Attached files
Exhibit
99.1
Audit • Tax • Consulting • Financial Advisory
Registered with Public Company Accounting Oversight Board
(PCAOB)
|
CITY
ZONE HOLDINGS LIIMITED AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
December
31, 2009
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
Report of Independent Registered Public Accounting Firm | F-1 |
Financial Statements: | |
Consolidated Balance Sheets | F-2 |
Consolidated Statements of Operations | F-3 |
Consolidated Statements of Stockholders’ Equity | F-4 |
Consolidated Statements of Cash Flows | F-5 |
Notes to Consolidated Financial Statements | F-6 |
Audit • Tax • Consulting • Financial Advisory
Registered with Public Company Accounting Oversight Board
(PCAOB)
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of: City Zone Holdings Limited
We have
audited the accompanying consolidated balance sheets of City Zone Holdings
Limited (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 City Zone Holdings Limited
as of December 31, 2009 and 2008 and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
KCCW
Accountancy Corp.
Diamond
Bar, California
March 18,
2010
F-1
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash
equivalents
|
$ | 2,562,501 | $ | 332,409 | ||||
Accounts
receivable, net
|
4,200,749 | 2,285,502 | ||||||
Inventory
|
8,233,760 | 3,780,998 | ||||||
Other
receivable
|
28,998 | - | ||||||
Prepaid
expenses
|
1,104,072 | 326,222 | ||||||
Due from related
parties
|
- | 5,716,380 | ||||||
Total
Current Assets
|
16,130,080 | 12,441,511 | ||||||
Property,
plant, and equipment, net
|
2,939,475 | 3,340,212 | ||||||
Construction-in-progress
|
3,254,696 | - | ||||||
Other
assets
|
1,506,902 | 1,507,653 | ||||||
Intangible
assets, net
|
- | - | ||||||
Total Assets | $ | 23,831,153 | $ | 17,289,376 | ||||
Liabilities and
Equity
|
||||||||
Current
Liabilities
|
||||||||
Short-term
loan
|
$ | 1,801,960 | $ | 674,240 | ||||
Accrued
expenses
|
116,968 | 56,843 | ||||||
Due to related
parties
|
145,650 | 3,915,795 | ||||||
Other current
liabilities
|
68,339 | - | ||||||
Total
Current Liabilities
|
2,132,917 | 4,646,878 | ||||||
Total
Liabilities
|
2,132,917 | 4,646,878 | ||||||
Stockholders'
Equity
|
||||||||
Common
stock - no par value; 50,000 shares authorized, 10,000 shares issued and
outstanding
|
9,690,628 | - | ||||||
Paid-in
capital
|
- | 7,097,486 | ||||||
Additional
paid-in capital
|
- | 22,441 | ||||||
Other
comprehensive income
|
202,140 | 898,235 | ||||||
Retained
earnings
|
11,805,468 | 4,624,336 | ||||||
Total
Stockholders' Equity
|
21,698,236 | 12,642,498 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 23,831,153 | $ | 17,289,376 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-2
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
The Years Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Net
revenue
|
$ | 40,732,447 | $ | 17,269,937 | ||||
Cost
of goods sold
|
(30,136,581 | ) | (12,673,361 | ) | ||||
Gross
Profit
|
10,595,866 | 4,596,576 | ||||||
Selling
expenses
|
(1,947,613 | ) | (770,157 | ) | ||||
General
and administrative expenses
|
(719,910 | ) | (272,091 | ) | ||||
Other
expenses
|
(556,312 | ) | - | |||||
Research
and development expenses
|
(98,087 | ) | (43,364 | ) | ||||
Total Operating Expense | (3,321,922 | ) | (1,085,612 | ) | ||||
Operating
Income
|
7,273,944 | 3,510,964 | ||||||
Interest
income
|
10,081 | 1,440 | ||||||
Interest
expense
|
(102,893 | ) | (47,289 | ) | ||||
Total Other Expense | (92,812 | ) | (45,849 | ) | ||||
Income
before income taxes
|
7,181,132 | 3,465,115 | ||||||
Provision
for income taxes
|
- | - | ||||||
Net
Income
|
$ | 7,181,132 | $ | 3,465,115 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
/
Paid-in
Capital
|
Additional
Paid-in
|
Other
