Attached files
As filed with the U.S. Securities and Exchange Commission on June 29, 2010. SEC FILE NO.__________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA SHOUGUAN MINING CORPORATION
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation)
1000
(Primary Standard Industrial Classification Code Number)
27-2513824
(IRS Employer Identification No.)
6009 Yitian Road
New World Center Rm. 3207
Futian District, Shenzhen
People’s Republic of China
Telephone 0086-755-82520008
Facsimile 0086-755-82520156
(Address and telephone number of registrant’s principal executive offices)
__________________________
Law Office of Michael M. Kessler, P.C.
4900 Paloma Avenue
Carmichael, CA 95608
Telephone (916) 248-3666
Facsimile (916) 517-1449
(Name, address and telephone number of agent for service)
__________________________
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [x]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company:
Large accelerated filer [ ] Accelerated Filer [ ] Non-accelerated filer [ ] Smaller reporting company [x]
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CALCULATION OF REGISTRATION FEE
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Title of securities
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Amount to be
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Proposed maximum
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Proposed maximum
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Amount of
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to be registered
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Registered
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offering price per share (2)
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aggregate offering price (3)
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registration fee (1)
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Common stock
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1,000,000Shares
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$0.50
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$500,000
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$ 35.65
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(1)
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This is an initial offering and no current trading market exists for our common stock. The price paid for the currently issued and outstanding common stock was valued at $.50 per share.
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(2)
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Estimated solely for purposes of calculating the registration fee pursuant to Rule 457.
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(3)
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Our officers and directors intend to offer the shares to friends, family members and business acquaintances; we do not intend to engage the services of an underwriter to sell any of the shares. This will be an "all-or-none" offering, which means we will need to sell all of the shares before we can use any of the proceeds. We intend to establish a separate bank account where all proceeds from sales of shares will be deposited until the offering is sold out and the total offering amount of $500,000 is raised, at which time the funds will be transferred to our business account for use in our proposed business operations. In the event we do not sell all of the shares and raise all of the proceeds before the expiration date of the offering, all monies collected will be returned promptly to the subscribers, without deduction or interest.
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such section 8(a), may determine.
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China ShouGuan Mining Corporation
PROSPECTUS
1,000,000 Shares of Common Stock
$0.50 per share
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This is the initial offering of common stock of China ShouGuan Mining Corporation. No public market currently exists for our securities or the shares being offered. We are offering for sale a total of 1,000,000 shares of common stock on a "self-underwritten" basis, which means the shares will be offered and sold by our officers and directors, without any commissions being paid to them for any shares sold. We do not intend to engage the services of an underwriter to sell any of the shares and there is no guarantee we will be able to sell all of the shares being offered. The shares are being offered at a fixed price of $0.50 per share for a period not to exceed 180 days from the date of this Prospectus. There is no minimum number of shares required to be purchased. The offering will be an “all-or-none” offering, which means we will need to sell all of the shares before we can use any of the proceeds. We intend to establish a separate bank account, where all proceeds from sales of shares will be deposited until the offering is sold out and the total offering amount of $500,000 is raised, at which time the funds will be transferred to our business account for use in our business operations. In the event we do not sell all of the shares and raise all of the proceeds before the expiration date of the offering, all monies collected will be returned promptly to the subscribers, without deductions or interest.
China ShouGuan Mining Corporation is a mining company principally engaging in the project management of gold mining operations using the expertise and experience of its sophisticated management, advanced mining technologies, capital investment and consulting services.
BEFORE INVESTING, YOU SHOULD CAREFULLY READ THIS PROSPECTUS AND, PARTICULARLY, THE RISK FACTORS SECTION, BEGINNING ON PAGE 11.
Neither the U.S. Securities and Exchange Commission nor any state securities division has approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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Offering Price Per Share
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Total Amount of Offering
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Underwriting Commissions
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Proceeds to us
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Common Stock
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$0.50
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$500,000
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$0.00
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$500,000
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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion, Dated______________________________, 2010.
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TABLE OF CONTENTS
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Page No.
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SUMMARY OF PROSPECTUS
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5
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General Information about Our Company
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5
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The Offering
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9
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RISK FACTORS
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10
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RISKS ASSOCIATED WITH OUR COMPANY
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10
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RISKS RELATED TO DOING BUSINESS IN CHINA
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15
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RISKS ASSOCIATED WITH THIS OFFERING
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18
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USE OF PROCEEDS
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20
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DETERMINATION OF OFFERING PRICE
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20
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DILUTION OF THE PRICE YOU PAY FOR YOUR SHARES
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20
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PLAN OF DISTRIBUTION
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20
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Offering will be Sold by Our Officers and Directors
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20
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Terms of the Offering
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21
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Deposit of Offering Proceeds
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21
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Procedures for and Requirements for Subscribing
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21
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DESCRIPTION OF SECURITIES
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21
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INTEREST OF NAMED EXPERTS AND COUNSEL
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21
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DESCRIPTION OF BUSINESS
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22
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CAUTIONARY NOTE TO U.S. INVESTORS CONCERNING ESTIMATES OF INFERRED RESOURCES
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26
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DESCRIPTION OF PROPERTY
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29
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LEGAL PROCEEDINGS
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29
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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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29
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FINANCIAL STATEMENTS
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30
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MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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30
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
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40
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
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40
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EXECUTIVE COMPENSATION
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42
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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44
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INDEMNIFICATION
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45
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AVAILABLE INFORMATION
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45
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SUMMARY OF PROSPECTUS
Because this is only a summary, it does not contain all of the information that may be important to you. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors" beginning on page 11.
In this prospectus, unless the context otherwise denotes, references to “we,” “us,” “our,” “ShouGuan,” and “the Company” are to China ShouGuan Mining Corporation. “China” or “PRC” refers to the People’s Republic of China. “RMB” or “Renminbi” refers to the legal currency of China and “$” or “U.S. Dollars” refers to the legal currency of the United States.
General Information about Our Company
China ShouGuan Mining Corporation was incorporated in the State of Nevada on May 4, 2010. We are a holding company that conducts business operations through our subsidiaries and variable interest entities (VIEs) in Shandong Province in the People’s Republic of China (PRC).
We were founded by a number of business professionals and experts in China who specialize in mining technologies, mining resources management and financial and strategic management. Our primary focus is on acquiring existing gold mine projects in Shandong province of the PRC, preferably those with measured or indicated gold reserves. These potential targets are mostly run with low productivity because of inadequate funds and primitive technologies. We plan to re-engineer and redevelop these gold mines through the transfer of advanced exploration and mining technologies, capital injection and effective management.
Our business model includes sourcing of early stage gold mines with good profit potential, conducting feasibility studies to identify suitable projects, leasing the suitable mining sites and facilities and managing the mining operations on these selected sites, with the goal of acquiring the mine if the operations prove to be satisfactory based on the review criteria set by our experienced management. In addition, we also provide consulting services in areas related to mine exploration and analysis to our clients on a project-by-project basis.
Revenues are derived from the sales of gold concentrates, the principal raw material used in gold smelting operation to produce gold. All mining operations are outsourced to independent third contractors and we only take possession of the gold concentrates when they are sold to smelters. At that time, the selling prices are determined from two factors, the amount of gold in the gold concentrates and the price of gold on the date of sale. The amount of gold in the gold concentrates is determined and agreed upon between the Company and the smelters and then the selling price is determined according to the official gold price at the time of sale as indicated by the Shanghai Gold Exchange (http://www.sge.sh), an entity governed by the PRC Government). On the consulting side, revenues are derived on a project-by-project basis and payment is collected as we complete our service as outlined in the scope of each individual project.
We target to grow proactively through continual sourcing of existing gold mines in the PRC and managing them. These projects will be executed by our subsidiaries, VIE’s or related companies, Cunli Ji Gold Mine was the first project commenced in May 2009. To ensure all mines are legally and properly operated, all target gold mines are required to have full sets of government-approved licenses before effecting commencement of any business operations.
Corporate History and Structure
China ShouGuan Mining Corporation was incorporated in the State of Nevada on May 4, 2010. On May 27, 2010, Harry Orfanos, our original director and incorporator in the State of Nevada, resigned as our President and Chief Executive Officer and the Board of Directors appointed Mr. Feize Zhang to serve as our President, Treasurer, Chief Executive Officer and Director, Mr. Ming Cheung as Secretary, Chief Financial Officer and Director and Mr.Jingfeng Lv as Chief Technical Officer.
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On June 23, 2010, we entered into a stock exchange transaction with the shareholders of Bei Sheng Limited (“BSL”), whereby we issued 100,000,000 shares of common stock in exchange for 100% of the ownership interest in BSL, for the purpose of re-domiciling BSL as a Nevada corporation in the United States. These shares were issued as restricted securities under SEC Rule 144. As a result of the merger, we became the legal entity of BSL, while the business of BSL survives. Unless otherwise indicated, all references to the Company throughout this prospectus includes the operations of BSL and its subsidiaries and variable interest entities (“VIEs”).
Prior to acquisition of the Company shares, Mr. Zhang, Mr. Cheung and Mr. Lv were not affiliates of the Company. They were also not an affiliate of any of the Company’s shareholders.
BSL was incorporated in the British Virgin Islands on December 17, 2009 as a limited liability company for the purpose of holding 100% equity interest in Golden Wide International Limited (“GWIL”).
GWIL was incorporated in the Hong Kong Special Administrative Region (“Hong Kong”) on June 18, 2009 as a limited liability company. GWIL formed Shoujin Business Consulting (Shenzhen) Limited (“SBCL”) as a wholly foreign-owned enterprise under the laws of the People’s Republic of China (the “PRC”) on April 23, 2010. SBCL is principally engaged in the business of providing consulting services in the PRC.
Shenzhen Shouguan Investment Co., Ltd (“SSIC”) is an investment holding company established in Shenzhen, on December 1, 2008. It is 70% owned by Mr. Feize Zhang, our Chairman and CEO, 20% owned by Mr. Jingfeng Lv, our Chief Technical Officer and 10% owned by Mr. Jianxi Yang, a director of Yantan JinGuan Investment Limited, SSIC’s subsidiary.
Yantai JinGuan Investment Limited (“JinGuan”) was incorporated in Yantai, the PRC and is a subsidiary held 99% by SSIC.
Penglai XinGuan Investment Limited (“XinGuan”) was incorporated in Penglai, the PRC and is the wholly-owned subsidiary of JinGuan. XinGuan houses our licenses and operations in Penglai, the PRC.
To satisfy the investment restrictions in the PRC mining business, the Company, through SBCL entered into and consummated certain contractual arrangements with SSIC, JinGuan and XinGuan. As a result of these contractual arrangements, which obligates SBCL to absorb the risk of loss from the activities of SSIC, JinGuan and XinGuan ,and enables SBCL to receive all of its expected residual returns, we account for SSIC, JinGuan and XinGuan ,and their subsidiaries, as a variable interest entity (“VIE”) under U.S. GAAP and we consolidate their results in our consolidated financial statements.
Since the Company, BSL, GWIL, SBCL and its VIE arrangement as SSIC were under common control with the same ultimate beneficial owners, who are officers and directors of the Company, the re-domiciling transaction and VIE arrangement was accounted for as a transfer of entities under common control and all disclosures referencing business operations of our VIEs were made throughout this prospectus as if the share exchange transaction had become effective as of the beginning of the first period presented, even though the Company was not yet incorporated in Nevada. As such, the Company and its subsidiaries and VIEs are hereinafter collectively referred to as the Company and all are consolidated in our financial statements.
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Contractual Arrangements
Gold mining is a highly restricted industry in China. As such, it is extremely difficult for PRC gold mining companies to obtain government approval on having foreign ownership. Accordingly, our PRC subsidiary, SBCL, which is considered foreign-invested, is currently ineligible to directly own the required exploration and mining licenses in China. Our exploration and mining business is currently provided through contractual arrangement with our VIEs in China, which are currently SSIC and its subsidiaries, JinGuan and XinGuan.
Our VIEs sell gold concentrates directly to our customers, which are typically the refinery plants in China. We have been and are expected to continue to be dependent on our VIEs to operate our exploration and mining business. SBCL has entered into contractual arrangements with our VIEs, which enable us to:
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exercise effective control over our VIEs;
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receive substantially all of the economic benefits from our VIEs; and
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have an exclusive option to purchase all of the equity interests in our VIEs.
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1.
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Exclusive Technical Service and Business Consulting Agreement, signed on May 15, 2010 - SBCL has the exclusive right to provide to SSIC, JinGuan and XinGuan, consulting services, including operational management, human resources management, research and development of the technologies related to the operations of SSIC, JinGuan and XinGuan. SSIC, JinGuan and XinGuan pay to SBCL annually consulting service fees in an amount equal to all of their revenue for such year. The Agreement runs for a 10-year term and is subject to automatic renewal for an additional 10 year term provided that no objection is made by both parties on the renewal.
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2.
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Exclusive Option Agreement - SBCL has the option to purchase all of the assets and ownership of SSIC, JinGuan and XinGuan at any time.
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3.
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Equity Pledge Agreement, signed on May 15, 2010 - SSIC, JinGuan and XinGuan agree to pledge their legal interests to SBCL as a security for the obligations under the Exclusive Technical Service and Business Consulting Agreement.
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4.
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Proxy Agreement - SSIC, JinGuan and XinGuan irrevocably grant and entrust SBCL the right to exercise its voting and other stockholder rights.
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5.
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Operating Agreement, signed on May 15, 2010 - SBCL agrees to participate in the operations of JinGuan and XinGuan in different aspects.
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With the above agreements, SBCL demonstrates its ability to control SSIC, JinGuan and XinGuan as the primary beneficiaries and the operating results of the VIEs were included in the consolidated financial statements for the year ended December 31, 2009 and for the period from December 1, 2008 (Inception) through December 31, 2008.
XinGuan commenced operations on our first mining project, the Cunli Ji Gold Mine, in May 2009. XinGuan directly holds title to Cunli Ji Gold Mine and all regulatory and government operating licenses in China.
The Offering
Following is a brief summary of this offering. Please see the Plan of Distribution section for a more detailed description of the terms of the offering.
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Securities Being Offered:
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1,000,000 shares of common stock, par value $0.0001.
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Offering Price per Share:
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$ .50
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Offering Period:
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The shares are being offered for a period not to exceed 180 days.
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Net Proceeds to Our Company:
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$500,000
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Use of Proceeds:
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We intend to use the proceeds to expand our business operations.
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Number of Shares Outstanding Before the Offering:
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100,000,000
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Number of Shares Outstanding After the Offering:
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101,000,000
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Our officers, directors, control persons and/or affiliates do not intend to purchase any shares in this offering.
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RISK FACTORS
An investment in these securities involves an exceptionally high degree of risk and is extremely speculative in nature. Following are what we believe are all of the material risks involved if you decide to purchase shares in this offering.
RISKS ASSOCIATED WITH OUR COMPANY:
We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our management has extensive contacts and experience in the gold exploration and natural resource industry in China and we are dependent on their abilities and services to develop and market our business. There can be no assurance that we will be able to retain these managers for any given period of time. The loss of these managers could have a material adverse effect upon our business, financial condition, and results of operations. We must attract, recruit and retain a sizeable workforce of technically competent employees. Our ability to effectively implement our business strategy will depend upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced management and other key personnel. We cannot assure you that we will be able to hire or retain such employees if and when they are needed.
Since we are in the early stages of our business development with a limited operating history, an investment in the shares offered herein is highly risky and could result in a complete loss of your investment if we are unsuccessful in our business plans.
Mining operations on our first project, the Cunli Ji Gold Mine, only commenced one year ago, in May 2009. As such, we have a limited operating history upon which an evaluation of our future prospects can be made. Based upon current plans, we expect to incur operating losses in future periods as we incur significant expenses associated with the research of future mining prospects for possible acquisition. Further, we cannot guarantee that we will be successful in realizing revenues or in achieving or sustaining positive cash flow at any time in the future. Any such failure could result in the possible closure of our business or force us to seek additional capital through loans or additional sales of our equity securities to continue business operations, which would dilute the value of any shares you purchase in this offering.
Our continued operations depend on our ability to recover precious metals, process them and successfully sell them for more than the cost of production.
The success of this process depends on the market prices of metals in relation to our costs of production. We may not always be able to generate a profit on the sale of gold or other minerals because we can only maintain a level of control over our costs and have no ability to control market prices. The total cash costs of production at any location are frequently subject to great variation from year to year as a result of a number of factors, such as the changing composition of ore grade or mineralized material production and metallurgy, and exploration activities in response to the physical shape and location of the ore body or deposit. In addition, costs are affected by the price of commodities, such as fuel and electricity. Such commodities are at times subject to volatile price movements, including increases that could make production at certain operations less profitable. A material increase in production costs or a decrease in the price of gold or other minerals could adversely affect our ability to earn a profit on the sale of gold or other minerals, which would result in a failure of our business and a loss of any investment you make in our shares.
Since our business consists of managing gold mining projects, the drop in the price of gold would negatively impact our asset values, cash flows, potential revenues and profits.
We plan to pursue opportunities in properties with gold mineralized material or reserves with exploration potential. The price that we pay to lease these properties will be influenced, in large part, by the price of gold at the time of the leasing agreements. Our potential future revenues are expected to be derived from the production and sale of gold
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from these properties, or from the sale of some of these properties. The value of any gold reserves or other mineralized materials, and the value of any potential mineral production will vary in direct proportion to changes in those mineral prices. The price of gold has fluctuated widely as a result of numerous factors beyond our control. The effect of these factors on the price of gold and other minerals, and therefore the economic viability of any of our projects, cannot accurately be predicted. Any drop in the price of gold and other minerals we may produce would negatively affect our asset values, cash flows and potential revenues and profits.
Estimates of mineral reserves and of mineralized material are inherently forward-looking statements, subject to error, which could force us to curtail or cease our business operations.
Estimates of mineral reserves and of mineralized materials are inherently forward-looking statements subject to error. Although estimates of proven and probable reserves are made based on a high degree of assurance in the estimates at the time the estimates are made, unforeseen events and uncontrollable factors can have significant adverse impacts on the estimates. Actual conditions inherently differ from estimates. The unforeseen adverse events and uncontrollable factors include: geologic uncertainties including inherent sample variability, metal price fluctuations, fuel price increases, variations in mining and processing parameters, and adverse changes in environmental or mining laws and regulations. The timing and effects of variances from estimated values cannot be predicted.
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Geologic Uncertainty and Inherent Variability: Although the estimated reserves and additional mineralized materials are generally derived from appropriately spaced drilling to provide a high degree of assurance in the continuity of the mineralization, there is inherent variability between duplicate samples taken adjacent to each other and between sampling points that cannot be reasonably eliminated. There may also be unknown geologic details that have not been identified or correctly appreciated at the current level of delineation. This results in uncertainties that cannot be reasonably eliminated from the estimation process. Some of the resulting variances can have a positive effect and others can have a negative effect on mining operations. Acceptance of these uncertainties is part of any mining operation.
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Metal Price Variability: The prices for gold, silver, copper and other precious metals fluctuate in response to many factors beyond anyone's ability to predict. The prices used in making the reserve estimates are disclosed and differ from daily prices quoted in the news media. The percentage change in the price of a metal cannot be directly related to the estimated reserve quantities, which are affected by a number of additional factors. For example, a ten percent (10%) change in price may have little impact on the estimated reserve quantities and affect only the resultant positive cash flow, or it may result in a significant change in the amount of reserves. Because mining occurs over a number of years, it may be prudent to continue mining for some period during which cash flows are temporarily negative for a variety of reasons, including a belief that the low price is temporary and/or the greater expense would be incurred in closing a property permanently.
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Fuel Price Variability: The cost of fuel can be a major variable in the cost of mining; one that is not necessarily included in the contract mining prices obtained from mining contractors but is passed on to the overall cost of operation. Future fuel prices and their impact are difficult to predict, but could force us to curtail or cease our business operations.
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Variations in Mining and Processing Parameters: The parameters used in estimating mining and processing efficiency are based on testing and experience with previous operations at the properties or on operations at similar properties. While the parameters used have a reasonable basis, various unforeseen conditions can occur that may materially affect the estimates. In particular, past operations indicate that care must be taken to ensure that proper ore grade control is employed and that proper steps are taken to ensure that the leaching operations are executed as planned. Mining contracts generally include clauses addressing these issues to help ensure planned requirements are met. Nevertheless, unforeseen difficulties may occur in our current or future operations, which would force us to curtail or cease our business operations.
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Changes in Environmental and Mining Laws and Regulations: We believe that we are currently in compliance with existing environmental and mining laws and regulations affecting our operations. The reserve estimates contain cost estimates based on compliance with current laws and regulations. While there are no currently known proposed changes in these laws or regulations, significant changes have affected past operations of mining companies in China and if additional changes do occur in the future, we may or may not be able to comply with them and continue our operations.
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We may not be able to successfully compete with other mineral exploration and mining companies.
We compete with other mineral exploration and mining companies or individuals, including large, well established mining companies with substantial capabilities and financial resources, to research and acquire rights to mineral properties containing gold and other minerals. There is a limited supply of desirable mineral lands available for claim staking, lease or other acquisition in the PRC. There can be no assurance that we will be able to successfully acquire any prospective mineral properties against competitors with substantially greater financial resources than we have.
We are subject to the many risks of doing business internationally, including but not limited to the difficulty of enforcing liabilities in foreign jurisdictions.
We are a Nevada corporation and, as such, are subject to the jurisdiction of the State of Nevada and the United States courts for purposes of any lawsuit, action or proceeding by investors. An investor would have the ability to effect service of process in any action against the Company within the United States. In addition, we are registered as a foreign corporation doing business in Shandong Province, PRC, and as such, are subject to the local laws of Shandong Province governing an investors’ ability to bring actions in foreign courts and enforce liabilities against a foreign private issuer, or any person, based on U.S. federal securities laws. Generally, a final and conclusive judgment obtained by investors in U.S. courts would be recognized and enforceable against us in the Shandong Province courts having jurisdiction without re-examination of the merits of the case.
All of our assets are located in China and substantially all of our revenues are derived from our operations in China. As a result, any changes in the political climate and/or economic policies of the PRC government could have a significant impact upon our current and proposed future business operations in the PRC and our results of operations and financial condition.
Our business operations may be adversely affected by the current and future political and economic environment in the PRC. The PRC has operated as a socialist state since the mid-1900s and is controlled by the Communist Party of China. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. The PRC has only permitted provincial and local economic autonomy and private economic activities since the late1970s. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to successfully operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under current leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice, any of which could have an adverse effect on our results of operations and financial condition.
We are employing a VIE structure, which could materially adversely affect our business operations if current regulations change in the PRC regarding VIE’s.
In order to comply with PRC regulatory requirements, we operate our businesses through companies with which we have contractual relationships but in which we do not have controlling ownership. If the PRC government determines that our agreements with these companies are not in compliance with applicable regulations, our business in the PRC could be materially adversely affected.
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We do not, as of now, have direct or indirect equity ownership of SSIC and its subsidiaries, JinGuan and XinGuan, which operate all our business in China. At the same time, however, we have entered into contractual arrangements with SSIC, JinGuan and XinGuan and its individual owners pursuant to which we received an economic interest in, and exert a controlling influence over SSIC, JinGuan and XinGuan, in a manner substantially similar to a controlling equity interest. Although we believe the restructuring transaction and our current business operations are in compliance with the current laws in China, we cannot be sure that the PRC government would view our operating arrangements to be in compliance with PRC regulations that may be adopted in the future. If we are determined not to be in compliance, the PRC government could levy fines, revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our business, corporate structure or operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business. As a result, our business in the PRC could be materially adversely affected.
