Attached files
file | filename |
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EX-5.2 - EX-5.2 - Artistry Publications Inc | g23928exv5w2.htm |
EX-3.3 - EX-3.3 - Artistry Publications Inc | g23928exv3w3.htm |
EX-99.5 - EX-99.5 - Artistry Publications Inc | g23928exv99w5.htm |
EX-31.1 - EX-31.1 - Artistry Publications Inc | g23928exv31w1.htm |
EX-99.3 - EX-99.3 - Artistry Publications Inc | g23928exv99w3.htm |
EX-99.4 - EX-99.4 - Artistry Publications Inc | g23928exv99w4.htm |
EX-32.1 - EX-32.1 - Artistry Publications Inc | g23928exv32w1.htm |
EX-31.2 - EX-31.2 - Artistry Publications Inc | g23928exv31w2.htm |
EX-99.6 - EX-99.6 - Artistry Publications Inc | g23928exv99w6.htm |
EX-10.13 - EX-10.13 - Artistry Publications Inc | g23928exv10w13.htm |
EX-10.14 - EX-10.14 - Artistry Publications Inc | g23928exv10w14.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED MARCH 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 333-146942
CHINA REDSTONE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware | 20-8285559 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
239 Jianxin Road, Jiangbei District, Chongqing |
PRC 400000 | |
(Address of principal executive offices) | (Zip Code) |
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (86) 023-67755514
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None.
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
Common Stock, $.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes o No þ
Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
The aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was sold, or the average bid and
asked prices of such common equity, as of the last business day of the registrants most recently
completed second fiscal quarter: $0 as of September 30, 2009.
There were 12,672,262 shares outstanding of registrants common stock, par value $0.001 per share,
as of July 9, 2010. The shares of the registrants common stock are currently quoted on the
Over-the-Counter Bulletin Board, or OTCBB.
Documents Incorporated by Reference: None.
TABLE OF CONTENTS
TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2010
TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2010
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2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (Form 10-K) and other reports filed by the
Registrant from time to time with the Securities and Exchange Commission (collectively the
Filings) contain or may contain forward looking statements and information that are based
upon beliefs of, and information currently available to, the Registrants management as well as
estimates and assumptions made by the Registrants management. When used in the filings the words
anticipate, believe, estimate, expect, future, intend, plan or the negative of these
terms and similar expressions as they relate to the Registrant or the Registrants management
identify forward looking statements. Such statements reflect the current view of the Registrant
with respect to future events and are subject to risks, uncertainties, assumptions and other
factors (including the risks contained in the section of this report entitled Risk
Factors) relating to the Registrants industry, the Registrants operations and results of
operations and any businesses that may be acquired by the Registrant. Should one or more of these
risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual
results may differ significantly from those anticipated, believed, estimated, expected, intended or
planned.
Although the Registrant believes that the expectations reflected in the forward looking
statements are reasonable, the Registrant cannot guarantee future results, levels of activity,
performance or achievements. Except as required by applicable law, including the securities laws of
the United States, the Registrant does not intend to update any of the forward-looking statements
to conform these statements to actual results. The following discussion should be read in
conjunction with the Registrants pro forma financial statements and the related notes filed with
this Form 10-K.
In this Form 10-K, references to we, our, us, China Redstone, the Company or the
Registrant refer to China Redstone Group, Inc., a Delaware corporation.
PART I
Item 1. BUSINESS
Overview
China Redstone Group, Inc. (the Company), through our operating entity,
Chongqing Foguang Tourism Development (Group) Co., Ltd. (Foguang), is a private provider
of cemetery products and services in Chongqing, Peoples Republic of China (PRC or
China). Foguang is primarily focused on developing cemeteries and selling cemetery
plots, although it also provides park and garden development and construction services. Foguangs
first cemetery development project was the Chongqing Guiyuan Cemetery I (Guiyuan I),
located in Changshou District of Chongqing on approximately 66,660 square meters of land. The
entire cemetery plot of Guiyuan I have been sold, at an average price of RMB 30,000 ($4,412) per
plot. Foguang is currently developing the Chongqing Guiyuan Cemetery II (Guiyuan II), its
second cemetery project in Changshou. Guiyuan II, in development since 2002, occupies a land area
over 667,000 square meters, of which approximately 46,620 square meters have been developed to date
and 620,000 square meters remain undeveloped. Approximately 565,000 square meters are identified
as land to be developed as a cemetery and the remaining area will be developed as housing, parking
and office space in the future.
Both Guiyuan I and Guiyuan II are among the most highly regarded facilities in their market
area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume
of business, available inventory, name recognition, aesthetics and potential for development or
expansion. In 2006 and 2007, Foguang was ranked amongst the top 50 private-owned enterprises in
Chongqing by the Xinhuanet News Domestic, Xinhua News Agency.
In addition, the Chongqing municipal government has committed to enable Foguang to secure the
land use rights to approximately 1,194,804 square meters of land surrounding Longqiao Lake, which
portions of Guiyuan II overlook. However, as of the date of this Form 10-K, Foguang has yet to
officially receive such land use rights. Foguang is planning to develop this land as a park, with
mausoleums and temples, to complement and enhance Guiyuan II. The purpose of the Longqiao Lake
project is to make full use of Foguangs land resources, to cultivate
3
and produce flower seeds, and
to increase the overall green effect of its park. So far, Foguang has invested nearly RMB 12
million (approximately US $1.77 million) to cultivate the land for the planting of nursery
seedlings and the purchasing of nursery seedlings. A part of such seedlings will be used for the
development of Guiyuan II, and the remaining seedlings will be sold either to the Changshou
district government for urban landscaping or to outside parties for profit.
Reverse Acquisition
On February 10, 2010, Artistry Publications, Inc., entered into a share exchange agreement
(Share Exchange Agreement) under which it issued 8,800,000 shares of its common stock,
par value $0.001, to the shareholders of Gold Industry Limited
(Gold Industry), a Cayman Island company, in exchange
for all the issued and outstanding shares of Gold Industry (the Share Exchange).
As a result of the Share Exchange, Gold Industry became a wholly-owned legal subsidiary of
Artistry Publications, Inc., and Gold Industry shareholders acquired a majority of Artistry
Publications, Inc.s issued and outstanding stock. Concurrent with the Share Exchange, Mr. Yiyou
Ran (the managing director of Gold Industry, and all of its operating subsidiaries, Mr.
Ran) has been appointed the Chief Executive Officer of the Company.
As a result, the Share Exchange has been accounted for as a reverse acquisition using the
purchase method of accounting, whereby Gold Industry, is deemed to be the accounting acquirer
(legal acquiree) and Artistry Publications, Inc., to be the accounting acquiree (legal acquirer).
The financial statements before the date of Share Exchange are those of Gold Industry, with
the results of Artistry Publications, Inc. being consolidated from the date of Share Exchange. The
equity section and earnings per share have been retroactively restated to reflect the reverse
acquisition and no goodwill has been recorded.
History and Corporate Structure
The Company was incorporated in Delaware on July 10, 2007, originally under the name Artistry
Publications, Inc. for the purpose of entering the photography industry and establishing a large
scale photography publishing business focused on American History. The Companys plan was to
develop a successful photo journal publishing company by depicting history and producing excellent
affordable artwork in practical items to entertain and educate.
All of our business operations are carried out by Foguang, which the Company controls
through contractual arrangements between Foguang and Chongqing Ran Ji Industrial Co., Ltd.
(Ran Ji), a company wholly-owned by Gold Holy Industry Limited (Gold Holy).
Gold Holy is wholly-owned by Gold Industry. Through these contractual arrangements, the Company has
the ability to substantially influence Foguangs daily operations and financial affairs, appoint
its senior executives and approve all matters requiring shareholder approval. As a result of these
contractual arrangements, which enable the Company to control Foguang, the Company is considered
the primary beneficiary of Foguang. Accordingly, the Company consolidates Foguangs results, assets
and liabilities in its financial statements. Other than the Companys interests in the contractual
arrangements, neither the Company, Gold Industry, Gold Holy and Ranji own any equity interests in
Foguang.
Contractual Arrangements with Foguang and its Owners
On December 15, 2009, Ran Ji entered into the following contractual arrangements with Foguang
and its owners:
Consulting Services Agreement. Pursuant to the exclusive consulting services
agreement between Ran Ji and Foguang, Ran Ji has the exclusive right to provide to Foguang general
consulting services related to the tourism development industry as well as consulting services
related to tourism project, cemetery management, funeral ashes, planting of flowers, nursery stock
and Chinese herbal, biomass research, production and marketing of arts and crafts, and designing of
landscape (the Services). Ran Ji also sends employees to Foguang and Foguang bears the
costs and expenses for such employees. Under this agreement, Ran Ji owns the intellectual property
rights developed through the Services provided to Foguang. Foguang pays a quarterly consulting
service fee in Renminbi (RMB) to Ran Ji that is equal to all of Foguangs revenue for
such quarter. The consulting services agreement is in effect unless and until terminated by
written notice of either party in the event that: (a) the other party causes a material breach of
this agreement, provided that if the breach does not relate to a financial obligation of the
breaching party, that party may
4
attempt to remedy the breach within fourteen (14) days following
the receipt of the written notice; (b) the other party
becomes bankrupt, insolvent, is the subject of proceedings or arrangements for liquidation or
dissolution, ceases to carry on business, or becomes unable to pay its debts as they become due;
(c) Ran Ji terminates its operations; (d) Foguangs business license or any other license or
approval for its business operations is terminated, cancelled or revoked; or (e) circumstances
arise which would materially and adversely affect the performance or the objectives of the
consulting services agreement. Additionally, Ran Ji may terminate the consulting services
agreement without cause. Pursuant to the consulting services agreement, Ran Ji has the right to
collect the consulting services fee from Foguang.
Operating Agreement. Pursuant to the operating agreement among Ran Ji, Foguang and
the owners of Foguang who collectively hold 100% of the issued and outstanding equity interests of
Foguang (collectively the Foguang Owners), Ran Ji provides guidance and instructions on Foguangs
daily operations, financial management and employment issues. The Foguang Owners must designate
the candidates recommended by Ran Ji as their representatives on Foguangs board of directors. Ran
Ji has the right to appoint senior executives of Foguang. In addition, Ran Ji agrees to guarantee
the performance of Foguang under any agreements or arrangements relating to Foguangs business
arrangements with any third party. Foguang, in return, agrees to pledge its accounts receivable
and all of its assets to Ran Ji. Moreover, Foguang agrees that without the prior consent of Ran
Ji, Foguang will not engage in any transactions that could materially affect the assets,
liabilities, rights or operations of Foguang, including, without limitation, incurrence or
assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any
encumbrance on any of its assets or intellectual property rights in favor of a third party or
transfer of any agreements relating to its business operation to any third party. The term of this
agreement is ten years from December 15, 2009, and may be extended only upon Ran Jis written
confirmation prior to the expiration of the agreement, with the extended term to be mutually agreed
upon by the parties.
Equity
Pledge Agreement. Under the equity pledge agreement between the Foguang Owners
and Ran Ji, the Foguang Owners pledged all of their equity interests in Foguang to Ran Ji to
guarantee Foguangs performance of its obligations under the consulting services agreement. If
Foguang or the Foguang Owners breach their respective contractual obligations, Ran Ji, as pledgee,
will be entitled to certain rights, including, but not limited to, the right to sell the pledged
equity interests, the right to vote and control the pledged assets. The Foguang Owners also
agreed, that upon occurrence of any event of default, Ran Ji shall be granted an exclusive,
irrevocable power of attorney to take actions in the place and instead of the Foguang Owners to
carry out the security provisions of the equity pledge agreement and take any action and execute
any instrument that Ran Ji may deem necessary or advisable to accomplish the purposes of the equity
pledge agreement. The Foguang Owners agreed not to dispose of the pledged equity interests or take
any actions that would prejudice Ran Jis interest. The equity pledge agreement will expire in two
years after Foguangs obligations under the exclusive consulting services agreement have been
fulfilled.
Option Agreement. Under the option agreement between the Foguang Owners and Ran Ji,
the Foguang Owners irrevocably granted Ran Ji or its designated person an exclusive option to
purchase, to the extent permitted under Chinese law, all or part of the equity interests in Foguang
for the cost of the initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable Chinese law. Ran Ji or its designated person has sole
discretion to decide when to exercise the option, whether in part or in full. The term of this
agreement is ten years from December 15, 2009, and may be extended prior to its expiration by
written agreement of the parties.
Proxy Agreement. Pursuant to the proxy agreement among Ran Ji, the Foguang Owners,
and Foguang, the Foguang Owners agreed to entrust all the rights to exercise their voting power to
designee(s) of Ran Ji. Such designee(s) shall have the right to exercise the Foguang Owners
voting and other rights, including the attendance at and the voting of their shares at Foguangs
shareholders meetings (or by written consent in lieu of meetings) in accordance with applicable
laws and Foguangs Article of Association. This agreement may not be terminated without the
unanimous consent of all parties, except that Ran Ji may, by giving a thirty (30) day prior written
notice to the Foguang Owners, terminate the proxy agreement, with or without cause.
The operating agreement, equity pledge agreement, option agreement and proxy agreement ensure
that Foguang pays the consulting services fee to Ran Ji under the consulting services agreement
during the term of the consulting services agreement. Other than the consulting services agreement,
Foguang does not pay any other fees to Ran Ji.
5
However, Chinese laws and regulations concerning the validity of the contractual arrangement
is uncertain, as many of these laws and regulations are relatively new and may be subject to
change, and their official interpretation and enforcement by the Chinese government involves
substantial uncertainty. Additionally, the contractual arrangement may not be as effective in
providing control over Foguang as direct ownership, which we are restricted from under current
Chinese law. Due to such uncertainty, the Company may take such additional steps in the future as
may be permitted by the then applicable laws and regulations in China to further strengthen its
control over or toward actual ownership of Foguang or its assets or business operations, which
could include direct ownership of selected assets without jeopardizing any favorable government
policies toward domestic owned
enterprises. Because the Company relies on Foguang for its revenue, any termination of or
disruption to the contractual arrangement would detrimentally affect its business and financial
condition.
Company Organization
Gold Industry is a holding company incorporated in Cayman Islands. Since incorporation, Gold
Industry has not conducted any substantive operations of its own except for holding 100% equity
interests of Gold Holy.
Gold Holy is a holding company established in Hong Kong Special Administration Region on
September 29, 2009. Other than holding 100% equity interests of Ran Ji, Gold Holy has no other
separate operations of its own.
Ran Ji is a shareholding limited company organized in the PRC on December 15, 2009. Ran Ji
was formed by Gold Holy. Other than the activities relating to its contractual arrangements with
Foguang as described below, Ran Ji has no other business operations.
Foguang is a shareholding limited company organized in the PRC on October 10, 2002. Foguang
holds the government licenses and approvals necessary to operate the death care business in
China. We do not own any equity interests in Foguang, but control and receive the economic
benefits of its business operations through contractual arrangements. Through Ran Ji, we have
contractual arrangements with Foguang and its owners pursuant to which we provide consulting and
other general business operation services. Through these contractual arrangements, we also have the
ability to substantially influence their daily operations and financial affairs, since we are able
to appoint their senior executives and approve all matters requiring approval of the equity owners.
As a result of these contractual arrangements, which enable us to control Foguang and to receive,
through Ran Ji, all of its profits, we are considered the primary beneficiary of Foguang.
Accordingly, we consolidate its results, assets and liabilities in our financial statements.
6
The following diagram illustrates the Companys corporate structure as of the date of this
Form 10-K:
(1) | Our management includes: Yiyou Ran as Chief Executive Officer, President and Chairman, Michael Wang as Chief Financial Officer, Treasurer, Secretary and Director, and Jianquan Chen and Tim Hudson as members of the board of directors. | |
(2) | The management of Gold Industry is comprised of Yiyou Ran, Jianquan Chen and Yang Chen as its directors. Artistry is the sole shareholder of Gold Industry. | |
(3) | The management of Gold Holy is comprised of Yiyou Ran, Jianquan Chen and Yang Chen as its directors. Gold Industry is the sole shareholder of Gold Holy. | |
(4) | The management of Ran Ji is comprised of Yiyou Ran, Jianquan Chen and Yang Chen as its directors. Holy Gold is the sole shareholder of Ran Ji | |
(5) | Ran Ji controls Foguang through contractual arrangements designed to mimic equity ownership of Foguang by Ran Ji. These contracts include a consulting services agreement, operating agreement, equity pledge agreement, option agreement, and proxy agreement. | |
(6) | The management of Foguang is comprised of Yiyou Ran, Jianquan Chen and Yang Chen as its directors. |
Financing Transaction
In February 2010, the Company completed a financing transaction with 24 institutional and/or
accredited investors (collectively the Purchasers) pursuant to which it sold $4,599,415
of units of its equity securities to the Purchasers in a private placement (the
Transaction). Each unit is comprised of 100,000 shares of its common stock, par value
$0.001 per share (the Common Stock), at a per share purchase price of $3.28 per share,
and warrants to purchase up to 50,000 shares of Common Stock. At the closing of the Transaction on
February 23, 2010, the Company issued 1,402,262 shares of Common Stock and four-year warrants to
purchase 701,126 shares of Common Stock (the Warrants). In addition, the Company issued
warrants to purchase up to 70,113 shares of common stock to its placement agent and its assignees
for the Transaction.
7
Industry
Industry consolidation. Death care businesses in China have traditionally been relatively
small, family-owned enterprises that have passed through successive generations within the family.
The decade of the 1990s witnessed a trend of family-owned firms consolidating with larger
organizations, but this trend slowed dramatically in 2000. As the number of consolidators
participating in the acquisition market declined, those that remained generally applied
significantly tighter pricing criteria, and many potential sellers withdrew their businesses from
the market rather than pursuing transactions at lower prices. Our industry continues to be
characterized by a large number of locally-owned, independent operations, with approximately 70
percent of industry revenue being generated by independently-owned and/or state-owned operations.
We estimate that our industry, which consists of approximately 10,000 funeral homes and 40,000
cemeteries in China, collectively generates approximately $28 billion in annual revenue.
Importance of tradition; barriers to entry. We believe it is difficult for new competitors to
enter existing markets successfully by opening new cemeteries. The barriers to entry are lower on
the funeral side. Entry into the cemetery market can be difficult due to several factors. Because
families tend to return to the same cemetery for multiple generations to bury family members, it is
difficult for new cemeteries to attract families. Additionally, mature markets, including the areas
where our cemeteries are located, are often served by an adequate number of existing cemeteries
with sufficient land for additional plots, whereas land for new cemetery development is often
scarce and expensive. Regulatory complexities and zoning restrictions also make entry into the
cemetery market difficult. Finally, development of a new cemetery usually requires a significant
capital investment that takes several years to produce a return.
Continuing need for products and services; increasing number of deaths. There is an inevitable
need for our products and services. Deaths in China are expected to increase at a steady, moderate
pace over the long-term. According to official released figures from Ministry of Environmental
Protection of the PRC, the mortality rate of Chongqing is 6.5% on average, and the population
(urban residents) of the city is 6 million. Therefore, the expected deaths are about 200,000 per
year. Furthermore, the average age of the population aged 50 and over is also increasing every
year. According to the National Population and Family Planning Commission of the PRC, the Chinese
population over 50 years of age is expected to increase by approximately 3% per year, from
276.8 million in 2000 to 298.6 million in 2010. We believe the aging of the population is
particularly important because it expands our target market for preneed sales, as persons over the
age of 50 are the most likely group to make preneed funeral and cemetery arrangements. It is also a
Chinese belief that purchasing a grave prior to ones death is wishing for a healthier and longer
life, which attracts a large number of seniors.
Cremation. In recent years, there has been a steady, gradual increase in the number of
families in China that have chosen cremation as an alternative to traditional methods of burial.
According to industry studies, cremations represented approximately 57% of the Chinese burial
market in 2006. That number is expected to increase to 70% by 2010 and 95% by 2025. Cremation rates
can vary significantly based upon geographic, religious and cultural traditions. Historically,
direct cremation has been offered as a less costly alternative to a traditional burial. However,
with the population of China increasing and land and resources becoming more scarce, the government
is requiring more people be cremated. In some of the larger cities such as Beijing, Tianjin, and
Shanghai, the cremation rate is close to 100%.
Operations
Information for each of our business segments is presented below and in our financial
statements set forth herein.
Cemetery Operations
Foguang conducts its cemetery operations only in Chongqing, China. As of March 31, 2010,
Foguang has two cemeteries, Guiyuan I and Guiyuan II. The cemetery operations are managed by a team
of experienced death care industry and sales professionals. During the year ended March 31, 2010,
cemetery revenues account for 100% of our total revenues.
8
Foguangs cemetery operations include interment services, the rights to interment in cemetery
sites (including grave sites, mausoleum crypts and niches) and related cemetery merchandise such as
memorials and vaults. Cemetery operations generate revenues through sales of cemetery plots and
memorials, installation fees, and fees for interment services.
Foguangs cemetery operating results are impacted by the success of its sales organization
because approximately 97% of its cemetery revenues during the year ended March 31, 2010 was
generated from sales of interment rights. The remaining 3% of its 2010 cemetery revenues was
generated from deliveries of merchandise and services previously sold, such as plants and services
on Foguangs contracts. Foguang believes that changes in the level of consumer confidence (a
measure of whether consumers will spend money on discretionary items) impact the amount of cemetery
revenues and are currently having a significant negative impact on its sales and the industry as a
whole. Cemetery revenues generated from at-need services are principally a service business that
provides burial plots. Given the high fixed cost structure associated with cemetery operations,
Foguang believes the following are key factors affecting its profitability:
| demographic trends in terms of population growth and average age, which impact death rates and number of deaths; | ||
| establishing and maintaining leading market share positions supported by strong local heritage and relationships; | ||
| effectively responding to increasing cremation trends by packaging complimentary services and merchandise; | ||
| controlling salary and merchandise costs; and | ||
| exercising pricing leverage related to its at-need business to increase average revenues per contract. |
Park Construction Services
Foguang is also able to provide park and garden construction/landscaping services on a per
contract basis. However, Foguang only performs such services when it has the capacity to do
so. During the year ended March 31, 2010, Foguang had no park construction services revenues.
Customers
Foguangs customers are individuals or families that would purchase graves for members for
their families that are presently living or deceased. According to National Population and Family
Planning Commission of the PRC, the current annual death rate of Chongqing is 0.65% and it is
predicted to go up to approximately 0.7% in the next three years. In the meantime, the population
for the city keeps growing and the pace of urbanization has accelerated. For example, in 2009, the
population of urban residents increased by approximately 500,000 compared to 2008. This will
increase the market demand by nearly 3,000 graves in Foguangs target market annually. The number
of cremations in the city is about 50,000 each year, of which, 60% to 70% of the deceaseds
relatives will purchase graves. Their demand also constitutes Foguangs target market.
The following is a breakdown of the grave types purchased by Foguangs current customers:
Grave Type | Price | Percentage of Customer | ||||
Double Graves
|
Below $1,500 (Below RMB 10,000) | 0 | % | |||
Double Graves
|
Between $1,500 and $4,500 (Between RMB 10,000 and 30,000) | 40 | % | |||
Single Graves
|
Between $4,500 and $7,500 (Between RMB 30,000 and 50,000) | 42 | % | |||
Single Graves
|
Between $7,500 and $15,000 (Between RMB 50,000 and 100,000) | 11 | % | |||
Single Graves
|
Between $15,000 and $45,000 (Between RMB 100,000 and 300,000) | 4 | % | |||
Single Graves
|
Between $45,000 and $75,000 (Between RMB 300,000 and 500,000) | 2 | % | |||
Single Graves
|
0.5%Over $75,000 (Over RMB 500,000) | 1 | % |
9
Suppliers and Manufacturers
On January 28, 2008, an affiliated party of Foguang entered into a long term manufacturing
contract with a local manufacturer to manufacture tombstone memorials for Foguangs cemetery
operations. The manufacturer is provided with Foguangs own design specifications, and then
produces, delivers and mounts the memorials to the burial vaults. Foguang arranges for quality
inspection after the installation of the memorials. If there are quality issues, the manufacturer
will be responsible for conducting on-site repairs until the memorials pass Foguangs inspection.
After the memorials pass satisfactory inspection, Foguang assumes responsibility for the management
and upkeep of the memorials. For each memorial, 50% of its cost is paid to the manufacturer after
Foguangs acceptance, and the remaining 50% will be paid by the affiliate of Foguang at the time
the tombstone memorial is sold to the customer. The manufacturing contract does not provide for any
termination provisions.
Foguang also entered into various project-based construction agreements with local contractors
in connection with its cemetery facilities. Some of the projects include turning hillside into
terraced fields, building roads, pathways and office facilities, digging up burial vaults, and
building a lake dam.
Sales and Marketing
As of March 31, 2010, Foguangs sales and marketing force included 6 employees, who also
oversaw 12 salespeople and 30 agents who are independent contractors. Foguang has made a strong
commitment to the training of its employees in order to ensure that its customers receive the
highest quality customer service. Foguangs training program includes pre-employment training and
on-employment training of professional ethics and sales techniques. Each employees sales
performance will be evaluated by his supervisor on an as needed basis but at least once per
twelve-month period. Based on the evaluation, the employee may be granted a year-end bonus, pay
raise or promotion.
