company entered into an agreement to
purchase two technologies from four individuals including two related parties,
Mr. Zhonghao Su, Chief Executive Officer of the Company, and Mr. Yingjie Qiao,
technical director of the Company. Pursuant to the sales agreement, Mr.
Zhonghao Su agreed to contribute his interest in the technologies without any
consideration. The total amount payable to the other three individuals for
these two technologies is RMB 15 million (equivalent to $2,197,152 as of
December 31, 2009), of which the Company has paid RMB 5 million (equivalent to
$732,384 as of December 31 2009). The remaining amount of RMB10 million
(equivalent to $1,464,768 as of December 31, 2009) shall be paid by the Company
when it receives the patent rights certificates for these two technologies and
the ownership of patent rights has been completely transferred to the
Company.
On
December 17, 2009, the Company entered a supplemental agreement with three
owners of these technologies, Mr. Yingjie Qiao, Mr, Zhonghao Su, and Mrs.
Dongyan Tang, to amend the agreement which signed on September 17, 2009,
Pursuant to the supplemental agreement, the Company only acquired one technology
for the total purchase price of RMB 15 million (equivalent to $2,197,152 as of
December 31, 2009) payable to Mr. Yingjie Qiao and Mrs. Dongyen Tang, of which
the Company has paid RMB5 million (equivalent to $732,384 as of December 31,
2009). The remaining amount of RMB10 million (equivalent to $1,464,768 as of
December 31, 2009) shall be paid by the Company when it receives the patent
right certificate for the technology and the ownership of patent right has been
completely transferred to the Company. The total of the amount already
paid and the remaining contingent amount are carried on the balance sheet as an
asset with the caption “Know-how right, net,” and this remaining amount to be
paid is carried as a contingent liability on the balance sheet since it became
probable liability of the Company in December 2009 per patent application
agent’s performance. Since the Company began using this technology for
manufacture in September 2009, the Company began to amortization this technology
from that date.
The
know-how right at cost less amortization consisted of the following as of
December 31, 2009 and 2008:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Know-how
right
|
$ | 2,197,152 | $ | - | ||||
Less:
Accumulated amortization
|
36,619 | - | ||||||
Total
|
$ | 2,160,533 | $ | - | ||||
For the
years ended December 31, 2009 and 2008, amortization expenses for know-how right
amounted to $36,597 and $0, respectively.
Pursuant
to the supplemental agreement, the Company also acquired the right to use
technology that the Company currently applies in its dry-powder blending process
to produce its starch-based material. The Company’s agreement with the
current owners of the technology provides it with a royalty-free right to use
the technology as long as it is owned by the current owners, a right of
first refusal on any proposed transfers of the technology by the current owners
and an option to purchase the technology for a purchase price
of approximately $1,470,588 (equivalent to RMB15 million). This technology
is the subject of a patent application filed with and presently under review by
the PRC State Intellectual Property Office.
F-16
11.
Investment-At Cost
The
Company, through CHFY, indirectly owns a 16% equity interest in Longjun since
May 22, 2007. Prior to May 22, 2007, the Company was the indirectly
major owner of Longjun, but transferred control to other shareholders of Longjun
in connection with their additional investment in the entity. The Company began
to account for this investment at cost on May 22, 2007. As of December 31, 2009
and 2008, the investment amounts at cost were $310,419 and $310,807,
respectively. Longjun did not declare any dividends for the years ended December
31, 2009 and 2008, respectively.
12.
Due to Stockholders/Officers, Net
Commencing
from year 2005, certain of our principal stockholders have advanced necessary
working capital to the Company to support its research, development and
operations. These amounts are unsecured, non-interest bearing and have no set
repayment date. During the year 2009, the Company repaid a significant amount of
these loans to one of its stockholders. As a result, the net amounts due to the
stockholders/officers were $300,792 and $1,294,838 as of the years ended
December 31, 2009 and 2008, respectively.
13.
Income and Other Taxes
a.
Corporation Income Taxes (“CIT”)
The
Company will file federal consolidated income tax return with its US subsidiary
and state franchise tax individually with the State of Nevada. The Company’s PRC
subsidiary will file income tax returns under the Income Tax Law of the People’s
Republic of China concerning Foreign Investment Enterprises and Foreign
Enterprises and local income tax laws.
In
accordance with the relevant PRC tax laws and regulations, the Company’s PRC
subsidiary, CHFY, is subject to CIT at 33% and 30% tax rate before and after
September 1, 2006. Since CHFY was merged by AGM and became a foreign wholly-own
company on August 18, 2006, CHFY had been authorized to reduce its income tax
rate by 3% to 30% from the regular 33% tax rate starting from the following
month of acquisition date. Commencing from January 2008, PRC government had
reduced the regular CIT tax rate from 33% to 25%. However, the company who is
entitled to the privilege shall pay the tax based upon original CIT tax
rate.