We rely on contractual arrangements with SSIC, JinGuan and XinGuan for our operations, which may not be as effective in providing control over these entities as direct ownership. Our operations and financial results are partly dependent on the operations of SSIC, JinGuan and XinGuan in which we have no equity ownership interest. As a result, we must rely on contractual arrangements to control and operate their businesses. These contractual arrangements are not as effective in providing control over SSIC, JinGuan and XinGuan as direct ownership. For example, SSIC, JinGuan and XinGuan may be unwilling or unable to perform their contractual obligations under our commercial agreements, including payment of consulting fees under the Exclusive Technical Service and Business Consulting Agreement as they become due. Consequently, we will not be able to conduct our operations in the manner currently planned. In addition, SSIC, JinGuan and XinGuan may seek to renew their agreements on terms that are disadvantageous to us. Although we have entered into a series of agreements that provide us with substantial ability to control SSIC, JinGuan and XinGuan, we may not succeed in enforcing our rights under them insofar as our contractual rights and legal remedies under Chinese law are inadequate. In addition, if we are unable to renew these agreements on favorable terms when these agreements expire, or to enter into similar agreements with other parties, our business may not be able to operate or expand, and our operating expenses may significantly increase.
We operate our businesses in China through SSIC, JinGuan and XinGuan. Our chairman, CEO and principal shareholder, Mr. Feize Zhang, owns 70% of the equity interest in SSIC. Conflicts of interests between his duties to us and to SSIC may arise. We cannot assure you that when conflicts of interest arise, he will act in the best interests of our Company or that any conflict of interest will be resolved in our favor. These conflicts may result in management decisions that could negatively affect our operations and potentially result in the loss of opportunities.
Our arrangements with SSIC, JinGuan and XinGuan and its shareholders may be subject to a transfer pricing adjustment by the PRC tax authorities which could have an adverse effect on our income and expenses. We could face material and adverse tax consequences if the PRC tax authorities determine that our contracts with SSIC, JinGuan and XinGuan and its shareholders were not entered into based on arm’s length negotiations. Although our contractual arrangements are similar to other companies conducting similar operations in China, if the PRC tax authorities determine that these contracts were not entered into on an arm’s length basis, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. Such an adjustment may require that we pay additional PRC taxes plus applicable penalties and interest, if any.
The exercise of our option to purchase part or all of the equity interests in SSIC, JinGuan and XinGuan under the Exclusive Option Agreement might be subject to approval by the PRC government. Our failure to obtain this approval may impair our ability to substantially control SSIC, JinGuan and XinGuan and could result in actions by SSIC, JinGuan and XinGuan that conflict with our interests.
Our Exclusive Option Agreement with SSIC, JinGuan and XinGuan and its shareholders gives our Chinese subsidiary, SBCL the option to purchase all or part of the equity interests in them. The option may not be exercised by SBCL if the exercise would violate any applicable laws and regulations in China or cause any license or permit held by, and necessary for the operation of SSIC, JinGuan and XinGuan, to be cancelled or invalidated. Under the laws of China, if a foreign entity, through a foreign investment company that it invests in, acquires a domestic related company,
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China’s regulations regarding mergers and acquisitions may technically apply to the transaction. If these regulations apply, an examination and approval of the transaction by China’s Ministry of Commerce (“MOFCOM”), or its local counterparts would be required. In addition, an appraisal of the equity interest or the assets to be acquired would also be mandatory. Since the scope of business activities (mining operations and consulting services) as defined in the business license of SBCL does not involve the MOFCOM approval and monitoring, we do not believe at this time that an approval or an appraisal is required for SBCL to exercise its option to acquire SSIC, JinGuan and XinGuan. In light of the different views on this issue, however, it is possible that the central MOFCOM office in Beijing will issue a standardized opinion imposing the approval and appraisal requirement. If we are not able to purchase the equity of SSIC, JinGuan and XinGuan, then we will lose a substantial portion of our ability to control SSIC, JinGuan and XinGuan and our ability to ensure that SSIC, JinGuan and XinGuan will act in our interests.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Our executive officers and employees have not been subject to the United States Foreign Corrupt Practices Act prior to 2010. We can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
The PRC laws and regulations governing ourcurrent business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on our business.
The PRC’s legal system is a civil law system based on written statutes, in which system-decided legal cases have little value as precedents unlike the common law system prevalent in the United States. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and/or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We are considered a “foreign persons” or “foreign funded” enterprise under PRC laws, and as a result, we are required to comply with PRC laws and regulations. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
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levying fines;
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revoking our business and other licenses;
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requiring that we restructure our ownership or operations; and/or
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requiring that we discontinue any portion or all of our business operations in the PRC.
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Mining risks and insurance could have an adverse effect on our profitability.
The business of mining for gold and other metals is generally subject to a number of risks and hazards including environmental hazards, industrial accidents, labor disputes, unusual or unexpected geological conditions, pressures, cave-ins, changes in the regulatory environment and natural phenomena such as inclement weather conditions, floods, blizzards and earthquakes. At the present time, we have in effect statutory required social insurance for all employees and mine workers and have obtained additional accidental insurance. There is currently no other insurance in place for the mining site and management and even if we were to do so, no assurance can be given that such insurance will continue to be available or that it will be available at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards as a result of exploration and production is not generally available to companies in the mining industry on acceptable terms. We might also become subject to liability for pollution or other hazards which may not be insured against or which we may elect not to insure against because of premium costs or other reasons. Losses from these events may cause us to incur significant costs that could have a material adverse effect upon our financial performance and results of operations. Mining operations will be subject to risks normally encountered in the mining business.
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and, computer, financial and other control systems. In addition, 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 for our foreign subsidiaries. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
Changes in interest rates could negatively impact our results of operations, stockholders’ equity (deficit) and fair value of net assets.
Our investment activities and credit guarantee activities expose us to interest rate and other market risks. Changes in interest rates, up or down, could adversely affect our net interest yield. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, either can rise or fall faster than the other, causing our net interest yield to expand or compress. For example, due to the timing of maturities or rate reset dates on variable-rate instruments, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets. This rate change could cause our net interest yield to compress until the effect of the increase is fully reflected in asset yields. Changes in the slope of the yield curve could also reduce our net interest yield.
Interest rates can fluctuate for a number of reasons, including changes in the fiscal and monetary policies of the federal government and its agencies, such as the Federal Reserve. Federal Reserve policies directly and indirectly influence the yield on our interest-earning assets and the cost of our interest-bearing liabilities. The availability of derivative financial instruments (such as options and interest rate and foreign currency swaps) from acceptable counterparties of the types and in the quantities needed could also affect our ability to effectively manage the risks related to our investment funding. Our strategies and efforts to manage our exposures to these risks may not be as effective as they have been in the past.
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RISKS RELATED TO DOING BUSINESS IN CHINA
Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.
We conduct substantially all of our operations and generate most of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:
• the higher level of government involvement;
• the early stage of development of the market-oriented sector of the economy;
• the rapid growth rate;
• the higher level of control over foreign exchange; and
• the allocation of resources.
As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative effect on us.
Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.
Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of security and surveillance investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our business and prospects.
The PRC government exerts substantial influence over the manner in which we conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively.
Most of our sales revenue and expenses are denominated in Renminbi. Under PRC law, the Renminbi is currently convertible under the "current account," which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries and /or VIEs may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant PRC government
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authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside China that are denominated in foreign currencies.
Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiaries and / or VIEs borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries and / or VIEs by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or their respective local counterparts. These limitations could affect our PRC operating subsidiaries’ and / or VIEs’ ability to obtain foreign exchange through debt or equity financing.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ / VIEs’ ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, or the SAFE Notice, which requires PRC residents to register with the competent local SAFE branch before using onshore assets or equity interests held by them to establish offshore special purpose companies, or SPVs, for the purpose of overseas equity financing. Under the SAFE Notice, such PRC residents must also file amendments to their registration in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations. Moreover, if the SPVs were established and owned the onshore assets or equity interests before the implementation date of the SAFE Notice, a retroactive SAFE registration is required to have been completed before March 31, 2006. If any PRC resident stockholder of any SPV fails to make the required SAFE registration and amended registration, the PRC subsidiaries of that SPV may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV. Failure to comply with the SAFE registration and amendment requirements described above could also result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
Because of uncertainty over how the SAFE Notice will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with the SAFE Notice by our PRC resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by the SAFE Notice. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with the SAFE Notice, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’/VIEs’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations which became effective on September 8, 2006.
On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission or CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the new regulation will require the PRC parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer,
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which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the new regulations is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the new regulation, our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction.
The new regulation allows PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to the Ministry of Commerce and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and protect our stockholders’ economic interests.
In addition to the above risks, in many instances, we will seek to structure transactions in a manner that avoids the need to make applications or a series of applications with Chinese regulatory authorities under these new M&A regulations. If we fail to effectively structure an acquisition in a manner that avoids the need for such applications or if the Chinese government interprets the requirements of the new M&A regulations in a manner different from our understanding of such regulations, then acquisitions that we have effected may be unwound or subject to rescission. Also, if the Chinese government determines that our structure of any of our acquisitions does not comply with these new regulations, then we may also be subject to fines and penalties.
Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.
China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. Because the New EIT Law and its implementing rules are new, no official interpretation or application of this new “resident enterprise” classification is available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
If the PRC tax authorities determine that the Company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries / VIEs would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2008 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
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If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our securities will be indirectly affected by the foreign exchange rate between U.S. dollars and the Renminbi and between those currencies and other currencies in which our sales may be denominated. Because substantially all of our earnings and cash assets are denominated in Renminbi and the net proceeds from the offering of the securities covered by this registration statement will be denominated in U.S. dollars, fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect the relative purchasing power of these proceeds, our balance sheet and our earnings per share in U.S. dollars following the offerings of the securities. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue after the offerings of the securities covered by this registration statement that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future the PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currencies.
RISKS ASSOCIATED WITH THIS OFFERING:
Any future trading market in our shares will be regulated by Securities and Exchange Commission Rule 15g-9 which established the definition of a “penny stock.” The effective result being fewer purchasers qualified by their brokers to purchase our shares, and therefore a less liquid market for our investors to sell their shares.
The shares being offered are defined as a penny stock under the Securities and Exchange Act of 1934, and rules of the Commission. The Exchange Act and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our securities to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse), or in transactions not recommended by the broker-dealer. For transactions covered by the penny stock rules, a broker-dealer must make a suitability determination for each purchaser and receive the purchaser's written agreement prior to the sale. In addition, the broker-dealer must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase price and actual bid and offer quotations, the compensation to be received by the broker-dealer and certain associated persons, and deliver certain disclosures required by the Commission. Consequently, the penny stock rules may make it difficult for you to resell any shares you may purchase, if at all.
We are selling this offering without an underwriter and may be unable to sell any shares. Unless we are successful in selling all of the shares and receiving all of the proceeds from this offering, we may have to seek alternative financing to implement our business plans and you would receive a return of your entire investment.
This offering is self-underwritten, that is, we are not going to engage the services of an underwriter to sell the shares; we intend to sell them through our officers and directors, who will receive no commissions. We will offer the shares to friends, relatives, acquaintances and business associates, however, there is no guarantee that we will be able to sell any of the shares.
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Due to the lack of a trading market for our securities, you may have difficulty selling any shares you purchase in this offering.
There is presently no demand for our common stock and no public market exists for the shares being offered in this prospectus. We plan to contact a market maker immediately following completion of this offering to apply to have the shares quoted on the OTC Electronic Bulletin Board (OTCBB); however, we cannot guarantee that our application will be accepted or approved and our stock listed and quoted for sale. The OTCBB is a regulated quotation service that displays real-time quotes, last sale prices and volume information in over-the-counter (OTC) securities. As of the date of this filing, there have been no discussions or understandings between China ShouGuan Mining Corporation or anyone acting on our behalf with any market maker regarding participation in a future trading market for our securities. If no market is ever developed for our common stock, it will be difficult for you to sell any shares you purchase in this offering. In such a case, you may find that you are unable to achieve any benefit from your investment or liquidate your shares without considerable delay, if at all. In addition, if we fail to have our common stock quoted on a public trading market, your common stock will not have a quantifiable value and it may be difficult, if not impossible, to ever resell your shares, resulting in an inability to realize any value from your investment.
You will incur immediate and substantial dilution of the price you pay for your shares.
Our existing stockholders acquired their shares at a cost of $0.004 per share, a cost per share substantially less than that which you will pay for the shares you purchase in this offering. Accordingly, any investment you make in the shares offered herein will result in the immediate and substantial dilution of the net tangible book value of those shares from the $0.50 you pay for them. Upon completion of the offering, the net tangible book value of your shares will be $.016 per share, $.484 per share less than what you paid for them.
All proceeds from the offering will be deposited into our business operating account and our management will have sold discretion in how the funds will be disbursed there is no guarantee all of the funds will be used as outlined in this prospectus.
All funds received from the sale of shares in this offering will be deposited into our business operating account. We have committed to use the proceeds raised in this offering for the uses set forth in the Use of Proceeds section of this prospectus; however, certain factors beyond our control, such as increases in certain costs, could result in the Company being forced to reduce the proceeds allocated for other uses in order to accommodate for these unforeseen changes. The failure of our management to use these funds effectively could result in unfavorable returns. This could have a significant adverse effect on our financial condition and could cause the price of our common stock to decline.
Our officers and directors will continue to exercise significant control over our operations, which means as a minority shareholder, you would have no control over certain matters requiring stockholder approval that could affect your ability to ever resell any shares you purchase in this offering.
After the completion of this offering, our principal stockholders, of which our officers and directors are controlling principals, will own approximately 40.42% of our common stock. Due to the controlling amount of that share ownership, our officers and directors will, directly and indirectly, have a significant influence in determining the outcome of all corporate transactions, including the election of directors, approval of significant corporate transactions, changes in control of the Company or other matters that could affect your ability to ever resell your shares. Their interests may differ from the interests of the other stockholders and thus result in corporate decisions that are disadvantageous to other shareholders.
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USE OF PROCEEDS
Assuming all of the shares being offered are sold, the gross proceeds to us will be $500,000. We expect to disburse the proceeds in the priority set forth below, within the first 12 months after successful completion of this offering and receipt of the funds:
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Proceeds to Us:
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$ 500,000
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Analyzing geological reports of potential mining projects
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200,000
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Transfer Agent and filing fees
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10,000
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Accounting, Auditing and Legal
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15,000
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Office and Administration
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75,000
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Working Capital
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200,000
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Total Net Proceeds
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$ 500,000
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DETERMINATION OF OFFERING PRICE
The offering price of the shares has been determined arbitrarily by us. The price does not bear any relationship to our assets, book value, earnings or other established criteria for valuing a privately held company. In determining the number of shares to be offered and the offering price, we took into consideration our capital structure and the amount of money we would need to implement our business plans. Accordingly, the offering price should not be considered an indication of the actual value of our securities.
DILUTION OF THE PRICE YOU PAY FOR YOUR SHARES
Dilution represents the difference between the offering price and the net tangible book value per share immediately after completion of this offering. Net tangible book value is the amount that results from subtracting total liabilities and intangible assets from total assets. Dilution arises mainly as a result of our arbitrary determination of the offering price of the shares being offered. Dilution of the value of the shares you purchase is also a result of the lower book value of the shares held by our existing stockholders.
As of March 31, 2010, the net tangible book value of our shares was $1,112,292, or approximately $0.011 per share, based upon 100,000,000 shares outstanding.
Upon completion of this Offering, but without taking into account any change in the net tangible book value after completion of this Offering other than that resulting from the sale of the shares and receipt of the total proceeds of $500,000, the net tangible book value of the 101,000,000 shares to be outstanding will be $1,612,292, or approximately $0.016 per share. Accordingly, the net tangible book value of the shares held by our existing stockholders (100,000,000 shares) will be increased by $0.005 per share without any additional investment on their part. The purchasers of shares in this offering will incur immediate dilution (a reduction in the net tangible book value per share from the offering price of $0.50 per Share) of $0.484 per share.
After completion of the offering, the existing stockholder will own approximately 99% of the total number of shares then outstanding, for which it made a cash investment of $436,583, or $0.004 per share. Upon completion of the offering, the purchasers of the shares offered hereby will own approximately 1% of the total number of shares then outstanding, for which they will have made a cash investment of $500,000, or $0.50 per Share.
The following table illustrates the per share dilution to the new investors and does not give any effect to the results of any operations subsequent to March 31, 2010:
|
Price Paid per Share by Existing Stockholder
|
$0.004
|
|
Public Offering Price per Share
|
$0.50
|
|
Net Tangible Book Value Prior to this Offering
|
$0.011
|
|
Net Tangible Book Value After this Offering
|
$0.016
|
|
Increase in Net Tangible Book Value per Share Attributable
|
|
|
to cash payments from purchasers of the shares offered
|
$0.005
|
|
Immediate Dilution per Share to New Investors
|
$0.484
|
The following table summarizes the number and percentage of shares purchased, the amount and percentage of consideration paid, and the average price per share paid by our existing stockholders and by new investors in this offering:
|
Price
Per Share
|
Number of Shares Held
|
Percent of Ownership
|
Consideration Paid
|
|
|
Existing Stockholders
|
$0.004
|
100,000,000
|
99%
|
$ 436,583
|
|
Investors in this Offering
|
$0.50
|
1,000,000
|
1%
|
$ 500,000
|
PLAN OF DISTRIBUTION
Offering will be Sold by Our Officers and Directors
This is a self-underwritten offering. This Prospectus is part of a registration statement that permits our officers and directors to sell the shares directly to the public, with no commission or other remuneration payable to them for any shares they sell. There are no plans or arrangements to enter into any contracts or agreements to sell the Shares with any underwriter, broker or dealer. Our officers and directors will sell the shares and intend to offer them to friends, family members and business acquaintances. In offering the securities on our behalf, they will rely on the safe harbor from broker-dealer registration provisions, as set out in Rule 3a4-1 under the Securities Exchange Act of 1934.
Our officers and directors will not register as broker-dealers to sell shares in this offering, pursuant to Section 15 of the Securities Exchange Act of 1934, in reliance upon Rule 3a4-1, which sets forth those conditions under which a person associated with an Issuer may participate in the offering of the Issuer's securities and not be deemed to be a broker-dealer.
|
a.
|
Our officers and directors are not subject to a statutory disqualification, as that term is defined in Section 3(a)(39)of the Act, at the time of their participation; and
|
|
b.
|
Our officers and directors will not be compensated in connection with their participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities; and
|
|
c.
|
Our officers and directors are not, nor will they be at the time of their participation in the offering, an associated person of a broker-dealer; and
|
|
d.
|
Our officers and o directors meet the conditions of paragraph (a)(4)(ii) of Rule 3a4-1 of the Exchange Act, in that they (A) primarily performs, or are intended primarily to perform at the end of the offering, substantial duties for or on behalf of our Company, other than in connection with transactions in securities; and (B) are not a broker or dealer, or been associated person of a broker or dealer, within the preceding twelve months; and (C) have not participated in selling and offering securities for any Issuer more than once every twelve months other than in reliance on Paragraphs (a)(4)(i) (a)(4)(iii).
|
20
Our officers, directors, control persons and affiliates of same do not intend to purchase any shares in this offering.
Terms of the Offering
The shares will be sold at a fixed price of $0.50 per share until completion of this offering. There is no minimum amount of subscription required per investor, and subscriptions, once received, are irrevocable.
This offering will commence on the effective date of this prospectus and will continue for a period not to exceed 180 days (the "Expiration Date").
Deposit of Offering Proceeds
This is a “best effort”, “all or none” offering and, as such, we will not be able to spend any of the proceeds unless and until all shares are sold and all proceeds are received. We intend to hold all monies collected for subscriptions in a separate bank account until the total amount of $500,000 has been received or until the 1,000,000 shares being offered have been sold. At that time, the funds will be transferred to our business account for use in the implementation of our business plans. In the event the offering is not sold out prior to the Expiration Date, all monies will be returned to investors, without interest or deduction.
Procedures and Requirements for Subscription
If you decide to subscribe for any shares in this offering, you will be required to execute a Subscription Agreement and tender it, together with a check or certified funds to us. Subscriptions, once received by us are irrevocable. All checks for subscriptions should be made payable to China ShouGuan Mining Corporation.
DESCRIPTION OF SECURITIES
Common Stock
Our authorized capital stock consists of 300,000,000 shares of common stock, par value $0.0001 per share. The holders of our common stock (i) have equal ratable rights to dividends from funds legally available therefore, when, as and if declared by our Board of Directors; (ii) are entitled to share in all of our assets available for distribution to holders of common stock upon liquidation, dissolution or winding up of our affairs; (iii) do not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions or rights; and (iv) are entitled to one non-cumulative vote per share on all matters on which stockholders may vote.
Non-cumulative Voting
Holders of shares of our common stock do not have cumulative voting rights, which means that the holders of more than 50% of the outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and, in such event, the holders of the remaining shares will not be able to elect any of our directors. After this offering is completed, the present stockholders will own approximately 99% of our outstanding shares and the purchasers in this offering will own approximately 1%.
Cash Dividends
As of the date of this prospectus, we have not paid any cash dividends to stockholders. The declaration of any future cash dividend will be at the discretion of our Board of Directors and will depend upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.
INTEREST OF NAMED EXPERTS AND COUNSEL
None of the below described experts or counsel have been hired on a contingent basis and none of them will receive a direct or indirect interest in the Company.
Our consolidated financial statements for years ended December 31, 2009 and 2008 for our wholly-owned subsidiaries, and since inception for the Company, as required and included in this prospectus, have been audited by ZYCPA Company Limited, an independent registered accounting firm in Hong Kong. We include the financial statements in reliance on their report, given upon their authority as experts in accounting and auditing.
The law offices of Michael M. Kessler, Esq., 3436 American River Drive, Suite 11, Sacramento, California 95864, has passed upon the validity of the shares being offered and certain other legal matters and is representing us in connection with this offering.
21
DESCRIPTION OF BUSINESS
General Information
Our primary business operations are to manage and acquire existing gold mine projects in Shandong Province, the PRC, preferably with measured or indicated gold reserves. Our prime target gold mines would typically run with low productivity because of inadequate funds and primitive technologies. We would then step in to re-engineer and redevelop these gold mines through the transfer of advanced exploration and mining technologies, capital injection and effective management. Our business model includes the sourcing of early stage gold mines with good profit potential, conducting feasibility studies to identify suitable projects, leasing the suitable mining sites and facilities and managing the mining operations on these selected sites, with the goal of acquiring the mine if the operations proved to be satisfactory based on our criteria. In addition, we also provide consulting services in areas related to mine exploration and analysis to our clients.
Revenues are derived from the sales of gold concentrates, the principal raw material used in gold smelting operations to produce gold. All mining operations are outsourced to independent third contractors and we only take possession of the gold concentrates when they are sold to the smelters. At that time, the selling prices are determined from two factors, the amount of gold in the gold concentrates and the price of gold on the date of sale. The amount of gold in the gold concentrates is determined and agreed upon between the Company and the smelters and then the selling price is determined according to the official gold price at the time of sale, as indicated by the Shanghai Gold Exchange (http://www.sge.sh), an entity governed by the PRC Government. On the consulting side, revenues are derived on a project-by-project basis and payment is collected as we complete our services, as outlined in the scope of each individual project.