Foguang rewards its salespeople with incentives for generating new customers. Substantially
all of its sales force is compensated based on performance. Commissions are augmented with various
bonus and incentive packages to ensure a high quality, motivated sales force. Foguang pays
commissions to its sales personnel based on a percentage of the price of the products and services,
which varies from 6% to 30% of the total contract price. In addition, Foguangs sales personnel
receive an award varying from 1,000 RMB to 10,000 RMB for yearly sales of 1 million RMB or more by
the sales agents assigned to them. Foguang pays its sales agent based on a percentage of sales
varying from 10% to 12% and also offer an extra 2% or 3% award to yearly sales of 1.8 million RMB
or more.
Foguang spent $196,945 and $426,415 on marketing and advertising expenses for its fiscal year
2010 and 2009, respectively. Foguang spent less on marketing expenses for the year ended March 31,
2010 due to the ability to focus its advertising on the channels that have been proven as the most
effective. Foguang focused its advertising on mainstream television shows, such as Chongqing
Commercial Daily, Evening, Morning, and Chongqing TV 12, which have proven to be the most effective
dissemination of advertising to the public. In fiscal 2010, Foguang also cut back on its television
advertisements and print advertisements by 50% to reduce advertising expenses.
Competition
The operating environment in the death care industry has been highly competitive. Although
Foguang is the largest private provider of cemetery products and services in Chongqing, management
believes that it nevertheless face intense competition from numerous local funeral homes and
cemetery firms based on the internal research and site visits conducted by its management.
Foguangs primary competitors in Chongqing and their relative strengths and weaknesses are:
Name of Competitors | Strength of Competitors | Weakness of Competitors | ||
Chongqing Long Tai Mountain Cemetery
|
Established in 1996 with a long operating history, conveniently located in downtown Chongqing, consists of over 41 acres. | This cemetery has more demand than its land could supply, has a conservative operation and closed 80% of its sales offices since 2009. | ||
Chongqing Hua Yan Ta Yuan
|
This was a Hong Kong based project and currently the only pagoda cemetery project in China. | This cemetery is limited to 40,000 tombs, all of which have been sold as of November 2009, and it has no land for further development. | ||
Chongqing Hua Xia Cemetery
|
The most elaborate cemetery site in China popular with high income families in urban areas, known for its good management and exceptional construction features. | The high price is not affordable for the average family, with a cost per tomb starting at 60,000 RMB (approximately US$10,000). The cemetery is relatively small with only 8.7 acres in size and has no land for further expansion. |
10
Each of the above-mentioned competitors has a more established and longer operating history
compared to Foguang, and each enjoys a good reputation with a mature sales network. However, none
of these competitors have land reserves, so they do not have any more land to further develop and
expand their businesses, and as a result, will lose their competitiveness in the marketplace. By
comparison, Foguangs cemetery has a rich land reserve which gives it an unparallel edge to further
develop and expand its business. Foguangs management believes that land reserve is the most
important factor of success in the cemetery business. So even though Foguang is relatively new in
the cemetery business and has a shorter operating history and a less established customer network,
it still has a lot of room to grow and believes that it shall remain competitive in the cemetery
business for a long time. Foguang also conducts market research and prices its products and
services more competitively than its competitors, and provides more added values for its services
and products.
Intellectual Properties and Licenses
Foguang currently does not have any intellectual properties and licenses.
Governmental Regulations
Compliance with Circular 106 and the 2006 M&A Regulations
On May 29, 2007, Chinas State Administration of Foreign Exchange (SAFE) issued an
official notice known as Circular 106, which requires the owners of any Chinese companies to
obtain SAFEs approval before establishing any offshore holding company structure in so-called
round-trip investment transactions for foreign financing as well as subsequent acquisition
matters in China. Likewise, the Provisions on Acquisition of Domestic Enterprises by Foreign
Investors, issued jointly by Ministry of Commerce (MOFCOM), State-owned Assets
Supervision and Administration Commission, State Taxation Bureau, State Administration for Industry
and Commerce (SAIC), China Securities Regulatory Commission and SAFE in August 2006,
impose approval requirements from MOFCOM for round-trip investment transactions, including
acquisitions in which equity was used as consideration.
Dividend Distribution
The principal laws, rules and regulations governing dividends paid by our PRC operating
subsidiary include the Company Law of the PRC (1993), as amended in 1999, 2004 and 2005
respectively, Wholly Foreign Owned Enterprise Law (1986), as amended in 2000, and Wholly Foreign
Owned Enterprise Law Implementation Rules (1990), as amended in 2001. Under these laws and
regulations, our PRC subsidiary may pay dividends only out of its accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. In addition, our PRC
subsidiary is required to set aside at least 10% of its after-tax profit based on PRC accounting
standards each year to its statutory surplus reserve fund until the accumulative amount of such
reserve reaches 50% of its respective registered capital. These reserves are not distributable as
cash dividends. The board of directors of a wholly foreign-owned enterprise (WFOE) has
the discretion to allocate a portion of its after-tax profits to its staff welfare and bonus funds.
After the allocation of relevant welfare and funds, the equity owners can distribute the rest of
the after-tax profits provided that all the losses of the previous fiscal year have been made up.
11
Taxation
The applicable income tax laws, regulations, notices and decisions (collectively referred to
as Applicable Foreign Enterprises Tax Law) related to foreign investment enterprises and
their investors mainly include the following:
| Notice Relating to Taxes Applicable to Foreign Investment Enterprises / Foreign Enterprises and Foreign Nationals in Relation to Dividends and Gains obtained from Holding and Transferring of Shares promulgated by State Tax Bureau on July 21, 1993; | ||
| Amendments to the Income Tax Law Applicable to Individuals of the PRC promulgated by Standing Committee of the National Peoples Congress (NPC) on October 31, 1993; | ||
| Notice on Relevant Policies Concerning Individual Income Tax issued by Ministry of Finance and the State Tax Bureau on May 13, 1994; | ||
| Notice on Reduction of Income Tax in Relation to Interests and Gains Derived by Foreign Enterprises from the PRC, promulgated by the State Council on November 18, 2000; and | ||
| Enterprise Income Tax Law of the PRC (New EIT Law) issued by NPC on March 16, 2007, which came into effect on January 1, 2008. |
Income Tax on Foreign Investment Enterprises
According to the New EIT Law, PRC domestic enterprises and foreign investment enterprises
(including Sino-foreign equity joint ventures, Sino-foreign co-operative joint ventures and WFOEs
established in the territory of the PRC) are required to pay a uniform income tax at a rate of 25%
of their taxable income and the former tax exemption, reduction and preferential treatments
applicable to foreign investment enterprises are revoked.
Value Added Tax
The Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State
Council came into effect on January 1, 1994 and were amended in 2008. Under these regulations and
the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value
added tax is imposed on goods sold in or imported into the PRC and on processing, repair and
replacement services provided within the PRC.
Value added tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17%
(depending on the type of goods involved) on the full price collected for the goods sold or, in the
case of taxable services provided, at a rate of 17% on the charges for the taxable services
provided but excluding, in respect of both goods and services, any amount paid in respect of value
added tax included in the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and service in the same financial year.
Business Tax
According to the Provisional Regulations of the PRC Concerning Business Tax promulgated by the
State Council on December 13, 1993 and came into effect on January 1, 1994, which was revised by
the State Council on November 10, 2008 and enforced from January 1, 2009, business that provides
services, assigns intangible assets or sells immovable property became liable to business tax at a
rate ranging from 3 to 5% of the charges of the services provided, intangible assets assigned or
immovable property sold, as the case may be.
Tax on Dividends from PRC Enterprise with Foreign Investment
According to the Applicable Foreign Enterprises Tax Law, income such as rental, royalty and
profits from the PRC derived by a foreign enterprise which has no establishment in the PRC or has
establishment but the income has no relationship with such establishment is subject to a 10%
withholding tax, subject to reduction as provided by any
12
applicable double taxation treaty, unless the relevant income is specifically exempted from
tax under the Applicable Foreign Enterprises Tax Law. The profit derived by a foreign investor
from a PRC enterprise with foreign investment is exempted from PRC withholding tax according to the
Applicable Foreign Enterprises Tax Law.
Wholly-Owned Foreign Enterprise (WFOE)
WFOEs are governed by the Law of the PRC Concerning Enterprises with Sole Foreign Investments,
which was promulgated on April 12, 1986 and amended on October 31, 2000, and its Implementation
Regulations promulgated on December 12, 1990 and amended on April 12,2001 (together the
Foreign Enterprises Law).
(a) | Procedures for establishment of a WFOE | ||
The establishment of a WFOE will have to be approved by the MOFCOM (or its delegated authorities). If two or more foreign investors jointly apply for the establishment of a WFOE, a copy of the contract between the parties must also be submitted to the MOFCOM (or its delegated authorities) for its record. A WFOE must also obtain a business license from the SAIC before it can commence business. | |||
(b) | Nature | ||
A WFOE is a limited liability company under the Foreign Enterprises Law. It is a legal person which may independently assume civil obligations, enjoy civil rights and has the right to own, use and dispose of property. It is required to have a registered capital contributed by the foreign investor(s). The liability of the foreign investor(s) is limited to the amount of registered capital contributed. A foreign investor may make its contributions by installments and the registered capital must be contributed within the period as approved by the MOFCOM (or its delegated authorities) in accordance with relevant regulations. | |||
(b) | Profit Distribution | ||
The Foreign Enterprise Law provides that after payment of taxes, a WFOE must make contributions to a reserve fund, an enterprise development fund and an employee bonus and welfare fund. The allocation ratio for the employee bonus and welfare fund may be determined by the enterprise. However, at least 10% of the after tax profits must be allocated to the reserve fund. If the cumulative total of allocated reserve funds reaches 50% of an enterprises registered capital, the enterprise will not be required to make any additional contribution. The reserve fund may be used by a WFOE to make up its losses and with the consent of the examination and approval authority, can also be used to expand its production operations and to increase its capital. The enterprise is prohibited from distributing dividends unless the losses (if any) of previous years have been made up. The development fund is used for expanding the capital base of the company by way of capitalization issues. The employee bonus and welfare fund can only be used for the collective benefit and facilities of the employees of the WFOE. |
Catalogue for the Guidance of Foreign Investment Industries
China issued the Catalogue for the Guidance of Foreign Investment Industries (Guidance
Catalogue) in 1995, which was amended in 2002, 2004 and 2007 respectively. The current version
of the Guidance Catalogue was promulgated by the MOFCOM and the National Development and Reform
Commission (NDRC) on October 31, 2007 and became effective as of December 1, 2007, which
retains the classification methodology and organizational structure used in the previous versions
without significant changes. The Guidance Catalogue divides foreign investments into four
categories:
(i) Encouraged Category. There are various incentives and preferential treatments for
encouraged projects, mainly tax exemptions and rebates. Most foreign investment projects in the
encouraged sector are allowed to take the form of WFOE;
(ii) Permitted Category. Sectors not listed therein belong to the permitted category and
they are determined by the rule of exception. Therefore, unless the items are transferred among the
encouraged, restricted and prohibited categories, any addition to or deletion from the
encourage, restricted and prohibited categories would consequently affect the scope of the
permitted category. Like those in the encouraged sector, foreign
13
investment projects in the permitted sector are allowed to take the form of WFOE. However,
they are generally not eligible for extra incentives and preferential treatments;
(iii) Restricted Category. There are stricter approvals or filing requirements for
restricted projects. Furthermore, foreign investment projects in the restricted sectors may be
required to take the form of Joint Venture. The foreign investors may only hold a minority interest
in the investment projects; and
(iv) Prohibited Category. Foreign investments are not allowed in these sectors.
Foreign Exchange Controls
Major reforms have been introduced to the foreign exchange control system of the PRC since
1993.
On December 28, 1993, the Peoples Bank of China (PBOC), with the authorization of
the State Council issued the Notice on Further Reform of the Foreign Exchange Control System which
came into effect on January 1, 1994. Other new regulations and implementation measures include the
Regulations on the Foreign Exchange Settlement, Sale and Payments which were promulgated on June
20, 1996 and took effect on July 1, 1996 and which contain detailed provisions regulating the
settlement, sale and payment of foreign exchange by enterprises, individuals, foreign organizations
and visitors in the PRC and the regulations of the PRC on Foreign Exchange Control which were
promulgated on January 1, 1996 and took effect on April 1, 1996 and which contain detailed
provisions in relation to foreign exchange control.
The foreign exchange earnings of all PRC enterprises, other than those foreign investment
enterprises (FIE), who are allowed to retain a part of their regular foreign exchange
earnings or specifically exempted under the relevant regulations, are to be sold to designated
banks. Foreign exchange earnings obtained from borrowings from foreign institutions or issues of
shares or bonds denominated in foreign currency need not be sold to designated banks, but must be
kept in foreign exchange bank accounts of designated banks unless specifically approved otherwise.
At present, control of the purchase of foreign exchange is relaxed. Enterprises within the PRC
which require foreign exchange for their ordinary trading and non-trading activities, import
activities and repayment of foreign debts may purchase foreign exchange from designated banks if
the application is supported by the relevant documents. Furthermore, FIEs may distribute profit to
their foreign investors with funds in their foreign exchange bank accounts kept with designated
banks. Should such foreign exchange be insufficient, enterprises may purchase foreign exchange from
designated banks upon the presentation of the resolutions of the directors on the profit
distribution plan of the particular enterprise.
Although the foreign exchange control over transactions under current accounts has decreased,
enterprises shall obtain approval from SAFE before they accept foreign-currency loans, provide
foreign currency guarantees, make investments in foreign countries or carry out any other capital
account transactions involving the purchase of foreign currencies.
In foreign exchange transactions, designated banks may freely determine applicable exchange
rates based on the rates publicized by PBOC and subject to certain governmental restrictions.
On October 21, 2005, SAFE issued the Notice of the State Administration of Foreign Exchange on
Exchange Control Issues Relating to Financing and Reverse Investment by Persons Resident in the
Peoples Republic of China Through Offshore Special Purpose Vehicles (SAFE Notice No.
75), which became effective as of November 1, 2005. According to the SAFE Notice No. 75, prior
registration with the local SAFE branch is required for PRC residents to establish or to control an
offshore company for the purposes of financing that offshore company with assets or equity
interests in an onshore enterprise located in the PRC. An amendment to registration or filing with
the local SAFE branch by such PRC resident is also required for the injection of equity interests
or assets of an onshore enterprise in the offshore company or overseas funds raised by such
offshore company, or any other material change involving a change in the capital of the offshore
company.
Moreover, the SAFE Notice No. 75 applies retroactively. As a result, PRC residents who have
established or acquired control of offshore companies that have made onshore investments in the PRC
in the past are required to
14
complete the relevant registration procedures with the local SAFE branch by March 31, 2006.
Under the relevant rules, failure to comply with the registration procedures set forth in the SAFE
Notice No. 75 may result in restrictions being imposed on the foreign exchange activities of the
relevant onshore company, including the increase of its registered capital, the payment of
dividends and other distributions to its offshore parent or affiliate and the capital inflow from
the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign
exchange administration regulations. PRC residents who control our Company from time to time are
required to register with the SAFE in connection with their investments in us.
PRC Funeral Regulations and Compliance with Environmental Laws
Foguangs cemetery operations are subject to regulations and supervision under state, and
local laws, ordinances, and regulations, including extensive regulations concerning cemetery
construction, sales of funeral and cemetery products and services, and various other aspects of its
business.
Foguang is subject to the requirements of the Regulations on Funeral and Interment Control
promulgated by Decree No. 225 of the State Council of the PRC on July 21, 1997 and Rules of
Chongqing on Funeral and Interment Control promulgated by the local government on May 29, 1998.
Pursuant to the laws and regulations, the type of funeral equipment it uses and the size of burial
vaults Foguang constructs and sells to its customers must comply with state unified specifications
and standards. In addition, any construction of cemetery or funeral home must be approved by the
Administration of Civil Affairs and the construction must be limited away from a certain areas such
as cultivated land, forest land, urban parks, scenic spots, protected areas of water resources,
railways and highways.
We believe that Foguang is in substantial compliance with all such laws and regulations.
Seasonality
The death care business is relatively stable and predictable. However, Foguang generally
experiences fewer sales in the summer season due to the extreme hot weather in Chongqing since less
people are willing to conduct site visits in extreme heat, even though these decreases have not
historically had any significant impact on its results of operations.
Employees
The following table sets forth the number of employees for each of Foguangs areas of
operations and as a percentage of its total workforce as of March 31, 2010:
Number of | % | |||||||
Employees | of Employees | |||||||
Management & Administration |
11 | 25.58 | % | |||||
Finance |
5 | 11.62 | % | |||||
Cemetery Administration Office |
8 | 18.60 | % | |||||
Sales & Marketing |
6 | 13.95 | % | |||||
Construction Projects |
8 | 18.60 | % | |||||
Customer Service |
5 | 11.62 | % | |||||
TOTAL |
43 | 100.0 | % |
Foguangs employees are interviewed and hired by management team and generally, it offers
training programs to new workers to better understand its corporate regulations and professional
ethics and to improve their relevant skills during the training period. Management believes that
relationship with its employees is good. Management also expects that Foguangs access to
reasonably priced and competent labor force will continue into the foreseeable future.
Foguang is in full compliance with Chinese labor laws and regulations. Foguang believes in the
importance of maintaining its social responsibilities, and it is committed to providing employees
with a safe, clean and comfortable working environment and accommodations. Foguangs employees are
also entitled to time off during
15
public holidays, and it is in full compliance with its obligations to provide pension benefits and other social
insurance benefits to its workers, as mandated by the PRC government.
Environmental Matters
Foguangs operations are subject to certain PRC environmental regulations. We believe that
Foguang is in substantial compliance with all such laws and regulations. For more information on
such environmental laws and regulations, please refer to the section on PRC Funeral Regulations
and Compliance with Environmental Law.
CORPORATE INFORMATION
Our principal executive office is located at 239 Jianxin Road, Jiangbei District, Chongqing,
PRC 400000. Our main telephone number is (86) 023-67755514, and our fax number is (86)
023-67759771.
ITEM 1A. RISK FACTORS
The reader should carefully consider the risks described below together with all of the other
information included in this prospectus. The statements contained in or incorporated into this
prospectus that are not historic facts are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those set forth in or
implied by forward-looking statements. If any of the following risks actually occurs, our business,
financial condition or results of operations could be harmed. In that case, the trading price of
our common stock could decline, and an investor in our securities may lose all or part of their
investment.
Risks Relating to Our Business and Industry
Declines in the number of deaths in Foguangs markets can cause a decrease in revenues. Changes in
the number of deaths are not predictable from market to market or over the short term, and reliable
statistics on deaths in particular markets can be difficult to obtain.
Declines in the number of deaths could cause cemetery services, property and merchandise to
decline which could decrease revenues. Although the National Population and Family Planning
Commission of the P.R.C. estimates that the population of people that are 50 years old or older are
expected to increase by approximately 3% per year, from 276.8 million in 2000 to 298.6 million in
2010, longer life spans could reduce the rate of deaths. Changes in the number of deaths can vary
among local markets and from quarter to quarter, and variations in the number of deaths in
Foguangs markets or from quarter to quarter are not predictable. These variations can cause
revenues to fluctuate.
The death care industry continues to be increasingly competitive and as a result, Foguang may lose
market share to its competitors.
In China, the death care industry is characterized by a large number of locally owned and
independent operations. To compete successfully, Foguangs cemeteries must be maintained in good
condition and Foguang must maintain good reputations and high professional standards, as well as
offer attractive products and services at competitive prices. In addition, Foguang must be marketed
in such a manner as to distinguish itself from its competitors. Foguang has historically
experienced price competition from independent cemetery operators. New market entrants tend to
attempt to build market share by offering lower cost alternatives. If Foguang is unable to
successfully compete by offering attractive products and services pursuant to consumer preferences
and at competitive prices, Foguang may lose market share to its competitors, and the Companys
financial condition, results of operations, and cash flows could be materially adversely affected.
Because the cemetery business is a high fixed-cost business, positive or negative changes in
revenue can have a disproportionately large effect on cash flow and profits.
The cemetery business must incur many of the costs of operating and maintaining facilities,
land and equipment regardless of the level of sales in any given period. For example, Foguang must
pay salaries, utilities,
16
property taxes and maintenance costs and maintain the grounds of
cemeteries regardless of the number of sales.
Because Foguang cannot decrease these costs significantly or rapidly when it experiences
declines in sales, declines in sales can cause margins, profits and cash flow to decline at a
greater rate than the decline in revenues.
Changes or increases in, or failure to comply with, regulations applicable to Foguangs business
could increase costs or decrease cash flows.
The death care industry is subject to extensive regulation and licensing requirements under
state and local laws. Any construction of cemetery must be approved by the Administration of Civil
Affairs and the construction must be limited away from a certain areas such as cultivated land,
forest land, urban parks, scenic spots, protected areas of water resources, railways and highways.
Compliance with these regulations is burdensome, and Foguang is always at risk of not complying
with the regulations.
In addition, from time to time, governments and agencies propose to amend or add regulations,
which could increase costs or decrease cash flows. If additional legislation or regulations are
adopted by the regulatory authorities of the jurisdictions in which Foguang operates, these and
other possible proposals could have a material adverse effect on the Company, our financial
condition, our results of operations, our cash flows and our future prospects.
If Foguang is not able to respond effectively to changing consumer preferences, its market share,
revenues and profitability could decrease.
Future market shares, revenues and profits will depend in part on Foguangs ability to
anticipate, identify and respond to changing consumer preferences. In past years, Foguang has
implemented new product and service strategies based on results of customer surveys that it
conducts on a continuous basis. However, Foguang may not correctly anticipate or identify trends in
consumer preferences, or Foguang may identify them later than its competitors do. In addition, any
strategies Foguang may implement to address these trends may prove incorrect or ineffective.
Foguangs ability to generate sales depends on a number of factors such as sales strategies and
sales incentives.
Declines in sales would reduce Foguangs revenues and could reduce its future market share.
Foguang has modified its sales strategies to local standards, such as focusing on face to face
interaction and spending more time communicating with its customers since the death care business
is a sensitive business requiring compassion and understanding. Foguang is also continuing to
create a more efficient and competitive sales commission and incentive structure in order to retain
good salespeople. If Foguang cannot retain good salespeople or its sales strategies and sales
incentives are ineffective, Foguang could experience declines in sales in the short-run.
Foguangs ability to generate sales depends on local and general economic conditions.
In addition, a weakening economy at the local or national level could cause customers to
reduce discretionary spending, especially spending on pre-need funeral planning or death care
products and services for family members. Also, the growth of the Chinese economy has been uneven
across geographic regions and economic sectors. There can be no assurance that growth of the
Chinese economy will be steady or that any downturn will not have a negative effect on Foguangs
business, especially if it results in either a decreased use of Foguangs products or in pressure
on Foguang to lower its prices. A weak economy could lead to a decline in cemetery sales and/or a
decrease in the amounts customers are willing to pay for cemetery products and services. Declines
in cemetery property sales and average revenue per event would reduce Foguangs current revenues.
Declines in cemetery products and services could also reduce Foguangs future revenues and market
share.
The success of Foguangs business is typically dependent upon one or a few key employees because of
the localized and personal nature of its business.
Death care businesses have built local heritage and tradition through successive generations,
providing a foundation for ongoing business opportunities from established client family
relationships and related referrals. Foguang believes these relationships build trust in the
community and are a key driver to market share. Foguangs
17
businesses, which tend to serve small
local markets, usually have a few key employees that drive its relationships. In particular, we
depend on the services of the two co-founders of Foguang, Mr. Yiyou Ran, who is also our Chief
Executive Officer, President and Chairman of our board of directors, and Mr. Jianquan Chen,
who is also a member of our board of directors. Mr. Ran is responsible for the strategic direction
and business of Foguang. Mr. Chen is responsible for the management of business operations and
organization of Foguang. We also depend on Mr. Anshan Chen, the Vice General Manager of Foguang,
since Mr. Chen plays a key role by developing the sales and distribution channel for Foguang.
Currently, Foguang does not have employment agreements with these key employees and Foguang can
give no assurance that it can retain these employees or that these relationships will drive market
share.
Foguangs limited operating history makes it difficult for it to respond to changes in the
regulatory environment compared to its competitors, which may have more resources and experience
compared to Foguang.
Foguang, which commenced business in 2002, has a limited operating history and may be
inexperienced in responding to changes in the regulatory environment compared to its competitors.
Foguangs current or potential competitors, many of which have substantial resources, may have more
resources and experience dealing with changes in the regulatory environment compared to Foguang.
Accordingly, you should consider Foguangs future prospects in light of the risks and uncertainties
experienced by early-stage companies in China. If Foguang is unable to respond to changes in the
regulatory environment quickly and effectively, its business may be materially and adversely
affected.
Foguang may be unable to sustain its past growth or manage its future growth, which may have a
material adverse effect on our future operating results.
Foguang has experienced rapid growth since its inception, and has increased its net sales from
$5 million in 2002 to $36.5 million for the fiscal year ended March 31, 2010. We anticipate that
Foguangs future growth rate will depend upon various factors, including the strength of its brand
image, the market success of its current and future products, the success or its growth strategies,
competitive conditions and its ability to manage our future growth. Future growth may place a
significant strain on its management and operations. As Foguang continues to grow in its
operations, its operational, administrative, financial and legal procedures and controls will need
to be expanded. As a result, it may need to train and manage an increasing number of employees,
which could distract its management team from its business. Foguangs future success will depend
substantially on the ability of its management team to manage its anticipated growth. If Foguang is
unable to anticipate or manage its growth effectively, our future operating results could be
adversely affected.