Comprehensive
|
Retained | |||||||||||||||||||||
Shares | Amount | Capital | Income | Earnings | Total | |||||||||||||||||||
Balance
at December 31, 2007
|
- | $ | 4,769,979 | $ | - | 206,957 | $ | 1,159,221 | $ | 6,136,157 | ||||||||||||||
Capital
contributions
|
- | 2,327,507 | 22,441 | - | - | 2,349,948 | ||||||||||||||||||
Net
changes in foreign currency translation adjustment
|
- | - | - | 691,278 | - | 691,278 | ||||||||||||||||||
Net
earnings for the year ended December 31, 2008
|
- | - | - | - | 3,465,115 | 3,465,115 | ||||||||||||||||||
Balance
at December 31, 2008
|
- | 7,097,486 | 22,441 | 898,235 | 4,624,336 | 12,642,498 | ||||||||||||||||||
Capital
contributions
|
- | 2,647,482 | - | - | - | 2,647,482 | ||||||||||||||||||
Issuance
of shares for cash
|
10,000 | 23,579,850 | - | - | - | 23,579,850 | ||||||||||||||||||
Recapitalization
|
- | (23,634,190 | ) | (22,441 | ) | (707,171 | ) | - | (24,363,802 | ) | ||||||||||||||
Net
changes in foreign currency translation adjustment
|
- | - | - | 11,076 | - | 11,076 | ||||||||||||||||||
Net
earnings for the year ended December 31, 2009
|
- | - | - | - | 7,181,132 | 7,181,132 | ||||||||||||||||||
Balance
at December 31, 2009
|
10,000 | $ | 9,690,628 | $ | - | 202,140 | $ | 11,805,468 | $ | 21,698,236 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
The Years Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$ | 7,181,132 | $ | 3,465,115 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
& amortization
|
329,265 | 237,246 | ||||||
Impairment
of long-lived assets
|
556,312 | - | ||||||
Decrease
(increase) in current assets:
|
||||||||
Accounts
receivable
|
(1,915,038 | ) | (1,624,060 | ) | ||||
Inventories
|
(4,451,514 | ) | (2,202,870 | ) | ||||
Prepaid
expense and other current assets
|
(206,213 | ) | (139,932 | ) | ||||
Increase
(decrease) in liabilities:
|
||||||||
Accrued
expense and other liabilities
|
128,402 | 23,154 | ||||||
Net
cash provided by (used in) operating activities
|
1,622,346 | (241,347 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Acquisitions
of equities for recapitalization
|
(24,346,681 | ) | - | |||||
Repayment
from (loan to) related parties
|
5,709,517 | (2,015,055 | ) | |||||
Construction
of warehouse
|
(3,252,409 | ) | - | |||||
Purchase
of machinery and equipment
|
(1,087,016 | ) | (827,419 | ) | ||||
Net
cash used in investing activities
|
(22,976,589 | ) | (2,842,474 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Net
proceeds from short-term loans from bank
|
395,274 | 359,831 | ||||||
Net
proceeds from short-term loans from related parties
|
84,061 | 1,731,301 | ||||||
Net
proceeds from short-term loans from others
|
731,989 | - | ||||||
Net
repayments of short-term loans from related parties
|
(3,849,607 | ) | (1,110,254 | ) | ||||
Proceeds
from capital contributions
|
26,221,217 | 2,305,293 | ||||||
Net
cash provided by financing activities
|
23,582,934 | 3,286,171 | ||||||
|
||||||||
EFFECT
OF EXCHANGE RATE CHANGE ON CASH AND
CASH EQUIVALENTS
|
1,401 | 10,020 | ||||||
NET
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
|
2,230,092 | 212,370 | ||||||
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
332,409 | 120,039 | ||||||
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
$ | 2,562,501 | $ | 332,409 | ||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
Income
tax paid
|
$ | - | $ | - | ||||
Interest
paid
|
$ | 102,893 | $ | 47,289 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. ORGANIZATION AND
DESCRIPTION OF BUSINESS
City Zone
Holdings Limited (“City Zone”) was incorporated in the British Virgin Islands on
July 27, 2009 under the BVI Business Companies Act, 2004. City Zone is a holding
company and has not carried on substantive operations of its own.