We target to grow proactively through continual sourcing of existing gold mines in the PRC and managing them. These projects will be executed by our subsidiaries, VIE’s or related companies. Cunli Ji Gold Mine was the first project commenced in May 2009. To ensure all mines are legally and properly operated, all target gold mines are required to have full sets of government-approved licenses before effecting commencement of any business operations.
Corporate History and Structure
China ShouGuan Mining Corporation was incorporated in the State of Nevada on May 4, 2010.
The details of the Company’s subsidiaries and VIEs are described below:
|
Name
|
Place of incorporation
and kind of
legal entity
|
Principal activities
and place of operation
|
Particulars of issued/
registered share
capital
|
Effective interest
held
|
||||
|
Bei Sheng Limited (“BSL”)
|
British Virgin Islands, a limited liability company
|
Investment holding in GWIL and provision of mining technical advice
|
50,000 issued shares of US$1 each
|
100%
|
||||
|
Golden Wide International Limited (“GWIL”)
|
Hong Kong, a limited liability company
|
100%-investment holding in SBCL
|
10,000 issued shares of HKD1 each
|
100%
|
||||
|
Shoujin Business Consulting (Shenzhen) Limited (“SBCL”)
|
The PRC, a limited liability company
|
Provision of consulting service in the PRC
|
RMB100,000
|
100%
|
||||
|
Shenzhen Shouguan Investment Co., Ltd (“SSIC”) #
|
The PRC, a limited liability company
|
99%-investment holding in JinGuan
|
RMB18,100,000
|
N/A
|
||||
|
Yantai Jinguan Investment Limited (“JinGuan”) #
|
The PRC, a limited liability company
|
100%-investment holding in XinGuan
|
RMB5,000,000
|
N/A
|
||||
|
Penglai Xinguan Investment Limited (“XinGuan”) #
|
The PRC, a limited liability company
|
Exploration, drilling, mining and sale of gold products
|
RMB21,000,000
|
N/A
|
# represents variable interest entity (“VIE”)
BSL was incorporated in the British Virgin Islands on December 17, 2009 as a limited liability company for the purpose of holding 100% equity interest in Golden Wide International Limited (“GWIL”).
GWIL was incorporated in the Hong Kong Special Administrative Region (“Hong Kong”) on June 18, 2009 as a limited liability company. GWIL formed Shoujin Business Consulting (Shenzhen) Limited (“SBCL”) as a wholly foreign-owned enterprise under the laws of the People’s Republic of China (the “PRC”) on April 23, 2010. SBCL is principally engaged in the provision of business consulting service in the PRC.
Shenzhen Shouguan Investment Co., Ltd (“SSIC”) is an investment holding company established in Shenzhen, on December 1, 2008. It is 70% owned by Mr. Zhang Feize, our Chairman and CEO, 20% owned by Mr. Lv Jingfeng, our Chief Technical Officer and 10% owned by Mr. Yang Jianxi, a director of Yantan JinGuan Investment Limited, SSIC’s subsidiary.
Yantai JinGuan Investment Limited (“JinGuan”) was incorporated in Yantai, the PRC and is a subsidiary held 99% by SSIC, the other 1% is held by Mr. Yang Jianxi, a director of JinGuan.
Penglai XinGuan Investment Limited (“XinGuan”) was incorporated in Penglai, the PRC and is the wholly-owned subsidiary of JinGuan. XinGuan houses our current mining property, licenses and operations in Penglai, the PRC.
22
To satisfy the investment restrictions in the PRC mining business, the Company, through SBCL entered into and consummated certain contractual arrangements with SSIC, JinGuan and XinGuan. As a result of these contractual arrangements, which obligates SBCL to absorb the risk of loss from the activities of SSIC, JinGuan and XinGuan and enables SBCL to receive all of their expected residual returns, we account for SSIC, JinGuan and XinGuan and our other subsidiaries as a variable interest entity (“VIE”) under U.S. GAAP and we consolidate their results in our consolidated financial statements.
Since the Company, BSL, GWIL, SBCL and its VIE arrangement and SSIC, the holding company of JinGuan and XinGuan, were under common control with the same ultimate beneficial owners, Mr. Feize Zhang and Mr. Jingfeng Lv, officers and directors of the Company, the re-domiciling transaction and VIE arrangement were accounted for as a transfer of entities under common control and all disclosures referencing business operations of our VIEs were made throughout this prospectus as if the share exchange transaction had become effective as of the beginning of the first period presented, even though the Company was not yet incorporated in Nevada. As such, the Company and its subsidiaries and VIEs are hereinafter collectively referred to as (“the Company”) and all are consolidated in our financial statements.
Contractual Arrangements
Gold mining is a highly restricted industry in China. As such, it is extremely difficult for PRC gold mining companies to obtain government approval on having foreign ownership. Accordingly, our PRC subsidiary, SBCL, which is considered foreign-invested, is currently ineligible to directly own the required exploration and mining licenses in China. Our exploration and mining business is currently provided through contractual arrangement with our VIEs in China, which are currently SSIC and its subsidiaries, JinGuan and XinGuan.
Our variable interest entities directly sell non-refined gold concentrates to our clients which are typically the smelters in China. We have been and are expected to continue to be dependent on our variable interest entities to operate our exploration and mining business. SBCL has entered into contractual arrangements with our variable interest entities, which enable us to:
|
-
|
exercise effective control over our VIEs;
|
|
-
|
receive substantially all of the economic benefits from our VIEs; and
|
|
-
|
have an exclusive option to purchase all of the equity interests in our VIEs.
|
SBCL entered into a series of agreements (“VIE agreements”) among SSIC and the individual owners of SSIC, JinGuan and XinGuan; details of the VIE agreements are as follows:
|
1.
|
Exclusive Technical Service and Business Consulting Agreement, signed on May 15, 2010 - SBCL has the exclusive right to provide to SSIC, JinGuan and XinGuan consulting services, including operational management, human resources management, research and development of the technologies related to the operations of SSIC, JinGuan and XinGuan. SSIC, JinGuan and XinGuan pays to SBCL annually consulting service fees in an amount equal to all of their revenue for such year. These agreements run for a 10-year term and are subject to automatic renewal for an additional 10 years, provided that no objection is made by both parties on the renewal.
|
|
2.
|
Exclusive Option Agreement - SBCL has the option to purchase all assets and ownership of SSIC, JinGuan and XinGuan at any time.
|
|
3.
|
Equity Pledge Agreement, signed on May 15, 2010, - SSIC, JinGuan and XinGuan agree to pledge their legal interest to SBCL as a security for the obligations under the Exclusive Technical Service and Business Consulting Agreement.
|
|
4.
|
Proxy Agreement - SSIC, JinGuan and XinGuan irrevocably grant and entrust SBCL the right to exercise its voting and other stockholder rights.
|
|
5.
|
Operating Agreement, signed on May 15, 2010 - SBCL agrees to participate in the operations of SSIC, JinGuan and XinGuan in different aspects.
|
With the above agreements, SBCL demonstrates its ability to control SSIC, JinGuan and XinGuan as the primary beneficiaries and the operating results of the VIEs were included in the consolidated financial statements for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008.
23
Current Mining Property and Location
Cunli Ji Gold Mine (“CJ Mine”)
Our first project, the Cunli Ji Gold Mine, began in May 2009 and is operated and managed by our subsidiary, XinGuan. On May 4, 2009, the Company, through its VIE, XinGuan entered into a master agreement, an operating lease agreement and an acquisition agreement with Penglai City Gold Mining Holding Co. Ltd., an unrelated third
party. The master agreement sets out the general terms of the operating lease agreement and the acquisition agreement. Pursuant to the operating lease agreement, XinGuan agreed to pay a monthly rent of $14,641 (RMB 100,000) for the right to lease and manage the gold mine for a term of 20 months, with a rental deposit of $2,925,174 (equivalent to RMB 20 million). Pursuant to the acquisition agreement, XinGuan agreed to acquire the gold mine for a purchase consideration of $5,089,803 if the following conditions are satisfied upon the expiry of the operating lease agreement: 1) the satisfaction of certain levels of the monthly production capacity, and 2) the production management of the mine reaches ISO (or equivalent) standard. Upon successful closing of the acquisition, the aforesaid rental deposit would become part of the purchase consideration.
Shandong is a coastal province of eastern PRC. Shandong is located on the eastern edge of the North China Plain. From the economic aspect, Shandong is one of the wealthiest provinces in China, with its economic development focuses on large enterprises with well-known brand names. Shandong ranks first among the provinces in the production of precious metals such as gold and diamonds. It is also the biggest industrial producer and one of the top manufacturing provinces in China. Shandong has also benefited from South Korean and Japanese investment, due to its geographical proximity to those countries. In 2008, the nominal GDP and GDP per capital for Shandong were RMB3.11 trillion (US$446 billion) and RMB33,083 (US$4,749) respectively, ranking second and seventh accordingly in the country. Penglai City is a port, a town and an administrative subdivision of Yantai, which Yantai is a prefecture-level city in Shandong province. Yantai is the largest fishing seaport in Shandong and a robust economic center today.
Mining Areas
CJ Mine consists of three mining and exploration areas namely, Cunliji Mining Area (”Cunliji”), Jiyingshan Exploration Area (”Jiyingshan”) and Chenjiagou Exploration Area (”Chenjiagou”). Cunliji Mining Area has an exploration right and a mining right while both Jiyingshang and Chenjiagou each has an exploration right.
Each individual area has an exploration right and a mining right. Geographically, Jiyingshan locates in the middle of the whole site; Chenjiagou on west to northwestern side; and Cunliji on the southeast side.
Resources and Reserves Estimation
In a geological report prepared by Shandong Zhengyuan Geological Exploration Institute located in Penglai, Shandong on August 2009, the CJ Mine contains gold reserves in three categories including 111b, 333 and 334, according to current Chinese Reserve Classification. Average thickness of each ore body is 0.94m, 1.68m and 1.37m for the category 111b, 333, 334, respectively. Total ore tonnage of the mine is estimated at 3,230,100 tonnes, and estimated total gold content and average gold grade of the mine are 18,462.27 kg and 5.72g/tones, respectively. 111b, 333 and 334 are categorization codes under the Chinese Reserve Classification Standard and the following table refers to the conversion of ore reserve standards from Current Chinese Reserve Category to JORC code.
Allocation guide for Resource estimates based on a broad comparison between
the JORC Code classification, the Previous Chinese ”Reserve Category” and
the Current Chinese “Reserve Category”
|
JORC Code
|
Previous Chinese "Reserve Category"
|
Current Chinese “Reserve” Category
|
|
Measured Resource
|
A
|
111, 111b, 121, 121b, 122, 122b, 2M11, 2M21, 2M22, 2S21, 331
|
|
Indicated Resource
|
B
|
|
|
|
|
|
|
Inferred Resource
|
C
|
2S11, 2S22, 332
|
|
|
D
|
333, 334
|
JORC refers to the Australasian Joint Ore Reserves Committee, which is sponsored by the Australian mining industry and its professional organizations. The JORC Code is the code for Reporting of Mineral Resources and Ore Reserves and is widely accepted as a standard for professional reporting purposes. The JORC Code provides minimum standards for public reporting to ensure that investors and their advisers have all the information they would reasonably require for forming a reliable opinion on the results and estimates being reported.
A Mineral Resource is defined in the JORC Code as an identified in-situ mineral occurrence from which valuable or useful minerals may be recovered. Mineral Resources are classified as Measured, Indicated or Inferred according to the degree of confidence in the estimate:
|
-
|
a Measured Resource is one which has been intersected and tested by drill holes or other sampling procedures at locations which are close enough to confirm continuity and where geo-scientific data are reliably known;
|
|
-
|
an Indicated Resource is one which has been sampled by drill holes or other sampling procedures at locations too widely spaced to ensure continuity, but close enough to give a reasonable indication of continuity and where geo-scientific data are known with a reasonable level of reliability; and
|
|
-
|
an Inferred Resource is one where geo-scientific evidence from drill holes or other sampling procedures is such that continuity cannot be predicted with confidence and where geo-scientific data may not be known with a reasonable level of reliability.
|
25
The mine resource information for the CJ Mine is summarized as follow.
|
CJ Mine
|
||||
|
Current Chinese Reserve Category
|
111b
|
333
|
334
|
Total
|
|
JORC Code
|
Measured
|
Inferred
|
Inferred
|
|
|
Mine Resource Information
|
||||
|
Mineral Resource (Tonnage)
|
73,000
|
1,359,000
|
1,798,100
|
3,230,100
|
|
Gold Grade (g/ t Au)
|
6.23
|
4.77
|
6.41
|
5.72 (avg)
|
|
Estimated Gold Content (kg)
|
455
|
6,488.39
|
11,518.88
|
18,462.27
|
CAUTIONARY NOTE TO U.S. INVESTORS CONCERNING ESTIMATES OF INFERRED RESOURCES
These tables use the term “Inferred Resources”. We advise U.S. investors that while this term is recognized and required by Chinese Regulations, the U.S. Securities and Exchange Commission does not recognize the term. “Inferred Resources” have a great amount of uncertainty as to their existence and great uncertainty as to their economic or legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. U.S. investors are cautioned not to assume that all or part of an Inferred Resource exists or is economically or legally mineable on our properties.
Future potential mining projects
We target to grow proactively through continual sourcing of existing gold mines in the PRC and managing them. Before investing in a potential mining project, we intend to go through a series of procedures for preliminary assessment in order to determine the amount of minerals, if any, and therefore whether the subject property should be acquired, based on the economic viability of extracting the potential minerals and profitably processing them. To do so, we intend to engage geotechnical professionals to conduct such assessments and analyses.
The following table summarizes our estimated costs in our Use of Proceeds section for the next 12 months for such assessments and analyses :
|
Preliminary geological, geotechnical and hydrological assessments and surveys
|
$40,000
|
|
Preliminary soil geochemical surveys, sampling and geological mapping of the veins within anomalous zones
|
$60,000
|
|
Test drilling of prime targets
|
$100,000
|
|
Total:
|
$200,000
|
Sources of Revenue and Distribution Methods
Revenues are generated from the sales of gold concentrates, which are the principal raw materials used in gold smelting operations to produce gold. The Company, though its operating subsidiary, XinGuan, extracts chunks of mineral rocks from the mining site, which then undergo a series of physical processes, including crushing, screening, grinding and scanning to produce gold concentrates. All the above processes are outsourced to independent third-party contractors and we do not take possession of the mineral rocks or any gold concentrates until the process has been completed. We only become directly involved and take possession of the gold concentrates when they are ready for sale to the smelters and the refineries. The selling prices are determined from two factors, the amount of gold in the gold concentrates and the price of gold at the date of sale. The amount of gold in the gold concentrates is determined and agreed between the Company and the smelter or refinery and the selling price is determined according to the official gold price at the time of sale, as indicated by the Shanghai Gold Exchange (http://www.sge.sh), an entity governed by the PRC Government.
We are selling the gold concentrates we produced through normal channels associated with the industry. Specifically, we are selling our gold concentrates to smelting plants which then refine the concentrates to produce gold. Since inception of our first mining project, we have sold the majority of our gold concentrates to ShanDong Humon Smelting Co. Ltd. (http://en.hbyl.cn/newEbiz1/EbizPortalFG/portal/html/index.html), an unrelated third party, which is a public company listed on the China ShenZhen A-Share Exchange under the stock code 002237. Since we have a well established and cooperative arrangement with ShanDong Humon Smelting Co. Ltd. to date, we plan to continue to sell our gold concentrates to them in the future. As gold is a commodity product with prices governed by the PRC government, we do not see the need or benefit of shopping around for better prices from other smelters at this time.
26
Proposed Business Expansion/Business Strategy
We intend to continue to seek for and possibly acquire distressed gold mines that may have low productivity because of inadequate funds and primitive technologies, but proven or probably reserves. Our business model includes researching of early stage gold mines with good profit potential, conducting feasibility studies to identify suitable projects, leasing the suitable mining sites and facilities and managing the mining operations on these selected sites, with the ultimate goal of acquiring the mine if the operations prove to be satisfactory under our criteria. The criteria we intend to review and base our decision to purchase a property are as follows:
|
-
|
Whether the average monthly volume of minerals reaches a certain level, which we will determine as appropriate for each property
|
|
-
|
Whether the mine attains and passes international known standard (e.g. ISO or equivalent) in regard to its operation flow
|
To ensure all mines are legally and properly operated, all target gold mines are required to have full sets of government-approved licenses before effecting commencement of any business operation.
Mining in China - An Overview
Currency
The current monetary unit in China is the RMB (also referred to as yuan). At December 31, 2009, the exchange rate was 6.8372 RMB per One U.S. Dollar.
Outward Remittance of Funds by Foreign Investors
China has a set of regulations relating to outward remittance by foreign investors of their share of profits and final repatriation of their investments in foreign currency. Subject to payment of applicable taxes on profits and payment of its paid-up subscribed capital contribution, a foreign investor may remit funds out of China, in foreign exchange, its shares of the distributable profits or dividends. Remittance by a foreign investor of some other amounts (including, for instance, proceeds of sale arising from a disposal by the foreign investor of any of its investment in China and a foreign investor’s distributable income derived from the assets of the foreign investment enterprise after its liquidation) out of China is subject to the approval of the State Administration of Foreign Exchange or its local branch office. Additional restrictions on the repatriation of earnings in China may be imposed in the future.
Environmental Laws and Regulations
The Environmental Protection Law of the People’s Republic of China has established the basic principles for balancing environmental protection with economic and social development and defines the rights and duties of governments of all levels and of all individuals and corporations regarding environmental protection. China has enacted and promulgated many special laws governing environmental protection, including the Law on the Prevention and Control of Water Pollution, the Law on the Prevention and Control of Air Pollution and the Law on the Prevention and Control of Environmental Pollution by Solid Waste. In addition, the Chinese government has enacted more than 30 administrative decrees regarding environmental protection.
Mineral exploration must be carried out in compliance with all environmental legislation and regulations and an environmental impact assessment report must be filed when applying for the establishment of a mineral exploration or mining corporation and when applying for a mining permit. An environmental impact assessment must be completed by a qualified Chinese entity and the environmental impact assessment report must be approved by the provincial or state environmental protection agency.
Our current project is operating in compliance with all environmental laws, rules and regulations and has obtained all of the necessary permits and licenses for its current mining operations.
27
Exploration rights and mining rights can be transferred, with government approval, provided that, among other things, a minimum capital investment has been made and a minimum period has passed since the transferor’s original acquisition of such rights.
The Chinese government has classified mineral exploration by foreign companies as being encouraged, allowed, restricted or prohibited, depending on the mineral. Foreign investment in the mining of low-grade and refractory gold ores is encouraged, while mining of other types of gold ores are restricted.
A mining company will be required to obtain the lawful right to use the land it will occupy in connection with operation of the mine. It may do so through a grant or allocation of land use rights from the State, or through a transfer or lease of rights from the prior holder of the land use rights.
Government and Industry Regulation
We may be delayed by or unable to comply with government and environmental laws, rules and regulations related to our operations which could severely impact our business operations. Our proposed mineral exploration programs will be subject to extensive laws, rules and regulations. Various governmental permits will be required prior to implementation of proposed exploration operations. We are not assured of receiving such permits as and when needed for operations, or at all. There is no assurance environmental or safety standards more stringent than those presently in effect may not be enacted, which could adversely affect future exploration programs. Also, the industry often finds itself in conflict with the interests of private environmental groups which often have an adverse effect on the mining industry.
There are several governmental regulations that materially restrict the exploration of minerals. We will be subject to the mining laws and regulations of Shandong Province as we carry out our exploration program. We may be required to obtain work permits, post bonds and perform remediation work for any physical disturbance to the land in order to comply with these regulations. While our planned exploration program budgets for regulatory compliance, there is a risk that new regulations could increase our time and costs of doing business and prevent us from carrying out our exploration program.
Competition
We expect to compete with many mining and exploration companies in identifying and acquiring claims with gold mineralization. We believe that most of our competitors have greater resources than us. We also expect to compete for qualified geological and environmental experts to assist us in our exploration of mining prospects, as well as any other consultants, employees and equipment that we may require in order to conduct our operations. We cannot give any assurances that we will be able to compete without adequate financial resources.
Intellectual Property
We do not currently own the rights to any intellectual property.
Employees and Employment Agreements
There are currently 45 full-time employees working for our Company, including our subsidiaries and VIEs, the majority of which are working at our mine. We have no formal employment agreements with any officers, directors or employees.
28
DESCRIPTION OF PROPERTY
The Company’s headquarters is located in Futian District, Shenzhen, China. The address is Room 3207, New World Center, 6009 Yitian Road, Futian District, Shenzhen, China. The monthly rental for the office is US$3,480 with a contract lease period from March 1, 2009 to March 1, 2011.
The Company has a branch office in the City of YanTai, ShanDong, China with the address of Room 501-505, Lantian International Building, 59 Changjiang Road, Development District, Yantai, China. The rent is US$1,923 per month with a contract lease period from March 1, 2010 to February 28, 2011.
LEGAL PROCEEDINGS
We are not involved in any pending legal proceeding, nor are we aware of any pending or threatened litigation against us.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No public market currently exists for shares of our common stock. Following completion of this offering, we intend to apply to have our common stock listed for quotation on the Over-the-Counter Bulletin Board.
Penny Stock Rules
The Securities and Exchange Commission has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).
A purchaser is purchasing penny stock which limits the ability to sell the stock. The shares offered by this prospectus constitute penny stock under the Securities and Exchange Act. The shares will remain penny stocks for the foreseeable future. The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, which makes it more difficult for a purchaser to liquidate his/her investment. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in us will be subject to Rules 15g-1 through 15g-10 of the Securities and Exchange Act. Rather than creating a need to comply with those rules, some broker-dealers will refuse to attempt to sell penny stock.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document, which:
- contains a description of the nature and level of risk in the market for penny stock in both public offerings and secondary trading;
- contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the Securities Act of 1934, as amended;
- contains a brief, clear, narrative description of a dealer market, including "bid" and "ask" price for the penny stock and the significance of the spread between the bid and ask price;
- contains a toll-free telephone number for inquiries on disciplinary actions;
- defines significant terms in the disclosure document or in the conduct of trading penny stocks; and
- contains such other information and is in such form (including language, type, size and format) as the Securities and Exchange Commission shall require by rule or regulation;
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, to the customer:
- the bid and offer quotations for the penny stock;
29
- the compensation of the broker-dealer and its salesperson in the transaction;
- the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and
- monthly account statements showing 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 acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling their securities.
Regulation M
Our officers and directors, who will offer and sell the Shares, are aware that they are required to comply with the provisions of Regulation M promulgated under the Securities Exchange Act of 1934, as amended. With certain exceptions, Regulation M precludes the officers and directors, sales agents, any broker-dealer or other person who participate in the distribution of shares in this offering from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete.
Reports
Upon completion of this offering, we will be subject to certain reporting requirements and will furnish annual financial reports to our stockholders, certified by our independent accountants, and will furnish unaudited quarterly financial reports in our quarterly reports filed electronically with the SEC. All reports and information filed by us can be found at the SEC website, www.sec.gov.