Corporate insiders or their affiliates may be able to exercise significant control matters
requiring a vote of our stockholders and their interests may differ from the interests of our other
stockholders.
As of March 31, 2010, our officers, directors and their affiliates as a group beneficially own
approximately 57.8% of our outstanding Common Stock. As a result, these stockholders may be able to
exercise significant control over matters requiring approval by our stockholders. Matters that
require the approval of our stockholders include the election of directors and the approval of
mergers or other business combination transactions. Certain transactions are effectively not
possible without the approval of these officers, directors and their affiliates, including, proxy
contests, tender offers, open market purchase programs or other transactions that can give our
stockholders the opportunity to realize a premium over the then-prevailing market prices for their
shares of our common stock.
We will be required to evaluate our internal control over financial reporting under Section 404 of
the Sarbanes-Oxley Act.
Failure to timely comply with the requirements of Section 404 of the Sarbanes-Oxley Act of
2002 (Section 404) or any adverse results from such evaluation could result in a loss of
investor confidence in our financial reports and have an adverse effect on the trading price of our
debt and equity securities.
We currently are not an accelerated filer as defined in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to
include an internal control report with our annual report on Form 10-K. That report must include
managements assessment of the effectiveness of our
18
internal control over financial reporting as of
the end of the fiscal year. This report must also include disclosure of any material weaknesses in
internal control over financial reporting that we have identified. Additionally, for the fiscal
year ended March 31, 2011, our independent registered public accounting firm will be required
to issue a report on managements assessment of our internal control over financial reporting and
their evaluation of the operating effectiveness of our internal control over financial reporting.
Our assessment requires us to make subjective judgments and our independent registered public
accounting firm may not agree with our assessment.
Achieving compliance with Section 404 within the prescribed period may require us to incur
significant costs and expend significant time and management resources. We cannot assure you that
we will be able to fully comply with Section 404 or that, we and our independent registered public
accounting firm would be able to conclude that our internal reported financial information, which
could have an adverse effect on the trading price of our securities, as well as subject us to civil
or criminal investigations and penalties. In addition, our independent registered public accounting
firm may not agree with our managements assessment or conclude that our internal control over
financial reporting is operating effectively. We will continue to consistently improve our internal
control over the financial reporting with our best efforts and we plan to engage assistance from
outside experts in doing so.
Risks Related to Our Corporate Structure
We conduct our business through Foguang by means of contractual arrangements. If the Chinese
government determines that these contractual arrangements do not comply with applicable
regulations, our contractual arrangements will become invalid or unenforceable.
There are uncertainties regarding the interpretation and application of PRC laws, rules and
regulations, including but not limited to the laws, rules and regulations governing the validity
and enforcement of the contractual arrangements between Ran Ji and Foguang. Although we have been
advised by our PRC counsel, that based on their understanding of the current PRC laws, rules and
regulations, the structure for operating our business in China (including our corporate structure
and contractual arrangements with Foguang and its owners) comply with all applicable PRC laws,
rules and regulations, and do not violate, breach, contravene or otherwise conflict with any
applicable PRC laws, rules or regulations, we cannot assure you that the PRC regulatory authorities
will not determine that our corporate structure and contractual arrangements violate PRC laws,
rules or regulations. If the PRC regulatory authorities determine that our contractual arrangements
are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will
become invalid or unenforceable. In addition, new PRC laws, rules and regulations may be introduced
from time to time to impose additional requirements that may be applicable to our contractual
arrangements. For example, the PRC Property Rights Law that became effective on October 1, 2007 may
require us to register with the relevant government authority the security interests on the equity
interests in Foguang granted to us under the equity pledge agreements that are part of the
contractual arrangements. If we are required to register such security interests, failure to
complete such registration in a timely manner may result in such equity pledge agreements to be
unenforceable against third party claims.
If the PRC regulatory bodies determine that the agreements that establish the structure for
operating our business in China do not comply with PRC regulatory restrictions on foreign
investment, we could be subject to severe penalties, which may materially and adversely affect our
business.
The Chinese government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and requiring actions
necessary for compliance. In particular, licenses and permits issued or granted to us by relevant
governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict
the effect of the interpretation of existing or new Chinese laws or regulations on our businesses.
We cannot assure you that our current ownership and operating structure would not be found in
violation of any current or future Chinese laws or regulations. As a result, we may be subject to
sanctions, including fines, and could be required to restructure our operations or cease to provide
certain services. Any of these or similar actions could significantly disrupt our business
operations or restrict us from conducting a substantial portion of our business operations, which
could materially and adversely affect our business, financial condition and results of operations.
19
If Ran Ji or Foguang are determined to be in violation of any existing or future PRC laws,
rules or regulations or fail to obtain or maintain any of the required governmental permits or
approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such
violations, including:
| revoking the business and operating licenses of our PRC consolidated entities; | ||
| discontinuing or restricting the operations of our PRC consolidated entities; | ||
| imposing conditions or requirements with which we or our PRC consolidated entities may not be able to comply; | ||
| requiring us or our PRC consolidated entities to restructure the relevant ownership structure or operations; | ||
| restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; or | ||
| imposing fines. |
The imposition of any of these penalties would severely disrupt our ability to conduct
business and have a material adverse effect on our financial condition, results of operations and
prospects.
Our contractual arrangements with Foguang and its owners may not be as effective in providing
control over these entities as direct ownership.
We have no equity ownership interest in Foguang, and rely on contractual arrangements to
control and operate the company and its businesses. These contractual arrangements may not be as
effective in providing control over the company as direct ownership. For example, Foguang could
fail to take actions required for our business despite its contractual obligation to do so. If
Foguang fails to perform under its agreements with us, we may have to rely on legal remedies under
Chinese law, which may not be effective. In addition, we cannot assure you that the owners of
Foguang will act in our best interests.
Because we rely on the consulting services agreement with Foguang for our revenue, the termination
of the consulting services agreement or the proxy agreement will severely and detrimentally affect
our continuing business viability under our current corporate structure.
We are a holding company and do not have any assets or conduct any business operations other
than the contractual arrangements between Ran Ji, our indirect wholly owned subsidiary, and
Foguang. As a result, we currently rely entirely for our revenues on dividends payments from Ran Ji
after it receives payments from Foguang pursuant to the consulting services agreement which forms a
part of the contractual arrangements. The consulting services agreement may be terminated by
written notice of Ran Ji or Foguang in the event that: (a) Foguang causes a material breach of the
agreement, provided that if the breach does not relate to a financial obligation of the breaching
party, that party may attempt to remedy the breach within 14 days following the receipt of the
written notice; (b) one party becomes bankrupt, insolvent, is the subject of proceedings or
arrangements for liquidation or dissolution, ceases to carry on business, or becomes unable to pay
its debts as they become due; (c) Ran Ji terminates its operations; or (d) circumstances arise
which would materially and adversely affect the performance or the objectives of the agreement.
Additionally, Ran Ji may terminate the consulting services agreement without cause. Because neither
we nor our direct and indirect subsidiaries own equity interests of Foguang, the termination of the
consulting services agreement would sever our ability to continue receiving payments from Foguang
under our current holding company structure. While we are currently not aware of any event or
reason that may cause the consulting services agreement to terminate, we cannot assure you that
such an event or reason will not occur in the future. In addition, pursuant to the proxy agreement
among Ran Ji, the shareholders of Foguang (Foguang Owners), and Foguang, the Foguang
Owners agreed to entrust all the rights to exercise their voting power to designee(s) of Ran
Ji. Such designee(s) shall have the right to exercise the Foguang Owners voting and other rights,
including the attendance at and the voting of their shares at Foguangs shareholders meetings (or
by written consent in lieu of meetings) in accordance with applicable laws and Foguangs Article of
Association. This proxy agreement may not be terminated without the unanimous consent of all
parties, except that Ran Ji may, by giving a
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thirty (30) day prior written notice to the Foguang
Owners, terminate the proxy agreement, with or without cause. So in the event that the consulting
services agreement or proxy agreement is terminated, this may have a severe and detrimental effect
on our continuing business viability under our current corporate structure, which in turn may
affect the value of your investment.
We rely principally on dividends paid by our consolidated operating entity to fund any cash and
financing requirements we may have, and any limitation on the ability of our consolidated PRC
entities to pay dividends to us could have a material adverse effect on our ability to conduct our
business.
We are a holding company, and rely principally on dividends paid by our consolidated PRC
operating entity for cash requirements, including the funds necessary to service any debt we may
incur. In particular, we rely on earnings generated by Foguang, which are passed on to us through
Ran Ji. If any of our consolidated operating subsidiaries incurs debt in its own name in the
future, the instruments governing the debt may restrict dividends or other distributions on its
equity interest to us. In addition, the PRC tax authorities may require us to adjust our taxable
income under the contractual arrangements Ran Ji currently have in place with Foguang, in a manner
that would materially and adversely affect our ability to pay dividends and other distributions on
our equity interest.
Furthermore, applicable PRC laws, rules and regulations permit payment of dividends by our
consolidated PRC entity only out of its retained earnings, if any, determined in accordance with
PRC accounting standards. Under PRC laws, rules and regulations, our consolidated PRC entities are
required to set aside at least 10.0% of their after-tax profit based on PRC accounting standards
each year to their statutory surplus reserve fund until the accumulative amount of such reserves
reach 50.0% of their respective registered capital. As a result, our consolidated PRC entity is
restricted in its ability to transfer a portion of its net income to us whether in the form of
dividends, loans or advances. As of March 31, 2010, we had retained earnings of approximately $18.7
million. Our retained earnings are not distributable as cash dividends. Any limitation on the
ability of our consolidated operating subsidiaries to pay dividends to us could materially and
adversely limit our ability to grow, make investments or acquisitions that could be beneficial to
our businesses, pay dividends or otherwise fund and conduct our business.
Management members of Foguang have potential conflicts of interest with us which may result in a
breach of fiduciary duties and adversely affect our business.
Mr. Yiyou Ran, our Chief Executive Officer and President, is also the Chairman of the board of
directors of Foguang. Mr. Jianquan Chen, who is a member of our board of directors, is the General
Manager of Foguang. Conflicts of interests between their respective duties to our Company and
Foguang may arise. As our directors and executive officer (in the case of Mr. Ran), they have a
duty of loyalty and care to us under U.S. and Hong Kong law when there are any potential conflicts
of interests between our Company and Foguang. We cannot assure you; however, that when conflicts of
interest arise, every one of them will act completely in our interests or that conflicts of
interests will be resolved in our favor. We cannot assure you that our officers and directors will
not breach their fiduciary duties which require that they exercise good faith and due care in
handling our affairs, For example, they may determine that it is in Foguangs interests to sever
the contractual arrangements with Ran Ji; irrespective of the effect such action may have on us. In
addition, any one of them could violate his or her legal duties by diverting business opportunities
from us to others, thereby affecting the amount of payment that Foguang is obligated to remit to us
under the consulting services agreement, which may adversely affect our business.
Our officers and directors may allocate their time to other businesses, including engaging in
business activities competitive with the Company or Foguang, which may cause conflicts of interest
and adversely affect our business.
Mr. Yiyou Ran, Mr. Michael Wang, and all of our directors have the ability to allocate their
time to other businesses and activities, including engaging in business activities competitive with
the Company or Foguang, thereby causing possible conflicts of interest. These individuals are
engaged in several other business endeavors and are not obligated to devote any specific number of
hours to our affairs. There is also nothing preventing these individuals to engage in business
activities competitive with the Company or Foguang. If these individuals decide to engage in
competitive business activities or be involved with other business affairs requiring them to devote
more substantial amounts of time to such affairs, it could create conflicts of interest and have a
negative impact on our ongoing business.
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Risks Related to Doing Business in China
Foguang is subject to restrictions on making payments to us.
We are a holding company incorporated in Delaware and do not have any assets or conduct any
business operations other than our indirect investments in Foguang. As a result of our holding
company structure, we rely entirely on payments from that company under the contractual
arrangements with our indirect wholly owned subsidiary, Ran Ji. The Chinese government also imposes
controls on the conversion of RMB into foreign currencies and the remittance of currencies out of
China. We may experience difficulties in completing the administrative procedures necessary to
obtain and remit foreign currency. See Government control of currency conversion may affect the
value of your investment. Furthermore, if our affiliated entity in China incurs debt on their own
in the future, the instruments governing the debt may restrict their ability to make payments. If
we are unable to receive all of the revenues from our operations through these contractual
arrangements, we may be unable to pay dividends on our ordinary shares.
New labor laws in the PRC may adversely affect Foguangs results of operations.
On January 1, 2008, the PRC government promulgated the Labor Contract Law of the PRC, or the
New Labor Contract Law. The New Labor Contract Law imposes greater liabilities on employers and
significantly impacts the cost of an employers decision to reduce its workforce. Further, it
requires certain terminations to be based upon seniority and not merit. In the event Foguang
decides to significantly change or decrease its workforce, the New Labor Contract Law could
adversely affect its ability to enact such changes in a manner that is most advantageous to its
business or in a timely and cost effective manner, thus materially and adversely affecting
Foguangs financial condition and results of operations.
Because our assets are located overseas, shareholders may not receive distributions that they would
otherwise be entitled to if we were declared bankrupt or insolvent.
All of our assets are located in the PRC. Because our assets are located overseas, our assets
may be outside of the jurisdiction of U.S. courts to administer if we are the subject of an
insolvency or bankruptcy proceeding. As a result, if we declared bankruptcy or insolvency, our
shareholders may not receive the distributions on liquidation that they would otherwise be entitled
to if our assets were to be located within the U.S., under U.S. Bankruptcy law.
Adverse changes in economic and political policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could adversely affect Foguangs
business.
All of Foguangs business operations are currently conducted in the PRC, under the
jurisdiction of the PRC government. Accordingly, our results of operations, financial condition and
prospects are subject to a significant degree to economic, political and legal developments in
China. Chinas economy differs from the economies of most developed countries in many respects,
including with respect to the amount of government involvement, level of development, growth rate,
and control of foreign exchange and allocation of resources. While the PRC economy has experienced
significant growth in the past 20 years, growth has been uneven across different regions and among
various economic sectors of China. The PRC government has implemented various measures to encourage
economic development and guide the allocation of resources. Some of these measures benefit the
overall PRC economy, but may also have a negative effect on us. For example, our financial
condition and results of operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to Foguang. Since early 2004, the PRC
government has implemented certain measures to control the pace of economic growth. Such measures
may cause a decrease in the level of economic activity in China, which in turn could adversely
affect our results of operations and financial condition.
Unprecedented rapid economic growth in China may increase Foguangs costs of doing business, and
may negatively impact our profit margins and/or profitability.
Foguangs business depends in part upon the availability of relatively low-cost labor and
materials. Rising wages in China may increase its overall costs of production. In addition, rising
raw material costs, due to strong
22
demand and greater scarcity, may increase Foguangs overall costs of production. If Foguang is not able
to pass these costs on to its customers in the form of higher prices, our profit margins and/or
profitability could decline.
You may face difficulties in protecting your interests, and your ability to protect your rights
through the U.S. federal courts may be limited, because our subsidiaries are incorporated in
non-U.S. jurisdictions, we conduct substantially all of our operations in China, and all of our
officers reside outside the United States.
Although we are incorporated in Delaware, all of our business operations are conducted in
China by Foguang. Most of our officers and directors reside in China and some or all of the assets
of those persons are located outside of the United States. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in China in the event
that you believe that your rights have been infringed under the securities laws or otherwise. Even
if you are successful in bringing an action of this kind, the laws of the PRC may render you unable
to enforce a judgment against our assets or the assets of our directors and officers.
As a result of all of the above, our public shareholders may have more difficulty in
protecting their interests through actions against our management, directors or major shareholders
than would shareholders of a corporation doing business entirely within the United States.
Governmental control of currency conversion may affect the value of your investment.
The Chinese government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive substantially all of our
revenues in RMB. Under our current structure, our income is primarily derived from payments from
Foguang. Shortages in the availability of foreign currency may restrict the ability of our Chinese
subsidiaries and our affiliated entity to remit sufficient foreign currency to pay dividends or
other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under
existing Chinese foreign exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade-related transactions, can be made in
foreign currencies without prior approval from China State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency and remitted out of
China to pay capital expenses such as the repayment of bank loans denominated in foreign
currencies. The Chinese government may also at its discretion restrict access in the future to
foreign currencies for current account transactions. If the foreign exchange control system
prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not
be able to pay dividends in foreign currencies to our stockholders.
Fluctuation in the value of RMB may have a material adverse effect on your investment.
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected
by, among other things, changes in political and economic conditions. Our revenues and costs are
mostly denominated in RMB, while a significant portion of our financial assets are denominated in
U.S. dollars. We rely entirely on fees paid to us by our affiliated entity in China. Any
significant fluctuation in the value of RMB may materially and adversely affect our cash flows,
revenues, earnings and financial position, and the value of, and any dividends payable on, our
stock in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any
new RMB denominated investments or expenditures more costly to us, to the extent that we need to
convert U.S. dollars into RMB for such purposes. An appreciation of RMB against the U.S. dollar
would also result in foreign currency translation losses for financial reporting purposes when we
translate our U.S. dollar denominated financial assets into RMB, as RMB is our reporting currency.
Dividends we receive from our subsidiary located in the PRC may be subject to PRC withholding tax.
The recently enacted PRC Enterprise Income Tax Law, or the EIT Law, and the implementation
regulations for the EIT Law issued by the PRC State Council, became effective as of January 1,
2008. The EIT Law provides that a maximum income tax rate of 20% is applicable to dividends payable
to non-PRC investors that are non-resident enterprises, to the extent such dividends are derived
from sources within the PRC, and the State Council has reduced such rate to 10% through the
implementation regulations. We are a Delaware holding company and substantially all of our income
is derived from the operations of Foguang located in the PRC, which is
23
contractually obligated to pay its quarterly profits to our WFOE. Therefore, dividends paid to us by our WFOE in China may be
subject to the 10% income tax if we are considered as a non-resident enterprise under the EIT
Law. If we are required under the EIT Law and its implementation regulations to pay income tax for
any dividends we receive from our WFOE, it may have a material and adverse effect on our net income
and materially reduce the amount of dividends, if any, we may pay to our shareholders.
Foguang faces risks related to health epidemics and other outbreaks.
Foguangs business could be adversely affected by the effects of an epidemic outbreak, such as
the SARS epidemic in April 2004. Any prolonged recurrence of such adverse public health
developments in China may have a material adverse effect on Foguangs business operations. For
instance, health or other government regulations adopted in response may require temporary closure
of Foguangs stores or offices. Such closures would severely disrupt Foguangs business operations
and adversely affect its results of operations. Foguang has not adopted any written preventive
measures or contingency plans to combat any future outbreak of SARS or any other epidemic.
If Foguangs land use rights are revoked, it would have no operational capabilities.
Under Chinese law land is owned by the state or rural collective economic organizations. The
state issues to the land users the land use right certificate. Land use rights can be revoked and
the land users forced to vacate at any time when redevelopment of the land is in the public
interest. The public interest rationale is interpreted quite broadly and the process of land
appropriation may be less than transparent. Each of Foguangs cemeteries relies on these land use
rights as the cornerstone of its operations, and the loss of such rights would have a material
adverse effect on its company.
Because Foguangs funds are held in banks which do not provide insurance, the failure of any bank
in which it deposits its funds could affect its ability to continue in business.
Banks and other financial institutions in the PRC do not provide insurance for funds held on
deposit. A significant portion of Foguangs assets are in the form of cash deposited with banks in
the PRC, and in the event of a bank failure, it may not have access to its funds on deposit.
Depending upon the amount of money Foguang maintains in a bank that fails, its inability to have
access to its cash could impair its operations, and, if Foguang is not able to access funds to pay
its suppliers, employees and other creditors, it may be unable to continue in business.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to
penalties and other adverse consequences.
As our ultimate holding company is a Delaware corporation, we are subject to the United States
Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in
bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may
occur from time-to-time in the PRC. We can make no assurance, however, 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.
If we make equity compensation grants to persons who are PRC citizens, they may be required to
register with the State Administration of Foreign Exchange of the PRC, or SAFE. We may also face
regulatory uncertainties that could restrict our ability to adopt an equity compensation plan for
our directors and employees and other parties under PRC law.
On April 6, 2007, SAFE issued the Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas
Listed Company, also known as Circular 78. It is not clear whether Circular 78 covers all forms
of equity compensation plans or only those which provide for the granting of stock options. For any
plans which are so covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register
24
with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC
citizens to register with SAFE and make the necessary applications and filings if they participated in
an overseas listed companys covered equity compensation plan prior to April 6, 2007. We have
adopted an equity compensation plan in the future and intend to make securities grants to our
officers and directors, most of who are PRC citizens. Circular 78 may require our officers and
directors who receive option grants and are PRC citizens to register with SAFE. We believe that the
registration and approval requirements contemplated in Circular 78 will be burdensome and time
consuming. If it is determined that any of our equity compensation plans are subject to Circular
78, failure to comply with such provisions may subject us and participants of our equity incentive
plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant
equity compensation to our PRC employees. In that case, our ability to compensate our employees and
directors through equity compensation would be hindered and our business operations may be
adversely affected.
Because Foguang is located in the PRC, we may have difficulty establishing adequate management,
legal and financial controls, which we are required to do in order to comply with U.S. securities
laws.
PRC companies have historically not adopted a US style of management and financial reporting
concepts and practices, which includes strong corporate governance, internal controls and,
computer, financial and other control systems. Most of our middle and top management staff are not
educated and trained in the US system, and we may have difficulty hiring new employees in the PRC
with such training. 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 US standards. 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 such deficiencies, weaknesses or lack of compliance could have a materially adverse
effect on our business.
Foguang is subject to a variety of environmental laws and regulations related to its operations,
and Foguang may become subject to forthcoming environmental regulations enacted in response to
climate change. Foguangs failure to comply with environmental laws and regulations may have a
material adverse effect on our business and results of operations.
Foguang is subject to various environmental laws and regulations for its cemetery operations.
We cannot assure you that at all times Foguang will be in compliance with environmental laws and
regulations or its environmental permits or that it will not be required to expend significant
funds to comply with, or discharge liabilities arising under, environmental laws, regulations and
permits. In addition, future environmental regulations that are enacted in response to global and
regional climate change could place additional burdens on Foguangs operations. Complying with
existing and possible future environmental laws and regulations, including laws and regulations
relating to climate change, may impose upon Foguang the need for additional capital equipment or
other process requirements, restrict its ability to expand its operations, disrupt its operations,
increase costs, subject it to liability or cause it to curtail its operations.
Risks Related to an Investment in Our Securities
Our stock is categorized as a penny stock. Trading of our stock may be restricted by the SECs
penny stock regulations which may limit a shareholders ability to buy and sell our stock.
Our stock is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally
defines penny stock to be any equity security that has a market price (as defined) less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.
Our securities are covered by the penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established customers and accredited
investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock
not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form
prepared by the SEC which provides information about penny stocks and the nature and level of risks
in the penny stock market. The
25
broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in
the transaction and monthly account statements showing the market value of each penny stock held in the customers account. The bid and offer quotations,
and the broker-dealer and salesperson compensation information, must be given to the customer
orally or in writing prior to effecting the transaction and must be given to the customer in
writing before or with the customers confirmation. In addition, the penny stock rules require that
prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer
must make a special written determination that the penny stock is a suitable investment for the
purchaser and receive the purchasers written agreement to the transaction. These disclosure
requirements may have the effect of reducing the level of trading activity in the secondary market
for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may
affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a shareholders ability to buy and sell our stock.
In addition to the penny stock rules described above, FINRA has adopted rules that require
that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to recommending speculative low
priced securities to their non-institutional customers, broker-dealers must make reasonable efforts
to obtain information about the customers financial status, tax status, investment objectives and
other information. Under interpretations of these rules, FINRA believes that there is a high
probability that speculative low priced securities will not be suitable for at least some
customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
We expect to experience volatility in our stock price, which could negatively affect shareholders
investments.
The market price for shares of our common stock may be volatile and may fluctuate based upon a
number of factors, including, without limitation, business performance, news announcements or
changes in general market conditions.
Other factors, in addition to the those risks included in this section, that may have a
significant impact on the market price of our common stock include, but are not limited to:
| receipt of substantial orders or order cancellations of products; | ||
| quality deficiencies in services or products; | ||
| international developments, such as technology mandates, political developments or changes in economic policies; | ||
| changes in recommendations of securities analysts; | ||
| shortfalls in our backlog, revenues or earnings in any given period relative to the levels expected by securities analysts or projected by us; | ||
| government regulations, including stock option accounting and tax regulations; | ||
| energy blackouts; | ||
| acts of terrorism and war; | ||
| widespread illness; | ||
| proprietary rights or product or patent litigation; | ||
| strategic transactions, such as acquisitions and divestitures; or |
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| rumors or allegations regarding our financial disclosures or practices. |
In the past, securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. Due to changes in the
volatility of our common stock price, we may be the target of securities litigation in the future.
Securities litigation could result in substantial costs and divert managements attention and
resources.
To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable
future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future and
we may not have sufficient funds legally available to pay dividends. Even if the funds are legally
available for distribution, we may nevertheless decide not to pay any dividends. We presently
intend to retain all earnings for our operations.
Our common shares are not currently traded at high volume, and you may be unable to sell at or near
ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.