In
November 2009, City Zone conducted a restructuring exercise whereby City Zone
has become the ultimate holding company of Most Smart, Shenzhen Redsun, Shenzhen
JiRuHai, Beijing Detian Yu, Jinzhong Deyu, Jinzhong Yongcheng, and Jinzhong
Yuliang (collectively, the “Company”) through direct and indirect ownership
interests. The former shareholders and key management of Jinzhong Deyu, Jinzhong
Yongcheng, and Jinzhong Yuliang became the ultimate controlling parties and key
management of City Zone. This restructuring exercise has been accounted for as a
recapitalization of Jinzhong Deyu, Jinzhong Yongcheng, and Jinzhong Yuliang with
no adjustment to the historical basis of the assets and liabilities of these
companies, while the historical financial positions and results of operations
are consolidated as if the restructuring occurred as of the beginning of the
earliest period presented in the accompanying consolidated financial statements.
For the purpose of consistent and comparable presentation, the consolidated
financial statements have been prepared as if City Zone had been in existence
since the beginning of the earliest and throughout the whole periods covered by
these consolidated financial statements.
The
Company mainly operates in the Shanxi Province, China in the business of bulk
purchasing, preliminary processing, product preservation, distribution, and
wholesale of organic grains and corns. Corns are mainly wholesale distributed to
agricultural product trading companies. Grains are distributed through wholesale
and through the network of supermarkets with the Company’s own brand names,
including “De Yu” and “Shi-Tie” for certified organic grain products. The
Company has established a complete chain of cultivation, seed breeding, research
and development, production, marketing, and a nationwide distribution network in
China. The Company currently controls approximately 40,000 acres (or 250,000 mu)
of organic farmland, with 120,000-ton storage capacity, and 3 exclusive railroad
lines.
Details
of the subsidiaries of the Company are as follows:
Name of Subsidiary | Domicile and Date of Incorporation | Registered Capital | Percentage of Ownership | Principal Activities | ||||
Most Smart International Limited (“Most Smart”) | Hong Kong, March 11, 2009 | $1 | 100% | Holding company of Shenzhen Redsun | ||||
Redsun Technology (Shenzhen) Co., Ltd. (“Shenzhen Redsun”) | The PRC, August 20, 2009 | $30,000 | 100% | Holding company of Shenzhen JiRuHai | ||||
Shenzhen JiRuHai Technology Co., Ltd. (“Shenzhen JiRuHai”) | The PRC, August 20, 2009 | $14,638 | 100% | Holding company of Beijing Detian Yu | ||||
Detian Yu Biotechnology (Beijing) Co., Ltd. (“Beijing Detian Yu”) | The PRC, November 30, 2006 |
$7,637,723
|
100% | Wholesale distribution of packaged food products. Holding company of the following three entities | ||||
F-6
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Name of Subsidiary | Domicile and Date of Incorporation | Registered Capital | Percentage of Ownership | Principal Activities | ||||
Jinzhong Deyu Agriculture Trading Co., Ltd. (“Jinzhong Deyu”) | The PRC, April 22, 2004 | $1,492,622 | 100% | Organic grains preliminary processing and wholesale distribution. | ||||
Jinzhong Yongcheng Agriculture Trading Co., Ltd. (“Jinzhong Yongcheng”) | The PRC, May 30, 2006 | $288,334 | 100% | Organic corns preliminary processing and wholesale distribution. | ||||
Jinzhong Yuliang Agriculture Trading Co., Ltd. ("Jinzhong Yuliang") | The PRC, March 17, 2008 | $281,650 | 100% | Organic corns preliminary processing and wholesale distribution. |
NOTE
2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
The
accompanying consolidated financial statements include the financial statements
of City Zone Holdings Limited and its wholly-owned subsidiaries. All significant
inter-company account balances and transactions have been eliminated in
consolidation.