Stock Transfer Agent
We are currently self-clearing and have appointed Michael Kessler, Esq., our legal counsel, 3436 American River Drive, Suite 11, Sacramento, CA 95864; (916) 239-4000, to hold and keep the stock transfer ledger up to date for the Company. Upon completion of the offering, we intend to engage the services of and appoint a stock transfer agent in the U.S.
FINANCIAL STATEMENTS
Our fiscal year end is December 31. We intend to provide financial statements audited by an Independent Registered Public Accounting Firm to our shareholders in our annual reports. Our audited financial statements for the fiscal years ended December 31, 2009 and 2008 and for the period from December 1, 2008 (inception) through December 31, 2008, and our unaudited financial statements for the three-month period ended March 31, 2010, for our wholly-owned subsidiaries and VIEs, are included in their entirety at the end of this Prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Forward Looking Statements
The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. We disclaim any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
30
Selected Financial Data
The following table provides consolidated selected financial data about our Company, our wholly-owned subsidiaries and VIEs for the fiscal years ended December 31, 2009 and 2008 and for the three-months ended March 31, 2010. For detailed financial information, see the financial statements included in this prospectus.
|
Balance Sheet Data:
|
3/31/2010
|
12/31/2009
|
|
12/31/2008
|
||||||
|
Cash and cash equivalents
|
$
|
893,659
|
$
|
598,288
|
$
|
448,750
|
||||
|
Total assets
|
$
|
4,480,589
|
$
|
4,009,318
|
$
|
448,750
|
||||
|
Total liabilities
|
$
|
3,368,297
|
$
|
3,195,372
|
$
|
7,295
|
||||
|
Stockholders’ equity
|
$
|
1,112,292
|
$
|
813,946
|
$
|
441,455
|
||||
Other than the shares offered by this prospectus, no other source of capital has been identified or sought. If we experience a shortfall in operating capital prior to receiving the proceeds of this offering, our officers and directors have verbally agreed to advance the funds to us to complete this offering and apply for listing on the OTCBB.
Limited Operating History
There is little historical financial information about our Company upon which to base an evaluation of our performance or to make a decision regarding an investment in our shares. We cannot guarantee we will be successful in our business operations or that we will achieve significant, if any, level of market acceptance for our proposed business operations and products. Our business could be subject to any or all of the problems, expenses, delays and risks inherent in the establishment of a new business enterprise, including limited capital resources, possible delays in the exploration and/or development of our properties, possible cost overruns due to price and cost increases in services we require. Therefore, we cannot guarantee we will be able to achieve or maintain profitable operations. Further, there is no assurance that we will not encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated.
Since inception, we have suffered from continuous losses with an accumulated deficit of $690,605 as of our year ended December 31, 2009 and have incurred negative operating cash flow. The continuation of our business operations is dependent upon the continuing financial support of our principals and shareholders, the proceeds of this offering, generating significant revenue and achieving profitability. These actions all involve certain growing and investment strategies; however, there is no assurance we will be successful in securing sufficient funds to sustain our operations and future acquisition plans. These and other factors raise substantial doubt by our auditors about our ability to continue as a going concern.
Overview and Future Plan of Operations
China ShouGuan Mining Corporation (the Company) was incorporated in the State of Nevada on May 4, 2010. We are a holding company that conducts business operations through our subsidiaries and variable interest entities (VIEs) in Shandong Province in the People’s Republic of China PRC.
We were founded by a number of business professionals and experts in China who specialize in mining technologies, mining resources management and financial and strategic management. Our primary focus is on acquiring existing gold mine projects in Shandong province of the PRC, preferably those with measured or indicated gold reserves. These potential targets are mostly run with low productivity because of inadequate funds and primitive technologies. We
31
plan to re-engineer and redevelop these gold mines through the transfer of advanced exploration and mining technologies, capital injection and effective management.
Our business model includes sourcing of early stage gold mines with good profit potential, conducting feasibility studies to identify suitable projects, leasing the suitable mining sites and facilities, and managing the mining operations on these selected sites, with the goal of acquiring the mine if the operations prove to be satisfactory, based on the review criteria set by our experienced management. In addition, we also provide consulting services in areas related to mine exploration and analysis to our clients.
Revenues are derived from the sales of gold concentrates, the principal raw material used in gold smelting operation to produce gold. All mining operations are outsourced to independent third contractors and we only take possession of the gold concentrates when they are sold to smelters. At that time, the selling prices are determined from two factors, the amount of gold in the gold concentrates and the price of gold on the date of sale. The amount of gold in the gold concentrates is determined and agreed between the Company and the smelters and then the selling price is determined according to the official gold price at the time of sale as indicated by the Shanghai Gold Exchange (http://www.sge.sh), an entity governed by the PRC Government. On the consulting side, revenues are derived on a project-by-project basis and payment is collected as we complete our services,as outlined in the scope of each individual project.
We target to grow proactively through continual sourcing of existing gold mines in the PRC and managing them. These projects will be executed by our subsidiaries, VIE’s or related companies in China. Cunli Ji Gold Mine was the first project commenced in May 2009. To ensure all mines are legally and properly operated, all target gold mines are required to have full sets of government-approved licenses before effecting commencement of any business operations.
Current Operations
In May 2009, we commenced our first project, the Cunli Ji Mine which is located in Shandong, China. On May 4, 2009, the Company, through its VIE, XinGuan entered into a master agreement, an operating lease agreement and an acquisition agreement with Penglai City Gold Mining Holding Co. Ltd. The master agreement sets out the general terms of the operating lease agreement and the acquisition agreement. Pursuant to the operating lease agreement, XinGuan agreed to pay a monthly rent of $14,641 (RMB 100,000) for the right to lease and manage the gold mine for a term of 20 months, with a rental deposit of $2,925,174 (equivalent to RMB 20 million). Pursuant to the acquisition agreement, XinGuan agreed to acquire the gold mine for a purchase consideration of $5,089,803 if the following conditions are satisfied upon the expiry of the operating lease agreement: 1) the satisfaction of certain level of the monthly production capacity and 2) the production management of the mine reaches ISO (or equivalent) standard. Upon successful closing of the acquisition, the aforesaid rental deposit would become part of the purchase consideration.
The Company has been deriving revenue since the commencement of Cunli Ji Mine. Currently we derive our revenue from the sales of non-refined gold concentrates produced from Cunli Ji Mine and our expenses are mainly the leasing fee, the direct costs associated with the operation and overhead expenses such as staff salaries and other general administrative expenses. Management believes that the revenue generated from the Cunli Ji Mine, plus our cash reserves, will allow our operation to continue without requiring any external funding in the next twelve months. Management does not intend to use any of the proceeds from this offering on the operation of the Cunli Ji Mine.
For acquisition of mines, the capital requirement can be substantial. We intend to attain the capital for acquisition of future mining operations either from internal funding generated from our operations, or in the event that is not adequate, external source of funding which we may generate either through future debt or equity financing. Nevertheless, management does not intend to use any of the proceeds from this offering on acquisition of the Cunli Ji or any other future mines.
32
Results of Operations
The following table set forth key components of our results of operations for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. All numbers referenced are in U.S. Dollars:
For Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009
|
31-Mar-10
|
31-Mar-09
|
Change in %
|
|||||||
|
Revenues
|
$
|
1,103,777
|
$
|
-
|
100.00%
|
||||
|
Costs of Revenues
|
(358,059)
|
-
|
100.00%
|
||||||
|
Gross Profit
|
745,718
|
-
|
100.00%
|
||||||
|
Administrative Expenses
|
(319,493)
|
(55,044)
|
480.43%
|
||||||
|
Income (Loss) From Operations
|
426,225
|
(55,044)
|
874.34%
|
||||||
|
Other Income and (Expenses)
|
(17,878)
|
396
|
(4,614.65%
|
) | |||||
|
Income (Loss) Before Income Tax
|
408,347
|
(54,648)
|
847.23%
|
||||||
|
Income Tax Expenses
|
(110,333)
|
-
|
100.00%
|
||||||
|
Net Income (Loss)
|
$
|
298,014
|
$
|
(54,648)
|
645.33%
|
||||
|
Other Comprehensive Income:
|
|||||||||
|
Foreign Currency Translation Adjustment
|
332
|
4,198
|
(92.09%)
|
||||||
|
Comprehensive Income (Loss)
|
$
|
298,346
|
$
|
(50,450)
|
691.37%
|
||||
|
|
|||||||||
Net Revenues
We commenced gold mining activity in May 2009 and began selling of gold concentrate in July 2009. Gold concentrate is mainly sold to smelting plants in the Shandong Province, PRC. Apart from the selling of gold concentrate, we also provide consulting services through our own experts.
Revenue for the three months ended March 31, 2010 and 2009 comprised the following:
|
31-Mar-10
|
%
|
31-Mar-09
|
%
|
||||||
|
Revenues
|
|||||||||
|
- Sales of Gold Concentrate
|
$
|
807,534
|
73.16
|
$
|
-
|
-
|
|||
|
- Consulting Services
|
296,243
|
26.84
|
-
|
-
|
|||||
|
$
|
1,103,777
|
100
|
$
|
-
|
-
|
||||
|
Cost of Revenue
|
|||||||||
|
- Sales of Gold Concentrate
|
$
|
331,526
|
92.59
|
$
|
-
|
-
|
|||
|
- Consulting Services
|
26,533
|
7.41
|
-
|
-
|
|||||
|
$
|
358,059
|
100
|
$
|
-
|
-
|
||||
|
Gross Profit
|
|||||||||
|
- Sales of Gold Concentrate
|
$
|
476,008
|
63.83
|
$
|
-
|
-
|
|||
|
- Consulting Services
|
269,710
|
36.17
|
$
|
-
|
-
|
||||
|
745,718
|
100
|
||||||||
|
Gross Profit (Total)
|
$
|
745,718
|
N/A
|
$
|
-
|
N/A
|
|||
|
Gross Profit Margin
|
|||||||||
|
- Sales of Gold Concentrate
|
58.95%
|
N/A
|
-
|
N/A
|
|||||
|
- Consulting Services
|
91.04%
|
N/A
|
-
|
N/A
|
33
Net revenue for the three months period ended March 31, 2010 was $1.10 million, of which approximately $0.81 million was the sales of gold concentrate, which accounted for 73.16% of the total revenue. Consulting services income amounted to $0.29 million, which accounted for 26.84% of the total revenue.
Cost of Revenue
Cost of revenue for the three months ended March 31, 2010 was $0.36 million, it consisted primarily of direct materials, direct labor, sub-contracting mining fee, extracting fee and other operating overhead, which were primarily attributable to the sales of gold concentrates. Shipping and handling costs associated with the distribution of our products were borne by the customers.
Gross Profit
Our gross profit margin for the three months ended March 31, 2010 were 58.95% and 91.04% for the sales of gold concentrate and provision of consulting services respectively.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2010 comprised mainly of salaries and staff welfare expenses, legal and professional fees, entertainment expenses, traveling and hotel accommodation expenses and office expenses. General and administrative expense in 2010 increased significantly by 480.43% and the increase was attributable to the fact that we commenced gold mining activity in May 2009.
Other Income (expense)
Other expenses for the three months ended March 31, 2010 were $17,878, representing a decrease of 4,614.65% over the same period in year 2009. The decrease was primarily attributable to an increase in loan interest expense.
Income Tax Expenses
Income tax expense amounted to $0.11 million for the three months ended March 31, 2010 was primarily attributable to the commencement of mining activity in May 2009.
We have subsidiaries that operate in various countries: United States, British Virgin Islands, Hong Kong and the People’s Republic of China that are subject to taxes in the jurisdictions in which they operate, as follows:
United States of America
We are incorporated in the State of Nevada and are subject to the tax laws of the United States of America. Since no income is derived in the US, we believe that we are not subject to US taxes.
British Virgin Islands
Under the current BVI law, BSL is not subject to tax on its income or profits. In addition, dividends and capital gains from our investments in the BVI are not subject to income taxes and no withholding tax is imposed on payments of dividends to the Company. For the three months ended March 31, 2010 and 2009, BSL generated an operating income of $83,484 and $0 respectively.
Hong Kong
GWIL is subject to Hong Kong Profits Tax, which is charged at the statutory income rate of 16.5% on assessable income. For the three months ended March 31, 2010 and 2009, GWIL generated an operating income of $173,933 and $0 respectively.
34
The PRC
We have generated all of our income through our subsidiaries and VIEs operating in the PRC for the three months ended March 31 2010 and 2009. Effective from January 1, 2008, all entities in the PRC are subject to the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”) at a unified income tax rate of 25%.
Net (Income) Loss
Net income increased to $0.30 million in the three months ended March 31, 2010 and the increase was attributable to the commencement of gold mining activity and the selling of gold concentrate since May 2009, together with consulting services provided to customers during the first quarter of 2010.
For Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
|
Year Ended December 31, 2009
|
Period from December 1, 2008 (Inception) through December 31, 2008
|
|
Change in %
|
||||
|
Revenues
|
$
|
1142818.00
|
$
|
-
|
100%
|
||
|
Costs of Revenues
|
(915775.00)
|
-
|
100%
|
||||
|
Gross Profit
|
227043.00
|
-
|
100%
|
||||
|
Administrative Expenses
|
(878169.00)
|
(4341.00)
|
20,129.65%
|
||||
|
Income (Loss) From Operations
|
(651126.00)
|
(4341.00)
|
14,899.45%
|
||||
|
Other Income and (Expenses)
|
1697.00
|
232.00
|
631.47%
|
||||
|
Loss Before Income Tax
|
(649429.00)
|
(4109.00)
|
15,705.04%
|
||||
|
Income Tax Expenses
|
(28513.00)
|
-
|
100%
|
||||
|
Net Loss
|
$
|
(677942.00)
|
$
|
(4109.00)
|
16,398.95%
|
||
|
Other Comprehensive Income (Loss):
|
|||||||
|
Foreign Currency Translation Adjustment
|
10308.00
|
(1019.00)
|
(1,111.58%)
|
||||
|
Comprehensive Loss
|
$
|
(667,634.00)
|
$
|
(5128.00)
|
12,919.38%
|
||
Net Revenue
We commenced gold mining activities in May 2009 and sales of gold concentrate in July 2009. Gold concentrate is mainly sold to smelting plants in the Shandong Province, PRC. Net revenue for the year ended December 31, 2009 was $1.14 million, of which approximately $0.92 million was sold to Shandong Humon Smelting Gold Co., Ltd., an unrelated third party, and approximately $0.22 million was sold to Shandong Guo Dai Co., Ltd., an unrelated third party.
Cost of Revenue
Cost of revenue for the year ended December 31, 2009 amounted to $0.92 million and consisted primarily of direct materials, direct labor, subcontracting mining fees, extracting fees and other operating overhead, which were primarily attributable to the sales of gold concentrate. Shipping and handling costs, associated with the distribution of finished products were borne by the customers.
Gross Profit
Our gross profit for the year ended December 31, 2009 was $0.23 million, with a gross profit margin of 19.87%. Our management believes that the gross profit margin will improve in the future due to an improvement in technology and operational efficiency.
35
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2009 were mainly comprised of salaries and staff welfare expenses, legal and professional fees, entertainment expenses, traveling and hotel accommodation expenses and office expenses. General and administrative expenses increased significantly to $878,169 in 2009, representing an increase of 20,129.65% over the same period in 2008. The substantial increase was due to the fact that we did not commence any gold mining activity during the same period ended December 31, 2008 that resulted in a small amount of general administrative expenses.
Other Income
Other income for the year ended December 31, 2009 was $1,697, representing an increase of 631.47% over the same period in 2008. The increase was primarily attributable to the increase in bank interest income.
Income Tax Expenses
Income tax expense increased to $0.03 million for the year ended December 31, 2009 and the increase was primarily attributable to the commencement of mining activity in July 2009.
Net (Income) Loss
Net income increased to $0.68 million in the year ended December 31, 2009 which was attributable to the commencement of gold mining activity and the sales of gold concentrate since July 2009.
Liquidity and Capital Resources
Our primary liquidity needs are to fund operational expenses, capital expenditures and potential acquisition of gold mining properties in the Shandong province. To date, we have financed our working capital requirements and capital expenditures through internally generated cash and capital contribution from our existing shareholders.
As of December 31, 2009, our current assets were $776,115 and our current liabilities were $3,195,372. Cash and cash equivalents totaled $598,288 as of December 31, 2009. Stockholders’ equity at December 31, 2009 was $813,946.
Net cash provided by operating activities was $0.27 million for the three months ended March 31, 2010 as compared to net cash used in operating activities of $3.21 million for the year ended December 31, 2009. Net cash provided by operating activities increased by $3.48 million was primarily due to an increase in our net income, other receivables and prepayment, a decrease in accounts payable, other payable and accrued liabilities and rental deposit.
Net cash used in investing activities amounted to $0.10 million for the 3 months ended March 31, 2010 as compared to net cash used in investing activities of $0.32 million for the year ended December 31, 2009. Net cash used in investing activities decreased by $0.22 million primarily due to the decrease in the purchases of plant and equipment and construction in progress.
Net cash provided by financing activities amounted to $0.12 million for the period ended March 31, 2010 as compared to net cash provided by financing activities of $3.67 million and the decrease was attributable to the proceeds from loan payable and capital contribution from stockholders.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, financings or other relationships.
36
Leased Mine Rental Deposit
On May 4, 2009, the Company, through its VIE, XinGuan, entered into a master agreement, an operating lease agreement and an acquisition agreement with Penglai City Gold Mining Holding Co. Ltd., an unrelated third party. The master agreement sets out the general terms of the operating lease agreement and the acquisition agreement. Pursuant to the operating lease agreement, XinGuan agreed to pay a monthly rent of $14,641 (RMB 100,000) for the right to lease and manage the gold mine for a term of 20 months with a rental deposit of $2,925,174 (equivalent to RMB 20 million). Pursuant to the acquisition agreement, XinGuan agreed to acquire the gold mine for a purchase consideration of $5,089,803 if the following conditions are satisfied upon the expiry of the operating lease agreement: 1) the satisfaction of certain level of the monthly production capacity and 2) the production management of the mine reaches ISO (or equivalent) standard. Upon successful closing of the acquisition, the aforesaid rental deposit would become part of the purchase consideration.
Amount Due to a Related Party
As of December 31, 2009 we owed a total of $29,252 to Mr. Zhang, a director, for temporary advances he made to us, which was used in the general course of business. The amount due to Mr. Zhang is unsecured and interest-free.
China Contribution Plan
Under the PRC Law, full-time employees of its subsidiaries in the PRC are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. The Company is required to accrue for these benefits based on certain percentages of the employees’ salaries. The total contributions made for such employee benefits were $19,663 and $0 for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, respectively.
Statutory Reserve
Under the PRC Law, the Company’s subsidiaries and variable interest entities in the PRC are required to make appropriation to the statutory reserve based on after-tax net earnings and determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve should be at least 10% of the after-tax net income until the reserve is equal to 50% of the registered capital. The statutory reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.
For the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, we contributed $8,554 and $0 to statutory reserves, respectively.
Commitments and Contingencies
Operating lease commitments - In respect to the rental payments due under non-cancelable operating leases in the next two years as follows: US$0.24 million for year 2010 and US$0.01 million for year 2011, resulting in a total for the next two years of US$0.25 million.
37
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s results of operations and liquidity and capital resources are based on our audited consolidated financial statements for the years ended December 31, 2009 and 2008, which have been prepared in accordance with U.S. GAAP. In connection with the preparation of consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates and judgments included within these estimates are based on historical experience, current trends and other factors we believe to be relevant at the time the consolidated financial statements were prepared. On a regular basis, the accounting policies, assumptions, estimates and judgments are reviewed to ensure that the consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from the assumptions and estimates, and such differences could be material.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions are used for, but are not limited to: (1) inventory costs and reserves; (2) asset impairments (3) and depreciable lives of assets. Future events and their effects cannot be predicted with certainty, and accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update these assumptions and estimates on an ongoing basis and may employ outside experts to assist us with these evaluations. Actual results could differ from the estimates that have been used.
Significant accounting policies are discussed in Note 3, Summary of Significant Accounting Policies, to the accompanying audited consolidated financial statements. We believe the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, as they require management to make difficult, subjective or complex judgments, and to make estimates about the effect of matters that are inherently uncertain.
Basis of Consolidation
The audited consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs. All inter-company balances and transactions between the Company and its subsidiaries and VIEs were eliminated upon consolidation. We adopted the Accounting Standards Codification (“ASC”) Topic 810-10-5-8, “Variable Interest Entities”. ASC Topic 810-10-5-8 requires a variable interest entity or VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIEs or is entitled to receive a majority of the VIEs’ residual returns.
Variable Interest Entities (VIEs)
The Company’s subsidiary, SBCL entered into a series of agreements (“VIE agreements”) with SSIC, JinGuan and XinGuan, and the individual owners of SSIC, JinGuan and XinGuan, and details of the VIE agreements are as follows:
|
1.
|
Exclusive Technical Service and Business Consulting Agreement, signed on May 15, 2010 - SBCL has the exclusive right to provide to SSIC, JinGuan and XinGuan consulting services, including operational management, human resources management, research and development of the technologies related to the operations of SSIC, JinGuan and XinGuan. SSIC, JinGuan and XinGuan pay to SBCL annually consulting service fees in an amount equals to all of their revenue for such year. These agreements run for a 10-year term and are subject to automatic renewal for an additional 10 year provided that no objection is made by both parties on the renewal.
|
|
2.
|
Exclusive Option Agreement - SBCL has the option to purchase all of the assets and ownership of SSIC, JinGuan and XinGuan at any time.
|
38
|
3.
|
Equity Pledge Agreement, signed on May 15, 2010 - SSIC, JinGuan and XinGuan agree to pledge their legal interest to SBCL as a security for the obligations under the Exclusive Technical Service and Business Consulting Agreement.
|
|
4.
|
Proxy Agreement - SSIC, JinGuan and XinGuan irrevocably grants and entrusts SBCL the right to exercise its voting and other stockholder rights.
|
|
5.
|
Operating Agreement, signed on May 15, 2010 - SBCL agrees to participate in the operations of SSIC, JinGuan and XinGuan in different aspects.
|
With the above agreements, SBCL demonstrates its ability to control SSIC, JinGuan and XinGuan as the primary beneficiary and the operating results of the VIEs was included in the consolidated financial statements for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008.
Impairment of Long-lived Assets
All long-lived assets such as property, plant and equipment held and used by the Company reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. Future cash flows are based on estimated quantities of gold and other recoverable metals, expected price of gold and other commodity (considering current and historical prices, price trends and related factors), production levels and cash costs of production, capital and reclamation costs, all based on detailed engineering life-of-mine plans. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets.
Numerous factors including, but not limited to, such things as unexpected grade changes, gold recovery problems, shortages of equipment and consumables, equipment failures, and collapse of pit walls, could impact our ability to achieve forecasted production schedules from proven and probable reserves. Additionally, commodity prices, capital expenditure requirements and reclamation costs could differ from the assumptions used in the cash flow models used to assess impairment. The ability to achieve the estimated quantities of recoverable minerals from exploration stage mineral interests involves further risks in addition to those factors applicable to mineral interests where proven and probable reserves have been identified, due to the lower level of confidence that the identified mineralized material can ultimately be mined economically.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
We derive revenues from the sales of non-refined gold concentrate, whereas it usually takes 6 days for the production from non-refined gold concentrate to gold bullion. We generally recognize revenues, net of value-added taxes ("VAT") at the time the gold bullion is produced and delivered to the customers, smelters and/or refineries.