Our common shares are currently traded, but currently with low volume, based on quotations on
the Over-the-Counter Bulletin Board under the symbol CGPI.OB, meaning that the number of persons
interested in purchasing our common shares at or near bid prices at any given time may be
relatively small or non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company which is still relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment community that generate or influence
sales volume, and that even if we came to the attention of such persons, they tend to be
risk-averse and would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned and viable.
We cannot assure that a broader or more active public trading market for our common stock will
develop or be sustained.
There may be periods of several days or more when trading activity in our shares is minimal or
non-existent, as compared to a seasoned issuer which has a large and steady volume of trading
activity that will generally support continuous sales without an adverse effect on share price. We
cannot give you any assurance that a broader or more active public trading market for our common
stock will develop or be sustained, or that trading levels will be sustained. We cannot predict
the extent to which an active public market for our common stock will develop or be sustained.
However, we do not rule out the possibility of applying for listing on the NYSE Alternext (fka
American Stock Exchange) or Nasdaq Capital Market or other markets.
The penny stock market suffers from fraud and abuse and could increase the future volatility of our
Companys share price.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include
(1) control of the market for the security by one or a few broker-dealers that are often related to
the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases; (3) boiler room practices involving high-pressure
sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and
undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale
dumping of the same securities by promoters and broker-dealers after prices have been manipulated
to a desired level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have occurred historically
in the penny stock market. Although we do not expect to be in a position to dictate the behavior of
the market or of broker-dealers who participate in the market, management will strive within the
confines of practical limitations to prevent the described patterns from being established with
respect to our securities. The occurrence of these patterns or practices could increase the future
volatility of our share price.
27
The NASDAQ OTC Bulletin Board (OTCBB) is a quotation system, not an issuer listing
service, market or exchange, and as a result, it may be difficult for you to sell your common stock
or you may not be able to sell your common stock for an optimum trading price.
The OTCBB is a regulated quotation service that displays real-time quotes, last sale prices
and volume limitations in over-the-counter securities. Because trades and quotations on the OTCBB
involve a manual process, the market information for such securities cannot be guaranteed. In
addition, quote information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations
may result in the failure of a limit order to execute or the execution of a market order at a
significantly different price. Execution of trades, execution reporting and the delivery of legal
trade confirmations may be delayed significantly. Consequently, one may not be able to sell shares
of our common stock at the optimum trading prices.
When fewer shares of a security are being traded on the OTCBB, volatility of prices may
increase and price movement may outpace the ability to deliver accurate quote information. Lower
trading volumes in a security may result in a lower likelihood of an individuals orders being
executed, and current prices may differ significantly from the price one was quoted by the OTC
Bulletin Board at the time of the order entry.
Orders for OTCBB securities may be canceled or edited like orders for other securities. All
requests to change or cancel an order must be submitted to, received and processed by the OTCBB.
Due to the manual order processing involved in handling OTC Bulletin Board trades, order processing
and reporting may be delayed, and an individual may not be able to cancel or edit his order.
Consequently, one may not able to sell shares of common stock at the optimum trading prices.
The dealers spread (the difference between the bid and ask prices) may be large and may
result in substantial losses to the seller of securities on the OTCBB if the common stock or other
security must be sold immediately. Further, purchasers of securities may incur an immediate paper
loss due to the price spread. Moreover, dealers trading on the OTCBB may not have a bid price for
securities bought and sold through the OTCBB. Due to the foregoing, demand for securities that are
traded through the OTCBB may be decreased or eliminated.
Legislative actions, higher insurance costs and potential new accounting pronouncements may impact
our future financial position and results of operations.
There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may
potentially be new accounting pronouncements or additional regulatory rulings that will have an
impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002
and other rule changes as well as proposed legislative initiatives following the Enron bankruptcy
are likely to increase general and administrative costs and expenses. In addition, insurers are
likely to increase premiums as a result of high claims rates over the past several years, which we
expect will increase our premiums for insurance policies. Further, there could be changes in
certain accounting rules. These and other potential changes could materially increase the expenses
we report under generally accepted accounting principles, and adversely affect our operating
results.
Holders of our common stock may be diluted in the future.
We are authorized to issue up to 100 million shares of common stock and 20 million shares of
preferred stock. Our board of directors will have the ability, without seeking stockholder
approval, to issue additional shares of common stock and/or preferred stock in the future for such
consideration as our board of directors may consider sufficient. The issuance of additional common
stock and/or preferred stock in the future will reduce the proportionate ownership and voting power
of our common stock held by existing stockholders. At July 9, 2010 there were 12,672,262 shares of
common stock outstanding and warrants to purchase 771,239 shares of common stock.
Shares eligible for future sale may adversely affect the market price of our common stock, as the
future sale of a substantial amount of outstanding stock in the public marketplace could reduce the
price of our common stock.
The market price of our common stock could decline as a result of sales of a large number of
shares of our common stock in the market or the perception that these sales could occur. These
sales, or the possibility that these sales may occur, also might make it more difficult for us to
sell equity securities in the future at a time and at a price that we deem appropriate.
28
As of July 9, 2010, we had approximately 12,672,262 shares of common stock outstanding.
Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an
adverse effect on the market price of our common stock by creating an excessive supply.
We may not be able to achieve access to the capital markets as we have expected to result from the
Share Exchange.
On February 12, 2010, we concluded an Exchange Agreement and as a result Foguang became our
variably controlled entity, and our primary business operations became that of Foguang. We also
appointed a new board of directors and management consisting of persons from Gold Industry and
changed our corporate name from Artistry Publications, Inc. to China Redstone Group, Inc. As a
result of the Share Exchange, we hoped to enhance our access to the capital markets and gain access
to the capital markets of the United States. However, there can be no assurance that such access
will be realized with respect to our new business operations. In addition, the attention and effort
devoted to achieving the benefits of the Share Exchange and attending to the obligations of being a
public company, such as reporting requirements and securities regulations, could significantly
divert managements attention from other important issues, which could materially and adversely
affect our operating results or stock price in the future.
Compliance with changing regulation of corporate governance and public disclosure will result in
additional expenses.
Changing laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created
uncertainty for public companies and significantly increased the costs and risks associated with
accessing the public markets and public reporting. For example, on January 30, 2009, the SEC
adopted rules requiring companies to provide their financial statements in interactive data format
using the eXtensible Business Reporting Language, or XBRL. We will have to comply with these rules
by June 15th, 2011. Our management team will need to invest significant management time and
financial resources to comply with both existing and evolving standards for public companies, which
will lead to increased general and administrative expenses and a diversion of management time and
attention from revenue generating activities to compliance activities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
DESCRIPTION OF PROPERTY
Chongqing offices and facilities
The table below provides a general description of our offices and facilities, all of which are
located in Chongqing, China.
Location | Principal Activities | Area (sq. meters) | Lease Expiration Date | |||||
LongQiao Village
|
Cemetery | 339,444 | N/A (property use rights owned by the Company) | |||||
and QianFo Village,
|
||||||||
JiangNan Town,
|
||||||||
ChangShou District, |
||||||||
Chongqing, PRC |
||||||||
401258 |
||||||||
Fuli Bowling House,
|
Office of Gui Yuan Cemetery | 1,363.2 | N/A | |||||
131 Changshou Rd.,
|
||||||||
ChangShou District, |
||||||||
Chongqing, PRC |
||||||||
401220 |
||||||||
71 E. Jianxin Rd.,
|
Office of Foguang | 1,053 | 12/31/2012 | |||||
F/2 Jiangbei |
29
Location | Principal Activities | Area (sq. meters) | Lease Expiration Date | |||||
District, Chongqing
|
Foguang may renew | |||||||
the lease upon | ||||||||
expiration (a) | ||||||||
1 Huigong Rd.,
|
Rented out | 1,938.15 | N/A (property use | |||||
Nanan District,
|
rights owned by the | |||||||
Chongqing, PRC
|
Company) | |||||||
400000 |
||||||||
Agricultural Land,
|
(1) Employee | (1)54,027 | 12/31/2027 | |||||
Group 6, Longqiao
|
housing, parking, | |||||||
Village, Changshou
|
to be developed in | |||||||
District, Chongqing, PRC
|
2011 to 2014 | According to Chinese | ||||||
Laws, the maximum | ||||||||
lease term of | ||||||||
(2) Cemetery, | (2)79,373 | agricultural land is | ||||||
46,620 square | 22 years. (a) | |||||||
meters developed, | ||||||||
32,753 square | ||||||||
meters on | ||||||||
development | ||||||||
Wasteland, Group 6,
|
Cemetery, to be | 120,060 | 12/31/2055 | |||||
Longqiao Village,
|
developed in 2011 | |||||||
Changshou District,
|
to 2015 | |||||||
Chongqing, PRC
|
According to Chinese | |||||||
Laws, the maximum | ||||||||
lease term of | ||||||||
non-agricultural | ||||||||
land is 50 years. | ||||||||
(a) | ||||||||
Timberland, Group
|
Cemetery, to be | 100,050 | 12/31/2055 | |||||
6, Longqiao
|
developed in 2011 | |||||||
Village, Changshou
|
to 2015 | |||||||
District,
|
According to Chinese | |||||||
Chongqing, PRC
|
Laws, the maximum | |||||||
lease term of | ||||||||
non-agricultural | ||||||||
land is 50 years. | ||||||||
(a) | ||||||||
House land, Group
|
Cemetery, to be | 28,014 | 12/31/2105 | |||||
6, Longqiao
|
developed in 2011 | |||||||
Village, Changshou
|
to 2015 | |||||||
District,
|
According to Chinese | |||||||
Chongqing, PRC
|
Laws, the maximum | |||||||
lease term of | ||||||||
non-agricultural | ||||||||
land is 50 years. | ||||||||
(a) |
(a) | Lease commitments |
The Company has a lease commitment in relation to the land use lease rights that were acquired by
the Company through a cash payment of $836,000 from local farmers. The tenure of arable land is 22
years, from January 1, 2005 to December 31, 2027. The tenure of non-arable land is 50 years, from
January 1, 2005 to December 31, 2055. At the end of these terms, the Company will have to
negotiate new lease terms. The Company pays annual lease payment on or before October 31st to the
provincial government in Changshou Chongqing, Peoples Republic of China (PRC) and in turn
the PRC government then pays the sixth villager group, Longqiaohu village according to the terms of
the contract, and the sixth villager group re-distributes the funds to each farmer household. This
is the consideration that was agreed upon by the farmers for relocating in ChangShou Jiang Nan. As
of March 31, 2010 and 2009, lease expense was $22,641 and $22,515, respectively.
The Company leased office space of 1,053 square meters at 239 Jianxi Road in Chongqing, PRC. The
term of the lease was for four and a half years from August 1, 2009 to December 31, 2012, at which
time the Company would have priority to renew it lease under the same conditions, with rent
adjusted based on the market price. If the
30
Company fails to pay the rent on time, a penalty will be assessed and if rent is due for three
months, the counterparty could terminate its lease. As of March 31, 2010, lease expense was
$14,191.
Future minimum operating lease payments relating to the above leases are as follows:
Years Ending | ||||
March 31, | ||||
2010 |
$ | 22,641 | ||
2011 |
43,927 | |||
2012 |
43,927 | |||
2013 |
38,606 | |||
2014 |
22,641 | |||
Thereafter |
294,337 | |||
Total |
$ | 466,079 | ||
ITEM 3. LEGAL PROCEEDINGS
Currently there are no legal proceedings pending or threatened against us. However, from time
to time, we may become involved in various lawsuits and legal proceedings which arise in the
ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse
result in these or other matters.
ITEM 4. RESERVED
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK, R ELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
MARKET PRICES OF COMMON STOCK
Our common stock price is quoted on the Over-The-Counter Bulletin Board, or OTCBB, under the
symbol CGPI.OB. The following table sets forth for the periods indicated the high and low prices
per share traded for our common stock as reported on the OTCBB.
Year Ending March 31, 2010 |
High | Low |
First Quarter |
$ | | $ | | ||||
Second Quarter |
| | ||||||
Third Quarter |
| | ||||||
Fourth Quarter |
| |
Year Ending December 31, 2009 | High | Low | ||||||
First Quarter |
$ | | $ | | ||||
Second Quarter |
| | ||||||
Third Quarter |
| | ||||||
Fourth Quarter |
| |
As of July 9, 2010, we had 12,672,262 shares of common stock issued and outstanding.
Additionally, there were warrants to purchase up to 701,126 shares of common stock outstanding as
of such date. Assuming the full
31
exercise of these warrants as of such date, we would have had approximately 13,373,388 shares
of common stock outstanding.
Holders
As of July 9, 2010, there were approximately 44 shareholders of record of our common stock
(not including beneficial owners who hold shares at broker/dealers in street name). Our transfer
agent is Continental Stock Transfer & Trust Company. The transfer agents address is 17 Battery
Place, 8th Floor, New York, New York 10004 and its phone number is (212) 845-3299.
Dividends
We have never paid cash dividends on our common stock. We intend to keep future earnings, if
any, to finance the expansion of our business, and we do not anticipate that any cash dividends
will be paid in the foreseeable future. Our future payment of dividends will depend on our
earnings, capital requirements, expansion plans, financial condition and other relevant factors
that our board of directors may deem relevant. Our retained earnings deficit currently limits our
ability to pay dividends.
Recent Sales of Unregistered Securities
Reference is made to the Current Report on Form 8-K (Form 8-K) filed with the SEC on
February 24, 2010, for a description of recent sales of unregistered securities, which is hereby
incorporated by reference.
Equity Compensation Plan Information
The Company does not have any equity compensation plans as of March 31, 2010 and 2009.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Form 10-K. This Form 10-K
contains forward-looking statements. The words anticipated, believe, expect, plan,
intend, seek, estimate, project, could, may, and similar expressions are intended to
identify forward-looking statements. These statements include, among others, information regarding
future operations, future capital expenditures, and future net cash flow. Such statements reflect
our managements current views with respect to future events and financial performance and involve
risks and uncertainties, including, without limitation, general economic and business conditions,
changes in foreign, political, social, and economic conditions, regulatory initiatives and
compliance with government regulations, the ability to achieve further market penetration and
additional customer, and various other matters, any of which are beyond our control. Should one or
more of these risks and uncertainties occur, or should underlying assumptions prove to be
incorrect, actual results may vary materially and adversely from those anticipated, believed,
estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this
report are qualified by these cautionary statements and there can be no assurance of the actual
results or developments.
GENERAL OVERVIEW
The Company, through its operating entity, Chongqing Foguang Tourism Development (Group) Co.,
Ltd. (Foguang), is a private provider of cemetery products and services in Chongqing,
Peoples Republic of China (PRC or China). Foguang is primarily focused on
developing cemeteries and selling cemetery plots, although it also provides park and garden
development and construction services. Foguangs first cemetery development project was the
Chongqing Guiyuan Cemetery I (Guiyuan I), located in Changshou District of Chongqing on
approximately 66,660 square meters of land. The entire cemetery plot of Guiyuan I have been sold,
at an average
32
price of RMB 30,000 ($4,412) per plot. Foguang is currently developing the Chongqing Guiyuan
Cemetery II (Guiyuan II), its second cemetery project in Changshou. Guiyuan II, in
development since 2002, occupies a land area of 667,000 square meters, of which approximately
46,620 square meters have been developed to date and 620,000 square meters remain undeveloped.
Approximately 565,000 square meters are identified as land to be developed as a cemetery and the
remaining area will be developed as housing, parking and office space in the future.
Both Guiyuan I and Guiyuan II are among the most highly regarded facilities in their market
area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume
of business, available inventory, name recognition, aesthetics and potential for development or
expansion. In 2006 and 2007, Foguang was ranked amongst the top 50 private-owned enterprises in
Chongqing by the Xinhuanet News Domestic, Xinhua News Agency.
The Chongqing municipal government has also committed to enable Foguang to secure the land use
rights to approximately 1,194,804 square meters of land surrounding Longqiao Lake, which portions
of Guiyuan II overlook. However, as of the date of this Form 10-K, Foguang has yet to officially
receive those land use rights. Foguang is planning to develop this land as a park, with mausoleums
and temples, to complement and enhance Guiyuan II. The purpose of the Longqiao Lake project is to
make full use of its land resources, to cultivate and produce flower seeds, and to increase the
overall green effect of its park. The project is about 33 acres in size. So far, Foguang has
invested nearly RMB 12 million (approximately US $1.77 million) to cultivate the land for the
planting of nursery seedlings and the purchasing of nursery seedlings. A part of such seedlings
will be used for the development of Guiyuan II, and the remaining seedlings will be sold either to
the Changshou district government for urban landscaping or to outside parties for profit.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities and
expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to
accrued expenses, fair valuation of stock related to stock-based compensation and income taxes. We
based our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
This summary of significant accounting policies is presented to assist the understanding of the
consolidated financial statements. The consolidated financial statements and notes are
presentations of the Companys management, which is responsible for their integrity and
objectivity. These accounting policies conform to the accounting principles generally accepted in
the United States of America and have been consistently applied in the preparation of the
consolidated financial statements.
FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as 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 on the measurement date. This topic also establishes a fair value hierarchy
which requires classification based on observable and unobservable inputs when measuring fair
value. The fair value hierarchy distinguishes between assumptions based on market data (observable
inputs) and an entitys own assumptions (unobservable inputs). The hierarchy consists of three
levels:
o | Level one Quoted market prices in active markets for identical assets or liabilities; | ||
o | Level two Inputs other than level one inputs that are either directly or indirectly observable; and | ||
o | Level three Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use. |
Determining which category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates its hierarchy disclosures each quarter.
Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Fair value measurement using inputs | Carrying amount at March 31, | |||||||||||||||||||
Financial instruments | Level 1 | Level 2 | Level 3 | 2010 | 2009 | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Derivative instruments Warrants |
$ | | $ | 1,366,327 | $ | | $ | 1,366,327 | $ | | ||||||||||
Total |
$ | | $ | 1,366,327 | $ | | $ | 1,366,327 | $ | |
Derivative Instruments Warrants
The Company issued 701,126Warrants in connection with the February 2010 Private Placement of
1,402,262 shares of common stock, which are further disclosed in Note 13. 70,113 Warrants were
issued to the placement agent. The strike price of these warrants is $4.10 per share. These
warrants were not issued with the intent of effectively hedging any future cash flow, fair value of
any asset, liability or any net investment in a foreign operation.
These Warrants were issued with a down-round provision whereby the exercise price would be adjusted
downward in the event that, during additional shares of the Companys common stock or securities
exercisable, convertible or exchangeable for the Companys common stock were issued at a price less
than the exercise price. Therefore, according to the guidance provided in FASB ASC 815-40-15-5
through 815-40-15-8, which was adopted by the Company on April1, 2009, the Company accounted for
these warrants as derivative liabilities. All changes in the fair value of these warrants were
recognized in statement of income until they are exercised or expire or otherwise extinguished.
The Company estimates the fair value of the warrants using the Black-Scholes option pricing model
using the following assumptions:
Warrants | Underwriter Warrants | |||||||||||||||
March 31, | Feb. 19, | March 31, | Feb. 19, | |||||||||||||
2010 | 2010 | 2010 | 2010 | |||||||||||||
Market price and estimated fair value of common stock: |
$ | 4.55 | $ | 3.50 | $ | 4.55 | $ | 3.50 | ||||||||
Exercise price: |
$ | 4.10 | $ | 4.10 | 4.10 | $ | 4.10 | |||||||||
Expected term (years): |
3.87 | 4.00 | 3.87 | 4.00 | ||||||||||||
Dividend yield: |
| | | | ||||||||||||
Expected volatility: |
41. | % | 41 | % | 41 | % | 41 | % | ||||||||
Risk-free interest rate: |
2.07 | % | 2.11 | % | 2.07 | % | 2.11 | % |
The fair value of the warrants on February 18, 2009 was determined using the Black-Scholes option
pricing model based on the following assumptions: dividend yield: 0%, expected volatility:41.40%,
risk-free interest rate: 1.88%, and expected term: 3.86 years.
Before the reverse merger, the Companys common stock had not been publicly traded. Whilst the
Companys common stock began public trading and was quoted on the OTCBB in February 2010, the fair
value of the Companys common stock as of February 19, 2010 has been determined based on market
price.
As the Companys stock only begun public trading effective with the reverse merger date, historical
volatility information is limited and considered not representative of the expected volatility. In
accordance with ASC 718-10-30-2 (formerly SFAS No. 123R, Accounting for Stock-Based Compensation
), the Company identified similar public entities for which share and option price information was
available, and considered the historical volatilities of those public entities share prices in
calculating the expected volatility appropriate to the Company (i.e. the calculated value).
The risk-free rate of return reflects the interest rate for United States Treasury Note with
similar time-to-maturity to that of the warrants.
Allocation of Proceeds from Private Placement
The proceeds from the Private Placement were first allocated between the Common Shares and the
warrants issued in connection with the Private Placement based upon their estimated fair values as
of the closing date, resulting in an aggregate amount of $794,376 being allocated to the Warrants
and $3,400,995 to the common shares.
Accounts receivable
Accounts receivable are carried at original invoice amount less allowance for doubtful receivables.
Managements evaluation on the adequacy of the allowance for doubtful accounts is based on a review
of all outstanding amounts by account on a monthly basis. Specifically, the Company analyzes the
aging of accounts receivable balances, historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in the customer payment terms. Significant
changes in customer concentration or payment terms, deterioration of customer credit-worthiness or
weakening in economic trends could have a significant impact on the collectability of receivables
and the Companys operating results. If the financial condition of the Companys customers were to
deteriorate, resulting in an impairment of their ability to make payments, the Company will write
off 100% as bad debt.
Inventory
Inventory consists of completed cemetery plots ready for sale. Inventory includes all direct costs
associated with land development and construction of cemetery plots, including interest, costs of
land use rights based on units of production and other carryings costs incurred. Inventory is
valued at the lower of cost or market (determined on a weighted average cost basis) or net
realizable value.
33
The Company uses the full cost absorption method of accounting for direct costs associated with
land development and construction of cemetery plots, including interest and costs of land use
rights. Such costs are allocated to the estimated number of cemetery plot to be developed using
the selling price relative fair value method. When the cemetery plots are sold, the carrying costs
are charged to cost of goods sold.
During 2005, the Company received land use rights which were contributed by the PRC government for
no consideration. Under PRC law, all land in the PRC is state-owned.
Inventory Impairment
Management periodically compares the carrying cost of inventory with the expected net realizable
value to arrive at market prices. An allowance is made for the decline in market value of inventory
if lower than the carrying cost. As of March 31, 2010 and 2009, impairment was $999,805 and $0,
respectively.
Contributed property
The Company received land use rights from the PRC government for no consideration paid. The Company
recorded the fair value of the land use rights as an intangible asset and deferred revenue as
determined by management with the advice of PRC legal counsel and third party consultants.
Article 12 of the PRCs Regulations on the Land Use Right sets forth the maximum term of the land
use rights for different uses as follows: (1) 70 years for residential use; (2) 50 years for
industrial use; (3) 50 years for educational, technological, cultural, health, and sport site use;
(4) 40 years for commercial, tourist and recreational use; (5) 50 years for comprehensive or other
use; (6) 20 years for gas station use. Article 11 of the PRCs Regulations on Funeral
Administration stipulates that the term of the use of cemetery land or grave yard shall be
determined by each provincial government. Article 21 of the Chongqing Funeral Rules states that the
land use rights for graves shall be no more than 20 years, subject to renewal. Foguangs land use
rights consists of two parts: one piece of allocated land from the PRC government and one piece of
land leased from the local farmers which the Company acquired by paying $835,000. The leased land
is comprised of both farm land and residential land. The farm land is subject to a maximum term of
20 years and the Company has a priority to renew the lease when it expires. The residential land is
under a lease term of 100 years.
Revenue recognition
The Company recognizes revenue when four basic criteria must be met. The four basic criteria are:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred with no future other
than perfunctory performance obligations; (3) the selling price is fixed and determinable; and (4)
collectability is reasonably assured. Determination of criteria (3) and (4) is based on
managements judgments regarding the fixed nature of the selling prices of the products and
services delivered and the collectability of those amounts.
The Company has two revenue sources including the following revenue recognition policies:
The Company recognizes revenue from the sale of cemetery plots when it is realized or realizable
and earnings process is complete. In general, a potential customer will tour the Companys facility
and choose a particular spot or location of the cemetery plot that is ready and available for use.
A sales agreement is executed with Foguang for the exact location at a fixed price. The sales
process ends when the consideration is paid in full, at which time, the Company provides the
customer full access to the use of the plot. The Company does not provide any other post-death
type services, other than to develop and sell the cemetery plots, obtain executed agreements, full
payment and deliver the keys to the plot embedded in a concrete box. The Company records revenue
when the title or right to use the completed cemetery plots has passed to the customer in
accordance with the terms of the fixed price sale agreement and consideration is exchanged. The
costs associated with revenue from sale of cemetery plots are the costs to convert the land into
the actual burial plots. Additionally, direct selling costs incurred in selling the cemetery plots
are recorded in cost of goods sold.
Park construction income is recognized when the Company is contracted to provides services for
third party clients. These services include the construction of sidewalks, pagodas, landscaping
and other structures for parks. These projects are not associated with the Companys sales of
cemetery plots. Revenue is recognized upon the completion
34
of the park, and the project has been
approved by the customer and collection is assured. The costs associated with
the park construction income are raw materials purchased for that specific project and services
performed by the Company recorded in costs of goods sold.