In
accordance with the relevant tax laws and regulations of the PRC, CHFY is
entitled to full exemption from CIT for the first two years and a 50% reduction
in CIT for the next three years, commencing from the first profitable year after
offsetting all tax losses carried forward from the previous five years. As 2007
was the Company’s first profitable year, CHFY was entitled to a full exemption
from CIT for the years 2007 and 2008. Commencing from January 2009, CHFY had
begun to be charged CIT at a 15% rate.
The
deferred income tax assets results from bad debt allowance are deductible when
the bad debt is incurred.
The
components of the provisions for income taxes were as follows:
For
the Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Current
taxes:
|
||||||||
Current
income taxes in P.R. China
|
$ | 743,726 | $ | - | ||||
Deferred
income taxes benefits
|
4,916 | - | ||||||
Total
provision for income taxes
|
$ | 738,810 | $ | - |
F-17
b.
Value Added Tax (“VAT”)
The
Company’s PRC subsidiary, CHFY, is subjected to VAT on merchandises sales in the
PRC. For the years ended December 31, 2006, a small scale tax rate of 6% was
applicable. Commencing from March 1, 2007, general VAT tax rate of 17% was
applicable. Since the CHFY is located in HeLongJiang district and belongs to
Hi-Tech Manufacturing Company, China National Tax Authority had authorized CHFY
to offset the VAT tax paid for purchasing equipments and machineries with the
regular VAT tax collected from sales products of CHFY. This authorization has
begun in December 2007.
c.
Taxes Payable
As of
December 31, 2009 and 2008, taxes payable consists of the
following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Value-added
taxes
|
$ | 202,280 | $ | 73,922 | ||||
Income
taxes payable
|
209,240 | - | ||||||
Individual
income taxes withholdings
|
18,888 | (269 | ) | |||||
Total
|
$ | 430,408 | $ | 73,653 |
14.
Stockholders’ Equity
The
Company was authorized to issue 100,000,000 shares of Common Stock, $0.001 par
value per share, of which 18,711,388 and 18,711,388 shares are issued and
outstanding as of December 31, 2009 and 2008.
Holders
of the Common Stock are entitled to one vote for each share in the election of
directors and in all other matters to be voted on by the stockholders. There is
no cumulative voting in the election of directors. Holders of Common Stock are
entitled to receive such dividends as may be declared from time to time by the
Board of Directors with respect to the Common Stock out of funds legally
available therefor and, in the event of liquidation, dissolution or winding up
of the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. The holders of Common Stock have
no preemptive or conversions rights and are not subject to further calls or
assessments. There are no redemption or sinking fund provisions applicable to
the Common Stock. The Common Stock currently outstanding is validly issued,
fully paid and non-assessable. The Company is also authorized to issue
20,000,000 shares of Preferred Stock, $0.001 par value. The Articles of
Incorporation give the Board of Directors the authority to divide Preferred
Stock into series, and to designate the rights and preferences of each
series.
In the
2007 Business Combination which the Company completed on February 9, 2007, the
Company acquired all of the outstanding capital stock of AGM by merging a wholly
owned subsidiary of the Company into AGM. Through AGM, the Company
indirectly owns all of the outstanding capital stock of CHFY. AGM has
substantially no operations and substantially no assets other than the shares of
CHFY. As consideration for the acquisition of AGM and CHFY, the Company
issued to the former owners of AGM shares of its Series A Convertible Preferred
Stock that were convertible into approximately 98% of the Company’s outstanding
common shares, on an after-converted basis. On January 14, 2008 the
Company effected a 1-for-150 reverse split of its common stock. In
connection with the split, the Company issued additional shares to certain
shareholders so that, after the split, no shareholder owned fewer than 100
shares. The following month, on February 29, 2008, the holders of all
outstanding shares of Series A Convertible Preferred Stock converted their
preferred shares into a total of 18,150,000 shares of the Company’s common
stock, and all shares of Series A Convertible Preferred Stock were
cancelled.
F-18
On
January 15, 2010, the Company entered into a Securities Purchase Agreement with
certain accredited investors (the “Purchasers”) relating to the issuance and
sale of up to an aggregate of 5,300,000 shares of the Company’s
common stock, par value $0.001 per share (the “Shares”), in a private placement
transaction (the “Private Placement”). On January 25, 2010, the Company
closed the Private Placement. The Company sold an aggregate of 5,051,461
Shares in the Private Placement at a price of $0.90 per Share. Accordingly,
the number of shares of common stock, par value $.001 per share, outstanding and
issued as of January 25, 2010 and December 31, 2009 were 23,762,849 and
18,711,388, respectively.
15.
Reserve Funds
The
Company’s subsidiary in PRC is required to maintain certain statutory reserves
by appropriating from the profit after taxation in accordance with the relevant
laws and regulations in the PRC and articles of association of the subsidiary
before declaration or payment of dividends. The reserves form part of the equity
of the Company.
The
appropriation to the statutory surplus reserve and statutory common welfare fund
reserve represent 10 percent and 5 percent of the profits after taxation,
respectively. In accordance with the laws and regulations in the PRC, the
appropriation to statutory reserve cease when the balances of the reserve reach
50 percent of the registered capital of the Company. Commencing from year 2006,
the appropriation to statutory common welfare fund is not required. Thus, the
Company had ceased the reservation of statutory common welfare fund from January
2009.