These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
Company’s function currency is the Chinese Yuan, or Renminbi (“RMB”); however,
the accompanying consolidated financial statements have been translated and
presented in United States Dollars (“USD”).
Use
of estimates
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management makes its estimates based on historical experience
and various other assumptions and information that are available and believed to
be reasonable at the time the estimates are made. Therefore, actual results
could differ from those estimates under different assumptions and
conditions.
Cash
and cash equivalents
Cash and
cash equivalents consist of cash on hand, cash in bank and all highly liquid
investments with original maturities of three months or less.
Accounts
receivable
Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less allowance for doubtful accounts, as needed. The Company assesses the
collectability of accounts receivable based primarily upon the creditworthiness
of the customer as determined by credit checks and analysis, as well as the
customer’s
F-7
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
payment
history. Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends, and changes in customer payment patterns to evaluate
the adequacy of these reserves.
Inventories
The
Company's inventories are stated at lower of cost or market. Cost is determined
on moving-average basis. Costs of inventories include purchase and related costs
incurred in delivering the products to their present location and condition.
Market value is determined by reference to selling prices after the balance
sheet date or to management’s estimates based on prevailing market conditions.
Management periodically evaluates the composition of its inventories at least
quarterly to identify slow-moving and obsolete inventories to determine if
valuation allowance is required.
Property,
plant, and equipment
Property,
plant, and equipment are stated at cost less accumulated depreciation.
Expenditures for maintenance and repairs are charged to earnings as incurred;
additions, renewals and betterments are capitalized. When property, plant, and
equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is
included in operations.
Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets as follows:
Useful
Life
(in
years)
|
||||
Automobiles
|
5 | |||
Buildings
|
30 | |||
Office
equipment
|
5 | |||
Machinery
and equipment
|
10 |
Construction-in-Progress
Construction-in-progress
consists of amounts expended for warehouse construction.
Construction-in-progress is not depreciated until such time as the assets are
completed and put into service. Once warehouse construction is completed, the
cost accumulated in construction-in-progress is transferred to property, plant,
and equipment.
Long-lived
assets
The
Company applies the provisions of FASB ASC Topic 360 (ASC 360), "Property,
Plant, and Equipment" which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company periodically evaluates
the carrying value of long-lived assets to be held and used in accordance with
ASC 360, at least on an annual basis. ASC 360 requires the impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Loss on long-lived assets to be
disposed of is determined in a similar manner, except that fair market values
are reduced for the cost of disposal.
F-8
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Financial
assets and liabilities measured at fair value
FASB ASC
820, “Fair Value Measurements” (formerly SFAS No. 157) defines fair value for
certain financial and nonfinancial assets and liabilities that are recorded at
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. This guidance applies to other
accounting pronouncements that require or permit fair value measurements. On
February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2,
Effective Date of FASB Statement No. 157 (ASC 820). This Staff Position delays
the effective date of SFAS No. 157 (ASC 820) for nonfinancial assets and
liabilities to fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years, except for those items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). The adoption of SFAS No. 157 (ASC 820) had no effect on the
Company's financial position or results of operations.
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with the SEC Staff
Accounting Bulletin No. 104 (“SAB 104”). The Company recognizes product revenue
when the following fundamental criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) our price to the customer
is fixed or determinable and (iv) collection of the resulting accounts
receivable is reasonably assured. The Company recognizes revenue for product
sales upon transfer of title to the customer. Customer purchase orders and/or
contracts are generally used to determine the existence of an arrangement.
Shipping documents and the completion of any customer acceptance requirements,
when applicable, are used to verify product delivery or that services have been
rendered. The Company assesses whether a price is fixed or determinable based
upon the payment terms associated with the transaction and whether the sales
price is subject to refund or adjustment.
The
Company’s revenue is recognized net of value-added tax (VAT), reductions to
revenue for estimated product returns, and sales discounts based on volume
achieved in the same period that the related revenue is recorded. The estimates
are based on historical sales returns, analysis of credit memo data, and other
factors known at the time. For the years ended December 31, 2009 and 2008, sales
discounts were $847,849 and $455,633, respectively.