Foreign Currency
The Companys reporting currency is the U.S. dollar. The functional currency of the parent company
is the U.S. dollar and the functional currency of the Companys operating subsidiaries is the
Chinese Reminbi (RMB). For the subsidiaries whose functional currencies are the RMB,
Assets and liabilities are translated at the exchange rates at the balance sheet date and revenue
and expenses are translated at the average exchange rates and stockholders equity is translated at
historical exchange rates. Any translation adjustments resulting are not included in determining
net income but are included in foreign exchange adjustment to other comprehensive income, a
component of equity. There is no significant fluctuation in exchange rate for the conversion of RMB
to U.S. dollars after the balance sheet date.
Recent accounting pronouncements
FASB Establishes Accounting Standards Codification
In June 2009, the FASB issued Accounting Standards Update No. 2009-01, ASC 105 Generally Accepted
Accounting Principles which establishes the FASB Accounting Standards Codification (the
Codification) as the official single source of authoritative US GAAP. All existing
accounting standards are superseded. All other accounting guidance not included in the Codification
will be considered non-authoritative. The Codification also includes all relevant Securities and
Exchange Commission guidance organized using the same topical structure in separate sections within
the Codification.
Following the Codification, the Board will not issue new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (ASU) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the changes to the
Codification.The Codification is not intended to change US GAAP, but it will change the way US GAAP
is organized and presented. The Codification is effective for our third-quarter 2009 financial
statements and the principal impact on our financial statements is limited to disclosures as all
future references to authoritative accounting literature will be referenced in accordance with the
Codification.
In August 2009, the FASB issued an Accounting Standards Update (ASU 2009-05) regarding
measuring liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted price in an active
market for the identical liability is not available; under those circumstances, a reporting entity
is required to measure fair value using one or more of valuation techniques, as defined. This ASU
is effective for the first reporting period, including interim periods, beginning after the
issuance of this ASU. The adoption of this ASU did not have a material impact on the Companys
consolidated financial position, results of operations or cash flows.
In October 2009, the FASB issued an Accounting Standards Update (ASU 2009-15) regarding the
accounting for own-share lending arrangements in contemplation of convertible debt issuance or
other financing. This ASU requires that at the date of issuance of the shares in a share-lending
arrangement entered into in contemplation of a convertible debt offering or other financing, the
shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset
to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings
per share unless default of the share-lending arrangement occurs, at which time the loaned shares
would be included in the basic and diluted earnings-per-share calculation. This ASU is effective
for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal
years for arrangements outstanding as of the beginning of those fiscal years. The Company is
currently evaluating the impact of this ASU on its consolidated financial statements.
In December 2009, the FASB issued an Accounting Standards Update regarding the accounting for
transfers of financial assets which amends previous guidance. The amendments in this ASU improve
financial reporting by eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the transferred financial
assets. In addition, the amendments require enhanced disclosures about the risks that a
35
transferor continues to be exposed to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on portions of financial
assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU
to have a material impact on its consolidated financial position, results of operations or cash
flows.
In December 2009, the FASB issued an Accounting Standards Update regarding improvements to
financial reporting by enterprises involved with variable interest entities which amends previous
guidance. The amendments in this ASU replace the quantitative-based risks and rewards calculation
for determining which reporting entity, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which reporting entity has the power to
direct the activities of a variable interest entity that most significantly impact the entitys
economic performance and (1) the obligation to absorb losses of the entity or (2) the right to
receive benefits from the entity. An approach that is expected to be primarily qualitative will be
more effective for identifying which reporting entity has a controlling financial interest in a
variable interest entity. The amendments in this ASU also require additional disclosures about a
reporting entitys involvement in variable interest entities, which will enhance the information
provided to users of financial statements. The adoption of this ASU did not have any material
impact on its consolidated financial position, results of operations or cash flows.
In December 2009, the FASB issued an accounting standard update, Transfers and Servicing (Topic
860) Accounting for Transfers of Financial Assets. The adoption of this update did not have any
impact on the Companys consolidated financial statements.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting and
reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to
deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the
subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair value. In contrast, an
entity is required to account for a decrease in its ownership interest of a subsidiary that does
not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies
the scope of the decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for
beginning in the first interim or annual reporting period ending on or after December 31, 2009. The
adoption of this ASU did not have any material impact on its consolidated financial position,
results of operations or cash flows.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting for
distributions to shareholders with components of stock and cash. The amendments in this ASU clarify
that the stock portion of a distribution to shareholders that allows them to elect to receive cash
or stock with a potential limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and
is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this ASU are effective for interim and annual periods ending on or after
December 15, 2009, and should be applied on a retrospective basis. The adoption of this ASU did not
have a material impact on the Companys consolidated financial position, results of operations or
cash flows.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting and
reporting for decreases in ownership of a subsidiary a scope clarification. The amendments in
this ASU affect accounting and reporting by an entity that experiences a decrease in ownership in a
subsidiary that is a business or nonprofit activity. The amendments also affect accounting and
reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit
activity for an equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts accounting for Non-controlling Interests in
Consolidated Financial Statements An Amendment of ARB No. 51. The amendments in this update are
effective beginning in the first interim or annual reporting period ending on or after December 15,
2009. The amendments in this update should be applied retrospectively to the first period that an
entity adopted accounting for Non-controlling Interests in Consolidated Financial Statements An
Amendment of ARB No. 51. The adoption of this ASU did not have a material impact on the Companys
consolidated position, results of operations or cash flows.
36
In January 2010, the FASB issued an Accounting Standard Update regarding improving disclosures
about fair value measurements. This update provides amendments to Subtopic 820-10 that requires new
disclosure as follows:
1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and
describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the
reconciliation for fair value measurements using significant unobservable inputs (Level 3), a
reporting entity should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This update provides
amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of
disaggregation. A reporting entity should provide fair value measurement disclosures for each class
of assets and liabilities. A class is often a subset of assets or liabilities within a line item in
the statement of financial position. A reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation
techniques. A reporting entity should provide disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value measurements. Those
disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The
new disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. The Company is currently evaluating the impact
of this ASU, however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial position, results of operations or cash flows.
In January 2010, the FASB issued an accounting standard update to address implementation issues
related to the changes in ownership provisions in the ConsolidationOverall Subtopic (Subtopic
810-10) of the FASB Accounting Standards Codification, originally issued as FASB Statement No.
160, Noncontrolling Interests in Consolidated Financial Statements. Subtopic 810-10 establishes the
accounting and reporting guidance for noncontrolling interests and changes in ownership interests
of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity
recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary
at fair value. The gain or loss includes any gain or loss associated with the difference between
the fair value of the retained investment in the subsidiary and its carrying amount at the date the
subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in its
ownership interest of a subsidiary that does not result in a change of control of the subsidiary as
an equity transaction.
While Subtopic 810-10 provides general guidance on accounting for the decreases in ownership of a
subsidiary, including a deconsolidation, some constituents raised concerns that the guidance
appears to conflict with the gain or loss treatment or derecognition criteria of other U.S.
generally accepted accounting principles, such as the guidance for sales of real estate, transfers
of financial assets, conveyances of oil and gas mineral rights, and transactions with equity method
investees.
Some constituents also questioned whether the FASB intended for the decrease in ownership
provisions of Subtopic 810-10 to apply to all entities because a subsidiary is defined as an
entity, including an unincorporated entity such as a partnership or trust, in which another entity,
known as its parent, holds a controlling financial interest. Those constituents were concerned that
such an interpretation could result in the accounting for a transaction being driven by its form
rather than its substance. For example, different accounting might be applied to a transaction
involving the same underlying assets depending on whether those assets were transferred in asset or
entity form. The amendments in this update are effective beginning in the period that an entity
adopts Subtopic 810-10. If an entity has previously adopted Subtopic 810-10 as of the date of the
amendments in this update are included in the Accounting Standards Codification, the amendments in
this update are effective beginning in the interim or annual reporting period ending on or after
December 31, 2009. The amendments in this update should be applied retrospectively to the first
period upon adoption. The adoption of this update for the changes in the accounting and reporting
guidance for noncontrolling interests and changes in ownership interests of a subsidiary, as
codified in ASC 810-10, did not have any impact on the Companys financial position, results of
operations or cash flows.
Other recent accounting pronouncements issued by the FASB, the American Institute of Certified
Public Accountants (AICPA), and the SEC did not or are not believed by management to have a
material impact on the Companys present condensed consolidated financial statements.
37
Comparison of Years Ended March 31, 2010 and March 31, 2009
Net Revenues
Net revenues for the year ended March 31, 2010 were $36,498,969 as compared to $18,313,720 for
the year ended March 31, 2009, an increase of $18.185.249 or approximately 99.3%. For the years
ended March 31, 2010 and 2009, net revenues consisted of the following:
Year Ended | Year Ended | |||||||
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
Cemetery |
$ | 36,498,969 | $ | 17,647,785 | ||||
Park and Nursery Garden Services |
| 665,935 | ||||||
Net revenues |
$ | 36,498,969 | $ | 18,313,720 | ||||
Cemetery
For the year ended March 31, 2010, cemetery revenues increased by $18,851,184 or 106.8%. The
significant increase in revenues was mainly attributable to the development of new cemetery which
led to an increase of sales of cemetery plots. The total number of cemetery plots sold increased
from 4,051 in fiscal 2009 to 6,730 in fiscal 2010. In addition, the average sales price increased
by approximately US$1,000 per cemetery plot. The increase in cemetery revenues was also
attributable to better marketing as Foguang started to focus its advertising costs on television
advertisements in targeted areas and increased incentives for its sales agents and hired additional
agents to better promote and sell its services and products. Also, the opening of the Changshou
Bridge shortened the driving distance between Foguangs cemetery and the downtown area of Changshou
from two hours to 12 minutes, which brought Foguang more customers who used to limit their choices
of cemetery products and services to the downtown area for transportation reasons. The
overall improvement of local economic conditions in Chongqing also contributed to the increase of
economic value of Foguangs cemetery and increased the number of cemeteries sold. The local
economic environment experienced overall improvement in fiscal 2010 due to the assistance of
large-scale state-owned enterprises and their projects in the Chongqing area.
Park and Nursery Garden Services
For the year ended March 31, 2010, we had no revenues for park and nursery garden services
compared to $665,935 in revenues for the year ended March 31, 2009. We did not incur any revenues
for fiscal 2010 because Foguang shifted its focus to the development of its cemetery
business. Foguang gradually decreased the input of its resources on the park and nursery garden
business starting from fiscal year of 2009. We do not expect this trend to change in the next
fiscal year as Foguang continues to focus on developing its cemetery business.
Cost of Sales
Cost of sales includes amortization of land use rights, raw materials, conversion costs,
direct labor, commissions and bonuses, manufacturing costs, and utilities. For the year ended March
31, 2010, cost of sales amounted to $17,565,765 or approximately 48.1% of total net revenues as
compared to $9,938,853 or approximately 54.3% of total net revenues for the year ended March 31,
2009. The decrease in cost of sales as a percentage of total net revenues was primarily due to
economies of scale that Foguang achieved in developing more plots of land and from being more cost
efficient in the development of cemetery derived from its past experiences. Costs associated with
the development of the cemetery were reduced because of an improvement in the production process
and the more efficient use of technology. Specifically, a change was made to the way shale stone
memorials were casted into cement walls for the cemetery which significantly decreased labor costs
and materials. The new technology led to a 60% decrease in the use of raw material for the
construction of the cemetery cement walls.
Total cost of sales increase of $7,626,912 or 76.7% was attributable to the following:
38
For the year ended March 31, 2010, cemetery costs amounted to $17,565,765 as compared to
$9,445,153 for the year ended March 31, 2009, an increase of $8,120,612 or 85.9% from the
comparable period in fiscal 2009. This increase was primarily attributable to the increase in the
number of cemetery plots sold and markdown of certain products to the lower of cost or market.
For the year ended March 31, 2010, we incurred no park and nursery garden services costs
because Foguang did not provide such services for fiscal 2010 as compared to $493,700 for costs incurred
for the park and nursery garden services for the year ended March 31, 2009. We do not expect
Foguang to provide much park and nursery garden services as it plans to focus on expanding its
cemetery business.
Gross Profit
Gross profit for the year ended March 31, 2010 was $18,933,204 or 51.9% of total net revenues,
as compared to $8,374,867 or 45.7% of total net revenues for the year ended March 31, 2009. The
increase in gross profit was attributable to a decrease in the cost of goods sold as Foguang was
able to develop cemetery plots for a cheaper price due to the advantage of economies of scale.
Foguang was also able to sell higher margin products since it was able to utilize its historical
sales records to develop and sell higher margin cemetery plots. In the cemetery industry, the sale
of a deluxe tomb is able to generate a 20% higher margin for Foguang as compared to the simple
tombs. As Foguang continues to develop its cemeteries, it will focus on the development of such
deluxe tombs to achieve higher profit margins. In addition, Foguang utilizes Feng Shui concepts to
develop its cemetery with the best Feng Shui to attract more customers. By having good Feng
Shui, Foguang is able market its cemetery plots at higher prices while keeping the cost of sales
relatively constant to achieve higher profit margins.
Operating Expenses
Total operating expenses for the year ended March 31, 2010 were $1,792,584, an increase of
$321,109 or 21.8% from total operating expenses in the year ended March 31, 2009 of $1,471,475.
This increase included the following:
For
the year ended March 31, 2010, advertising and selling expenses
amounted to $196,945 as
compared to $426,415 for the year ended March 31, 2009, a
decrease of $229,470 or 53.8%. Foguang
spent less on advertising expenses for the year ended March 31, 2010 due to the ability to focus
its advertising on the channels that have been proven as the most effective. Foguang focused its
advertising on mainstream television shows, such as Chongqing Commercial Daily, Evening, Morning,
and Chongqing TV 12, which have proven to be the most effective dissemination of advertising to the
public. In fiscal 2010, Foguang also cut back on its television advertisements and print
advertisements by 50% to reduce advertising expenses.
For the year ended March 31, 2010, general and administrative expenses amounted to $1,595,639
as compared to $1,045,060 for the year ended March 31, 2009, an increase of $550,579 or 52.7%. The
increase in expenses was mainly attributable to the increase in costs associated with the increase
in sales and costs associated with using more sales agents. Foguang paid a higher sales commission
to its sales agents in order to stay competitive to industry standards due to the rapidly
increasing labor costs in China. In addition, the cost of gasoline has also increased which
increased Foguangs transportation costs to visit the sales agents and taking the customers to view
the cemetery accordingly. Our general and administrative expenses increased due to the overall
increase of labor costs and rise of inflation in China. For example, the cost to print a high
quality pamphlet used in our sales offices went from $.03 to $.05, up 44%
Income from Operations
We reported income from operations of $17,140,620 for the year ended March 31, 2010 as
compared to income from operations of $6,903,392 for the year ended March 31, 2009, an increase of
$10,237,228 or approximately 148.3%. The substantial increase in income from operations was
attributable to the increase in the sale of cemetery plots. Also, the opening of the Changshou
Bridge shortened the driving distance between Foguangs cemetery and the downtown area of Changshou
from two hours to 12 minutes, which brought Foguang more customers who used to limit their choices
of cemetery products and services to the downtown area for transportation reasons. The
local economic environment experienced overall improvement in fiscal 2010 due to the assistance of
39
large-scale state-owned enterprises and their projects in the Chongqing area, which led to higher
overall consumer consumption. The significant increase in income from operations was mainly
attributable to Foguangs overall development momentum and a healthy sales pipeline. Foguang has
been able to increase traffic to the cemetery and build momentum, which makes the rest of the
cemetery land more desirable and valuable.
Other Income
For
the year ended March 31, 2010, total other income amounted to
$(106,026) as compared to
$283,560 for the year ended March 31, 2009, an decrease of $389,586 or 135% from the comparable
period in 2009. This change was primarily attributable the following:
For the year ended March 31, 2010, other income amounted to $427,510 as compared to $255,893
for the year ended March 31, 2009, an increase of $171,617 or 67.1% from the comparable period in
2009. This change was primarily attributable to the divesture of some of our non-core assets to an
unrelated third party.
For the year ended March 31, 2010,
loss on change in fair value of warrants classified as a derivative liability is $571,950 as compared to
$0.00 for the year ended March 31, 2009, an increase of $571,950 or
100% from the comparable period. This change was attributable to warrants that were issued in connection with the
February 2010 Private Placement of common stock.
For the year ended March 31, 2010, interest expense stayed approximately the same from
$235,240 as compared to $235,208 for the year ended March 31, 2009 because our outstanding loans
did not change and interest rates stayed stable.
For the year ended March 31, 2010, rental income, net amounted to $261,750 as compared to
$260,286 for the year ended March 31, 2009, an increase of $1,464 or 0.5% from the comparable
period in 2009. This change was primarily attributable to the change in the foreign exchange rate
between the RMB and the US dollar, since the income was paid in RMB and then converted to US
dollar.
For the year ended March 31, 2010, non-operating expense amounted to $12,642 as compared to
$3,772 for the year ended March 31, 2009, an increase of $8,870 or 235.2% from the comparable
period in 2009. This change was primarily attributable to the cost associated with the divesture of
non-core assets.
Liquidity and Capital Resources
Year Ended March 31, 2010
For the year ended March 31, 2010, net cash provided by operating activities was $9,497,685,
as compared to net cash provided by operating activities of $6,489,196 for the year ended March 31,
2009. The increase was primarily attributable to the increase in the sales of cemetery plots,
offset by costs incurred to build up inventory.
For the year ended March 31, 2010, net cash used in investing activities was $5,998,116 as
compared to net cash used in investing activities of $6,988,020 for the year ended March 31, 2009.
The decrease was mainly due to a previous prepayment for trees which the company received in full
this year and for a reclassficiation of headstones from prepayment to a related party accounts
receivable.
For fiscal year 2010, the net cash provided by financing activities was $4,195,371 compared to
no cash used in or provided by financing activities for fiscal year 2009. On February 19, 2010, we
completed a financing transaction with 24 institutional and/or accredited investors (collectively
the Purchasers) pursuant to which we sold $4,599,371 of units of our equity securities to
the Purchasers in a private placement (the Transaction). Each unit is comprised of
100,000 shares of our common stock, par value $0.001 per share (the Common Stock), at a
per share purchase price of $3.28 per share, and warrants to purchase up to 50,000 shares of Common
Stock. At the closing of the Transaction on February 23, 2010, we issued 1,402,262 shares of Common
Stock and four-year warrants to purchase 701,126 shares of Common Stock (the Warrants) at
$4.10 per share. In addition, we issued warrants to purchase up to 70,113 shares of common stock at
$4.10 per share to our placement agent and its assignees for the Transaction. Offering costs of
approximately $404,000 was netted against the proceeds.
As of March 31, 2010, we had available and unrestricted cash of $9,367,276. Our total current
assets were $20,564,611 and our total current liabilities were $6,437,449. We believe that we have
adequate working capital to sustain operations and maintain positive operating cash flows for at
least the next twelve months.
40
We have various short term loans of approximately $2.5 million that are due and payable by
March 2011. We plan to use all the funds from the Transaction to develop the Gui Yuan II project.
In 2010, we plan to complete the first phase of land acquisition and the construction of the
cemetery and supporting facilities within the acquired land. We plan to develop 5,000 external
tombs and 2,000 internal tombs. After the Gui Yuan II project is completed, our next focus will be
the development of the Longqiao Lake project. In 2011, we plan to develop tourism, leisure,
entertainment, dining accommodation, transportation and other comprehensive services and
facilities. We plan to expand our seedling base in the Longqiao Lake area. Management believes
that the funds for such short-term developments can be obtained through the sale of securities or
issuance of debt instruments in addition to our retained earnings. Foguangs projected income is
approximately US$12 and US$16 million in 2011 and 2012, respectively, so Foguang expects to have
enough funds for its short term development projects.
Our long term development includes acquisition and merger with cemeteries locally or in other
cities. We plan to acquire Shenzhen Huaqiao Public Cemetery in 2013. The funds needed for this
acquisition is approximately US$29.33 million.
We believe that cash and cash equivalents currently on hand and cash flows from operations
will be sufficient to continue our operations and to pursue our growth strategy for the foreseeable
future. Our future capital requirements will depend on many factors, including the rate of our
revenue growth; the timing and extent of spending to enhance our advertising and marketing
programs; investing in our sales force; the levels of the inventory we carry; and other factors
relating to our business. We will require additional financing in the future in order to execute
our operating and growth plans and we may not be able to obtain such financing. We cannot predict
whether this additional financing will be in the form of equity, debt, or a combination of debt and
equity. There are no assurances that our plans will be successful, or even be implemented.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated
payments. Changes in our business needs, cancellation provisions, changing interest rates, and
other factors may result in actual payments differing from the estimates. We cannot provide
certainty regarding the timing and amounts of payments. We have presented below a summary of the
most significant assumptions used in our determination of amounts presented in the tables, in order
to assist in the review of this information within the context of our consolidated financial
position, results of operations, and cash flows.
The following tables summarize our contractual obligations as of March 31, 2010, and the
effect these obligations are expected to have on our liquidity and cash flows in future periods.
Payments Due by Period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 Years | 3-5 Years | 5 Years + | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Contractual Obligations : |
||||||||||||||||||||
Bank Indebtedness |
$ | 2,475 | $ | 2,475 | $ | | $ | | $ | | ||||||||||
Other Indebtedness |
$ | 443 | $ | 44 | $ | 104 | $ | 69 | $ | 225 | ||||||||||
Capital Lease Obligations |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Purchase Obligations |
$ | 50,000 | $ | 25,000 | $ | 25,000 | $ | | $ | | ||||||||||
Total Contractual Obligations: |
$ | 52,918 | $ | 27,519 | $ | 25,104 | $ | 69 | $ | 225 |
41
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the
payment obligations of any third parties. We have not entered into any derivative contracts that
are indexed to our shares and classified as shareholders equity or that are not reflected in our
consolidated financial statements. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk
support to such entity. We do not have any variable interest in any unconsolidated entity that
provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging
or research and development services with us.
Exchange Rates
We maintain our books and records in Renminbi (RMB), the lawful currency of the PRC.
In general, for consolidation purposes, the Company translates our assets and liabilities into U.S.
Dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement
of income is translated at average exchange rates during the reporting period. Adjustments
resulting from the translation of our financial statements are recorded as accumulated other
comprehensive income.
Until July 21, 2005, RMB had been pegged to USD at the rate of RMB8.30: USD$1.00. On July 21,
2005, the PRC government reformed the exchange rate system into a managed floating exchange rate
system based on market supply and demand with reference to a basket of currencies. In addition, the
exchange rate of RMB to USD was adjusted to RMB8.11: USD$1.00 as of July 21, 2005. The Peoples
Bank of China announces the closing price of a foreign currency such as USD$ traded against RMB in
the inter-bank foreign exchange market after the closing of the market on each working day, which
will become the unified exchange rate for the trading against RMB on the following working day. The
daily trading price of USD against RMB in the inter-bank foreign exchange market is allowed to
float within a band of ±0.3% around the unified exchange rate published by the Peoples Bank of
China. This quotation of exchange rates does not imply free convertibility of RMB to other foreign
currencies. All foreign exchange transactions continue to take place either through the Bank of
China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by
the Peoples Bank of China. Approval of foreign currency payments by the Bank of China or other
institutions required submitting a payment application form together with invoices, shipping
documents and signed contracts.
The exchange rates used to translate amounts in RMB into US Dollars for the purposes of
preparing the consolidated financial statements or otherwise stated in this report were as follows:
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
Balance sheet items, except for the
registered and paid-up capital, as of end of period/year. |
USD1:RMB 0.1467 | USD1:RMB 0.1465 | ||||||
Amounts included in the statement of operations,
statement of changes in stockholders equity and
statement of cash flows for the period/ year ended. |
USD1:RMB 0.14664 |
USD1:RMB 0.14582 |
No representation is made that RMB amounts have been, or would be, converted into US$ at the above
rates.
Inflation
We believe that inflation has not had a material effect on our operations to date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our investment portfolio and has no foreign
exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts
receivable, accounts payable and long-term obligations. We consider investments in highly liquid
instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be
cash equivalents.
42
Interest Rates. Our exposure to market risk for changes in interest rates relates
primarily to our short-term investments and short-term obligations; thus, fluctuations in interest
rates would not have a material impact on the fair value of these securities. At March 31, 2010, we
had approximately $9,367,276 in cash and cash equivalents. A hypothetical 5% increase or decrease
in interest rates would not have a material impact on our earnings or loss, or the fair market
value or cash flows of these instruments.
Foreign Exchange Rates. A substantial portion of our sales is denominated in Renminbi
(RMB). As a result, changes in the relative values of U.S. Dollars and RMB affect our
reported levels of revenues and profitability as the results are translated into U.S. Dollars for
reporting purposes. In particular, fluctuations in currency exchange rates could have a significant
impact on our financial stability due to a mismatch among various foreign currency-denominated
sales and costs. Fluctuations in exchange rates, particularly among the U.S. dollar, and RMB,
affect our gross and net profit margins and could result in foreign exchange and operating losses.
Our exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from all of our revenue and cost of goods sold being conducted in RMB and then converting
it to USD. We translate monetary assets and liabilities denominated in other currencies into RMB,
the functional currency of our operating business. Our results of operations and cash flow are
translated at average exchange rates during the period, and assets and liabilities are translated
at the unified exchange rate as quoted by the Peoples Bank of China at the end of the period.