We are generally subject to VAT which is levied on the majority of the products at the standard rate of 17% on the invoiced value of sales.; however, our VIE, PXIL has been granted preferential tax treatment under the Chinese tax law of the “Notice from Ministry of Finance and State Tax Bureau in Relation to Exemption of Value Added Tax on Gold Production” and “Notice regarding issues on Tax Policy on Gold Transaction”, whereas gold produced and sold by gold mining and smelting enterprises are exempted from VAT.
Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
39
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors of the corporation are elected by the stockholders to a term of one year and serve until a successor is elected and qualified. Officers of the corporation are appointed by the Board of Directors to a term of one year and serves until a successor is duly appointed and qualified, or until he or she is removed from office. The Board of Directors has no nominating, auditing or compensation committees at this time.
The name, address, age and position of our officers and directors is set forth below:
|
Name and Address
|
Age
|
Position(s)
|
|
Feize Zhang
Room 3207, New World Center, 6009 Yitian Road, Futian District, Shenzhen, PR China
|
42
|
Chairman, Chief Executive Officer
|
|
Jingfeng Lv
Room 501-505, Lantian International Building, 59 Changjiang Road, Development District, Yantai, PR China
|
51
|
Chief Technical Officer
|
|
Ming Cheung
Room 3207, New World Center, 6009 Yitian Road, Futian District, Shenzhen, PR China
|
41
|
Chief Financial Officer and Corporate Secretary
|
The persons named above are expected to hold said offices/positions until the next annual meeting of our stockholders. Mr. Ming Cheung and Mr. Feize Zhang are also the Board of Directors of the company. Mr. Zhang is the Chairman of the Board. These officers and directors are the only officers, directors and promoters of our Company.
Background Information about Our Officers and Directors
Our management team, which includes our officers and directors, as well as sophisticated mining experts, have extensive mining industry experience and excellent working relationships with government departments, regulatory bodies, engineering and construction groups and suppliers across China. We also have a team of senior engineers specialized in geology, mining resources, mining and refinery.
Mr. Feize Zhang - Chairman and Chief Executive Officer
As the founder and CEO of the Company, Mr. Zhang is responsible for the strategic planning and overall management of the Company. He has been the senior manager of various public companies in Hong Kong and the United States. Before founding the Company, Mr. Zhang had over 15 years of experience in the gold investment industry. Mr. Zhang graduated from Central China Technology University with a Bachelor Degree in 2000 and is now an EMBA candidate of Tsinghua University, one of the top two universities in China. Mr. Zhang devotes full time to the business of our Company.
40
Mr. Jingfeng Lv - Chief Technical Officer
Mr. Lv, Chief Technical Officer of the Company, is a senior mining engineer with over 30 years of mining industry experience. Since 1976, Mr. Lv has been involved in numerous large-scale mine exploration and research projects in Shandong, China. He is a senior member of various mining-related associations in China including Chinese Gold Society, Chinese Rock Mechanics and Engineering Society, Chinese Society for Geodesy, Photogrammetry and Cartography. He is the Chief Engineer of Yantai JinGuan Investment Ltd, a committee member of the technical committee of Shandong Gold Society. Over the past years, Mr. Lv has published over 30 theses in academic periodicals and conferences in China, and received 6 awards in scientific achievements. Mr. Lv graduated from
China Northeastern University with a Bachelor Degree in Engineering Management in 1987. Mr. Lv devotes full time to the business of our Company.
Mr. Ming Cheung - Chief Financial Officer
Mr. Cheung is a self-employed certified public accountant in the Hong Kong Special Administrative Region. Mr. Cheung worked as an auditor in Deloitte Touche & Tohmatsu during year 2000 to 2001 and RSM Nelson Wheeler during year 1995 to 1999. Mr. Cheung has extensive experience in corporate accounting and is familiar with accounting standards in various jurisdictions such as USGAAP, PRCGAAP and IAS. Mr. Cheung graduated from the City University of Hong Kong (International Accounting and Information Systems) with a Masters Degree in 2001 and from the Chinese University of Hong Kong with a Masters Degree in Law in 2008. Mr. Cheung devotes 50% of his time to the business of our Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes of ownership of our common stock. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
We intend to ensure to the best of our ability that all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners are complied with in a timely fashion.
Board Committees; Corporate Governance
The Board of Directors acts as the Audit Committee and the Board has no separate committees. We do not currently have an audit committee. We expect our Board of Directors to appoint an audit committee, a nominating committee and a compensation committee and to adopt charters relative to each such committee in the near future. We intend to appoint such persons to committees of the Board of Directors as are expected to be required to meet the corporate governance requirements imposed by a national securities exchange, although we are not required to comply with such requirements until we elect to seek listing on a national securities exchange.
Auditors; Code of Ethics; Financial Expert
We have adopted a Code of Ethics; however, we do not currently have an audit committee financial expert. However, our Chief Financial Officer qualifies as an audit committee financial expert.
41
EXECUTIVE COMPENSATION
|
SUMMARY COMPENSATION TABLE
|
|
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock Awards
|
Option Awards
|
Non-Equity Incentive Plan Compensation
|
Change in Pension Value and Non-qualified Deferred Compensation Earnings
|
All Other Compensation
|
Total
|
|
Feize Zhang
CEO and
Chairman
Ming Cheung
CFO
Jingfeng Lv
CTO
|
2009
2010
2009
2010
2009
2010
|
$8,420
$2,106
$ 0
$1,931
$6,286
$2,136
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
|
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
|
|||||||||
|
Option Awards
|
Stock Awards
|
||||||||
|
Name
|
Number of Securities Underlying Unexercised Options (#) Exercisable
|
Number of Securities Underlying Unexercised Options (#) Unexercisable
|
Equity Incentive Plan Awards; Number of Securities Underlying Unexercised Unearned Options (#)
|
Option Exercise Price
|
Option Expiration Date
|
Number of Shares or Units of Stock That Have Not Vested (#)
|
Market Value of Shares or Units of Stock That Have Not Vested
|
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
|
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
|
|
Feize Zhang
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Ming Cheung
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Jingfeng Lv
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
42
DIRECTOR COMPENSATION
|
Name
|
Fees Earned or Paid in Cash
|
Stock Awards
|
Option Awards
|
Non-Equity Incentive Plan Compensation
|
Change in Pension Value and Nonqualified Deferred Compensation Earnings
|
All Other Compensation
|
Total
|
|
Feize Zhang
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Ming Cheung
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Option Grants.
There have been no individual grants of stock options to purchase our common stock made to any of the executive officer named in the Summary Compensation Tables.
Aggregated Option Exercises and Fiscal Year-End Option Value.
There have been no stock options exercised by the executive officers named in the Summary Compensation Table.
Long-Term Incentive Plan (“LTIP”) Awards.
There have been no awards made to a named executive officer in the last completed fiscal year under any LTIP.
Compensation of Directors
Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board of Directors has the authority to fix the compensation of directors. To date, no amounts have been paid to, or accrued to, our directors in such capacity.
Employment Agreements
We do not have any employment agreements in place with our officers and directors.
We will present all possible transactions between us and our officers, directors or 5% shareholders, and our affiliates to the Board of Directors for their consideration and approval. Any such transaction will require approval by a majority of the disinterested directors and such transactions will be on terms no less favorable than those available to disinterested third parties.
Conflicts of Interest
We do not currently have any conflicts of interest by or among our current officers, directors, key employees or advisors. We have not yet formulated a policy for handling conflicts of interest; however, we intend to do so upon completion of this offering and, in any event, prior to hiring any additional employees.
43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information and Security Ownership Table set forth, as of the date of this prospectus, the total number of shares owned beneficially by our directors, officers and key employees, individually and as a group, and the present owners of 5% or more of our total outstanding shares. The table also reflects what the percentage of ownership will be assuming completion of the sale of all shares in this offering, which we can't guarantee. The stockholder listed below has direct ownership of his shares and possesses sole voting and dispositive power with respect to the shares.
|
Percentage of Ownership
|
||||
|
No. of Shares
|
No. of Shares
|
Before
|
After
|
|
|
Name and Address of Beneficial Owner
|
Before Offering
|
After Offering
|
Offering
|
Offering
|
|
Feize Zhang
Room 3207, New World Center, 6009 Yitian Road, Futian District, Shenzhen, PR China
|
27,510,000
|
27,510,000
|
27.51%
|
27.24%
|
|
Jingfeng Lv
Room 501-505, Lantian International Building, 59 Changjiang Road, Development District, Yantai, PR China
|
6,000,000
|
6,000,000
|
6.00%
|
5.94%
|
|
Ming Cheung
Room 3207, New World Center, 6009 Yitian Road, Futian District, Shenzhen, PR China
|
1,220,000
|
1,220,000
|
1.22%
|
1.21%
|
|
Glory Knight International Limited (1)
4C, BLK 32, Parc Versailles, Tai Po, New Territories, Hong Kong
|
12,000,000
|
12,000,000
|
12.00%
|
11.88%
|
|
Man Peng
|
5,628,000
|
5,628,000
|
5.63%
|
5.57%
|
|
All Officers and Directors as a Group
|
34,730,000
|
34,730,000
|
34.73%
|
34.39%
|
|
(1)
|
Glory Knight International Limited is a limited partnership formed in the British Virgin Islands and is an unrelated third party, which purchased its shares in a private placement of our securities. The shares were issued in reliance upon the exemption contained in Section 4(2) of the Securities Act of 1933. These securities were issued to unrelated parties of the registrant and bear a restrictive legend.
|
Future Sales by Existing Stockholders
A total of 100,000,000 shares have been issued to the existing stockholders, and are restricted securities, as that term is defined in Rule 144 of the Rules and Regulations of the SEC promulgated under the Act. Under Rule 144, such shares can be publicly sold, subject to volume restrictions and certain restrictions on the manner of sale, commencing six months after their acquisition. Any sale of shares held by the existing stockholders (after applicable restrictions expire) and/or the sale of shares purchased in this offering (which would be immediately resalable after the offering), may have a depressive effect on the price of our common stock in any market that may develop, of which there can be no assurance.
44
INDEMNIFICATION
Pursuant to the Articles of Incorporation and By-Laws of our parent Nevada corporation, we may indemnify an officer or director who is made a party to any proceeding, including a law suit, because of his position, if he acted in good faith and in a manner he reasonably believed to be in our best interest. In certain cases, we may advance expenses incurred in defending any such proceeding. To the extent that the officer or director is successful on the merits in any such proceeding as to which such person is to be indemnified, we must indemnify him against all expenses incurred, including attorney's fees. With respect to a derivative action, indemnity may be made only for expenses actually and reasonably incurred in defending the proceeding, and if the officer or director is judged liable, only by a court order. The indemnification is intended to be to the fullest extent permitted by the laws of the State of Nevada.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the provisions above, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities, other than the payment by us of expenses incurred or paid by one of our directors, officers, or controlling persons in the successful defense of any action, suit or proceeding, is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification is against public policy as expressed in the Securities Act, and we will be governed by the final adjudication of such issue.
AVAILABLE INFORMATION
We have filed a registration statement on Form S-1, of which this prospectus is a part, with the U.S. Securities and Exchange Commission. Upon completion of the registration, we will be subject to the informational requirements of the Exchange Act and, in accordance therewith, will file all requisite reports, such as Forms 10-K, 10-Q and 8-K, proxy statements, under Sec.14 of the Exchange Act, and other information with the Commission. Such reports, proxy statements, this registration statement and other information, may be inspected and copied at the public reference facilities maintained by the Commission at 100 Fifth Street NE, Washington, D.C. 20549. Copies of all materials may be obtained from the Public Reference Section of the Commission's Washington, D.C. office at prescribed rates. You may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov.
45
(OUTSIDE BACK COVER OF PROSPECTUS)
Dealer Prospectus Delivery Obligation
“Until ______________, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.”
46
FINANCIAL STATEMENTS
CHINA SHOUGUAN MINING CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Fiscal years ended December 31, 2009 and 2008 (Audited)
|
Page
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated Balance Sheets
|
F-3
|
|
Consolidated Statements of Operations and Comprehensive Income
|
F-4
|
|
Consolidated Statements of Cash Flows
|
F-5
|
|
Consolidated Statements of Stockholders’ Equity
|
F-6
|
|
Notes to Consolidated Financial Statements
|
F-7 – F-20
|
|
Three months ended March 31, 2010 (Unaudited)
|
|
|
Condensed Consolidated Balance Sheet as of March 31, 2010 (unaudited) and December 31, 2009 (audited)
|
F-21
|
|
Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2010 and 2009 (unaudited)
|
F-22
|
|
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited)
|
F-23
|
|
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2010 (unaudited)
|
F-24
|
|
Notes to Condensed Consolidated Financial Statements
|
F-25 – F-38
|
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
China ShouGuan Mining Corporation
We have audited the accompanying consolidated balance sheets of China ShouGuan Mining Corporation and its subsidiaries (“the Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations and comprehensive income, cash flows and stockholders’ equity for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our 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 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 the Company as of December 31, 2009 and 2008 and the results of operations and cash flows for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred substantial losses, all of which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ ZYCPA Company Limited
ZYCPA Company Limited
Certified Public Accountants
Hong Kong, China
June [x], 2010
9 FLOOR, CHINACHEM HOLLYWOOD CENTRE, 1-13 HOLLYWOOD ROAD, CENTRAL HONG KONG
Phone: (852) 2573 2296 Fax: (852) 2384 2022 http://www.zycpa.us
F-2
48
CHINA SHOUGUAN MINING CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
|
As of December 31,
|
||||||
|
2009
|
2008
|
|||||
|
ASSETS
|
||||||
|
Current assets:
|
||||||
|
Cash and cash equivalents
|
$
|
598,288
|
$
|
448,750
|
||
|
Accounts receivable
|
32,557
|
-
|
||||
|
Amount due from a related party
|
102,381
|
-
|
||||
|
Deposits and prepayments
|
42,889
|
-
|
||||
|
Total current assets
|
776,115
|
448,750
|
||||
|
Non-current assets:
|
||||||
|
Rental deposit
|
2,925,174
|
-
|
||||
|
Property, plant and equipment, net
|
227,948
|
-
|
||||
|
Construction in progress
|
80,081
|
-
|
||||
|
TOTAL ASSETS
|
$
|
4,009,318
|
$
|
448,750
|
||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||
|
Current liabilities:
|
||||||
|
Accounts payable
|
$
|
224,429
|
$
|
-
|
||
|
Amount due to a related party
|
29,252
|
7,295
|
||||
| Loans payable | 2,705,786 | - | ||||
|
Income tax payable
|
28,528
|
-
|
||||
|
Accrued liabilities and other payable
|
207,377
|
-
|
||||
|
Total liabilities
|
3,195,372
|
7,295
|
||||
|
Commitments and contingencies
|
||||||
|
Stockholders’ equity:
|
||||||
|
Common stock, $0.0001 par value; 300,000,000 shares authorized; 100,000,000 shares issued and outstanding as of December 31, 2009 and 2008
|
10,000
|
10,000
|
||||
|
Additional paid-in capital
|
1,476,708
|
436,583
|
||||
|
Statutory reserve
|
8,554
|
-
|
||||
|
Accumulated other comprehensive income (loss)
|
9,289
|
(1,019)
|
||||
|
Accumulated deficit
|
(690,605)
|
(4,109)
|
||||
|
Total stockholders’ equity
|
813,946
|
441,455
|
||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
4,009,318
|
$
|
448,750
|
||
See accompanying notes to consolidated financial statements.
F-3
49
CHINA SHOUGUAN MINING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
|
Year ended December 31, 2009
|
Period from December 1, 2008 (Inception) through December 31, 2008
|
|||||
|
Revenues, net
|
$
|
1,142,818
|
$
|
-
|
||
|
Cost of revenue
|
(915,775)
|
-
|
||||
|
Gross profit
|
227,043
|
-
|
||||
|
Operating expenses:
|
||||||
|
General and administrative
|
(878,169)
|
(4,341)
|
||||
|
Total operating expenses
|
(878,169)
|
(4,341)
|
||||
|
Loss from operations
|
(651,126)
|
(4,341)
|
||||
|
Other income :
|
||||||
|
Interest income
|
1,697
|
232
|
||||
|
Loss before income taxes
|
(649,429)
|
(4,109)
|
||||
|
Income tax expense
|
(28,513)
|
-
|
||||
|
NET LOSS
|
$
|
(677,942)
|
$
|
(4,109)
|
||
|
Other comprehensive income (loss):
|
||||||
|
- Foreign currency translation gain (loss)
|
10,308
|
(1,019)
|
||||
|
COMPREHENSIVE LOSS
|
$
|
(667,634)
|
$
|
(5,128)
|
||
|
Net loss per share – Basic and diluted
|
$
|
(0.01)
|
$
|
(0.00)
|
||
|
Weighted average shares outstanding
|
100,000,000
|
100,000,000
|
||||
See accompanying notes to consolidated financial statements.
F-4
50
CHINA SHOUGUAN MINING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”))
|
Year ended December 31, 2009
|
Period from December 1, 2008 (Inception) through December 31, 2008
|
|||||
|
Cash flows from operating activities:
|
||||||
|
Net loss
|
$
|
(677,942)
|
$
|
(4,109)
|
||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||
|
Depreciation
|
10,790
|
-
|
||||
|
Changes in operating assets and liabilities:
|
||||||
|
Accounts receivable
|
(32,539)
|
-
|
||||
|
Deposits and prepayments
|
(42,866)
|
-
|
||||
|
Rental deposit
|
(2,923,600)
|
-
|
||||
|
Accounts payable
|
224,308
|
-
|
||||
|
Income tax payable
|
28,513
|
-
|
||||
|
Accrued liabilities and other payable
|
207,414
|
-
|
||||
|
Net cash used in operating activities
|
(3,205,922)
|
(4,109)
|
||||
|
Cash flows from investing activities:
|
||||||
|
Purchase of plant and equipment
|
(238,616)
|
-
|
||||
|
Payments on construction in progress
|
(80,038)
|
-
|
||||
|
Net cash used in investing activities
|
(318,654)
|
-
|
||||
|
Cash flows from financing activities:
|
||||||
|
Proceeds from loans payable
|
2,704,330
|
-
|
||||
|
Capital contribution from stockholders
|
1,048,988
|
445,393
|
||||
|
(Repayment to) advances from a related party
|
(80,399)
|
7,292
|
||||
|
Net cash provided by financing *activities
|
3,672,919
|
452,685
|
||||
|
Effect of exchange rate changes on cash and cash equivalents
|
1,195
|
174
|
||||
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
149,538
|
448,750
|
||||
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR/PERIOD
|
448,750
|
-
|
||||
|
CASH AND CASH EQUIVALENTS, END OF YEAR/ PERIOD
|
$
|
598,288
|
$
|
448,750
|
||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||
|
Cash paid for income taxes
|
$
|
-
|
$
|
-
|
||
|
Cash paid for interest
|
$
|
-
|
$
|
-
|
||
See accompanying notes to consolidated financial statements.
F-5
51
CHINA SHOUGUAN MINING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
|
Common stock
|
Additional paid-in capital
|
Statutory
reserve
|
Accumulated other comprehensive (loss) income
|
Accumulated deficit
|
Total
stockholders’
equity
|
|||||||||||||||
|
No. of shares
|
Amount
|
|||||||||||||||||||
|
Balance as of December 1, 2008 (date of inception)
|
100,000,000
|
$
|
10,000
|
$
|
436,583
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
446,583
|
|||||||
|
Foreign currency translation adjustment
|
-
|
-
|
-
|
-
|
(1,019)
|
-
|
(1,019)
|
|||||||||||||
|
Net loss for the period
|
-
|
-
|
-
|
-
|
-
|
(4,109)
|
(4,109)
|
|||||||||||||
|
Balance as of December 31, 2008
|
100,000,000
|
10,000
|
436,583
|
-
|
(1,019)
|
(4,109)
|
441,455
|
|||||||||||||
|
Contribution from stockholders
|
-
|
-
|
1,040,125
|
-
|
-
|
-
|
1,040,125
|
|||||||||||||
|
Appropriation to statutory reserve
|
-
|
-
|
-
|
8,554
|
-
|
(8,554)
|
-
|
|||||||||||||
|
Foreign currency translation adjustment
|
-
|
-
|
-
|
-
|
10,308
|
-
|
10,308
|
|||||||||||||
|
Net loss for the year
|
-
|
-
|
-
|
-
|
-
|
(677,942)
|
(677,942)
|
|||||||||||||
|
Balance as of December 31, 2009
|
100,000,000
|
$
|
10,000
|
$
|
1,476,708
|
$
|
8,554
|
$
|
9,289
|
$
|
(690,605)
|
$
|
813,946
|
|||||||
See accompanying notes to consolidated financial statements.
F-6
52
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
1. ORGANIZATION AND BACKGROUND
Reorganization
China ShouGuan Mining Corporation (“CSMC” or “the Company”) was incorporated in the State of Nevada on May 4, 2010.
On June 23, 2010, the Company entered into a stock exchange transaction with the shareholders of Bei Sheng Limited (“BSL”), whereby the Company issued 100,000,000 shares of common stock in exchange for 100% of the ownership interest in BSL, for the purpose of re-domiciling BSL as a Nevada corporation in the United States. As a result of the merger, the Company became the legal entity of BSL while the business of BSL survives. Unless otherwise indicated, all references to the Company throughout the financial statements include the operations of BSL and its subsidiaries and variable interest entities (“VIE”).
BSL was incorporated in the British Virgin Islands (the “BVI”) on December 17, 2009 as a limited liability company with registered share capital of $50,000, divided into 50,000 common shares of US$1 par value each, for the purpose of holding 100% equity interest in Golden Wide International Limited (“GWIL”).
GWIL was incorporated in the Hong Kong Special Administrative Region (“Hong Kong”) on June 18, 2009 as a limited liability company with authorized share capital of $10,000, divided into 10,000 ordinary shares of $0.13 (equivalent to Hong Kong Dollars (“HK$”) HK$1) par value each. GWIL formed Shoujin Business Consulting (Shenzhen) Limited (“SBCL”) as a wholly foreign-owned enterprise under the laws of the People’s Republic of China (the “PRC”) on April 23, 2010. SBCL has a registered capital of RMB100,000 and is principally engaged in the provision of business consulting service in the PRC.
To satisfy with the investment restrictions in the PRC mining business, the Company, through SBCL entered into and consummated certain contractual arrangements with Shenzhen Shouguan Investment Co., Ltd (“SSIC”), JinGuan and XinGuan on May 15, 2010. As a result of these contractual arrangements, which obligates SBCL to absorb a majority of the risk of loss from the activities of SSIC, JinGuan and XinGuan and enables SBCL to receive a majority of its expected residual returns, the Company accounts for SSIC, JinGuan and XinGuan and its subsidiaries as a variable interest entity (“VIE”) under Accounting Standards Codification (“ASC”) Topic 810-10-5-8, “Variable Interest Entities”. (the “VIE Arrangement”).