Advertising
costs
The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the years ended
December 31, 2009 and 2008 were not significant.
Research
and development
The
Company expenses its research and development costs as incurred. Research and
development costs for the years ended December 31, 2009 and 2008 were $98,087
and $43,364, respectively.
Stock-based
compensation
The
Company records stock-based compensation in accordance with FASB ASC Topic 718,
“Compensation – Stock Compensation.” ASC 718 requires companies to measure
compensation cost for stock-based employee compensation at fair value at the
grant date and recognize the expense over the employee’s requisite service
period. For the years ended December 31, 2009 and 2008, no stock-based
compensation was issued or recorded.
F-9
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Income
taxes
The
Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income
Taxes.” ASC 740 requires a company to use the asset and liability method of
accounting for income taxes, whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of, the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Under ASC
740, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no effect on the Company’s consolidated financial
statements.
Foreign
currency translation and comprehensive income
U.S. GAAP
requires that recognized revenue, expenses, gains and losses be included in net
income. Certain statements, however, require entities to report specific changes
in assets and liabilities, such as gain or loss on foreign currency translation,
as a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income. The functional
currency of the Company is Renminbi (“RMB”). The unit of RMB is in Yuan.
Translation gains are classified as an item of other comprehensive income in the
stockholders’ equity section of the consolidated balance sheet.
Statement
of cash flows
In
accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from
the Company’s operations are calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the consolidated
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the consolidated balance sheets.
Recent
pronouncements
In June
2009, the FASB issued ASC Topic 105, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles (“GAAP”) - a
replacement of FASB Statement No. 162”, which has become the source of
authoritative accounting principles generally accepted in the United States
recognized by the FASB to be applied to nongovernmental entities. The
Codification is effective in the third quarter of 2009, and accordingly, all
subsequent reporting will reference the Codification as the sole source of
authoritative literature. The Company does not believe that this will have a
material effect on its financial statements.
In June
2009, the FASB issued ASC Topic 855, “Subsequent Events”, which establishes
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before the financial statements are issued or
available to be issued. It is effective for interim and annual periods ending
after June 15, 2009. There was no material impact upon the adoption of this
standard on the Company’s financial statements.
In June
2009, the FASB issued ASC 810, “Consolidation”, for determining whether to
consolidate a variable interest entity. These amended standards eliminate a
mandatory quantitative approach to determine whether a
F-10
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
variable
interest gives the entity a controlling financial interest in a variable
interest entity in favor of a qualitatively focused analysis, and require an
ongoing reassessment of whether an entity is the primary beneficiary. The
Company does not believe this pronouncement will impact its financial
statements.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends
ASC Topic 820, “Measuring Liabilities at Fair Value”, which provides additional
guidance on the measurement of liabilities at fair value. These amended
standards clarify that in circumstances in which a quoted price in an active
market for the identical liability is not available, we are required to use the
quoted price of the identical liability when traded as an asset, quoted prices
for similar liabilities, or quoted prices for similar liabilities when traded as
assets. If these quoted prices are not available, we are required to use another
valuation technique, such as an income approach or a market approach. These
amended standards are effective for us beginning in the fourth quarter of fiscal
year 2009 and did not have a significant impact on our financial
statements.
In
October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition – Multiple
Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 updates the
existing multiple-element revenue arrangements guidance currently included in
FASB ASC 605-25. The revised guidance provides for two significant changes to
the existing multiple-element revenue arrangements guidance. The first change
relates to the determination of when the individual deliverables included in a
multiple-element arrangement may be treated as separate units of accounting.
This change will result in the requirement to separate more deliverables within
an arrangement, ultimately leading to less revenue deferral. The second change
modifies the manner in which the transaction consideration is allocated across
the separately identified deliverables. Together, these changes will result in
earlier recognition of revenue and related costs for multiple-element
arrangements than under previous guidance. This guidance also expands the
disclosures required for multiple-element revenue arrangements. The Company does
not believe that this will have a material effect on its financial
statements.
In
January 2010, the FASB issued ASU No. 20 10-06, “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”.