Translation adjustments resulting from this process are included in accumulated other comprehensive
income in our statement of shareholders equity. We recorded net foreign currency gains of $346,088
and $511,749 in fiscal 2010 and 2009 respectively. We have not used any forward contracts, currency
options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict
the impact of future exchange rate fluctuations on our results of operations and may incur net
foreign currency losses in the future. As our sales denominated in foreign currencies, such as RMB,
continue to grow, we will consider using arrangements to hedge our exposure to foreign currency
exchange risk.
Our financial statements are expressed in U.S. dollars but the functional currency of
our operating subsidiary is RMB. The value of your investment in our stock will be affected by the
foreign exchange rate between U.S. dollars and RMB. To the extent we hold assets denominated in
U.S. dollars, including the net proceeds to us from this offering, any appreciation of the RMB
against the U.S. dollar could result in a change to our statement of operations and a reduction in
the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB
against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results,
the value of your investment in our company and the dividends we may pay in the future, if any, all
of which may have a material adverse effect on the price of our stock.
Country Risk. The substantial portion of our assets and operations are located and
conducted in China. While the PRC economy has experienced significant growth in the past twenty
years, growth has been uneven, both geographically and among various sectors of the economy. The
Chinese government has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures benefit the overall economy of China, but may also
have a negative effect on us. For example, our operating results and financial condition may be
adversely affected by government control over capital investments or changes in tax regulations
applicable to us. If there are any changes in any policies by the Chinese government and our
business is negatively affected as a result, then our financial results, including our ability to
generate revenues and profits, will also be negatively affected.
Interest Rate Risk. We may face some risk from potential fluctuations in interest rates,
although our debt obligations are primarily short-term in nature, but some bank loans have
different rates. If interest rates have great fluctuations, our financing cost may be significantly
affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to information
begins on Page F-1 of this Form 10-K.
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As reported in the Form 8-K filed with the SEC on April 8, 2010, we changed our
independent accountants from Webb & Company, P.A. to PMB Helin Donovan, LLP effective April 5,
2010.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
the Company in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and that
information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is accumulated and communicated to our management, including our principal executive and
financial officers, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this Form 10-K, we conducted an evaluation,
under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e)
of the Exchange Act).
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were not effective as of March 31, 2010 because of the
weaknesses described below under Managements Report on Internal Control over Financial
Reporting.
Managements Report on Internal Control Over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board
of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and includes those policies
and procedures that:
(1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | ||
(2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and | ||
(3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal control over financial
reporting is a process that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over financial reporting
also can be circumvented by collusion or improper management override. Because of such limitations,
there is a risk that material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent limitations are known features
of the financial reporting process. Therefore, it is possible to design into the process safeguards
to reduce, though not eliminate, this risk. Management is responsible for establishing and
maintaining adequate internal control over financial reporting for the company.
44
Management has used the framework set forth in the report entitled Internal ControlIntegrated
Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known
as COSO, to
evaluate the effectiveness of the Companys internal control over financial reporting. . A
material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
the Companys annual or interim financial statements will not be prevented or detected on a timely
basis. As of March 31, 2010 the following weaknesses in our internal control over financial
reporting have been identified:
(i) | As of March 31, 2010, the Company does not have adequate office and financial staffing in place to effectively control the level of transaction activity and consistently address the complex accounting matters that arise on a timely basis. | ||
(ii) | A principal shareholder and director of the Company who is involved in certain functions of the daily operations of the Company, could in theory override normal operating procedures. |
Given the above identified matters, management believes that disclosure controls and
procedures are not effective. Further, even with proper oversight and controls, management do not
expect that our disclosure controls and procedures or our internal controls will necessarily
prevent all errors and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the registrant would be detected.
Due to the material weakness described above, management has concluded that we did not
maintain effective internal control over financial reporting as of March 31, 2010.
Managements Remediation Initiatives
We have planned to make the following necessary changes and improvements to address the
material weaknesses in our internal control over financial reporting as described above:
| recruiting accounting resources to fulfill U.S. GAAP reporting requirements; | ||
| providing training to our finance team and other relevant personnel of the Company in respect of identification of U.S. GAAP accounting guidance applicable to the Companys financial statements; and; | ||
| deferring to external expertise, i.e., outside firm as accounting advisors, if necessary to ensure proper disclosure and reporting in a timely fashion. |
This Form 10-K does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Our managements report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only our managements report in this Form 10-K.
Changes in Internal Control
Except as otherwise discussed herein, there were no changes in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934, as amended) during the quarter ended March 31, 2010 that have materially affected, or
are reasonably likely to materially affect, our international control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
45
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Departure and Appointment of Officers and Directors
Departure of Sole Officer and Director
Effective February 12, 2010, Helen Schwartz voluntarily resigned as the President, Chief
Executive Officer, Chief Financial Officer, and sole director of the Company at the closing of the
Share Exchange.
Appointment of Officers
Effective February 12, 2010, Yiyou Ran was appointed as the Chief Executive Officer and
President and Michael Wang was appointed as the Chief Financial Officer, Secretary and Treasurer of
the Company at the closing of the Share Exchange.
Appointment of Directors
Effective February 12, 2010, Yiyou Ran was appointed as the Chairman of our board of directors
and Michael Wang, Jianquan Chen and Tim Hudson were also appointed to our board of directors at the
closing of the Share Exchange.
Effective April 1, 2010, Michael Rudolph and Lihua Zhang were appointed to our board of
directors.
Effective May 1, 2010, Ray Hsu was appointed to our board of directors.
Current Management
The following table identifies our current executive officers and directors, their
respective offices and positions, and their respective dates of election or appointment:
Name | Age | Position | Effective Date of Appointment | |||||
Yiyou Ran
|
47 | President, Chief Executive Officer and Chairman of the Board | February 12, 2010 | |||||
Michael Wang
|
32 | Chief Financial Officer, Treasurer, Secretary and Director | February 12, 2010 | |||||
Jianquan Chen
|
36 | Director | February 12, 2010 | |||||
Tim Hudson
|
56 | Director | February 12, 2010 | |||||
Michael Rudolph
|
59 | Director | April 1, 2010 | |||||
Lihua Zhang
|
54 | Director | April 1, 2010 | |||||
Ray Hsu
|
40 | Director | May 1, 2010 |
Biographical Information
The following is a brief account of the education and business experience of these directors
and executive officers during at least the past five years, indicating the persons principal
occupation during the period, the name and principal business of the organization by which he or
she was employed. Below also includes a discussion of the specific experience, qualifications,
attributes or skills that led to the conclusion that the person should serve as a director for the
Company.
Yiyou Ran received a bachelor degree in Atmosphere Quality Assessment from Chengdu Institute
of Meteorology in 1983 and a master degree in Economic Management from Southwestern University of
Finance and Economics in 1997. Mr. Ran established Chongqing Fo Guang Tourism Development Co., Ltd.
in October 2002 and serve as the legal representative and Chairman of the Company. Mr. Ran is a
member of the Association of Industry
46
and Commerce of ChangShou and the President of the Chamber of
Industry and Commerce of Jiangnan Town. Mr. Ran was given the honor as Non-Public Ownership System Public Figure, Excellent Socialism
Constructor in 2006 by the United Front Work Department of the CPC and the Association of Industry
and Commerce of Changshou District in Chongqing.
Mr. Ran is the founder and Chairman of Foguang and he had developed Foguang from a small local
company into one of the 50 largest private companies in Chongqing City. Mr. Ran is very experienced
in the death care industry and he is responsible for developing Foguangs strategic vision and
mission. Mr. Ran has also developed good relationships with the local government and other key
players in the industry. Mr. Ran is considered the soul of Foguang and his service and knowledge
are invaluable to the Company.
Michael Wang graduated from University of Texas in 2001 with a masters degree in Accounting
and received a M.B.A from the Tuck School of Business in 2007. Licensed as a CPA in the state of
Texas, Mr. Wang formerly worked as an auditor at Ernst and Young and started his career as a
financial analyst at Arthur Anderson. Mr. Wang formerly worked as the Chief Financial Officer of
Snif Labs Inc., a RFID technology company based in Massachusetts and served as a special consultant
to the CEO of JTec Inc., a software company based in Beijing.
Mr. Wang is an asset to the Company due to his education and background in accounting and
finance. Mr. Wang has professional knowledge in U.S. GAAP and is very experienced in financial
management from his previous finance and auditing positions with Ernst and Young and Arthur
Anderson, and several executive positions with U.S. companies. Mr. Wangs professional experience
in the United States offers a good balance to Foguang, which is based in China. Mr. Wangs skills
and experience will be very helpful to the Companys listing process.
Jianquan Chen graduated from Wuhan University of Electric Engineering in 1996 with a major in
Construction Engineering. Mr. Chen formerly worked as the Vice President of the Chamber of Industry
and Commerce of Jiangnan Town and served as the chief engineer of Chongqing Shenglin Architectural
Engineering Co., Ltd. Currently, Mr. Chen serves as the Vice President, Deputy Chairman, Deputy
General Manager and the Senior Engineer of Chongqing Fo Guang Tourism Development (Group) Co., Ltd.
Mr. Chen also serves as the founder and General Manager of Foguang. He has managed Foguang
alongside Mr. Ran for over 8 years and is responsible for Foguangs overall operation and
management. Mr. Chen formulated Foguangs current strategic plan and has comprehensive knowledge
of the death care industry. Mr. Chen has established a very good partnership with Mr. Ran and the
key employees of Foguang so it is a good prospect for Foguangs long-term development.
Tim Hudson is currently President of the University of Houston, Victoria. Previously, Dr.
Hudson served as provost and founding dean of the College of International and Continuing Education
at the University of Southern Mississippi. Prior to that, he served as an analyst for the U. S.
Department of State. Dr. Hudson received his Ph.D. in Geography from Clark University in Worcester,
Massachusetts.
Mr. Hudson has a deep background in the development of education in the U.S. Mr. Hudson was
also invited as the sole U.S. representative to serve on the European Commissions Millennium
Committee, which was responsible for producing a strategic plan for European higher education for
the next decade. Mr. Hudsons familiarity with U.S. regulations and relations in the U.S. is
valuable to Foguang, a company based in China. Mr. Hudsons experience is also going to help the
Company with its listing process in the U.S.
Michael Rudolph is currently the founder, chief financial officer and managing member of
Viking Asset Management, LLC and an investment adviser to Longview Fund, LP and Longview Fund
International, Ltd. (BVI). Previously, Mr. Rudolph served as the president of The Edgehill Group,
Inc. and held various senior management positions with Charles Schwabs Institutional Trading
Division, Bank of America and Wells Fargo Bank. Mr. Rudolph also served on several board of
directors, including ElectroSource, LLC and the Stanford University Medical Center Stroke Advisory
Board. Mr. Rudolph received his Bachelors degree in Biochemistry from Purdue University in 1973
and a Master of Business Administration degree from Washington University in 1975.
Mr. Rudolph has over 30 years of experience in the financial services industry, spanning from
sales, marketing, finance, operations, lending, strategic planning, trust administration,
investment management and
47
administration. Mr. Rudolph also holds directorships in several other
companies so he is an experienced director. Mr. Rudolphs breadth of experience can help the Company to develop and mature in many ways,
including helping the Company understand and adapt to the U.S. regulatory and stock market.
Lihua Zhang is currently the chairman of Songyuan Hydropower Plant, Bo Gong Ken Hydropower
Plant and Huaxi Hydropower Plant and has invested a total of RMB One Hundred Million in building
these three plants. Mr. Zhang also serves as vice chairman of Zhejiang Commercial Association and
is responsible for public relations between the Zhejiang Commercial Association and other
government agencies in other provinces, including Taiwan and Hong Kong. Mr. Zhang also has served
as a member of Political Consultant Conference in Songxi, Fujiang province. Mr. Zhang received his
professional degree from Hangzhou Water Resources and Hydropower Professional School in 1980.
Mr. Zhang has over 20 years of business experience in the management, operation and
development of Chinese companies, including knowledge of accounting, finance and public relation
principles accumulated from his two decades of business experience. He has also served as the vice
chairman of Zhejiang Commerce Association so he is skilled in handling public affairs and has good
relationships with the local government. Mr. Zhangs vast understanding of Chinese companies and
relationships with the government makes him a valuable asset to the Company.
Ray Hsu also serves as the senior product manager at National Instruments (NI) where he
leads initiatives to create innovative products to enable hands-on learning for science,
technology, engineering, and math education. Mr. Hsu works closely with educators and industry
partners such as LEGO, FIRST, and Project Lead the Way to significantly improve K-12 curriculum and
better prepare students for a successful career in science and engineering. Mr. Hsu has over 17
years of experience leading high-growth companies to create highly successful software products and
solutions for a variety of industries. Prior to joining NI, Mr. Hsu was the vice president and
founding member of @hand Corporation and responsible for delivering enterprise mobile solutions for
the Oil & Gas industry and federal government agencies. Mr. Hsu started his professional career as
senior member of the LabVIEW software development team at NI. He was awarded two U.S. patents for
his work related to detecting differences between two graphical programs. Mr. Hsu received a Master
of Science degree from the Georgia Institute of Technology in 1994 and a Bachelor of Science degree
from the University of Texas at Arlington in 1992.
Mr. Hsu has vast experience in management and software development and his unique experience
adds value to the Company. Mr. Hsu is a Chinese-American whom is fluent in Mandarin and Chinese.
Mr. Hsus background should bridge the gap between the Chinese and American directors on the board
and his language skills will be very useful with communicating with the Chinese management and
directors of Foguang.
Family Relationships
There are no family relationships between or among any of our directors and executive
officers.
Involvement in Certain Legal Proceedings
There are no orders, judgments, or decrees of any governmental agency or administrator, or of
any court of competent jurisdiction, revoking or suspending for cause any license, permit or other
authority to engage in the securities business or in the sale of a particular security or
temporarily or permanently restraining any of our officers or directors from engaging in or
continuing any conduct, practice or employment in connection with the purchase or sale of
securities, or convicting such person of any felony or misdemeanor involving a security, or any
aspect of the securities business or of theft or of any felony. Nor are any of the officers or
directors of any corporation or entity affiliated with us so enjoined.
Board of Directors
Our board of directors is currently composed of seven members. All members of our board of
directors serve in this capacity until their terms expire or until their successors are duly
elected and qualified. Our bylaws provide that the authorized number of directors will be not less
than one.
48
Board Committees; Director Independence
Effective May 1, 2010, our board of directors established an audit committee, a nominating
committee and a compensation committee.
Audit Committee
Currently, three directors comprise the Audit Committee: Michael Rudolph, Ray Hsu and Tim
Hudson. Mr. Rudolph serves as Chairman of the Audit Committee. The members of the Audit Committee
are currently independent directors as that term is defined under the listing standards of both
the American Stock Exchange and the NASD Marketplace Rules. Mr. Rudolph also qualifies as an
audit committee financial expert as defined by the rules of the SEC. Mr. Rudolph has the
requisite attributes of an audit committee financial expert as defined by regulations promulgated
by the SEC and that such attributes were acquired through relevant education and experience.
Our Audit Committee is responsible, in accordance with the Audit Committee charter,
recommending our independent auditors, and overseeing our audit activities and certain financial
matters to protect against improper and unsound practices and to furnish adequate protection to all
assets and records.
Our Audit Committee pre-approves all audit and non-audit services provided by our independent
auditors. These services may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as
to particular service or category of services and is generally subject to a specific budget. The
Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is
necessary. The independent auditors and management are required to periodically report to the full
Audit Committee regarding the extent of services provided by the independent auditor in accordance
with this pre-approval, and the fees for the services performed to date.
Compensation Committee
The Compensation Committee currently consists of Mr. Hudson, Mr. Rudolph and Mr. Zhang. Mr.
Hudson serves as Chairman of the Compensation Committee. The members of the Compensation Committee
are currently independent directors under the listing standards of both the American Stock
Exchange and the NASD Marketplace Rules.
In accordance with the Compensation Committees charter, the Compensation Committee is
responsible for overseeing and, and as appropriate, making recommendations to the board regarding
the annual salaries and other compensation of the Companys executive officers and general
employees and other polices, providing assistance and recommendations with respect to the
compensation policies and practices of the Company.
Nominating Committee
The Nominating Committee currently consists of Mr. Hsu, Mr. Rudolph and Mr. Zhang. Mr. Hsu
serves as the Chairman of the Nominating Committee. The members of the Nominating Committee are
currently independent directors under the listing standards of both the American Stock Exchange
and the NASD Marketplace Rules.
In accordance with the Nominating Committees charter, the Nominating Committee is responsible
for proposing to the board a slate of nominees for election by the stockholders at the Annual
Meeting of Stockholders, to periodically review and develop criteria for selection of new directors
and nominees for vacancies on the board, to review the desired experience and qualities to assure
appropriate board composition, and to recommend to the board qualified candidates for the board.
Code of Ethics
The Company has formally adopted a written financial code of ethics to be applied to the
Companys Chief Executive Officer, Chief Financial Officer and finance department personnel. The
Chief Executive Officer, Chief Financial Officer and finance department personnel have a special
role both to adhere to the principles of integrity
49
and also to ensure that a culture exists throughout Artistry as a whole that ensures the fair
and timely reporting of our financial results and conditions.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors and the board of directors
or compensation committee of any other company, nor has any interlocking relationship existed in
the past.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Companys
officers and directors, and persons who own more than ten percent of a registered class of the
Companys equity securities, to file reports of ownership of Form 3 and changes in ownership on
Form 4 or Form 5 with the Securities and Exchange Commission. Such officers, directors and 10%
stockholders are also required by SEC rules to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms received by it, the
Company believes that, as of the date of filing of this Form 10-K, all
Section 16(a) filing requirements applicable to its officers, directors and 10% stockholders were
satisfied.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The Compensation Committee of our board of directors and our Chief Executive Officer, and
Chief Financial Officer are collectively responsible for implementing and administering all aspects
of our benefit and compensation plans and programs, as well as developing specific policies
regarding compensation of our executive officers. The Board of Directors has determined that all of
the members of our Compensation Committee, Mr. Hudson, Mr. Rudolph and Mr. Zhang are currently
independent directors under the listing standards of both the American Stock Exchange and the
NASD Marketplace Rules.
Compensation Objectives
Our primary goal with respect to executive compensation has been to set compensation at levels
that attract and retain the most talented and dedicated executives possible. Individual executive
compensation is set at levels believed to be comparable with executives in other companies of
similar size and stage of development operating in China. The Committee has implemented and
maintained compensation policies that attempt to accomplish our strategic goals.
Elements of Compensation
Base Salary. All full time executives are paid a base salary. In all cases, the Committee
establishes a minimum base salary for our executive officers. Base salaries for our executives are
established based on the scope of their responsibilities, taking into account competitive market
compensation paid by other companies in our industry for similar positions, professional
qualifications, academic background, and the other elements of the executives compensation,
including stock-based compensation. Our intent is to set executives base salaries near the median
of the range of salaries for executives in similar positions with similar responsibilities at
comparable companies, in line with our compensation philosophy. Base salaries are reviewed
annually, and may be increased to align salaries with market levels after taking into account the
subjective evaluation described previously.
Chinese Government Imposed Compensation. As a result of mandatory government employment
standards, our executives are also entitled to certain annual statutory benefits, including
fully subsidized, Company-paid health insurance, seven days of paid vacation and unlimited paid
sick leave.
50
Determination of Compensation
Our Chief Executive Officer and Chief Financial Officer meet during the last several weeks of
our fiscal year to evaluate each non-executive employees performance and determine his or her
compensation for the following year. In the case of our executive officers, the Compensation
Committee similarly evaluates the executives performance and the objectives set forth above at or
about the end of our fiscal year to determine executive compensation.
Summary Compensation Tables
The following table sets forth information concerning the compensation for the fiscal
years ended March 31, 2010 and 2009 of the principal executive officer, principal financial
officer, in addition to our three most highly compensated officers whose annual compensation
exceeded $100,000, and up to two additional individuals for whom disclosure would have been
required but for the fact that the individual was not serving as an executive officer of the
registrant at the end of the last fiscal year.
Non-Equity | ||||||||||||||||||||||||||||||||||||
Incentive | Nonquali-fied | |||||||||||||||||||||||||||||||||||
Plan | Deferred | |||||||||||||||||||||||||||||||||||
Stock | Option | Compen- | Compen-sation | All Other | ||||||||||||||||||||||||||||||||
Name and | Salary | Bonus | Awards | Awards | sation | Earnings | Compen-sation | Total | ||||||||||||||||||||||||||||
principal position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
Yiyou Ran, CEO (1) |
2010 | 220,558 | 0 | 0 | 0 | 0 | 0 | 0 | 220,558 | |||||||||||||||||||||||||||
2009 | 137,507 | 0 | 0 | 0 | 0 | 0 | 0 | 137,507 | ||||||||||||||||||||||||||||
Michael Wang, CFO
(2) |
2010 | 9,000 | 0 | 0 | 0 | 0 | 0 | 0 | 9,000 | |||||||||||||||||||||||||||
2009 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||
Jianquan Chen,
General Manager (3) |
2010 | 148,200 | 0 | 0 | 0 | 0 | 0 | 0 | 148,200 | |||||||||||||||||||||||||||
2009 | 106,950 | 0 | 0 | 0 | 0 | 0 | 0 | 106,950 |
(1) | Mr. Ran received his compensation for the fiscal year ended March 31, 2010 from Foguang, which was paid in RMB. For reporting purposes, the amount has been converted to U.S. dollars at the conversion rate of RMB 6.82 to one U.S. dollar. | |
(2) | Mr. Wang received his compensation for the fiscal year ended March 31, 2010 from the Company, which was paid in U.S. dollar, paid by Foguang to the Company. Mr. Wang was appointed as CFO on February 10, 2010. | |
(3) | Mr. Chen received his compensation for the fiscal year ended March 31, 2010 from Foguang, which was paid in RMB. For reporting purposes, the amount has been converted to U.S. dollars at the conversion rate of RMB 6.82 to one U.S. dollar. |
None of our executive officers received, nor do we have any arrangements to pay out, any
bonus, stock awards, option awards, non-equity incentive plan compensation, or non-qualified
deferred compensation.
Employment Agreements
We have no employment agreements with any of our executive officers as of March 31,
2010.
Director Compensation
For the year ended March 31, 2010, none of the members of our board of directors received
compensation for his or her service as a director. Each of our directors has executed a director
offer and acceptance letter with the Company. The term of the agreement is for one (1) year and
shall continue until his or her successor is duly elected
51
and qualified. The position shall be up for re-election each year at the annual stockholders
meeting and upon re-election, the terms and provisions of the agreement shall remain in full force
and effect. The annual compensation for each of the directors is 12,500 shares of the Companys
restricted common stock. Effective April 1, 2010, Tim Hudson, Michael Rudolph and Lihua Zhang,
have each have executed and delivered a director offer and acceptance letter with the Company.
Effective May 1, 2010, Ray Hsu has executed and delivered a director offer and acceptance letter
with the Company. Under the terms of the agreements, Mr. Hudson, Mr. Rudolph, Mr. Zhang and Mr.
Hsu shall be entitled to the annual compensation of 12,500 shares of the Companys restricted
common stock.
Potential Payments Upon Termination or Change-in-Control
SEC regulations state that we must disclose information regarding agreements, plans or
arrangements that provide for payments or benefits to our executive officers in connection with any
termination of employment or change in control of the company. We currently have no employment
agreements with any of our executive officers, nor any compensatory plans or arrangements resulting
from the resignation, retirement or any other termination of any of our executive officers, from a
change-in-control, or from a change in any executive officers responsibilities following a
change-in-control. As a result, we have omitted this table.
Pension Benefits
We do not sponsor any qualified or non-qualified defined benefit plans.
Nonqualified Deferred Compensation
We do not maintain any non-qualified defined contribution or deferred compensation plans.
Indemnification of Officers and Directors
Delaware Law
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a
corporations board of directors to grant, indemnity to directors and officers in terms
sufficiently broad to permit indemnification for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act. Pursuant to the provisions of Section 145, a
corporation may indemnify its directors, officers, employees, and agents as follows:
(a) A corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action by or in the right
of the corporation) by reason of the fact that the person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with such action, suit or
proceeding if the person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the persons conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which the person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the persons conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by reason of the fact that the person
is or was a director, officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses (including attorneys fees)
actually and reasonably incurred by the person in connection with the defense or settlement of such
action or suit if the person acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the
52
corporation and except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a corporation has been
successful on the merits or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys fees) actually and reasonably
incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case upon a
determination that indemnification of the present or former director, officer, employee or agent is
proper in the circumstances because the person has met the applicable standard of conduct set forth
in subsections (a) and (b) of this section. Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a majority vote of
the directors who are not parties to such action, suit or proceeding, even though less than a
quorum, or (2) by a committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys fees) incurred by an officer or director in defending any
civil, criminal, administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or proceeding upon receipt of
an undertaking by or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses (including attorneys fees) incurred by former directors
and officers or other employees and agents may be so paid upon such terms and conditions, if any,
as the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the
other subsections of this section shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in such persons
official capacity and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such persons status as
such, whether or not the corporation would have the power to indemnify such person against such
liability under this section.
(h) For purposes of this section, references to the corporation shall include, in addition
to the resulting corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and employees or agents,
so that any person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with respect to the resulting or
surviving corporation as such person would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to other enterprises shall include employee
benefit plans; references to fines shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to serving at the request of the corporation
shall include any service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or agent with respect
to an employee benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in
53
a manner such person reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to
the best interests of the corporation as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this
section shall, unless otherwise provided when authorized or ratified, continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine
all actions for advancement of expenses or indemnification brought under this section or under any
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporations obligation to advance expenses (including
attorneys fees).