Since the Company, BSL, GWIL, SBCL and its VIE arrangement as SSIC, the holding company of JinGuan and XinGuan, was under common control of same ultimate beneficial owners, Mr. Zhang and Mr. Yang, the re-domiciling transaction and VIE arrangement was accounted for as a transfer of entities under common control under the guidance of ASC Topic 805-50-15-6, “Transactions Between Entities Under Common Control”. Hence, the consolidation of all the companies has been accounted for at historical cost and prepared on the basis as if the share exchange transaction had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.
The details of the Company’s subsidiaries and VIEs are described below:
|
Name
|
Place of incorporation
and kind of
legal entity
|
Principal activities
and place of operation
|
Particulars of issued/
registered share
capital
|
Effective interest
held
|
||||
|
Bei Sheng Limited (“BSL”)
|
British Virgin Islands, a limited liability company
|
Investment holding in GWIL and provision of mining technical advice
|
50,000 issued shares of US$1 each
|
100%
|
||||
|
Golden Wide International Limited (“GWIL”)
|
Hong Kong, a limited liability company
|
100%-investment holding in SBCL
|
10,000 issued ordinary shares of HK$1 each
|
100%
|
||||
|
Shoujin Business Consulting (Shenzhen) Limited (“SBCL”)
|
The PRC, a limited liability company
|
Provision of consulting service in the PRC
|
RMB100,000
|
100%
|
||||
|
Shenzhen Shouguan Investment Co., Ltd (“SSIC”) #
|
The PRC, a limited liability company
|
99%-investment holding in JinGuan
|
RMB18,100,000
|
N/A
|
||||
|
Yantai JinGuan Investment Limited (“JinGuan”) #
|
The PRC, a limited liability company
|
100%-investment holding in XinGuan
|
RMB5,000,000
|
N/A
|
||||
|
Penglai XinGuan Investment Limited (“XinGuan”) #
|
The PRC, a limited liability company
|
Exploration, drilling, mining and sale of gold products
|
RMB21,000,000
|
N/A
|
# represents variable interest entity (“VIE”)
The Company and its subsidiaries and VIEs are hereinafter collectively referred to as (“the Company”).
Business background
The Company, through its subsidiaries and VIEs, is principally engaged in the project management of gold mining operations in China. In May 2009, the Company commenced its first project, the Cunli Ji Mine which is located in Shandong Province, PRC.
The Company was founded by a number of professionals and experts in China who specialize in mining technologies, mining resources management and financial and strategic management. The Company focuses on existing gold mine projects in Shandong province of the PRC, preferably those with estimated or indicated gold reserves. These potential targets are mostly run with low productivity because of inadequate funds and primitive technologies. The Company positions to re-engineer and redevelop these gold mines through transfer of advanced exploration and mining technologies, capital injection and effective management. The business model includes sourcing of early stage gold mines with good profit potential, conducting feasibility studies to identify suitable projects, leasing the suitable mining sites and facilities and managing the mining operations on these selected sites, with the goal of acquiring the mine if the operations proved to be satisfactory under the Company’s criteria.
Revenue is generated from the sales of non-refined gold concentrates, which is the principal raw material used in gold smelting operation to produce gold bar or product. The Company dig out chunks of mineral rocks from our mining site and undergoes a series of physical processes, including crushing, screening, grinding and scanning to produce gold concentrates. All the above processes are outsourced to independent third party contractors and the Company does not take possession of the mineral rocks during the whole processes. The Company only takes possession of the gold concentrates when they are sold to smelters and the selling prices are determined from two factors, the amount of gold in the gold concentrates and the price of gold at the date of sales. The amount of gold in the gold concentrates is determined and agreed between the Company and the smelters whereas the selling price is determined according to the official gold price at the time of sales as indicated by the Shanghai Gold Exchange (http://www.sge.sh, an entity governed by the PRC Government).
2. GOING CONCERN UNCERTAINTIES
These consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
From its inception, the Company suffered from continuous losses with the accumulated deficit of $690,605 as of that date and incurred a negative operating cash flow. The continuation of the Company is dependent upon the continuing financial support of shareholders and generating significant revenue and achieving profitability. The
F-7
53
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
actions involve certain growing and investment strategies. However, there is no assurance that the Company will be successful in securing sufficient funds to sustain the operations and investment plans.
These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
l
|
Use of estimates
|
In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amount of assets and liabilities in the balance sheets and revenues and expenses during the year or period reported. Actual results may differ from these estimates.
|
l
|
Basis of consolidation
|
The consolidated financial statements include the financial statements of CSMC, its subsidiaries and VIEs. All inter-company balances and transactions between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.
The Company has adopted the ASC Topic 810-10-5-8, “Variable Interest Entities”. ASC Topic 810-10-5-8 requires a variable interest entity or VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIEs or is entitled to receive a majority of the VIEs’ residual returns.
l Variable interest entity
On May 15, 2010, the Company’s subsidiary, SBCL entered into a series of agreements (“VIE agreements”) amongst SSIC, JinGuan, XinGuan and the individual owners of SSIC, JinGuan and XinGuan and details of the VIE agreements are as follows :
|
1.
|
Exclusive Technical Service and Business Consulting Agreement, SBCL has the exclusive right to provide to SSIC, JinGuan and XinGuan consulting services, including operational management, human resources management, research and development of the technologies related to the operations of SSIC, JinGuan and XinGuan. SSIC, JinGuan and XinGuan pays to SBCL annually consulting service fees in an amount equals to all of their revenue for such year. These agreements run for 10 year terms and are subject to automatic renewal for an additional 10 year term provided that no objection is made by both parties on the renewal.
|
|
2.
|
Exclusive Option Agreement, SBCL has the option to purchase SSIC, JinGuan and XinGuan all assets and ownership at any time.
|
|
3.
|
Equity Pledge Agreement, SSIC, JinGuan and XinGuan agree to pledge their legal interest to SBCL as a security for the obligations under the Exclusive Technical Service and Business Consulting Agreement.
|
|
4.
|
Proxy Agreement, SSIC, JinGuan and XinGuan irrevocably grant and entrust SBCL the right to exercise its voting and other stockholder’s right.
|
|
5.
|
Operating Agreement, SBCL agrees to participate in the operations of SSIC, JinGuan and XinGuan in different aspects.
|
With the above agreements, SBCL demonstrates its ability to control SSIC, JinGuan and XinGuan as the primary beneficiaries and the operating results of the VIEs was included in the consolidated financial statements for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008.
|
l
|
Cash and cash equivalents
|
F-8
54
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
|
l
|
Accounts receivable
|
Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. For the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, no allowance for doubtful accounts was provided.
|
l
|
Property, plant and equipment
|
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:
|
Depreciable life
|
Residual value
|
||
|
Plant and machinery
|
10 years
|
5%
|
|
|
Motor vehicles
|
5 years
|
5%
|
|
|
Office equipment
|
3-5 years
|
5%
|
Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.
|
l
|
Construction in progress
|
Construction in progress is stated at cost, which includes the costs of self-constructed assets, including mine development assets during the construction phase. Indirect overhead costs are not included in the cost of self-constructed assets. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction. Total estimated construction cost of mining development facility is approximately $175,510 and the construction project is expected to be fully completed in October, 2010.
|
l
|
Impairment of long-lived assets
|
In accordance with the provisions of ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as property, plant and equipment and construction in progress held and used by the Company are annually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. Future cash flows are based on estimated quantities of gold and other recoverable metals, expected price of gold and other commodity (considering current and historical prices, price trends and related factors), production levels and cash costs of production, capital and reclamation costs, all based on detailed engineering life-of-mine plans. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets.
Numerous factors including, but not limited to, such things as unexpected grade changes, gold recovery problems, shortages of equipment and consumables, equipment failures, and collapse of pit walls, could impact our ability to achieve forecasted production schedules from proven and probable reserves. Additionally, commodity prices, capital expenditure requirements and reclamation costs could differ from the assumptions used in the cash flow models used to assess impairment. The ability to achieve the estimated quantities of
F-9
55
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
recoverable minerals from exploration stage mineral interests involves further risks in addition to those factors applicable to mineral interests where proven and probable reserves have been identified, due to the lower level of confidence that the identified mineralized material can ultimately be mined economically. There has been no impairment as of December 31, 2009 and 2008.
|
l
|
Revenue recognition
|
In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
The Company derives revenues from the sales of non-refined gold concentrate to smelters, whereas the smelter usually takes 6 days for the production from non-refined gold concentrate to gold bullion. The Company generally recognizes its revenues, net of value-added taxes ("VAT") at the time of gold bullion is produced by the smelter and its selling price is determined by the market value of gold bullion quoted by the Shanghai Gold Exchange.
The Company is subject to VAT which is levied on the standard gold products at the standard rate of 17% on the invoiced value of sales. The Company’s VIE, XinGuan is granted with a preferential tax treatment under the Chinese tax law of the “Notice from Ministry of Finance and State Tax Bureau in Relation to Exemption of Value Added Tax on Gold Production” and “Notice regarding issues on Tax Policy on Gold Transaction”, whereas gold produced and sold by gold mining and smelting enterprises are exempted from VAT.
Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
|
l
|
Cost of revenue
|
Cost of revenues consists primarily of direct material, direct labor, sub-contracting mining fee, smelting and extracting fee and other operating overhead, which are directly attributable to the sales of gold concentrate. Shipping and handling costs, associated with the distribution of finished products, are borne by the customers.
|
l
|
Advertising expense
|
Advertising costs are expensed as incurred under ASC Topic 720-35, “Advertising Costs”. The Company incurred no advertising expense for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, respectively.
|
l
|
Resource compensation fees
|
In accordance with the relevant regulations under the Chinese Law, a company that is engaged in exploiting mineral resources is required to pay a resource tax and resources compensation levy to the local government as the compensation for the depletion of mineral resources. Pursuant to “Provisional Regulations on Resources Tax of the PRC” and “Administrative Rules on the Levy of Mineral Resources Compensation”, the amounts of the resource tax and resources compensation levy are computed on the basis of the sales revenue of mineral products. The Company was required to pay resource compensation fees of $10,180 and $0 for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, respectively.
|
l
|
Environmental costs
|
The PRC has adopted extensive environmental laws and regulations that affect the operations of the mining industry. The outcome of environmental liabilities under proposed or future environmental legislation cannot be reasonably estimated at present, and could be material. Under existing legislation, however, the Company management believes that there are no probable liabilities that will have a material adverse effect on the financial position of the Company.
F-10
56
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Comprehensive income
ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying consolidated statement of stockholders’ equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
|
l
|
Income taxes
|
The Company adopts the ASC Topic 740, “Income Taxes” regarding accounting for uncertainty in income taxes which prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. In addition, the guidance requires the determination of whether the benefits of tax positions will be more likely than not sustained upon audit based upon the technical merits of the tax position. For tax positions that are determined to be more likely than not sustained upon audit, a company recognizes the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not determined to be more likely than not sustained upon audit, a company does not recognize any portion of the benefit in the financial statements. The guidance provides for de-recognition, classification, penalties and interest, accounting in interim periods and disclosure.
For the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2009 and 2008, the Company did not have any significant unrecognized uncertain tax positions.
The Company conducts major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority.
|
l
|
Net income per share
|
The Company calculates net income per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.
|
l
|
Foreign currencies translation
|
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations.
The reporting currency of the Company is United States Dollars ("US$"). The Company's subsidiary in the PRC maintain its books and records in its local currency, Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which the entity operates.
In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.
F-11
57
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective year/period:
|
2009
|
2008
|
||||
|
Year-end RMB:US$1 exchange rate
|
6.8372
|
6.8542
|
|||
|
Annual/period average RMB:US$1 exchange rate
|
6.8409
|
6.9622
|
|
l
|
Retirement plan costs
|
Contributions to retirement schemes (which are defined contribution plans) are charged to general and administrative expenses in the accompanying consolidated statements of operation as the related employee service is provided.
|
l
|
Related parties
|
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
|
l
|
Segment reporting
|
ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. For the year ended December 31, 2009 and for the period from December 1, 2008 (Inception) through December 31, 2008, the Company operates in one reportable operating segment in the PRC.
|
l
|
Fair value measurement
|
ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10") establishes a new framework for measuring fair value and expands related disclosures. Broadly, ASC 820-10 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820-10 establishes a three-level valuation hierarchy based upon observable and non-observable inputs. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
For financial assets and liabilities, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
|
l
|
Fair value of financial instruments
|
The carrying value of the Company’s financial instruments include cash and cash equivalents, amounts due from (to) related parties, deposits and prepayments, accounts payable, income tax payable, accrued liabilities and other payable. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values.
|
l
|
Recent accounting pronouncements
|
F-12
58
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
In September 2009, Accounting Standards Codification (“ASC”) became the source of authoritative U.S. GAAP recognized by the Financial Accounting Standards Board (“FASB”) for nongovernmental entities, except for certain FASB Statements not yet incorporated into ASC. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative U.S. GAAP for registrants. The discussion below includes the applicable ASC reference.
The Company adopted ASC Topic 810-10, “Consolidation” (formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”) effective January 2, 2009. Topic 810-10 changes the manner of presentation and related disclosures for the noncontrolling interest in a subsidiary (formerly referred to as a minority interest) and for the deconsolidation of a subsidiary. The adoption of these sections did not have a material impact on the Company’s consolidated financial statements.
ASC Topic 815-10, “Derivatives and Hedging” (formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”) was adopted by the Company effective January 2, 2009. The guidance under ASC Topic 815-10 changes the manner of presentation and related disclosures of the fair values of derivative instruments and their gains and losses.
In June 2009, the FASB finalized SFAS No. 167, “Amending FASB interpretation No. 46(R)”, which was included in ASC Topic 810-10-05 “Variable Interest Entities”. The provisions of ASC Topic 810-10-05 amend the definition of the primary beneficiary of a variable interest entity and will require the Company to make an assessment each reporting period of its variable interests. The provisions of this pronouncement are effective January 1, 2010. The Company is evaluating the impact of the statement on its consolidated financial statements.
In July 2009, the FASB issued SFAS No. 168, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 168 codified all previously issued accounting pronouncements, eliminating the prior hierarchy of accounting literature, in a single source for authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10 “Generally Accepted Accounting Principles”, is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did not have an effect on the Company’s 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 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.
In November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets,” which formally codifies FASB Statement No. 166, “Accounting for Transfers of Financial Assets.” ASU 2009-16 is a revision to SFAS No. 140, “Accounting for Transfers and Servicing of
F-13
59
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Financial Assets and Extinguishments of Liabilities,” and 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 January 2010, the FASB issued an amendment to the fair value measurement and disclosure standard improving disclosures about fair value measurements. This amended guidance requires separate disclosure of significant transfers in and out of Levels 1 and 2 and the reasons for the transfers. The amended guidance also requires that in the Level 3 reconciliation, the information about purchases, sales, issuances and settlements be disclosed separately on a gross basis rather than as one net number. The guidance for the Level 1 and 2 disclosures was adopted on January 1, 2010, and did not have an impact on the consolidated financial position, results of operations or cash flows. The guidance for the activity in Level 3 disclosures is effective January 1, 2011, and will not have an impact on the consolidated financial position, results of operations or cash flows as the amended guidance provides only disclosure requirements.
In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and the adoption of these sections did not have a material impact on the Company’s consolidated financial statements.
4. AMOUNT DUE FROM A RELATED PARTY
As of December 31, 2009 and 2008, amount due from a related party of $102,381 and $0 represented temporary advances made to Mr. Lv Jingfeng, the director of a subsidiary, SSIC, which was unsecured, interest-free and repayable in the next twelve months. The balance is fully repaid to the Company in April 2010.
5. DEPOSITS AND PREPAYMENTS
Deposits and prepayments consisted of the following:
|
As of December 31,
|
||||||
|
2009
|
2008
|
|||||
|
Advances to employees
|
$
|
24,643
|
$
|
-
|
||
|
Prepaid operating expenses
|
7,395
|
-
|
||||
|
Rental deposits
|
7,245
|
-
|
||||
|
Other receivable
|
3,606
|
-
|
||||
|
$
|
42,889
|
$
|
-
|
|||
6. RENTAL DEPOSIT
The Company’s first project, the Cunli Ji Gold Mine, began in May 2009 and is operated and managed by the subsidiary, XinGuan. On May 4, 2009, the Company, through its VIE, XinGuan entered into an operating lease agreement with Penglai City Gold Mining Holding Co. Ltd. Pursuant to the operating lease agreement, XinGuan agreed to lease and manage the gold mine for a term of 20 months, with a rental deposit of $2,925,174 (equivalent to RMB 20 million). Also, XinGuan agreed to acquire the gold mine for a purchase consideration of $5,089,803 (equivalent to RMB 34.8 million) under the acquisition agreement if the following conditions are satisfied upon the expiry of the operating lease agreement: 1) the satisfaction of certain level of the monthly production capacity and 2) the production management of the mine reaches ISO (or equivalent) standard. Upon successful closing of the acquisition, the aforesaid rental deposit would become part of the purchase consideration.
F-14
60
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
As of December 31,
|
||||||
|
2009
|
2008
|
|||||
|
Plant and machinery
|
$
|
107,252
|
$
|
-
|
||
|
Motor vehicles
|
86,962
|
-
|
||||
|
Office equipment
|
44,401
|
-
|
||||
|
Foreign translation adjustment
|
129
|
-
|
||||
|
238,744
|
-
|
|||||
|
Less: accumulated depreciation
|
(10,790)
|
-
|
||||
|
Less: foreign translation adjustment
|
(6)
|
-
|
||||
|
Plant and equipment, net
|
$
|
227,948
|
$
|
-
|
||
Depreciation expense for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008 were $10,790 and $0, respectively.
8. AMOUNT DUE TO A RELATED PARTY
As of December 31, 2009 and 2008, amount due to a related party of $29,252 and $7,295 represented temporary advances made by Mr. Zhang, the director of the Company, which was unsecured, interest-free with no fixed repayment term. Imputed interest is considered insignificant.
9. ACCRUED LIABILITIES AND OTHER PAYABLE
Accrued liabilities and other payable consisted of the following:
|
As of December 31,
|
|||||
|
2009
|
2008
|
||||
|
Salaries payable
|
$
|
40,478
|
$
|
-
|
|
|
Accrued operating expenses
|
160,926
|
-
|
|||
|
Other payables
|
5,973
|
-
|
|||
|
$
|
207,377
|
$
|
-
|
||
10. LOANS PAYABLE
On May 7, 2009, the Company obtained a loan amount of $1,352,893 (equivalent to RMB9,250,000) from Ms. Wei Hui An, an independent third party, in a term of 1 year, and repayable in full on May 7, 2010, with an interest charge of $36,565 (equivalent to RMB 250,000) payable with the principal upon its due date. According to a release letter signed between Ms. Wei Hui An and the Company, Ms. Wei Hui An agreed to release the Company from paying interest charges of $24,363 for the loan period from May 7, 2009 to December 31, 2009.
F-15
61
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Also, on May 7, 2009, the Company obtained another loan amount of $1,352,893 (equivaleent to RMB9,250,000) from Ms. Wei Wen Jing, an independent third party, in a term of 1 year, repayable in full on May 7, 2010, with an interest charge of $36,565 (equivalent to RMB250,000) payable with the principal upon its due date. According to a release letter signed between Ms. Wei Wen Jing and the Company, Ms. Wei Wen Jing agreed to release the Company from paying interest charge of $24,363 for the loan period from May 7, 2009 to December 31, 2009.
The aggregate loans payable balance as of December 31, 2009 amounted to $2,705,786.
11. STOCKHOLDERS’ EQUITY
On June 23, 2010, the Company entered into a stock exchange transaction and issued a total of 100,000,000 shares of common stock, for the purpose of re-domiciling BSL as a Nevada corporation in the United States.
Pursuant to stock exchange transaction on June 23, 2010, the weighted average number of common shares issued and outstanding of 100,000,000 shares was adjusted to account for the effects of the stock exchange transaction as re-domiciling BSL as a Nevada corporation as fully described in Note 1, for all periods presented as if the recapitalization had occurred at the beginning of the earliest period presented.
As of December 31, 2009, the Company had a total of 100,000,000 shares of its common stock issued and outstanding.
12. INCOME TAXES
For the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, the local (United States) and foreign components of loss from continuing operations before income taxes were comprised of the following:
|
Year ended December 31, 2009
|
Period from December 1, 2008 (Inception) through December 31, 2008
|
|||||
|
Tax jurisdictions from:
|
||||||
|
- Local
|
$
|
-
|
$
|
-
|
||
|
- Foreign
|
(649,429)
|
(4,109)
|
||||
|
Loss before income taxes
|
$
|
(649,429)
|
$
|
(4,109)
|
||
The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company has subsidiaries that operate in various countries: United States, BVI, Hong Kong and the PRC that are subject to taxes in the jurisdictions in which they operate, as follows:
United States of America
The Company is registered in the State of Nevada and is subject to the tax laws of the United States of America.
British Virgin Island
Under the current BVI law, BSL is not subject to tax on its income or profits. For the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, BSL suffered from an operating loss of $161,269 and $0.
Hong Kong
GWIL is subject to Hong Kong Profits Tax, which is charged at the statutory income rate of 16.5% on assessable income. For the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, GWIL suffered from an operating loss of $1,522 and $0.
F-16
62
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The PRC
The Company generated its income from its subsidiaries and VIEs operating in the PRC for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008. Effective from January 1, 2008, all entities in the PRC are subject to the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”) at a unified income tax rate of 25%.
A reconciliation of income tax rate to the effective income tax rate for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008 is as follows:
|
Year ended December 31, 2009
|
Period from December 1, 2008 (Inception) through December 31, 2008
|
|||||
|
Loss before income taxes
|
$
|
(486,638)
|
$
|
(4,109)
|
||
|
Statutory income tax rate
|
25%
|
25%
|
||||
|
Income tax expense at the statutory rate
|
(121,660)
|
(1,027)
|
||||
|
Net operating loss not recognized as deferred tax asset
|
96,745
|
1,027
|
||||
|
Non-deductible item
|
15,340
|
-
|
||||
|
Accrued liabilities
|
38,088
|
-
|
||||
|
Income tax expense
|
$
|
28,513
|
$
|
-
|
||
The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of December 31, 2008 and 2009:
|
As of December 31,
|
||||||
|
2009
|
2008
|
|||||
|
Deferred tax assets:
|
||||||
|
Net operating loss carryforwards from the PRC
|
$
|
97,827
|
$
|
1,027
|
||
|
Less: valuation allowance
|
(97,827)
|
(1,027)
|
||||
|
Deferred tax assets
|
$
|
-
|
$
|
-
|
||
As of December 31, 2009, the Company incurred $391,308 of aggregate net operating loss carryforwards available to offset its taxable income for income tax purposes. The Company has provided for a full valuation allowance against the deferred tax assets of $97,827 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future. For the year ended December 31, 2009, the valuation allowance was increased by $96,800, primarily relating to net operating loss carryforward in the foreign tax regime.
13. CHINA CONTRIBUTION PLAN
Under the PRC Law, full-time employees of its subsidiaries in the PRC are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. The Company is required to accrue for these benefits based on certain percentages of the employees’ salaries. The total contributions made for such employee benefits were $19,663 and $0 for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, respectively.
F-17
63
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
14. STATUTORY RESERVE
Under the PRC Law, the Company’s subsidiary and variable interest entities in the PRC are required to make appropriation to the statutory reserve based on after-tax net earnings and determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve should be at least 10% of the after-tax net income until the reserve is equal to 50% of the registered capital. The statutory reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.