This ASU requires new disclosures and clarifies certain existing disclosure
requirements about fair value measurement as set forth in Codification Subtopic
820-10. The FASB’s objective is to improve these disclosures and, thus, increase
the transparency in financial reporting. The adoption of this ASU will not have
a material impact on the Company’s consolidated financial
statements.
NOTE
3. ACCOUNTS
RECEIVABLE
Accounts
receivable consisted of the following:
As of December 31, | ||||||||
2009 | 2008 | |||||||
Accounts receivable | $ | 4,200,749 | $ | 2,285,502 | ||||
Less: Allowance for doubtful accounts | - | - | ||||||
Accounts receivable, net | $ | 4,200,749 | $ | 2,285,502 |
F-11
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4. INVENTORY
Inventory
consisted of the following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Raw
materials – grains
|
$ | 1,323,848 | $ | 790,050 | ||||
Finished
goods – grains
|
412,995 | 228,472 | ||||||
Finished
goods – corns
|
6,496,917 | 2,762,476 | ||||||
Total
|
$ | 8,233,760 | $ | 3,780,998 |
NOTE
5. PREPAID
EXPENSES
Prepaid
expenses consisted of the following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Prepayment
for equipment
|
$ | 600,653 | $ | - | ||||
Deductible
value-added taxes (VAT)
|
442,646 | 293,365 | ||||||
Prepaid
rent
|
60,773 | 32,857 | ||||||
Total
|
$ | 1,104,072 | $ | 326,222 |
NOTE
6. PROPERTY, PLANT, AND
EQUIPMENT
Property,
plant, and equipment consisted of the following:
|
As
of December 31,
|
|||||||
2009
|
2008
|
|||||||
Automobiles
|
$ | 495,282 | $ | 81,633 | ||||
Buildings
|
1,529,035 | 2,086,777 | ||||||
Office
equipment
|
163,177 | 238,228 | ||||||
Machinery
and equipment
|
1,648,748 | 1,501,127 | ||||||
Total
cost
|
3,836,242 | 3,907,765 | ||||||
Less:
Accumulated depreciation
|
(896,767 | ) | (567,553 | ) | ||||
Property,
plant, and equipment, net
|
$ | 2,939,475 | $ | 3,340,212 |
The
buildings owned by the Company located in Jinzhong, Shanxi Province, China are
used for production, warehouse, and offices for the grains business. The
building structure is mainly constructed of light steels and bricks. For the
year ended December, 31 2009, the Company observed a significant decrease in the
construction cost of such property structure during its annual impairment
testing of long-lived assets. While future estimated operating results and cash
flows are considered, the Company eventually employed the quoted replacement
cost of the buildings as comparable market data. As a result of this analysis,
the Company concluded that the carrying amount of the buildings exceeded their
appraised fair value, and recorded an impairment of $556,312 for the year ended
December 31, 2009. These charges are classified in the caption “other expenses”
within operating expenses.
F-12
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation
expense for the years ended December 31, 2009 and 2008 was $329,265 and
$220,336, respectively. As of December 31, 2009 and 2008, $631,419 and $0 of
machinery and equipment were pledged as collateral for short-term bank loans,
respectively (see Note 9).
NOTE
7. INTANGIBLE
ASSETS
Intangible
assets consisted of the following:
As of December 31, | ||||||||
Right to use land | 2009 | 2008 | ||||||
Less: Accumulated depreciation | $ | 74,715 | $ | 74,753 | ||||
Intangible assets, net | (74,715 | ) | (74,753 | ) | ||||
$ | - | $ | - |
According
to government regulations of the People’s Republic of China (“PRC”), the PRC
Government owns all land. The Company leases and obtains the certificate of
right to use the industrial land of 11,667 square meters with the PRC Government
in Jingzhong, Shanxi Province where Jinzhong Deyu’s buildings and production
facility are located at. The term of the right is four to five years and renewed
upon expiration. The right was fully amortized as of December 31, 2009 and 2008
using the straight-line method. The current term of the right is for the period
from March 14, 2007 to March 14, 2011. Amortization expense recorded for the
years ended December 31, 2009 and 2008 was $0 and $16,910,
respectively.