Charter Provisions and Other Arrangements of the Registrant
The Company currently has not adopted any indemnification provisions in its certificate of
incorporation or bylaws for its officers and directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange
Commission. Unless otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth opposite the
shareholders name. Unless otherwise indicated, the address of each beneficial owner listed below
is 239 Jianxin Road, Jiangbei District, Chongqing, PRC 400000. The percentage of class
beneficially owned set forth below is based on 12,672,262 shares of common stock outstanding on
July 9, 2010.
Number of | ||||||||
Shares | Percentage of | |||||||
beneficially | class beneficially | |||||||
Named executive officers and directors: | owned | owned | ||||||
Yiyou Ran (1) |
7,150,000 | (1) | 56.4 | % | ||||
Michael Wang (2) |
30,000 | * | % | |||||
Jianquan Chen (1) |
7,150,000 | (1) | 56.4 | % | ||||
Tim Hudson (3) |
102,500 | * | % | |||||
Michael Rudolph (4) |
12,500 | * | % | |||||
Lihua Zhang (5) |
12,500 | * | % | |||||
Ray Hsu (6) |
12,500 | * | % | |||||
All directors and executive officers as a group (7 persons) |
7,320,000 | (1) | 57.8 | % | ||||
5% Shareholders: |
||||||||
Holy Golden Industry Limited (1) |
7,150,000 | (1) | 56.4 | % |
* | Less than 1%. | |
(1) | The address of Holy Golden Industry Limited (Holy Golden) is Scotia Centre, 4th Floor, P.O. Box 2804, George Town, Grand Cayman KY 1-1112, Cayman Islands. The shareholders of Holy Goldenare Yiyou Ran (24.00%), Jianquan Chen (27.9%), Chaoyang Fu (16.74%), Yang Chen (24.36%) and Mingsheng Liu (7.00%), with Yiyou Ran, Jianquan Chen and Yang Chen also as its directors. As such they are deemed to have or share investment control over Holy Goldens portfolio. The number of shares of common stock reported herein as beneficially owned by Mr. Ran and Mr. Chen are held by Holy Golden, which they in turn own indirectly through their respective ownership of Holy Golden. | |
(2) | Mr. Wangs address is: 2500 Citywest Boulevard, Suite 304, Houston, Texas 77402. |
54
(3) | Dr. Hudsons address is: 3007 North Ben Wilson, Victoria, Texas 77901. | |
(4) | Mr. Rudolphs address is: 1435 Alvarado Ave., Burlingame, California 94010. | |
(5) | Mr. Zhangs address is: No. 4, Row 1, Wenquan Garden, Wuyi, Zhejiang Province, P.R.C 321200. | |
(6) | Mr. Hsus address is: 10304 Tularosa Pass, Austin, Texas 78726 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
Share Exchange Agreement
On February 12, 2010 (Closing or the Closing Date), we executed the
Exchange Agreement with Gold Industry and the Cayman Shareholder. Gold Industry owns 100% of Gold
Holy, which in turn owns 100% of Ran Ji, a WFOE under the laws of the PRC. On the Closing Date of
the Exchange Agreement, we issued 8,800,000 shares of our common stock to the Cayman Shareholder in
exchange for 100% of the issued and outstanding common stock of Gold Industry. Immediately after
the Closing, we had a total of 11,000,000 shares of Common Stock outstanding, with the Cayman
Shareholder owning approximately 80% of our total issued and outstanding common shares.
Our Officers and Directors Relationship with Us, Our Subsidiaries and VIE
As described in Business Our History and Corporate Structure above, we control Foguang
through contractual arrangements between Foguang and Ran Ji. These contracts include a consulting
services agreement, operating agreement, equity pledge agreement, option agreement, and proxy
agreement. As described below, some of our officers and directors are also management members of
Gold Industry, Gold Holy, Ran Ji and Foguang:
Mr. Yiyou Ran, our Chairman and Chief Executive Officer, is also a director of Gold Industry,
Gold Holy, Ran Ji and Foguang. He is also a shareholder and director of Holy Golden Industry
Limited, which owned approximately 56.4% of our common stock issued and outstanding as of July 9,
2010.
Mr. Jianquan Chen, a member of our board of directors, is also a director of Gold Industry,
Gold Holy, Ran Ji and Foguang. He is also a shareholder and director of Holy Golden Industry
Limited, which owned approximately 56.4% of our common stock issued and outstanding as of July 9,
2010.
Other Related Party Transactions
The Company had $1,408,320 and $1,406,400 in prepayments to a related party supplier as of
March 31, 2010 and 2009, respectively.
Director Independence
See Item 10 Directors, Executive Officers and Corporation Governance for a
discussion of board member independence.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth fees billed to us by our independent registered accounting
firm, PMB Helin Donovan, LLP during the fiscal years ended March 31, 2010 and 2009 for: (i)
services rendered for the audit of our annual financial statements and the review of our quarterly
financial statements, (ii) services by our auditor that are reasonably related to the performance
of the audit or review of our financial statements and that are not reported as
55
Audit Fees, and (iii) services rendered in connection with tax compliance, tax advice and tax
planning. We did not engage our auditors for any other services during the fiscal years ended
March 31, 2010 and 2009.
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
(i) Audit Fees |
$ | 95,000 | $ | 75,000 | ||||
(ii) Audit Related Fees |
25,000 | | ||||||
(iii) Tax Fees |
| | ||||||
(iv) All Other Fees |
| | ||||||
Total fees |
$ | 120,000 | $ | 75,000 | ||||
Pre-Approval Policy
Effective May 1, 2010, our Audit Committee pre-approves all audit and non-audit services
provided by our independent auditors. These services may include audit services, audit-related
services, tax services and other services. Pre-approval is generally provided for up to one year
and any pre-approval is detailed as to particular service or category of services and is generally
subject to a specific budget. The Audit Committee has delegated pre-approval authority to its
Chairman when expedition of services is necessary. The independent auditors and management are
required to periodically report to the full Audit Committee regarding the extent of services
provided by the independent auditor in accordance with this pre-approval, and the fees for the
services performed to date.
The Audit Committee will not grant approval for:
| any services prohibited by applicable law or by any rule or regulation of the SEC or other regulatory body applicable to the Company; | ||
| provision by the independent auditor to the Company of strategic consulting services of the type typically provided by management consulting firms; or | ||
| the retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the tax treatment of which may not be clear under the Internal Revenue Code and related regulations and which it is reasonable to conclude will be subject to audit procedures during an audit of the Companys financial statements. |
Tax services proposed to be provided by the auditor to any director, officer or employee of the
Company who is in an accounting role or financial reporting oversight role must be approved by the
Audit Committee on a case-by-case basis where such services are to be paid for by the Company, and
the Audit Committee will be informed of any services to be provided to such individuals that are
not to be paid for by the Company.
In determining whether to grant pre-approval of any non-audit services in the all other category,
the Audit Committee or our Chairman will consider all relevant facts and circumstances, including
the following four basic guidelines:
| whether the service creates a mutual or conflicting interest between the auditor and the Company; | ||
| whether the service places the auditor in the position of auditing his or her own work; | ||
| whether the service results in the auditor acting as management or an employee of the Company; and | ||
| whether the service places the auditor in a position of being an advocate for the Company. |
56
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules
Our consolidated financial statements for the fiscal years ending March 31, 2010 and 2009
begin on page F-1 of this Form 10-K. We are not required to file any financial statement
schedules.
Exhibits
The Exhibit Index lists those documents that we are required to file with this Form 10-K.
57
EXHIBIT INDEX
Exhibit | Description | |
2.1
|
Share Exchange Agreement by and among Artistry and Your Out Doors LLC. (YOD) and the members of YOD dated March 12, 2009 (2) | |
2.2
|
Share Exchange Agreement by and among Artistry Publications, Inc. , Gold Industry Limited and the shareholders of Gold Industry dated February 12, 2010 (4) | |
3.1
|
Articles of Incorporation (1) | |
3.2
|
By-Laws (1) | |
3.3
|
Amended and Restated By-Laws* | |
4.1
|
Form of Warrant Issued to Purchasers in the February 2010 Financing (6) | |
5.1
|
Opinion of Richardson & Patel LLP (9) | |
5.2
|
Opinion of Tian Yuan Law Firm* | |
10.1
|
Consulting Service Agreement (4) | |
10.2
|
Operating Agreement (4) | |
10.3
|
Equity Pledge Agreement (4) | |
10.4
|
Option Agreement (4) | |
10.5
|
Voting Rights Proxy Agreement (4) | |
10.6
|
Rural Land Lease Agreement (4) | |
10.7
|
Jiangbei Office Lease Agreement (4) | |
10.8
|
Nanan Office Lease Agreement (4) | |
10.9
|
Bowling House Lease Agreement (4) | |
10.10
|
Form of Securities Purchase Agreement dated February 23, 2010 (6) | |
10.11
|
Form of Registration Rights Agreement, dated February 23, 2010 (6) | |
10.12
|
Form of Board Offer and Acceptance Letter (8) | |
10.13
|
Bluestone Pavement Slab and Tombstone Memorial Contract dated January 28, 2010 * | |
10.14
|
Construction Agreement dated November 4, 2009 * | |
14.1
|
Code of Ethics (3) | |
21.1
|
List of subsidiaries (9) | |
23.1
|
Consent of Richardson & Patel LLP (contained in Exhibit 5.1) | |
23.2
|
Consent of PMB Helin Donovan, LLP (9) |
58
Exhibit | Description | |
31.1
|
Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
31.2
|
Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
32.1
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
99.1
|
Presentation Materials (5) | |
99.2
|
Press Release dated March 4,2 010 (7) | |
99.3
|
Schedule to Form of Warrant * | |
99.4
|
Schedule to Form of Securities Purchase Agreement * | |
99.5
|
Schedule to Form of Registration Rights Agreement * | |
99.6
|
Schedule to Form of Board of Directors Offer and Acceptance Letter * |
* | Filed herewith. | |
(1) | Filed as an Exhibit to Form SB-2 filed with the SEC on October 26, 2007. | |
(2) | Filed as an Exhibit to Form 8-K filed with the SEC on March 20, 2009. | |
(3) | Filed as an Exhibit to Form 10-K filed with the SEC on December 1, 2008. | |
(4) | Filed as an Exhibit to Form 8-K filed with the SEC on February 18, 2010. | |
(5) | Filed as an Exhibit to Form 8-K filed with the SEC on February 23, 2010. | |
(6) | Filed as an Exhibit to Form 8-K filed with the SEC on February 24, 2010. | |
(7) | Filed as an Exhibit to Form 8-K filed with the SEC on March 4, 2010. | |
(8) | Filed as an Exhibit to Form 8-K filed with the SEC on April 6, 2010. | |
(9) | Filed as an Exhibit to Form S-1 filed with the SEC on April 9, 2010. |
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Province of Chongqing, Peoples Republic of China, on July 14,
2010.
CHINA REDSTONE GROUP, INC. (Registrant) |
||||
Dated: July 14, 2010 | By: | /s/ Yiyou Ran | ||
By: Yiyou Ran | ||||
Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | ||||
Dated: July 14, 2010 | By: | /s/ Michael Wang | ||
By: Michael Wang | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company in the capacities and on the dates
indicated.
Signature | Capacity | Date | ||
/s/ Yiyou Ran
|
Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer) | July 14, 2010 | ||
/s/ Michael Wang
|
Chief Financial Officer, Secretary, Treasurer and Director (Principal Financial and Accounting Officer) | July 14, 2010 | ||
/s/ Jianquan Chen
|
Director | July 14, 2010 | ||
/s/ Tim Hudson
|
Director | July 14, 2010 | ||
/s/ Michael Rudolph
|
Director | July 14, 2010 | ||
/s/ Lihua Zhang
|
Director | July 14, 2010 | ||
/s/ Ray Hsu
|
Director | July 14, 2010 |
60
INDEX TO FINANCIAL STATEMENTS
Page | ||||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
6 |
REPORT OF INDEPENDENT REGISTER PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of China Redstone Group, Inc. (the
Company) as of March 31, 2010 and 2009, and the related consolidated statement of operations and
comprehensive income, stockholders equity, and cash flows for the years ended March 31, 2010 and
2009. The Companys management is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of China Redstone Group, Inc. as of March 31, 2010 and
2009 and the results of its operations and comprehensive income and its cash flows for the years
ended March 31, 2010 and 2009 in conformity with accounting principles generally accepted in the
United States of America.
/s/ PMB Helin Donovan, LLP
PMB Helin Donovan, LLP
Spokane, WA
July 14, 2010
Spokane, WA
July 14, 2010
1
March 31, 2010 | March 31, 2009 | |||||||
A S S E T S |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 9,367,276 | $ | 1,392,961 | ||||
Accounts receivable |
| 61,384 | ||||||
Inventory |
11,194,905 | 6,178,182 | ||||||
Other current assets |
2,430 | 80,582 | ||||||
TOTAL CURRENT ASSETS |
20,564,611 | 7,713,109 | ||||||
PROPERTY AND EQUIPMENT, NET |
7,241,174 | 7,629,342 | ||||||
OTHER NON-CURRENT ASSETS |
||||||||
Costs incurred for real estate projects in progress |
10,122,300 | 4,101,970 | ||||||
Related party receivable |
1,408,320 | 1,406,400 | ||||||
Prepaid lease expense |
787,412 | 828,124 | ||||||
Other assets |
| 16,592 | ||||||
Intangible assets, net |
11,787,903 | 12,319,893 | ||||||
TOTAL OTHER NON-CURRENT ASSETS |
24,105,935 | 18,672,979 | ||||||
TOTAL ASSETS |
$ | 51,911,720 | 34,015,430 | |||||
L I A B I L I T I E S & S T O C K H O L D E R S E Q U I T Y |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable |
$ | 113,197 | $ | 308,637 | ||||
Welfare payable |
97,064 | 96,932 | ||||||
Taxes payable |
1,441,490 | 845,525 | ||||||
Other accrued payables |
76,507 | 54,523 | ||||||
Current portion of deferred revenue |
425,000 | 425,000 | ||||||
Accrued inventory purchases |
443,036 | | ||||||
Short-term notes payable |
2,474,829 | 2,471,455 | ||||||
Warrent
derivative liability |
1,366,326 | | ||||||
TOTAL CURRENT LIABILITIES |
6,437,449 | 4,202,072 | ||||||
LONG-TERM LIABILITIES |
||||||||
Deferred revenue |
9,625,403 | 10,038,803 | ||||||
TOTAL LONG-TERM LIABILITIES |
9,625,403 | 10,038,803 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 17) |
| | ||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, 20,000,000 shares authorized,
$0.001 par value; no shares issued and outstanding |
| | ||||||
Common stock, 100,000,000 shares authorized, |
||||||||
$0.001 par value; 12,402,262 and 8,800,000 shares
|
||||||||
issued and outstanding, respectively |
12,402 | 8,800 | ||||||
Additional paid-in capital |
15,488,593 | 12,091,200 | ||||||
Retained earnings |
18,161,863 | 5,834,633 | ||||||
Accumulated other comprehensive income |
2,186,010 | 1,839,922 | ||||||
TOTAL STOCKHOLDERS EQUITY |
35,848,868 | 19,774,555 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 51,911,720 | $ | 34,015,430 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
For the year ended | For the year ended | |||||||
March 31, 2010 | March 31, 2009 | |||||||
REVENUE |
||||||||
Cemetery |
$ | 36,498,969 | $ | 17,647,785 | ||||
Park construction services |
| 665,935 | ||||||
Total revenue |
36,498,969 | 18,313,720 | ||||||
COST OF GOODS SOLD |
||||||||
Cemetery |
17,565,765 | 9,445,153 | ||||||
Park construction services |
| 493,700 | ||||||
Total cost of goods sold |
17,565,765 | 9,938,853 | ||||||
GROSS PROFIT |
18,933,204 | 8,374,867 | ||||||
OPERATING E X P E N S E S |
||||||||
Selling expenses |
196,945 | 426,415 | ||||||
General & administrative expenses |
1,595,639 | 1,045,060 | ||||||
TOTAL OPERATING EXPENSES |
1,792,584 | 1,471,475 | ||||||
INCOME FROM OPERATIONS |
17,140,620 | 6,903,392 | ||||||
OTHER INCOME (EXPENSES) |
||||||||
Other income |
427,510 | 255,893 | ||||||
Loss on
change in fair value of warrants classified as derivatives |
(571,950 | ) | | |||||
Interest expenses |
(235,240 | ) | (235,208 | ) | ||||
Interest income |
24,546 | 6,361 | ||||||
Rental income, net |
261,750 | 260,286 | ||||||
Non-operating expenses |
(12,642 | ) | (3,772 | ) | ||||
TOTAL OTHER INCOME |
(106,026 | ) | 283,560 | |||||
INCOME BEFORE INCOME TAXES |
17,034,594 | 7,186,952 | ||||||
INCOME TAXES |
(4,707,364 | ) | (1,689,693 | ) | ||||
NET INCOME |
$ | 12,327,230 | $ | 5,497,259 | ||||
OTHER COMPREHENSIVE INCOME |
||||||||
Foreign currency translation adjustment |
346,088 | 511,749 | ||||||
COMPREHENSIVE INCOME |
$ | 12,673,318 | $ | 6,009,008 | ||||
EARNINGS PER SHARE: |
||||||||
EARNINGS PER SHARE BASIC |
$ | 1.33 | $ | 0.62 | ||||
EARNINGS PER SHARE DILUTED |
$ | 1.33 | $ | 0.62 | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC |
9,283,591 | 8,800,000 | ||||||
WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED |
9,283,591 | 8,800,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Common Stock | ||||||||||||||||||||||||
Number | Accumulated Other | Stockholders | ||||||||||||||||||||||
of Shares | Amount | APIC | Retained Earnings | Comprehensive income (loss) | Equity | |||||||||||||||||||
Balance, March 31, 2008 |
8,800,000 | $ | 8,800 | $ | 12,091,200 | $ | 337,374 | $ | 1,328,174 | $ | 13,765,548 | |||||||||||||
Net income for the year ended March 31, 2009 |
| | | 5,497,259 | | 5,497,259 | ||||||||||||||||||
Foreign currency translation adjustment |
| | | | 511,748 | 511,748 | ||||||||||||||||||
Balance, March 31, 2009 |
8,800,000 | $ | 8,800 | $ | 12,091,200 | $ | 5,834,633 | $ | 1,839,922 | $ | 19,774,555 | |||||||||||||
Sale of common shares and warrants (units) for cash, net of costs of $404,000 |
1,402,262 | 1,402 | 3,399,593 | | | 3,400,995 | ||||||||||||||||||
Effect of reverse merger |
2,200,000 | 2,200 | (2,200 | ) | | | | |||||||||||||||||
Net income for the year ended March 31, 2010 |
| | | 12,327,230 | | 12,327,230 | ||||||||||||||||||
Foreign currency translation adjustment |
| | | | 346,088 | 346,088 | ||||||||||||||||||
Balance, March 31, 2010 |
12,402,262 | $ | 12,402 | $ | 15,488,593 | $ | 18,161,863 | $ | 2,186,010 | $ | 35,848,868 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
For the year ended | For the year ended | |||||||
March 31, 2010 | March 31, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net Income |
$ | 12,327,230 | $ | 5,497,259 | ||||
Adjustments to reconcile net loss to
net cash used by operating activities: |
||||||||
Depreciation and amortization |
440,245 | 422,774 | ||||||
Loss on
change in fair value of warrants classified as derivatives |
571,950 | | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
61,467 | 122,828 | ||||||
Other receivable |
78,052 | | ||||||
Inventory |
(4,459,479 | ) | 2,915,901 | |||||
Prepaid lease expense |
39,412 | (828,124 | ) | |||||
Advances to suppliers |
| 263,703 | ||||||
Related party receivable |
2,641 | 373,572 | ||||||
Other current assets |
| 50,898 | ||||||
Accounts payable |
(195,862 | ) | (1,549,472 | ) | ||||
Welfare payable |
(44 | ) | 2,448 | |||||
Taxes payable |
594,812 | 263,206 | ||||||
Other accrued payables |
21,910 | (53,422 | ) | |||||
Related party payables |
| (735,289 | ) | |||||
Accrued inventory purchases |
443,036 | | ||||||
Deferred revenue |
(427,685 | ) | (257,086 | ) | ||||
Net cash provided by operating activities |
9,497,684 | 6,489,196 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
| (1,479,650 | ) | |||||
Costs incurred for real estate projects in progress |
(5,998,116 | ) | (4,101,970 | ) | ||||
Prepayments to related party suppliers |
| (1,406,400 | ) | |||||
Net cash used in investing activities |
(5,998,116 | ) | (6,988,020 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITY: |
||||||||
Sale of common stock units including warrants, net of costs of $404,000 |
4,195,371 | | ||||||
Net cash provided by financing activities |
4,195,371 | | ||||||
Net (decrease) increase in cash and cash equivalents |
7,694,940 | (498,824 | ) | |||||
Effects of foreign exchange translation |
279,375 | 172,165 | ||||||
Cash and cash equivalents, beginning of period |
1,392,961 | 1,719,620 | ||||||
Cash and cash equivalents, end of period |
$ | 9,367,276 | $ | 1,392,961 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
March 31, 2010 and 2009
NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS
China Redstone Group, Inc. (the Company) was incorporated in Delaware on July 10, 2007,
originally under the name Artistry Publications, Inc. China Redstone Group Inc., and its
subsidiaries and its controlled entity, Chongqing Foguang Tourism Development (Group) Co., Ltd, are
principally engaged in the development of cemetery plots and cemetery in the Peoples Republic of
China. All operations are carried out under Chongqing Foguang Tourism Development (Group) Co.,
Ltd., which sells the burial spaces. As a part of business integration and cross-marketing,
Chongquing Fouguang Tourism Development Co.., Ltd., is also engaged in the development of a park in
the PRC.
In the PRC, the Company has developed 113,280 square
meters and will develop 565,000 square meters for cemetery plots, and will develop 1,194,804 square meters for a park in Chongqing.
History
Artistry Publications, Inc. was originally formed for the purpose of entering the photography
industry and establishing a large scale photography publishing business focused on American
History. The Companys plan was to develop a successful photo journal publishing company by
depicting history and producing excellent affordable artwork in practical items to entertain and
educate.
On February 10, 2010, the Share Exchange closed and Gold Industry became the Companys wholly-owned
subsidiary. On April 6, 2010, in connection with the Share Exchange, the Company changed its name
to China Redstone Group, Inc. to better reflect its business operations.
All of the Companys business operations are carried out by Chongqing Foguang Tourism Development
(Group) Co., Ltd. (Foguang), which the Company controls through contractual arrangements
between Foguang and Chongqing Ran Ji Industrial Co., Ltd. (Ran Ji), a company
wholly-owned by Gold Holy Industry Limited (Gold Holy), a company wholly-owned by Gold
Industry. Further, Mr. Yiyou Ran, the Companys chairman and chief executive officer, and Mr.
Jianquan Chen, a Company director, are directors of Gold Industry, Gold Holy, Ran Ji and Foguang.
Mr. Ran and Mr. Chen are also shareholders and directors of Holy Golden Industry Limited, a British
Virgins Island company which currently owns approximately 56% of the Companys issued and
outstanding common stock. Through these contractual arrangements, the Company has the ability to
substantially influence Foguangs daily operations and financial affairs, appoint its senior
executives and approve all matters requiring shareholder approval. As a result of these contractual
arrangements, which enable the Company to control Foguang, the Company is considered the primary
beneficiary of Foguang. Accordingly, the Company consolidates Foguangs results, assets and
liabilities in its financial statements.
Specifically, on December 15, 2009, Ran Ji entered into following exclusive agreements with Foguang
and its owners (collectively the Contractual Arrangements):
(1) Consulting Services Agreement, through which Ran Ji has the right to advise, consult,
manage and operate Foguang, and collect and own all of its net profits;
6
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
(2) Operating Agreement, through which Ran Ji has the right to recommend director
candidates and appoint the senior executives of Foguang, approve any transactions that may
materially affect the assets, liabilities, rights or operations of Foguang, and guarantee the
contractual performance by Foguang of any agreements with third parties, in exchange for a pledge
by Foguang of its accounts receivable and assets;
(3) Proxy Agreement, under which the owners of Foguang have vested their collective voting
control over Foguang to Ran Ji and will only transfer their respective equity interests in Foguang
to Ran Ji or its designee(s);
(4) Option Agreement, under which the owners of Foguang have granted Ran Ji the irrevocable
right and option to acquire all of their equity interests in Foguang; and
(5) Equity Pledge Agreement, under which the owners of Foguang have pledged all of their
rights, titles and interests in Foguang to Ran Ji to guarantee the performance of their obligations
under the Consulting Services Agreement.
Other than the interests in the contractual arrangements, neither the Company, Gold Industry, Gold
Holy nor Ranji owns any equity interests in Foguang. As a result of these Contractual Arrangements,
which obligates Ran Ji to absorb a majority of the risk of loss from Foguangs activities and
enable Ran Ji to receive a majority of its expected residual returns, the Company believes that
Foguang is a Variable Interest Entity (VIE), because the owners of Foguang do not have
the characteristics of a controlling financial interest and the Company should be considered the
primary beneficiary of Foguang. Accordingly, the Company consolidates Foguangs results, assets and
liabilities in the accompanying consolidated financial statements.