For the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008, the Company contributed $8,554 and $0 to statutory reserve, respectively.
15. CONCENTRATIONS OF RISK
The Company is exposed to the following concentrations of risk:
(a) Major customers
For the year ended December 31, 2009 and for the period from December 1, 2008 (Inception) through December 31, 2008, the customer who accounts for 10% or more of the Company’s revenues and its outstanding balance at year-end date, are presented as follows:
|
Year ended December 31, 2009
|
December 31, 2009
|
|||||||||
|
Customer
|
Revenue
|
Percentage
of revenue
|
Accounts
receivable, trade
|
|||||||
|
Customer A
|
$
|
923,462
|
81%
|
$
|
32,557
|
|||||
|
Customer B
|
219,356
|
19%
|
-
|
|||||||
|
Total:
|
$
|
1,142,818
|
100%
|
$
|
32,557
|
|||||
For the period from December 1, 2008 (Inception) through December 31, 2008, there is no customer who accounts for 10% or more of the Company’s revenues.
(b) Major vendors
For the year ended December 31, 2009 and for the period from December 1, 2008 (Inception) through December 31, 2008, the vendor who accounts for 10% or more of the Company’s purchases and its outstanding balance at year-end date, are presented as follows:
|
Year ended December 31, 2009
|
December 31, 2009
|
|||||||||
|
Vendor
|
Purchases
|
Percentage
of purchases
|
Accounts
payable, trade
|
|||||||
|
Vendor A
|
$
|
272,611
|
37%
|
$
|
50,901
|
|||||
|
Vendor B
|
221,277
|
30%
|
31,261
|
|||||||
|
Total:
|
$
|
493,888
|
67%
|
$
|
82,162
|
|||||
For the period from December 1, 2008 (Inception) through December 31, 2008, there is no vendor who accounts for 10% or more of the Company’s purchases.
F-18
64
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
For the year ended December 31, 2009 and for the period from December 1, 2008 (Inception) through December 31, 2008, 100% of the Company’s revenue and purchases were derived from customers and vendors located in the PRC.
(c) Credit risk
Financial instruments that are potentially subject to credit risk consist principally of accounts receivables. The Company believes the concentration of credit risk in its accounts and retention receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. Credit is extended based on evaluation of a customer's financial condition. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
(d) Exchange rate risk
The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.
(e) Economic and political risks
The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
(f) Industry risks
The Company's mining operations are subject to extensive national and local governmental regulations in China, which regulations may be revised or expanded at any time. Generally, compliance with these regulations requires the Company to obtain permits issued by government regulatory agencies. Certain permits require periodic renewal or review of their conditions. The Company cannot predict whether it will be able to obtain or renew such permits or whether material changes in permit conditions will be imposed. The inability to obtain or renew permits or the imposition of additional conditions could have a material adverse effect on the Company's ability to develop and operate its mines.
(g) Risk on changing price in gold
|
|
At present, the price of gold in the PRC is generally in line with the price of gold in the international market. There are many factors influencing the price of gold in the international market, including the international economic situation (in particular the economic situation in the US), petroleum prices, fluctuations in the exchange rates of the US$, fluctuations in the stock and other financial investment markets and various political, military, social and economic contingencies. These factors are beyond the control of the Company. Changes in the prices of the gold in the PRC and in the exchange rate of RMB as a result of these may adversely affect the operating results of the Company. Under the relevant PRC laws and regulations, hedging activities presently are not permitted in gold tracing in the PRC market. The Company has not been involved in hedging transactions or any alternative measures to manager the potential price risk.
|
F-19
65
CHINA SHOUGUAN MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND
THE PERIOD FROM DECEMBER 1, 2008 (INCEPTION) THROUGH DECEMBER 31, 2008
(Currency expressed in United States Dollars (“US$”), except for number of shares)
16. COMMITMENTS AND CONTINGENCIES
|
(a)
|
Operating lease commitments
|
The Company’s VIEs in the PRC are committed under several non-cancelable operating leases of office premises and mining rights with the terms ranging from 20 months to 2 years, with fixed monthly rentals, due through January, 2011. Total rent expenses for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008 was $172,023 and $0, respectively.
As of December 31, 2009, future minimum rental payments due under non-cancelable operating leases in the next two years are as follows:
|
Year ending December 31:
|
||||||
|
2010
|
$
|
240,265
|
||||
|
2011
|
10,793
|
|||||
|
Total
|
$
|
251,058
|
F-20
66
CHINA SHOUGUAN MINING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2010 AND DECEMBER 31, 2009
(Currency expressed in United States Dollars (“US$”), except for number of shares)
|
March 31, 2010
|
December 31, 2009
|
|||||
|
(Unaudited)
|
(Audited)
|
|||||
|
ASSETS
|
||||||
|
Current assets:
|
||||||
|
Cash and cash equivalents
|
$
|
893,659
|
$
|
598,288
|
||
|
Accounts receivable
|
75,464
|
32,557
|
||||
|
Amount due from a related party
|
102,398
|
102,381
|
||||
|
Deposits and prepayments
|
85,293
|
42,889
|
||||
|
Total current assets
|
1,156,814
|
776,115
|
||||
|
Non-current assets:
|
||||||
|
Rental deposit
|
2,925,645
|
2,925,174
|
||||
|
Property, plant and equipment, net
|
252,677
|
227,948
|
||||
|
Construction in progress
|
145,453
|
80,081
|
||||
|
TOTAL ASSETS
|
$
|
4,480,589
|
$
|
4,009,318
|
||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||
|
Current liabilities:
|
||||||
|
Accounts payable
|
$
|
258,404
|
$
|
224,429
|
||
|
Amount due to a related party
|
152,544
|
29,252
|
||||
| Loans payable | 2,706,221 | 2,705,786 | ||||
|
Income tax payable
|
110,329
|
28,528
|
||||
|
Accrued liabilities and other payable
|
140,799
|
207,377
|
||||
|
Total liabilities
|
3,368,297
|
3,195,372
|
||||
|
Commitments and contingencies
|
||||||
|
Stockholders’ equity:
|
||||||
|
Common stock, $0.0001 par value; 300,000,000 shares authorized; 100,000,000 and 100,000,000 shares issued and outstanding as of March 31, 2010 and December 31, 2009
|
10,000
|
10,000
|
||||
|
Additional paid-in capital
|
1,476,708
|
1,476,708
|
||||
|
Statutory reserve
|
8,554
|
8,554
|
||||
|
Accumulated other comprehensive income
|
9,621
|
9,289
|
||||
|
Accumulated deficits
|
(392,591)
|
(690,605)
|
||||
|
Total stockholders’ equity
|
1,112,292
|
813,946
|
||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
4,480,589
|
$
|
4,009,318
|
||
See accompanying notes to condensed consolidated financial statements.
F-21
67
CHINA SHOUGUAN MINING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
|
Three months ended March 31,
|
||||||
|
2010
|
2009
|
|||||
|
Revenues, net
|
||||||
|
- Product sales
|
$
|
807,534
|
$
|
-
|
||
|
- Service income
|
296,243
|
-
|
||||
|
Total revenues, net
|
1,103,777
|
-
|
||||
|
Cost of revenue
|
(358,059)
|
-
|
||||
|
Gross profit
|
745,718
|
-
|
||||
|
Operating expenses:
|
||||||
|
General and administrative
|
(319,493)
|
(55,044)
|
||||
|
Total operating expenses
|
(319,493)
|
(55,044)
|
||||
|
Income (loss) from operations
|
426,225
|
(55,044)
|
||||
|
Other income (expense):
|
||||||
| Interest expense | (18,285) | - | ||||
|
Interest income
|
407
|
396
|
||||
|
Income (loss) before income taxes
|
408,347
|
(54,648)
|
||||
|
Income tax expense
|
(110,333)
|
-
|
||||
|
NET INCOME (LOSS)
|
$
|
298,014
|
$
|
(54,648)
|
||
|
Other comprehensive income:
|
||||||
|
- Foreign currency translation gain
|
332
|
4,198
|
||||
|
COMPREHENSIVE INCOME (LOSS)
|
$
|
298,346
|
$
|
(50,450)
|
||
|
Net income (loss) per share – Basic and diluted
|
$
|
0.00
|
$
|
(0.00)
|
||
|
Weighted average shares outstanding – Basic and diluted
|
100,000,000
|
100,000,000
|
||||
See accompanying notes to condensed consolidated financial statements.
F-22
68
CHINA SHOUGUAN MINING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
|
Three months ended March 31,
|
||||||
|
2010
|
-
|
2009
|
||||
|
Cash flows from operating activities:
|
||||||
|
Net income (loss)
|
$
|
298,014
|
$
|
(54,648)
|
||
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||||||
|
Depreciation
|
9,676
|
-
|
||||
|
Changes in operating assets and liabilities:
|
||||||
|
Accounts receivable
|
(25,597)
|
-
|
||||
|
Deposits and prepayments
|
(235,599)
|
(13,954)
|
||||
|
Accounts payable
|
16,637
|
-
|
||||
|
Income tax payable
|
275,002
|
-
|
||||
|
Accrued liabilities and other payable
|
(66,394)
|
7,303
|
||||
|
Net cash provided by (used in) operating activities
|
271,739
|
(61,299)
|
||||
|
Cash flows from investing activities:
|
||||||
|
Purchase of plant and equipment
|
(34,368)
|
(6,096)
|
||||
|
Payments on construction in progress
|
(65,360)
|
-
|
||||
|
Net cash used in investing activities
|
(99,728)
|
(6,096)
|
||||
|
Cash flows from financing activities:
|
||||||
|
Capital contribution from stockholders
|
-
|
3,652
|
||||
|
Advances from a related party
|
123,299
|
21,178
|
||||
|
Net cash provided by financing activities
|
123,299
|
24,830
|
||||
|
Effect of exchange rate changes on cash and cash equivalents
|
61
|
498
|
||||
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
295,371
|
(42,067)
|
||||
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
598,288
|
448,809
|
||||
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
893,659
|
$
|
406,742
|
||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||
|
Cash paid for income taxes
|
$
|
28,533
|
$
|
-
|
||
|
Cash paid for interest
|
$
|
-
|
$
|
-
|
||
See accompanying notes to condensed consolidated financial statements.
F-23
69
CHINA SHOUGUAN MINING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
|
Common stock
|
Additional paid-in capital
|
Statutory
reserve
|
Accumulated other comprehensive income
|
Accumulated deficit
|
Total
stockholders’
equity
|
|||||||||||||||
|
No. of shares
|
Amount
|
|||||||||||||||||||
|
Balance as of January 1, 2010
|
100,000,000
|
$
|
10,000
|
1,476,708
|
8,554
|
9,289
|
(690,605)
|
813,946
|
||||||||||||
|
Foreign currency translation adjustment
|
-
|
-
|
-
|
-
|
332
|
-
|
332
|
|||||||||||||
|
Net income for the period
|
-
|
-
|
-
|
-
|
-
|
298,014
|
298,014
|
|||||||||||||
|
Balance as of March 31, 2010
|
100,000,000
|
$
|
10,000
|
$
|
1,476,708
|
$
|
8,554
|
$
|
9,621
|
$
|
(392,591)
|
$
|
1,112,292
|
|||||||
See accompanying notes to condensed consolidated financial statements.
F-24
70
|
NOTE – 1
|
BASIS OF PRESENTATION
|
The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”) and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
In the opinion of management, the consolidated balance sheet as of December 31, 2008 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended March 31, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2010 or for any future period.
These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements of China Shouguan Mining Corporation for the year ended December 31, 2009 and the period from December 1, 2008 (Inception) through December 31, 2008.
|
NOTE – 2
|
ORGANIZATION AND BACKGROUND
|
China ShouGuan Mining Corporation (“CSMC” or “the Company”) was incorporated in the State of Nevada on May 4, 2010.
On June 23, 2010, the Company entered into a stock exchange transaction with the shareholders of Bei Sheng Limited (“BSL”), whereby the Company issued 100,000,000 shares of common stock in exchange for 100% of the ownership interest in BSL, for the purpose of re-domiciling BSL as a Nevada corporation in the United States. As a result of the merger, the Company became the legal entity of BSL while the business of BSL survives. Unless otherwise indicated, all references to the Company throughout the financial statements include the operations of BSL and its subsidiaries and variable interest entities (“VIE”).
BSL was incorporated in the British Virgin Islands (the “BVI”) on December 17, 2009 as a limited liability company with registered share capital of $50,000, divided into 50,000 common shares of US$1 par value each, for the purpose of holding 100% equity interest in Golden Wide International Limited (“GWIL”).
GWIL was incorporated in the Hong Kong Special Administrative Region (“Hong Kong”) on June 18, 2009 as a limited liability company with authorized share capital of $10,000, divided into 10,000 ordinary shares of $0.13 (equivalent to HK$1) par value each. GWIL formed Shoujin Business Consulting (Shenzhen) Limited (“SBCL”) as a wholly foreign-owned enterprise under the laws of the People’s Republic of China (the “PRC”) on April 23, 2010. SBCL has a registered capital of RMB100,000 and is principally engaged in the provision of business consulting service in the PRC.
To satisfy with the investment restrictions in the PRC mining business, the Company, through SBCL entered into and consummated certain contractual arrangements with Shenzhen Shouguan Investment Co., Ltd (“SSIC”), JinGuan and XinGuan on May 15, 2010. As a result of these contractual arrangements, which obligates SBCL to absorb a majority of the risk of loss from the activities of SSIC, JinGuan and XinGuan and enables SBCL to receive a majority of their expected residual returns, the Company accounts for SSIC and its subsidiaries as a variable interest entity (“VIE”) under Accounting Standards Codification (“ASC”) Topic 810-10-5-8, “Variable Interest Entities” (the “VIE Arrangement”).
F-25
71
The Company, through its subsidiaries and VIEs, is principally engaged in the project management of gold mining operations in China. In May 2009, the Company commenced its first project, the Cunli Ji Mine which is located in Shandong Province, PRC.
Since the Company, BSL, GWIL, SBCL and its VIE arrangement as SSIC was under common control of same ultimate beneficial owners, Mr. Zhang and Mr. Yang, the re-domiciling transaction and VIE arrangement was accounted for as a transfer of entities under common control under the guidance of ASC Topic 805-50-15-6, “Transactions Between Entities Under Common Control”. Hence, the consolidation of all the companies has been accounted for at historical cost and prepared on the basis as if the share exchange transaction had become effective as of the beginning of the first period presented in the accompanying condensed consolidated financial statements.
The details of the Company’s subsidiaries and VIEs are described below:
|
Name
|
Place of incorporation
and kind of
legal entity
|
Principal activities
and place of operation
|
Particulars of issued/
registered share
capital
|
Effective interest
Held
|
||||
|
Bei Sheng Limited (“BSL”)
|
British Virgin Islands, a limited liability company
|
Investment holding in GWIL and provision of mining technical advice
|
50,000 issued shares of US$1 each
|
100%
|
||||
|
Golden Wide International Limited (“GWIL”)
|
Hong Kong, a limited liability company
|
100%-investment holding in SBCL
|
10,000 issued ordinary shares of HK$1 each
|
100%
|
||||
|
Shoujin Business Consulting (Shenzhen) Limited (“SBCL”)
|
The PRC, a limited liability company
|
Provision of consulting service in the PRC
|
RMB100,000
|
100%
|
||||
|
Shenzhen Shouguan Investment Co., Ltd (“SSIC”) #
|
The PRC, a limited liability company
|
99%-investment holding in JinGuan
|
RMB18,100,000
|
N/A
|
||||
|
Yantai JinGuan Investment Limited (“JinGuan”) #
|
The PRC, a limited liability company
|
100%-investment holding in XinGuan
|
RMB5,000,000
|
N/A
|
||||
|
Penglai XinGuan Investment Limited (“XinGuan”) #
|
The PRC, a limited liability company
|
Exploration, drilling, mining and sale of gold products
|
RMB21,000,000
|
N/A
|
# represents variable interest entity (“VIE”)
The Company and its subsidiaries and VIEs are hereinafter collectively referred to as (“the Company”).
|
NOTE – 3
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
F-26
72
The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying condensed consolidated financial statements and notes.
|
l
|
Use of estimates
|
In preparing these condensed consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and revenues and expenses during the periods reported. Actual results may differ from these estimates.
|
l
|
Basis of consolidation
|
The condensed consolidated financial statements include the financial statements of CSMC, its subsidiaries and VIEs. All inter-company balances and transactions between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.
The Company has adopted ASC Topic 810-10-5-8, “Variable Interest Entities”, which requires a variable interest entity or VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIEs or is entitled to receive a majority of the VIEs’ residual returns.
l Variable interest entity
On May 15, 2010, the Company’s subsidiary, SBCL entered into a series of agreements (“VIE agreements”) amongst SSIC, JinGuan, XinGuan and the individual owners of SSIC, JinGuan and XinGuan and details of the VIE agreements are as follows :
|
1.
|
Exclusive Technical Service and Business Consulting Agreement, SBCL has the exclusive right to provide to SSIC, JinGuan and XinGuan consulting services, including operational management, human resources management, research and development of the technologies related to the operations of SSIC, JinGuan and XinGuan. SSIC, JinGuan and XinGuan pays to SBCL quarterly consulting service fees in an amount equals to all of their revenue for such quarter. These agreements run for 10 year terms and are subject to automatic renewal for an additional 10 year term provided that no objection is made by both parties on the renewal.
|
|
2.
|
Exclusive Option Agreement, SBCL has the option to purchase SSIC, JinGuan and XinGuan all assets and ownership at any time.
|
|
3.
|
Equity Pledge Agreement, SSIC JinGuan and XinGuan agree to pledge their legal interest to SBCL as a security for the obligations under the Exclusive Technical Service and Business Consulting Agreement.
|
|
4.
|
Proxy Agreement, SSIC, JinGuan and XinGuan irrevocably grant and entrust SBCL the right to exercise its voting and other stockholder’s right.
|
|
5.
|
Operating Agreement, SBCL agrees to participate in the operations of SSIC, JinGuan and XinGuan in different aspects.
|
With the above agreements, SBCL demonstrates its ability to control SSIC, JinGuan and XinGuan as the primary beneficiaries and the operating results of the VIEs was included in the condensed consolidated financial statements for the three months ended March 31, 2010 and 2009.
|
l
|
Cash and cash equivalents
|
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
F-27
73
Accounts receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of
receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
|
l
|
Property, plant and equipment
|
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:
|
Depreciable life
|
Residual value
|
||
|
Plant and machinery
|
10 years
|
5%
|
|
|
Motor vehicles
|
5 years
|
5%
|
|
|
Office equipment
|
3-5 years
|
5%
|
Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.
Depreciation expense for the three months ended March 31, 2010 and 2009 were $9,676 and $0, respectively.
|
l
|
Construction in progress
|
Construction in progress is stated at cost, which includes the costs of self-constructed assets, including mine development assets during the construction phase. Indirect overhead costs are not included in the cost of self-constructed assets. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction. Total estimated construction cost of mining development facility is approximately $175,539 and the construction project is expected to be fully completed in October 2010.
|
l
|
Impairment of long-lived assets
|
In accordance with the provisions of ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as property, plant and equipment and construction in progress held and used by the Company are annually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. Future cash flows are based on estimated quantities of gold and other recoverable metals, expected price of gold and other commodity (considering current and historical prices, price trends and related factors), production levels and cash costs of production, capital and reclamation costs, all based on detailed engineering life-of-mine plans. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets.
F-28
74
Numerous factors including, but not limited to, such things as unexpected grade changes, gold recovery problems, shortages of equipment and consumables, equipment failures, and collapse of pit walls, could impact our ability to achieve forecasted production schedules from proven and probable reserves. Additionally, commodity prices, capital
expenditure requirements and reclamation costs could differ from the assumptions used in the cash flow models used to assess impairment. The ability to achieve the estimated quantities of recoverable minerals from exploration stage mineral interests involves further risks in addition to those factors applicable to mineral interests where proven and probable reserves have been identified, due to the lower level of confidence that the identified mineralized material can ultimately be mined economically. There has been no impairment as of March 31, 2010.
|
l
|
Revenue recognition
|
In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
(a) Product sales
The Company derives revenues from the sales of non-refined gold concentrate to smelters, whereas the smelter usually takes 6 days for the production from non-refined gold concentrate to gold bullion. The Company generally recognizes its revenues, net of value-added taxes ("VAT") at the time of gold bullion is produced by the smelter and its selling price is determined by the market value of gold bullion quoted by the Shanghai Gold Exchange.
The Company is subject to VAT which is levied on the standard gold products at the standard rate of 17% on the invoiced value of sales. The Company’s VIE, XinGuan is granted with a preferential tax treatment under the Chinese tax law of the “Notice from Ministry of Finance and State Tax Bureau in Relation to Exemption of Value Added Tax on Gold Production” and “Notice regarding issues on Tax Policy on Gold Transaction”, whereas gold produced and sold by gold mining and smelting enterprises are exempted from VAT.
(b) Service revenue
Service revenue is primarily derived from the provision of mining consulting and technical services that are not an element of an arrangement for the sale of products. These services are generally billed on a time-cost plus basis, for a period of service time from 2 to 6 months. Revenue is recognized when service is rendered and accepted by the customers.
(c) Interest income
Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
|
l
|
Resource compensation fees
|
In accordance with the relevant regulations under the Chinese Law, a company that is engaged in exploiting mineral resources is required to pay a resource tax and resources compensation levy to the local government as the compensation for the depletion of mineral resources. Pursuant to “Provisional Regulations on Resources Tax of the PRC” and “Administrative Rules on the Levy of Mineral Resources Compensation”, the amounts of the resource tax and resources compensation levy are computed on the basis of the sales revenue of mineral products. The Company was required to pay resource compensation fees of $75,849 and $0 for the three months ended March 31, 2010 and 2009, respectively.
|
l
|
Comprehensive income
|
F-29
75
|
l
|
ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity
during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying condensed consolidated statement of stockholders’ equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
|
l
|
Income taxes
|
The Company adopts the ASC Topic 740, “Income Taxes” regarding accounting for uncertainty in income taxes which prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. In addition, the guidance requires the determination of whether the benefits of tax positions will be more likely than not sustained upon audit based upon the technical merits of the tax position. For tax positions that are determined to be more likely than not sustained upon audit, a company recognizes the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not determined to be more likely than not sustained upon audit, a company does not recognize any portion of the benefit in the financial statements. The guidance provides for de-recognition, classification, penalties and interest, accounting in interim periods and disclosure.
For the three months ended March 31, 2010 and 2009, the Company did not have any interest and penalties associated with tax positions. As of March 31, 2010, the Company did not have any significant unrecognized uncertain tax positions.
The Company conducts major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority.
|
l
|
Net income per share
|
The Company calculates net income per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.
|
l
|
Foreign currencies translation
|
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations.
The reporting currency of the Company is the United States Dollars ("US$"). The Company's subsidiary in the PRC maintain its books and records in its local currency, Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which the entity operates.
In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the
F-30
76
period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.
Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective period:
|
March 31, 2010
|
March 31, 2009
|
||||
|
Period-end RMB:US$1 exchange rate
|
6.8361
|
6.8456
|
|||
|
Period average RMB:US$1 exchange rate
|
6.8360
|
6.8466
|
|
l
|
Related parties
|
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
|
l
|
Segment reporting
|
ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. For the three months ended March 31, 2010, the Company operates in two reportable operating segments.
|
l
|
Fair value measurement
|
ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10") establishes a new framework for measuring fair value and expands related disclosures. Broadly, ASC 820-10 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820-10 establishes a three-level valuation hierarchy based upon observable and non-observable inputs. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
For financial assets and liabilities, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
|
l
|
Fair value of financial instruments
|
The carrying value of the Company’s financial instruments include cash and cash equivalents, amounts due from (to) related parties, deposits and prepayments, accounts payable, income tax payable, accrued liabilities and other payable. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values.
|
l
|
Recent accounting pronouncements
|
F-31
77
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
In June 2009, the Financial Accounting Standards Board (“FASB”) expanded ASC 810-10, to provide guidance for variable interest entities (VIEs). The change modifies our approach for determining the primary beneficiary of a VIE by assessing whether we have control over such entities. This change is effective for us on July 1, 2010. The Company is currently evaluating the requirements of the VIE provisions of ASC 810-10, but does not expect a material impact on its condensed consolidated financial statements.
In October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13, “Revenue Recognition” (Topic 605). The accounting standard update addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. Specifically, this subtopic addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. ASU 2009-13 will be effective for us on July 1, 2010. The Company is currently evaluating the requirements of ASU 2009-13, but do not expect a material impact on its condensed consolidated financial statements.
FASB ASC 810, “Consolidation” (“ASC 810”), establishes accounting and reporting standards for minority interests, which are recharacterized as noncontrolling interests. ASC 810 was revised so that noncontrolling interests are classified as a component of equity separate from the parent’s equity; purchases or sales of equity interests that do not result in a change in control are accounted for as equity transactions; net income attributable to the noncontrolling interest are included in consolidated net income in the statement of operations; and upon a loss of control, the interest sold, as well as any interest retained, is recorded at fair value, with any gain or loss recognized in earnings. This revision was effective for the Company as of January 1, 2009. It applies prospectively, except for the presentation and disclosure requirements, for which it applies retroactively. In addition, ASC 810, amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under ASC 810. This phase of ASC 810 became effective for the Company on January 1, 2010 and did not impact the Company’s consolidation conclusions for its variable interest entities.
In January 2010, the FASB issued an amendment to the fair value measurement and disclosure standard improving disclosures about fair value measurements. This amended guidance requires separate disclosure of significant transfers in and out of Levels 1 and 2 and the reasons for the transfers. The amended guidance also requires that in the Level 3 reconciliation, the information about purchases, sales, issuances and settlements be disclosed separately on a gross basis rather than as one net number. The guidance for the Level 1 and 2 disclosures was adopted on January 1, 2010, and did not have an impact on our consolidated financial position, results of operations or cash flows. The guidance for the activity in Level 3 disclosures is effective January 1, 2011, and will not have an impact on our consolidated financial position, results of operations or cash flows as the amended guidance provides only disclosure requirements. The Company had no significant transfers between Level 1, 2 or 3 inputs during the quarter ended March 31, 2010.
In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and the Company adopted these new requirements for the quarter ended March 31, 2010.
In April 2010, the FASB issued ASU No. 2010-18, “Receivables: Effect of a Loan Modification When the Loan is Part of a Pool That Is Accounted for as a Single Asset-a consensus of the FASB Emerging Task Force” (Topic 310). The amendments in this Update are effective for modifications of loans accounted for within pools under ASC Topic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be
F-32
78
applied prospectively. Early application is permitted. The Company does not expect the provisions of ASU 2010-18 to have a material effect on the financial position, results of operations or cash flows of the Company.
|
NOTE – 4
|
AMOUNT DUE FROM A RELATED PARTY
|
As of March 31, 2010, amount due from a related party of $102,398 represented temporary advances made to Mr. Jingfeng Lv, the director of a subsidiary, SSIC, which was unsecured, interest-free and repayable in the next twelve months. The balance is fully repaid to the Company in April 2010.
|
NOTE – 5
|
ACCRUED LIABILITIES AND OTHER PAYABLE
|
Accrued liabilities and other payable consisted of the following:
|
March 31, 2010
|
December 31, 2009
|
|||||
|
(Unaudited)
|
(Audited)
|
|||||
|
Salaries payable
|
$
|
44,323
|
$
|
40,478
|
||
|
Accrued operating expenses
|
70,600
|
160,926
|
||||
| Interest payable | 18,285 | - | ||||
|
Other payables
|
7,591
|
5,973
|
||||
|
$
|
140,799
|
$
|
207,377
|
|||
|
NOTE – 6
|
INCOME TAXES
|
For the three months ended March 31, 2010 and 2009, the local (United States) and foreign components of income (loss) before income taxes were comprised of the following:
|
Three months ended March 31,
|
||||||
|
2010
|
2009
|
|||||
|
Tax jurisdictions from:
|
||||||
|
- Local
|
$
|
-
|
$
|
-
|
||
|
- Foreign
|
408,347
|
(54,648)
|
||||
|
Income (loss) before income taxes
|
$
|
408,347
|
$
|
(54,648)
|
||
F-33
79
The provision for income taxes consisted of the following:
|
Three months ended March 31,
|
||||||
|
2010
|
2009
|
|||||
|
Current:
|
||||||
|
– Local
|
$
|
-
|
$
|
-
|
||
|
– Foreign, representing by:
|
||||||
|
Hong Kong
|
28,699
|
-
|
||||
|
The PRC
|
81,634
|
-
|
||||
|
Deferred:
|
||||||
|
– Local
|
-
|
-
|
||||
|
– Foreign
|
-
|
-
|
||||
|
Income tax expense
|
$
|
110,333
|
$
|
-
|
||
The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company has subsidiaries that operate in various countries: United States, BVI, Hong Kong and the PRC that are subject to taxes in the jurisdictions in which they operate, as follows:
United States of America
The Company is registered in the State of Nevada and is subject to the tax laws of the United States of America.
British Virgin Island
Under the current BVI law, Bei Sheng is not subject to tax on its income or profits. For the three months ended March 31, 2010 and 2009, Bei Sheng generated an operating income of $83,484 and $0.
Hong Kong
Golden Wide is subject to Hong Kong Profits Tax, which is charged at the statutory income rate of 16.5% on assessable income. For the three months ended March 31, 2010 and 2009, Golden Wide generated an operating income of $173,933 and $0. A reconciliation of income tax rate to the effective income tax rate for the three months ended March 31, 2010 and 2009 is as follows:
|
Three months ended March 31,
|
|||||||
|
2010
|
|
2009
|
|||||
|
Income before income taxes
|
$
|
173,933
|
$
|
-
|
|||
|
Statutory income tax rate
|
16.5%
|
16.5%
|
|||||
|
Income tax expense
|
$
|
28,699
|
$
|
-
|
|||
F-34
80
The PRC
The Company generated its income from its subsidiaries and VIEs operating in the PRC for the three months ended March 31, 2010 and 2009. Effective from January 1, 2008, all entities in the PRC are subject to the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”) at a unified income tax rate of 25%.
A reconciliation of income tax rate to the effective income tax rate for the three months ended March 31, 2010 and 2009 is as follows:
|
Three months ended March 31,
|
|||||||
|
2010
|
2009
|
||||||
|
Income (loss) before income taxes
|
$
|
150,930
|
$
|
(54,648)
|
|||
|
Statutory income tax rate
|
25%
|
25%
|
|||||
|
Income tax expense at the statutory rate
|
37,733
|
(13,662)
|
|||||
|
Net operating loss not recognized as deferred tax asset
|
28,868
|
13,662
|
|||||
|
Accrued liabilities
|
15,033
|
-
|
|||||
|
Income tax expense
|
$
|
81,634
|
$
|
-
|
|||
As of March 31, 2010, the Company incurred $506,832 of aggregate net operating loss carryforwards available to offset its taxable income for income tax purposes. The Company has provided for a full valuation allowance against the deferred tax assets of $126,708 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future. For the three months ended March 31, 2010, the valuation allowance was increased by $28,881, primarily relating to net operating loss carryforward in the foreign tax regime.
|
NOTE – 7
|
SEGMENT INFORMATION
|
The Company’s business units have been aggregated into two reportable segments, as defined by ASC Topic 280:
|
l
|
Mining management business – project management of gold mining operations;
|
|
l
|
Mining technical service business – provision of mining technical services.
|
The Company operates these business segments in the PRC and all of the identifiable assets of the Company are located in the PRC during the periods presented.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company has no inter-segment sales for the three months ended March 31, 2010 and 2009. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Summarized financial information concerning the Company’s reportable segments is shown in the following table for the three months ended March 31, 2010 and 2009:
|
Three months ended March 31, 2010
|
||||||||
|
Mining management business
|
Mining technical service business
|
Total
|
||||||
|
Operating revenues, net:
|
||||||||
|
- Products
|
$
|
807,534
|
$
|
-
|
$
|
807,534
|
||
|
- Service
|
-
|
296,243
|
296,243
|
|||||
|
Total operating revenues
|
807,534
|
296,243
|
1,103,777
|
|||||
|
Cost of revenues
|
(331,526)
|
(26,533)
|
(358,059)
|
|||||
|
Gross profit
|
476,008
|
269,710
|
745,718
|
|||||
|
Depreciation
|
9,676
|
-
|
9,676
|
|||||
|
Total assets
|
3,965,752
|
514,837
|
4,480,589
|
|||||
|
Expenditure for long-lived assets
|
$
|
99,728
|
-
|
99,728
|
||||
|
Three months ended March 31, 2009
|
||||||||
|
Mining management business
|
Mining technical service business
|
Total
|
||||||
|
Operating revenues, net:
|
||||||||
|
- Products
|
$
|
-
|
$
|
-
|
$
|
-
|
||
|
- Service
|
-
|
-
|
-
|
|||||
|
Total operating revenues
|
-
|
-
|
-
|
|||||
|
Cost of revenues
|
-
|
-
|
-
|
|||||
|
Gross profit
|
-
|
-
|
-
|
|||||
|
Depreciation
|
-
|
-
|
-
|
|||||
|
Total assets
|
426,794
|
-
|
426,794
|
|||||
|
Expenditure for long-lived assets
|
$
|
6,096
|
$
|
-
|
$
|
6,096
|
||
F-35
81
NOTE – 8 CONCENTRATIONS OF RISK
The Company is exposed to the following concentrations of risk:
(a) Major customers
For the three months ended March 31, 2010 and 2009, the customer who accounts for 10% or more of the Company’s revenues and its outstanding balance at period-end date, are presented as follows:
|
Three months ended March 31, 2010
|
March 31, 2010
|
||||||||
|
Customer
|
Revenue
|
Percentage
of revenue
|
Accounts
receivable, trade
|
||||||
|
Customer A
|
$
|
807,534
|
73%
|
$
|
75,464
|
||||
|
Customer B
|
296,243
|
27%
|
-
|
||||||
|
Total:
|
$
|
1,103,777
|
100%
|
$
|
75,464
|
||||
For the three months ended March 31, 2009, there is no customer who accounts for 10% or more of the Company’s revenues.
(b) Major vendors
For the three months ended March 31, 2010 and 2009, the vendor who accounts for 10% or more of the Company’s purchases and its outstanding balance at period-end date, are presented as follows:
|
Three months ended March 31, 2010
|
March 31, 2010
|
||||||||
|
Vendor
|
Purchases
|
Percentage
of purchases
|
Accounts
payable, trade
|
||||||
|
Vendor A
|
$
|
81,485
|
39%
|
$
|
13,650
|
||||
|
Vendor B
|
74,146
|
37%
|
45,154
|
||||||
|
Total:
|
$
|
155,631
|
76%
|
$
|
58,804
|
||||
For the three months ended March 31, 2009, there is no vendor who accounts for 10% or more of the Company’s purchases.
F-36
82
(c) Credit risk
Financial instruments that are potentially subject to credit risk consist principally of accounts receivables. The Company believes the concentration of credit risk in its accounts and retention receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. Credit is extended based on evaluation of a customer's financial condition. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
(d) Exchange rate risk
The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.
(e) Economic and political risks
The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
(f) Industry risks
The Company's mining operations are subject to extensive national and local governmental regulations in China, which regulations may be revised or expanded at any time. Generally, compliance with these regulations requires the Company to obtain permits issued by government regulatory agencies. Certain permits require periodic renewal or review of their conditions. The Company cannot predict whether it will be able to obtain or renew such permits or whether material changes in permit conditions will be imposed. The inability to obtain or renew permits or the imposition of additional conditions could have a material adverse effect on the Company's ability to develop and operate its mines.
(g) Risk on changing price in gold
|
|
At present, the price of gold in the PRC is generally in line with the price of gold in the international market. There are many factors influencing the price of gold in the international market, including the international economic situation (in particular the economic situation in the US), petroleum prices, fluctuations in the exchange rates of the US$, fluctuations in the stock and other financial investment markets and various political, military, social and economic contingencies. These factors are beyond the control of the Company. Changes in the prices of the gold in the PRC and in the exchange rate of Renminbi as a result of these may adversely affect the operating results of the Company. Under the relevant PRC laws and regulations, hedging activities presently are not permitted in gold tracing in the PRC market. The Company has not been involved in hedging transactions or any alternative measures to manager the potential price risk.
|
F-37
83
|
|
|
NOTE – 9
|
COMMITMENTS AND CONTINGENCIES
|
The Company’s VIEs in the PRC are committed under several non-cancelable operating leases of office premises and mining rights with the terms ranging from 20 months to 2 years, with fixed monthly rentals, due through January, 2011. Total rent expenses for the three months ended March 31, 2010 and 2009 was $20,580 and $9,080, respectively.
As of March 31, 2010, the Company has $191,022 of future minimum rental payments due under non-cancelable operating leases in the next twelve months.
F-38
84
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other expenses of issuance and distribution.
Expenses incurred or (expected) relating to this Prospectus and distributions are as follows:
|
Legal and Professional Fees
|
$ 4,500
|
|
Accounting and auditing
|
3,800
|
|
Transfer Agent fees
|
1,500
|
|
Printing of Prospectus
|
200
|
|
Total
|
$ 10,000
|
Item 14. Indemnification of directors and officers.
Pursuant to provisions in the Articles of Incorporation and By-Laws of China ShouGuan Mining Corporation, the parent company incorporated in the State of Nevada, U.S., we may indemnify an officer or director who is made a party to any proceeding, including a lawsuit, because of his position, if he acted in good faith and in a manner he reasonably believed to be in our best interest. In certain cases, we may advance expenses incurred in defending any such proceeding. To the extent that the officer or director is successful on the merits in any such proceeding as to which such person is to be indemnified, we must indemnify him against all expenses incurred, including attorney's fees. With respect to a derivative action, indemnity may be made only for expenses actually and reasonably incurred in defending the proceeding, and if the officer or director is judged liable, only by a court order. The indemnification is intended to be to the fullest extent permitted by the laws of the State of Nevada.
As to indemnification for liabilities arising under the Securities Act of 1933, as amended, for directors, officers or controlling persons, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and is, therefore, unenforceable.
85
Item 15. Recent sales of unregistered securities.
Set forth below is information regarding the issuance and sales of securities without registration since inception. No such sales involved the use of an underwriter; no advertising or public solicitation was involved; the securities bear a restrictive legend; and no commissions were paid in connection with the sale of any securities:
|
Name
|
Address of Beneficial Owner
|
No of Shares
|
Purchase Price
|
|
|
Feize Zhang
|
Room 3207, New World Center, 6009 Yitian Road, Futian District, Shenzhen, PR China
|
27,510,000
|
$.004/Share
|
|
|
Jingfeng Lv
|
Room 501-505, Lantian International Building, 59 Changjiang Road, Development District, Yantai, PR China
|
6,000,000
|
$.004/Share
|
|
|
Tie-nan Ma
|
Room 3207, New World Center, 6009 Yitian Road, Futian District, Shenzhen,PR China
|
1,605,000
|
$.004/Share
|
|
|
Jian -xi Yang
|
Room 3207, New World Center, 6009 Yitian Road, Futian District, Shenzhen,PR China
|
3,705,000
|
$.004/Share
|
|
|
Bin Li
|
Room 3207, New World Center, 6009 Yitian Road, Futian District, Shenzhen,PR China
|
780,000
|
$.004/Share
|
|
|
Ming Cheung
|
Room 3207, New World Center, 6009 Yitian Road, Futian District, Shenzhen,PR China
|
1,220,000
|
$.004/Share
|
|
|
Glory Knight International Limited
|
4C, BLK 32, Parc Versailles, Tai Po, New Territories, Hong Kong
|
12,000,000
|
$.004/Share
|
|
|
New Beauty Investments Limited
|
Room D, 7/F, Tower 1, High Prosperity Terrace, 188 Kwai Shing Circuit, Kwai Chung, N.T. Hong Kong
|
4,976,000
|
$.004/Share
|
|
|
Ngai Li
|
Room 616, Sheung Tsan House, Sheung Tak Estate, Tseung Kwan O, Kowloon, Hong Kong
|
4,776,000
|
$.004/Share
|
|
|
Tsun-wah Lee
|
Room 2907, Lai Chung House, Mei Chung Court, 27 Mei Tin Road, N.T., Hong Kong
|
4,774,000
|
$.004/Share
|
|
|
Man Peng
|
Room 202, Building 5, Xinguanghuoli District, No.10 Xinsha Rd, Futian, Shenzhen, PR China
|
5,628,000
|
$.004/Share
|
|
|
Jian-dong Liu
|
Room 202, Building 36, Customs Living Quarters, Huanggang Border, Futian, Shenzhen, PR China
|
3,752,000
|
$.004/Share
|
|
|
Song Zhang
|
18A Meijing Tower, Tianan Golf Garden, Futian, Shenzhen, PR China
|
3,000,000
|
$.004/Share
|
|
|
Wing-nam Lui
|
3E, Nuode Center, Fuzhong 3rd Rd, Futian, Shenzhen, PR China
|
3,000,000
|
$.004/Share
|
|
|
Jointways International Investments Holdings Limited
|
15B, Building 15, the second phase, Donghai Garden, Agricultural and Science Center, Futian, Shenzhen, PR China
|
1,800,000
|
$.004/Share
|
|
|
Kam-fai Chan
|
Room 3615, 36/F, Fu Tak House, Tai Wo Hau Estate, Kwai Chung, N.T., Hong Kong
|
4,974,000
|
$.004/Share
|
|
|
Kon-ki Lo
|
Flat B, 18/F, Tower 1, The Victoria Towers, 188 Canton Road, Kowloon, Hong Kong
|
4,450,000
|
$.004/Share
|
|
|
Lap-pan Denis Chan
|
Room 1308, Ying Fu House, Choi Ying Estate, Kowloonbay, Hong Kong
|
1,750,000
|
$.004/Share
|
|
|
Kan Cheung
|
Room 2503, Pok Man House, Pok Hong Estate, Shatin, N.T., Hong Kong
|
500,000
|
$.004/Share
|
|
|
Chun-hin Jason Kong
|
20/F Central Tower, 28 Queens Road, Central, Hong Kong
|
250,000
|
$.004/Share
|
|
|
Hin-chung Ho
|
Room 2204, Tong Chiu Commercial Building, 193 Lockhart Road, Wanchai, Hong Kong
|
250,000
|
$.004/Share
|
|
|
Century America Promotions, Inc.
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36 Elliot Road
Harrington Park, NJ 07640
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300,000
|
$.004/Share
|
|
|
Magellan Global Fund
|
3709 Bamboo Court
Concord, CA 94519
|
3,000,000
|
$.004/Share
|
|
|
Total Issued Prior to Registration
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100,000,000
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|||
All of these securities were issued in reliance upon the exemption contained in Section 4(2) of the Securities Act of 1933, were issued to related parties of the registrant and bear a restrictive legend and restrictions on resale pursuant
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to Rule 144. The Registrant continues to rely on Section 4(2) of the Securities Act of 1933 as the exemption applicable to its acquisition of shares.
Item 16. Exhibits.
The following exhibits are being filed herewith:
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Exhibit No.
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Description
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|
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2
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Share Exchange Agreement
|
|
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3.1
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Articles of Incorporation
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|
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3.2
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Bylaws
|
|
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4
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Form of Common Stock Certificate
|
|
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5
|
Opinion of Michael M. Kessler, Esq. re: Legality
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|
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10.1
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Operating Lease Agreement for Cunliji Gold Mine
|
|
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10.2
|
Acquisition Agreement for Cunliji Gold Mine
|
|
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10.3
|
Option Agreement to Purchase Equity Interests by and among Shoujin Business Consulting (Shenzhen), Shenzhen ShouGuan Investment Limited, Yantai JinGuan Investment Limited and Penglai XinGuan Investment Limited
|
|
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10.4
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Equity Pledge Agreement
|
|
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10.5
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Operating Agreement
|
|
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10.6
|
Exclusive Technical Service and Business Consulting Agreement
|
|
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10.7
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Proxy Agreement
|
|
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10.8
|
Zhengyuan Geological Exploration Institute Geological Report
|
|
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10.9
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Office Lease - Yantai, China
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|
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10.10
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Office Lease - Shenzhen, China
|
|
|
14
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Code of Ethics
|
|
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21
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List of Subsidiaries/Variable Interest Entities of Registrant
|
|
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23.1
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Consent of ZYCPA Company Limited, Certified Public Accountants
|
|
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23.2
|
Consent of Michael M. Kessler, Esq. (see Exhibit 5)
|
|
Item 17. Undertakings.
The undersigned registrant hereby undertakes to:
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1.
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To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
|
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(i)
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To include any prospectus required by section 10(a)(3) of the Securities Act:
|
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(ii)
|
Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b)(ss.230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement; and(2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.
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2.
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File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
|
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3.
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For determining liability of the undersigned small business issuer under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned small business issuer undertakes that in a primary offering of securities of the undersigned small business issuer pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communication, the undersigned small business issuer will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
|
|
(i)
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Any preliminary prospectus or prospectus of the undersigned small business issuer relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter)
|
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(ii)
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Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned small business issuer or used or referred to by the undersigned small business issuer;
|
|
(iii)
|
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned small business issuer or its securities provided by or on behalf of the undersigned small business issuer; and
|
|
(iv)
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Any other communication that is an offer in the offering made by the undersigned small business issuer to the purchaser.
|
|
4.
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Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the Act ) may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and as expressed in the Act and is, therefore, unenforceable.
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5.
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In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
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6.
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That for the purpose of determining any liability under the Securities Act to any purchaser:
|
|
(i)
|
Each prospectus filed by the undersigned small business issuer pursuant to Rule 424(b)(3)(ss.230.424(b)(3) of this chapter) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
|
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(ii)
|
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) (ss.230.424(b)(2), (b)(5), or (b)(7) of this chapter) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x)(ss.230.415(a)(1)(i), (vii), or (x) of this chapter) for the purpose of providing the information required by section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
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88
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in.
China ShouGuan Mining Corporation , Registrant
By: /s/ Feize Zhang
___________________________________________
Feize Zhang, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on June 28, 2010.
China ShouGuan Mining Corporation , Registrant
By: /s/ Feize Zhang
Feize Zhang, Chairman and Chief Executive Officer
By: /s/ Ming Cheung
Ming Cheung Ming, Chief Financial Officer, Secretary and Director
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