As of
December 31, 2009 and 2008, the right to use land was pledged as collateral for
short-term bank loans (see Note 9).
NOTE
8. OTHER
ASSETS
Other
assets consisted of timber, timberland, and farmland in the amount of $74,715
and $74,753 as of December 31, 2009 and 2008, respectively. According to
government regulations of the People’s Republic of China (“PRC”), the PRC
Government owns timberland and farmland. The Company leases and obtains the
certificate of right to use farmland of approximately 1,605 acres (or 10,032 mu)
for the period from August 2005 to December 2031. For the same farmland, the
Company obtains the certificate of the right to timber and 896 acres (or 5,600
mu) of timberland for the period from August 2006 to August 2028. Timber mainly
includes pine trees and poplar trees.
These
timber, timberland, and farmland were not for operating use or intended for
sale. Based on management’s assessment, there was no impairment for the years
ended December 31, 2009 and 2008.
F-13
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9. SHORT-TERM
LOAN
Short-term
loan consisted of the following:
As of December 31, | ||||||||
2009 | 2008 | |||||||
Loan payable to Hangzhou TianCi Investment Management Co., Ltd., an unrelated party. The loan was unsecured, bearing no interest and no due date was specified. | $ | 732,504 | $ | - | ||||
Bank loan payable to Shanxi Province Rural Credit Union, bearing interest at 9.75 6% per annum and due February 15, 2010. The loan was obtained by Jinzhong Yongcheng and guaranteed by Jinzhong Yuliang, and the use of proceeds from the loan was restricted for purchase of corns. The loan was paid off in February 2010. | 673,904 | - | ||||||
Bank loan payable to Agricultural Development Bank of China, bearing interest at 5.31% per annum and due March 26, 2010. The loan was collateralized by buildings, machinery and equipment, and right to use land. The use of proceeds from the loan was restricted for purchase of grains. | 219,751 | - | ||||||
Bank loan payable to Agricultural Development Bank of China, bearing interest at 5.31% per annum and due June 22, 2010. The loan was collateralized by buildings, machinery and equipment, and right to use land. The use of proceeds from the loan was restricted for purchase of grains. | 175,801 | - | ||||||
Bank loan payable to Shanxi Province Rural Credit Union, bearing interest at 12.24% per annum. The loan was obtained by Jinzhong Yongcheng and guaranteed by Jinzhong Yuliang, and the use of proceeds from the loan was restricted for purchase of corns. The loan was paid off in February 2009. | - | 439,722 | ||||||
Bank loan payable to Shanxi Province Rural Credit Union, bearing interest at 13.75% per annum. The loan was obtained by Jinzhong Yongcheng and guaranteed by Jinzhong Yuliang, and the use of proceeds from the loan was restricted for purchase of corns. The loan was paid off in February 2009 | - | 234,518 | ||||||
Total | $ | 1,801,960 | $ | 674,240 | ||||
F-14
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. ACCRUED EXPENSES
Accrued
expenses consisted of the following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Accrued
VAT and other taxes
|
$ | 71,690 | $ | 38,021 | ||||
Accrued
payroll
|
45,278 | 18,386 | ||||||
Others
|
- | 436 | ||||||
Total
|
$ | 116,968 | $ | 56,843 |
NOTE 11. INCOME TAXES
People’s Republic of China
(PRC)
Under the
Enterprise Income Tax (“EIT”) Law of the PRC, the standard EIT rate is 25%. The
PRC subsidiaries of the Company are subject to PRC income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which they
operate. According to the Tax Pronouncement [2008] No. 149 issued by the State
Administration of Tax of the PRC, the preliminary processing industry of
agricultural products is entitled to EIT exemption starting January 1, 2008. The
Company’s three primary operating entities, including Jinzhong Deyu, Jinzhong
Yongcheng, and Jinzhong Yuliang are subject to the EIT exemption.