The
reserve funds consisted of the following as of December 31, 2009 and
2008:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Statutory
reserve fund
|
$ | 908,392 | $ | 488,355 | ||||
Statutory
common welfare fund reserve
|
244,177 | 244,177 | ||||||
Total
|
$ | 1,152,569 | $ | 732,532 |
16.
China Contribution Plan
Under the
PRC Law, full-time employees of the Company’s subsidiaries in the PRC are
entitled to staff welfare benefits including medical insurance, maternity
insurance, housing provident funds benefit, welfare subsidies, unemployment
insurance, worker compensation, and retirement pension benefits through a China
government-mandated multi-employer defined contribution plan. The Company is
required to contribute these benefits based on certain percentages of the
employees’ salaries. The total contributions made for such employee benefits
were $35,699 and $35,554 for the years ended December 31, 2009 and 2008,
respectively.
17. Lease
Commitments
The
company leases certain sales representation offices, general and administrative
office, employee living space, and factory space under operating
leases.
The
following is a schedule of future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms as of
December 31, 2009:
For
the Year Ending December 31,
|
Amount
|
|||
2010
|
$ | 195,519 | ||
Total
minimum payments required
|
$ | 195,519 |
F-19
The total
rental expenses for the years ended December 31, 2009 and 2008 were $152,356 and
$207,886, respectively.
18. Rental
Income
The
Company leases out certain unused building with land use right, and equipment
and machinery under operating leases agreements, and the lease terms all had
been extended to December 31, 2010. The rental revenue and cost information for
the years ended December 31, 2009 and 2008 consisted of the
following:
For
the Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Rental
income
|
$ | 439,168 | $ | 431,805 | ||||
Less:
Depreciation and amortization
|
415,111 | 412,617 | ||||||
Total
Rental Income
|
$ | 24,057 | $ | 19,188 |
19.
Basic and Diluted Income per Common Share
The
Company accounts for net income per common share in accordance with ASC 260,
“Earnings per Share”
(“EPS”). ASC 260 requires the disclosure of the potential dilution effect
of exercising or converting securities or other contracts involving the issuance
of common stock. Basic net income (loss) per share is determined based on the
weighted average number of common shares outstanding. Diluted net income (loss)
per share is determined based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. The Company did not have
any outstanding convertible shares or share options as of December 31,
2009.
20.
Foreign Subsidiary Operations
Substantially
all of the Company’s operations are carried out through its subsidiary located
in the PRC. Accordingly, the Company’s business, financial condition and results
of operations may be influenced by the political, economic, and legal
environments in the PRC. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency fluctuation and remittances and methods of taxation, among
other things.
21.
Concentration of Business
a.
Financial Risks
The
Company provides credit in the normal course of business. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
b.
Major Customers
The table
following summarizes sales to major customers (each 10% or more of
sale):
Sold
to
|
Number
of
|
Percentage
|
||||||||
Year
Ended December 31,
|
Major
Customers
|
Customers
|
of
Total Revenues
|
|||||||
2009
|
$ | 8,131,317 | 3 | 60.65% | ||||||
2008
|
$ | 7,840,220 | 4 | 71.22% |
F-20
c.
Major Suppliers
The table
following summarizes purchases from major suppliers (each 10% or more of
purchases):
Purchased
from
|
Number
of
|
Percentage
|
||||||||
Year
Ended December 31,
|
Major
Suppliers
|
Suppliers
|
of
Total Purchased
|
|||||||
2009
|
$ | 5,527,902 | 2 | 93.46% | ||||||
2008
|
$ | 4,561,797 | 2 | 99.46% |
22. Subsequent
Event
On
January 15, 2010, the Company entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with certain accredited investors (the
“Purchasers”) relating to the issuance and sale of up to an aggregate of
5,300,000 shares of the Company’s common stock, par value $0.001 per share (the
“Shares”), in a private placement transaction (the “Private Placement”). On
January 25, 2010, the Company closed the Private Placement. The Company
sold an aggregate of 5,051,461 Shares in the Private Placement at a price of
$0.90 per Share. The aggregate gross proceeds received by the Company
in the Private Placement amounted to $4,546,320.49.
Pursuant
to the Securities Purchase Agreement, (i) $100,000 of the Aggregate Purchase
Price is being held in an escrow account to be issued to investor relations
firms designated by a representative of certain of the Purchasers and approved
by the Company (the "IR Cash") and (ii) the Company has deposited with
the escrow agent warrants to purchase 700,000 shares of common stock of the
Company at a price of $0.90 per share with cashless exercise rights and which
will be exercisable for a period of one year from the date that such warrants
are issued (the "IR Warrants") to investor relations firms designated by a
representative of certain of the Purchasers and approved by the Company.
The investor relations firms proposed to receive the IR Cash and the IR
Warrants must be designated (subject to Company approval) on or before September
30, 2010.
F-21