The
provision for income taxes from continuing operations on income consists of the
following for the years ended December 31, 2009 and 2008:
Years Ended December 31, | ||||||||
2009 | 2008 | |||||||
Income tax expense – current | $ | - | $ | - | ||||
Income tax benefit – deferred | - | - | ||||||
Total income tax expense | $ | - | $ | - |
The
following is a reconciliation of the statutory tax rate to the effective tax
rate for the years ended December 31, 2009 and 2008:
Years Ended December 31, | ||||||||
2009 | 2008 | |||||||
U.S. statutory corporate income tax rate | 34 | % | 34 | % | ||||
PRC tax rate difference | (9 | %) | (9 | %) | ||||
Effect of tax exemption | (25 | %) | (25 | %) | ||||
Effective tax rate | - | - |
F-15
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. RELATED PARTY
TRANSACTIONS
Due from related
parties
Total due
from related parties amounted to $0 and $5,716,380 as of December 31, 2009 and
2008, respectively. The balance of $5,716,380 mainly consisted of loans to the
original shareholders of Beijing Detian Yu. Those loans were unsecured, bearing
no interest, and no due date was specified.
Due to
related parties
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Advances
from -
|
||||||||
Mr.
Jianming Hao
|
$ | 84,120 | $ | - | ||||
Mr.
Junde Zhang
|
61,530 | 556,981 | ||||||
Mr.
Yongqing Ren
|
- | 3,358,814 | ||||||
Total
|
$ | 116,968 | $ | 3,915,795 |
Mr.
Jianming Hao is the Chief Executive Officer and Managing Director of the
Company. Mr. Junde Zhang and Mr. Yongqing Ren are Vice Presidents and Directors
of the Company. Those advances as of December 31, 2009 and 2008 were unsecured,
bearing no interest, and no due date was specified.
Guarantees
As of
December 31, 2009 and 2008, Jinzhong Yuliang provided guarantees on short-term
loans obtained by Jinzhong Yongcheng.
NOTE
13. CONCENTRATION OF
CREDIT RISK
As of
December 31, 2009 and 2008, all of the Company’s cash balances in bank were
maintained within the PRC where no rule or regulation currently in place to
provide obligatory insurance for bank deposits in the event of bank failure.
However, the Company has not experienced any losses in such accounts and
believes it is not exposed to such risks on its cash balances in
bank.
For the
years ended December 31, 2009 and 2008, all of the Company’s sales were
generated in the PRC. In addition, all accounts receivable as of December 31,
2009 and 2008 were due from customers located in the PRC.
For the
years ended December 31, 2009 and 2008, one customer accounted for 42% and 34%
of the Company’s gross revenue, respectively, and no other single customer
accounted for greater than 10%. As of December 31, 2009 and 2008, the same
customer accounted for 5% and 22% of the Company’s accounts receivable,
respectively.
F-16
CITY
ZONE HOLDINGS LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14. COMMITMENTS AND
CONTINGENCIES
The
Company leases railroad lines, warehouses, and offices payments under operating
leases with initial or remaining terms under
operating leases. Future minimum lease of one
year or more are as follows:
Operating
Leases
|
||||
Year
ended December 31, 2010
|
$ | 114,248 | ||
2011
|
104,480 | |||
2012
|
97,503 | |||
2013
|
96,625 | |||
2014
|
95,746 | |||
Thereafter
|
1,226,546 | |||
$ | 1,735,148 |
NOTE
15. SUBSEQUENT
EVENTS
On
January 6, 2010, Jinzhong Yuliang entered into a loan agreement with Shanxi
Province Rural Credit Union for a borrowing of $585,754, bearing interest of
11.592% per annum and due December 8, 2010. The use of proceeds from the loan is
restricted for purchase of corns. Jinzhong Deyu and Jinzhong Yongcheng provided
guarantees on the loan for a period of two years starting from December 8,
2010.
On
January 27, 2010, Jinzhong Yongcheng entered into a loan agreement with Shanxi
Province Rural Credit Union for a borrowing of $1,245,093, bearing interest of
10.98% per annum and due January 13, 2011. The use of proceeds from the loan is
restricted for purchase of corns. Jinzhong Deyu and Jinzhong Yuliang provided
guarantees on the loan for a period of two years starting from January 13,
2011.
F-17