However, Chinese laws and regulations concerning the validity of the contractual arrangement is
uncertain, as many of these laws and regulations are relatively new and may be subject to change,
and their official interpretation and enforcement by the Chinese government involves substantial
uncertainty. Additionally, the contractual arrangement may not be as effective in providing control
over Foguang as direct ownership, which the Company is restricted from under current Chinese law.
Due to such uncertainty, the Company may take such additional steps in the future as may be
permitted by the then applicable laws and regulations in China to further strengthen our control
over or toward actual ownership of Foguang or its assets or business operations, which could
include direct ownership of selected assets without jeopardizing any favorable government policies
toward domestic owned enterprises. Because the Company relies on Foguang for its revenue, any
termination of or disruption to the contractual arrangement would detrimentally affect the
Companys business and financial condition.
Gold Industry was incorporated on September 11, 2009, under the laws of the Cayman Islands. Gold
Holy was incorporated on September 29, 2009, under the laws of Hong Kong Special Administrative
Region. Ran Ji was established under the laws of the Peoples Republic of China (China or
the PRC) on December 15, 2009, as a wholly foreign owned enterprise (WFOE),
with registered capital of $25,000,000 USD, of which the first $3,000,000 USD has been contributed
and the balance due within two years. Foguang is a PRC limited liability company established on
October 10, 2002 with registered capital of 100,000,000 RMB. Foguang is engaged in selling death
care products, and holds the licenses and approvals necessary to operate its business in China.
All of the Companys business operations are carried out by Foguang in the PRC. The Companys
fiscal year-end is March 31st.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the understanding of the
Companys consolidated financial statements. The consolidated financial statements and notes are
presentations of the Companys management, which is responsible for their integrity and
objectivity. These accounting policies
7
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
conform to the accounting principles generally accepted in the United States of America and have
been consistently applied in the preparation of the consolidated financial statements.
Reverse Acquisition
On February 10, 2010, Artistry Publications, Inc., entered into a share exchange agreement (
Share Exchange Agreement ) under which it issued 8,800,000 shares of its Common Stock, par
value $0.001, to the shareholders of Gold Industry Ltd, a Cayman Island company., in exchange for
all the issued and outstanding shares of Gold Industry Limited (the Share Exchange ). As
a result of the Share Exchange, Gold Industry Ltd. has become a wholly-owned legal subsidiary of
Artistry Publications, Inc., and Gold Industry Ltd. shareholders acquired a majority of Artistry
Publications, Inc.s issued and outstanding stock. Concurrent with the Share Exchange, Mr. Yiyou
Ran (the managing director of Gold Industry Ltd., and all of its operating subsidiaries, Mr.
Ran) has been appointed the Chief Executive Officer of the Company.
As a result, the Share Exchange has been accounted for as a reverse acquisition using the purchase
method of accounting, whereby Gold Industry, Ltd., is deemed to be the accounting acquirer (legal
acquiree) and Artistry Publications, Inc., to be the accounting acquiree (legal acquirer). The
financial statements before the date of Share Exchange are those of Gold Industry, Ltd., with the
results of Artistry Publications, Inc. being consolidated from the date of Share Exchange. The
equity section and earnings per share have been retroactively restated to reflect the reverse
acquisition and no goodwill has been recorded.
The reporting entities
The Companys consolidated financial statements reflect the activities of the Company and the
following subsidiaries and VIE:
Percentage of | ||||||
Subsidiaries/VIE | Incorporated in | Ownership | ||||
Gold Industry Limited |
Cayman Islands | 100.00 | % | |||
Gold Holy Industry Limited |
Hong Kong | 100.00 | % | |||
Chongqing Ran Ji Industry Co, Limited |
PRC | 100.00 | % | |||
Foguang |
PRC | VIE by Contractual Arrangements |
Basis of presentation
The accompanying consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America (GAAP). The Companys
functional currency is the Chinese Renminbi (RMB); however, the accompanying consolidated
financial statements have been re-measured, translated and presented in United States Dollars ($).
Consolidation of Variable Interest Entities
VIEs are generally entities that lack sufficient equity to finance their activities without
additional financial support from other parties or whose equity holders lack adequate decision
making ability. Each VIE with which the Company is involved must be evaluated to determine the
primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to
consolidate the VIE for financial reporting purposes.
The Company has concluded that Foguang is a VIE and that the Companys indirect wholly owned
subsidiary, Ran Ji, absorbs a majority of the risk of loss from the activities of Foguang, and
enable the Company to receive a majority of Foguangs expected residual returns. Accordingly, the
Company accounts for Foguang as a VIE.
Because the Company and Foguang are under common control, the initial measurement of the assets and
liabilities of Foguang for the purpose of consolidation by the Company is at book value. Neither
the Company nor any of its subsidiaries has had any other business activities except for entering
into the Contractual Arrangements with Foguang and its shareholders. For the purpose of presenting
the financial statements on a consistent basis, the consolidated financial statements are prepared
as if the Company had been in existence since April 1, 2007 and throughout each of the two year
periods ended March 31, 2010.
The consolidated financial statements include the financial statements for the Company, its
subsidiaries and the VIE. All significant inter-company transactions and balances between the
Company, its subsidiaries and the VIE are eliminated upon consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates reflected in the Companys consolidated financial
statements include the fair value of financial instruments, the useful lives of and impairment for
property and equipment, estimates of intangible assets, and accruals for taxes due. Actual results
could differ from those estimates.
8
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Fair value of financial instruments
FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as 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 on the measurement date. This topic also establishes a fair value hierarchy
which requires classification based on observable and unobservable inputs when measuring fair
value. The fair value hierarchy distinguishes between assumptions based on market data (observable
inputs) and an entitys own assumptions (unobservable inputs). The hierarchy consists of three
levels:
o | Level one Quoted market prices in active markets for identical assets or liabilities; | ||
o | Level two Inputs other than level one inputs that are either directly or indirectly observable; and | ||
o | Level three Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use. |
Determining which category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates its hierarchy disclosures each quarter.
Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Fair value measurement using inputs | Carrying amount at March 31, | |||||||||||||||||||
Financial instruments | Level 1 | Level 2 | Level 3 | 2010 | 2009 | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Derivative instruments Warrants |
$ | | $ | 1,366,327 | $ | | $ | 1,366,327 | $ | | ||||||||||
Total |
$ | | $ | 1,366,327 | $ | | $ | 1,366,327 | $ | |
Derivative
Instruments Warrants
The
Company issued 701,126 Warrants in connection with the February 2010 Private Placement of
1,402,262 shares of common stock, which are further disclosed in Note 13. 70,113 Warrants were
issued to the placement agent. The strike price of these warrants is $4.10 per share. These
warrants were not issued with the intent of effectively hedging any future cash flow, fair value of
any asset, liability or any net investment in a foreign operation.
These Warrants were issued with a down-round provision whereby the exercise price would be adjusted
downward in the event that, during additional shares of the Companys common stock or securities
exercisable, convertible or exchangeable for the Companys common stock were issued at a price less
than the exercise price. Therefore, according to the guidance provided in FASB ASC 815-40-15-5
through 815-40-15-8, which was adopted by the Company on April 1, 2009, the Company accounted for
these warrants as derivative liabilities. All changes in the fair value of these warrants were
recognized in statement of income until they are exercised or expire or otherwise extinguished.
The Company estimates the fair value of the warrants using the Black-Scholes option pricing model
using the following assumptions:
Warrants | Underwriter Warrants | |||||||||||||||
March 31, | Feb. 19, | March 31, | Feb. 19, | |||||||||||||
2010 | 2010 | 2010 | 2010 | |||||||||||||
Market price and estimated fair value of common stock: |
$ | 4.55 | $ | 3.50 | $ | 4.55 | $ | 3.50 | ||||||||
Exercise price: |
$ | 4.10 | $ | 4.10 | 4.10 | $ | 4.10 | |||||||||
Expected term (years): |
3.87 | 4.00 | 3.87 | 4.00 | ||||||||||||
Dividend yield: |
| | | | ||||||||||||
Expected volatility: |
41. | % | 41 | % | 41 | % | 41 | % | ||||||||
Risk-free interest rate: |
2.07 | % | 2.11 | % | 2.07 | % | 2.11 | % |
The fair value of the warrants on February 18, 2009 was determined using the Black-Scholes option
pricing model based on the following assumptions: dividend yield: 0%,
expected volatility: 41.40%,
risk-free interest rate: 1.88%, and expected term: 3.86 years.
Before the reverse merger, the Companys common stock had not been publicly traded. Whilst the
Companys common stock began public trading and was quoted on the OTCBB in February 2010, the fair
value of the Companys common stock as of February 19, 2010 has been determined based on market
price.
As the Companys stock only begun public trading effective with the reverse merger date, historical
volatility information is limited and considered not representative of the expected volatility. In
accordance with ASC 718-10-30-2 (formerly SFAS No. 123R, Accounting for Stock-Based Compensation), the Company identified similar public entities for which share and option price information was
available, and considered the historical volatilities of those public entities share prices in
calculating the expected volatility appropriate to the Company (i.e. the calculated value).
The risk-free rate of return reflects the interest rate for United States Treasury Note with
similar time-to-maturity to that of the warrants.
Allocation of Proceeds from Private Placement
The proceeds from the Private Placement were first allocated between the Common Shares and the
warrants issued in connection with the Private Placement based upon their estimated fair values as
of the closing date, resulting in an aggregate amount of $794,376 being allocated to the Warrants
and $3,400,995 to the common shares.
In April 2009, the FASB issued the following updates that provide additional application guidance
and enhance disclosures regarding fair value measurements and impairments of securities: FSP FAS
157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly, ASC 820-10-65. This
update relates to determining fair values when there is no active market or where the price inputs
being used represent distressed sales. It reaffirms the need to exercise judgment to ascertain if a
formerly active market has become inactive and in determining fair values when markets have become
inactive.
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, ASC
320-10-65. This update applies to investments in debt securities for which other-than-temporary
impairments may be recorded. If an entitys management asserts that it does not have the intent to
sell a debt security and it is more likely than not that it will not have to sell the security
before recovery of its cost basis, then an entity may separate other-than-temporary impairments
into two components: (1) the amount related to credit losses (recorded in earnings) and (2) all
other amounts (recorded in other comprehensive income).
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, ASC
320-10-65. This update requires fair value disclosures for financial instruments that are not
currently reflected on the balance sheet at fair value on a quarterly basis.
We elected to adopt these updates effective for interim and annual reporting periods ending after
June 15, 2009.
ASC 825-10 Financial Instruments, previously SFAS No.159, allows entities to voluntarily choose to
measure certain financial assets and liabilities at fair value (fair value option). The fair value
option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new
election date occurs. If the fair value option is elected for an instrument, unrealized gains and
losses for that instrument should be reported in earnings at each subsequent reporting date. The
Company did not elect to apply the fair value option to any outstanding instruments. The carrying
values of the Companys financial instruments,
9
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
including cash and cash equivalents, trade receivables, other receivables, prepayments and
deposits, trade payables, accruals and other payables, and short-term notes payable approximate
their fair values due to the short-term maturity of such instruments.
It is managements opinion that the Company is not exposed to significant interest, price or credit
risks arising from these financial instruments. In respect of foreign currency risk, the Company is
not exposed to this risk as majority of its trading transactions are denominated in its functional
currency.
Cash and cash equivalents
For the purpose of the statement of cash flows, the Company considers all highly liquid investments
with maturities of three months or less to be cash equivalents.
Concentrations of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk
consist of cash and cash equivalents and accounts receivables. The Company extends credit based on
an evaluation of the customers financial condition, generally without collateral. Exposure to
losses on receivables is principally dependent on each customers financial condition. The Company
periodically reviews its trade receivables in determining its allowance for doubtful accounts. The
Company maintains certain amounts of its cash at state-owned banks in the PRC and has some cash on
hand. The total cash balances maintained in accounts at these state-owned banks are not insured.
The Company has not experienced any losses on such accounts.
The company maintains additional cash in a US Bank which, at times, may exceed federally insured
limits. The amount in excess of the federally insured limits was $2,703,523 and $0 at March 31,
2010 and 2009 respectively.
Country Risk
As the Companys principal operations are conducted in the PRC, the Company is subject to special
considerations and significant risks not typically associated with companies in the United States.
These risks include, among others, risks associated with the political, economic and legal
environments and foreign currency exchange limitations encountered in the PRC. The Companys
results of operations 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, among
other things.
In addition, all of the Companys transactions undertaken in the PRC are denominated in RMB, which
must be converted into other currencies before remittance out of the PRC may be considered. Both
the conversion of RMB into foreign currencies and the remittance of foreign currencies abroad
require the approval of the PRC government.
Accounts receivable
Accounts receivable are carried at original invoice amount less allowance for doubtful receivables.
Managements evaluation on the adequacy of the allowance for doubtful accounts is based on a
review of all outstanding amounts by account on a monthly basis. Specifically, the Company analyzes
the aging of accounts receivable balances, historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in customer payment terms. Significant
changes in customer concentration or payment terms, deterioration of customer credit-worthiness or
weakening in economic trends could have a significant impact on the collectability of receivables
and the Companys operating results. If the financial condition of the Companys customers were to
deteriorate, resulting in an impairment of their ability to make payments, the Company will write
off 100% as bad debt. In managements opinion, no allowance for doubtful accounts is necessary at
March 31, 2010 and 2009.
Inventory
Inventory is stated at the lower of cost or market (using the first in, first out method). Market
value is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
10
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
The Company uses the full cost absorption method of accounting for direct costs associated with
land development and construction of cemetery plots, including interest and costs of land use
rights. Such costs are allocated to the estimated number of cemetery plots to be developed using
the selling price relative fair value method. When the cemetery plots are sold, the carrying costs
are charged to cost of goods sold.
During 2005, the Company received land use rights which were contributed by the PRC government for
no consideration. Under PRC law, all land in the PRC is state-owned.
Inventory Impairment
Management periodically compares the carrying cost of inventory with the expected net realizable
value. An allowance is made for the decline in market value of inventory if lower than the carrying
cost. As of March 31, 2010 and 2009, the impairment was $999,805 and $0, respectively.
Property and equipment
Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as
incurred; major replacements and improvements are capitalized. When assets are retired or disposed
of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or
losses are included in income in the year of disposition. Depreciation and amortization are
computed on the straight-line method over the following estimated useful lives of the related
assets, which range from five to thirty years, and are as follows:
Buildings, improvements and structures
|
25 to 30 years | |
Machinery and equipment
|
5 to 10 years | |
Office equipment
|
5 years |
Long-lived asset
Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed
for impairment annually or whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a forecasted inability
to achieve break-even operating results over an extended period. Management assesses the
recoverability of the Companys long-lived assets by determining whether the depreciation and
amortization of long-lived assets over their remaining lives can be recovered through projected
undiscounted future cash flows. The amount of long-lived asset impairment if any, is measured based
on fair value and is charged to operations in the period in which long lived assets impairment is
determined by management. At March 31, 2010 and 2009, management believes there was no impairment
of the Companys long lived assets. There can be no assurance, however, that market conditions will
not change or competition will increase or demand for the Companys services will continue, which
could result in an impairment of long-lived assets in the future.
Contributed property
The Company received land use rights from the PRC government for no consideration paid. The Company
recorded the fair value of the land use rights as an intangible asset and deferred revenue as
determined by management with the advice of PRC legal counsel and third party consultants.
Article 12 of the PRCs Regulations on the Land Use Right sets forth the maximum term of land use
rights for different uses as follows: (1) 70 years for residential use; (2) 50 years for industrial
use; (3) 50 years for educational, technological, cultural, health, and sport site use; (4) 40
years for commercial, tourist and recreational use; (5) 50 years for comprehensive or other use;
and (6) 20 years for gas station use. Article 11 of the PRCs Regulations on Funeral Administration
stipulates that the term of the use of cemetery land or grave yard shall be determined by each
provincial government. Article 21 of the Chongqing Funeral Rules states that the land use rights
for graves shall be no more than 20 years, subject to renewal. Foguangs land use rights consist of
two parts: one piece of allocated land and contributed by the PRC government and one piece of land
leased from local farmers which the Company acquired by paying $836,000. The leased land is
comprised of both farm land and residential land. The farm land is subject to a
11
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
maximum term of 20 years and the Company has a priority to renew the lease when it expires. The
residential land is under a lease term of 100 years.
Intangible assets
Intangible assets consist primarily of the land use rights contributed by the PRC government and
are recorded at estimated fair value.
The Company reviews annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable for impairment of long lived assets and
intangible assets in accordance with accounting for impairment of long lived assets. An impairment
loss of the excess of the carrying value over the fair value of the underlying long lived assets
will be recognized if the carrying amount of the long lived asset is not recoverable and its
carrying amount exceeds its fair value. During the year ended March 31, 2010 and 2009, the Company
performed these reviews and concluded that no impairment existed.
Income taxes
The Company uses the asset-liability method of accounting for income taxes prescribed by ASC 740
Income Taxes. Under the asset-liability method of ASC 740, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences between the
financial statements carrying amounts of existing assets and liabilities and loss carry forwards
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company is
governed by the PRCs Income Tax Law and local income tax laws (collectively the PRC Income
Tax Law). Pursuant to the PRC Income Tax Law, enterprises are subject to tax at a statutory
rate of 25%. The local government has also provided companies with various incentives to encourage
economic development in the region. Such incentives include reduced tax rates and other measures.
Revenue recognition
The Company recognized revenue when the amount of revenue can be reliably measured, it is probable
that economic benefits will flow to the entity and specific criteria have been met for the
Companys revenue producing activities. The requires that four basic criteria that must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery
has occurred with no future other than perfunctory performance obligations; (3) the selling price
is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria
(3) and (4) is based on managements judgments regarding the fixed nature of the selling prices of
the products and services delivered and the collectability of those amounts.
The Company has two revenue sources and the following revenue recognition policies:
The Company recognizes revenue from the sale of cemetery plots when it is realized or realizable
and earnings process is complete. In general, a potential customer will tour the Companys facility
and choose a particular spot or location of the cemetery plot that is ready and available for use.
A sales agreement is executed with Foguang for the exact location at a fixed price. The sales
process ends when the consideration is paid in full, at which time, the Company provides the
customer full access to the use of the plot. The Company does not provide any other post-death
type services, other than to develop and sell the cemetery plots, obtain executed agreements, full
payment and deliver the keys to the plot embedded in a concrete box. The Company records revenue
when the title or right to use the completed cemetery plot has passed to the customer in accordance
with the terms of the fixed price sale agreement and consideration is exchanged. The costs
associated with revenue from sale of cemetery plots are the costs to convert the land into the
actual burial plots. Additionally, direct selling costs incurred in selling the cemetery plots are
recorded in cost of goods sold.
12
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Park construction income is recognized when the Company is contracted to provides services for
third party clients. These services include the construction of sidewalks, pagodas, landscaping and
other structures for parks. These projects are not associated with the Companys sales of cemetery
plots. Revenue is recognized upon the completion of the park, and the project has been approved by
the customer and collection is assured. The costs associated with the park construction income
are raw materials purchased for that specific project and services performed by the Company
recorded in costs of goods sold.
Cost of goods sold
Cost of goods sold includes the capitalized costs of cemetery plots sold and services provided by
the Company to third parties for development and construction of parks.
Operating Expenses
Operating expenses include management and staff salaries, administrative and facilities related
expenses, and other expenses to the non-production functions of the business, all of which are
expensed as incurred.
Advertising
Advertising is expensed as incurred. Advertising expenses were included in selling expenses.
Advertising expense amounted to $0 and $291,640 for the years ended March 31, 2010 and 2009,
respectively.
Foreign currency translation
As of March 31, 2010 and 2009, the accounts of the Company were maintained, and its consolidated
financial statements were expressed, in the RMB. Such consolidated financial statements were
translated into U.S. Dollars with the RMB as the functional currency. All assets and liabilities
were translated at the exchange rate on the consolidated balance sheet dates, stockholders equity
are translated at the historical rates and the statements of income items are translated at the
weighted average exchange rate for the year. The resulting translation adjustments are reported
under other comprehensive income. The exchange rate for the conversion of one US Dollar to RMB was
6.8194 and 6.8256 at March 31, 2010 and 2009, respectively.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as
incurred. Such amounts were not material during each of the years ended March 31, 2010 and 2009.
Cash flow from the Companys operations included in the statement of cash flows is calculated based
upon the functional currency using the average translation rate. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not necessarily agree with
arithmetical changes in the corresponding balances on the consolidated balance sheet. No
presentation is made that the RMB amounts could have been, or could be, converted into U.S. dollars
at the rates used in translation.
Earnings per common share
Basic earnings per share is computed by dividing net income available to common shareholders by the
weighted average number of shares of common stock outstanding during the period. Diluted income per
share is computed by dividing net income available to common shareholders (as adjusted for income
and expenses arising from certain potentially dilutive securities) by the weighted average number
of shares of common stock, common stock equivalents and potentially dilutive securities outstanding
during each period. Potentially dilutive common shares consist of common stock warrants (using the
treasury stock method). The following table presents a reconciliation of basic and diluted net
income per share:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net income for basic and diluted earnings per share |
$ | 12,327,230 | $ | 5,497,259 | ||||
Weighted average shares outstanding basic |
9,283,591 | 8,800,000 | ||||||
Weighted average shares outstanding diluted |
9,283,591 | 8,800,000 | ||||||
Earnings per share basic |
$ | 1.33 | $ | .62 | ||||
Earnings per share diluted |
$ | 1.33 | $ | .62 | ||||
13
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Comprehensive income
Comprehensive income or loss is defined as the change in equity during a period resulting from
transactions and other events and circumstances from non-owner sources. The Companys total
comprehensive income or loss consists of net unrealized income or loss from foreign currency
translation adjustments and net income. The Company has presented comprehensive income or loss on
the Statement of Operations and Comprehensive Income.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing performance. For the
years ended March 31, 2010 and 2009, the Company derived almost all of its revenue from the sale of
cemetery plots and operated only in one segment.
Recent accounting pronouncements
In August 2009, the FASB issued an Accounting Standards Update regarding measuring liabilities at
fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair
value in circumstances in which a quoted price in an active market for the identical liability is
not available; under those circumstances, a reporting entity is required to measure fair value
using one or more of valuation techniques, as defined. This ASU is effective for the first
reporting period, including interim periods, beginning after the issuance of this ASU. The adoption
of this ASU did not have a material impact on the Companys consolidated financial position,
results of operations or cash flows.
In October 2009, the FASB issued an Accounting Standards Update regarding the accounting for
own-share lending arrangements in contemplation of convertible debt issuance or other financing.
This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered
into in contemplation of a convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in
capital. Further, loaned shares are excluded from basic and diluted earnings per share unless
default of the share-lending arrangement occurs, at which time the loaned shares would be included
in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years
beginning on or after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The Company is currently
evaluating the impact of this ASU on its consolidated financial statements.
In December 2009, the FASB issued an Accounting Standards Update regarding the accounting for
transfers of financial assets which amends previous guidance. The amendments in this ASU improve
financial reporting by eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the transferred financial
assets. In addition, the amendments require enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on portions of financial
assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU
to have a material impact on its consolidated financial position, results of operations or cash
flows.
In December, 2009, the FASB issued an Accounting Standards Update regarding improvements to
financial reporting by enterprises involved with variable interest entities which amends previous
guidance. The amendments in this ASU replace the quantitative-based risks and rewards calculation
for determining which reporting entity, if any, has a controlling financial interest in a variable
interest entity with an
14
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
approach focused on identifying which reporting entity has the power to direct the activities of a
variable interest entity that most significantly impact the entitys economic performance and (1)
the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity.
An approach that is expected to be primarily qualitative will be more effective for identifying
which reporting entity has a controlling financial interest in a variable interest entity. The
amendments in this ASU also require additional disclosures about a reporting entitys involvement
in variable interest entities, which will enhance the information provided to users of financial
statements. The adoption of this ASU did not have any material impact on its consolidated financial
position, results of operations or cash flows.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting and
reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to
deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the
subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair value. In contrast, an
entity is required to account for a decrease in its ownership interest of a subsidiary that does
not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies
the scope of the decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for
beginning in the first interim or annual reporting period ending on or after December 31, 2009. The
adoption of this ASU did not have any material impact on its consolidated financial position,
results of operations or cash flows.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting for
distributions to shareholders with components of stock and cash. The amendments in this ASU clarify
that the stock portion of a distribution to shareholders that allows them to elect to receive cash
or stock with a potential limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and
is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this ASU are effective for interim and annual periods ending on or after
December 15, 2009, and should be applied on a retrospective basis. The adoption of this ASU did not
have a material impact on the Companys consolidated financial position, results of operations or
cash flows.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting and
reporting for decreases in ownership of a subsidiary a scope clarification. The amendments in
this ASU affect accounting and reporting by an entity that experiences a decrease in ownership in a
subsidiary that is a business or nonprofit activity. The amendments also affect accounting and
reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit
activity for an equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts accounting for Non-controlling Interests in
Consolidated Financial Statements An Amendment of ARB No. 51. The amendments in this update are
effective beginning in the first interim or annual reporting period ending on or after December 15,
2009. The amendments in this update should be applied retrospectively to the first period that an
entity adopted accounting for Non-controlling Interests in Consolidated Financial Statements An
Amendment of ARB No. 51. The adoption of this ASU did not have a material impact on the Companys
consolidated position, results of operations or cash flows.
In January 2010, the FASB issued an Accounting Standard Update regarding improving disclosures
about fair value measurements. This update provides amendments to Subtopic 820-10 that requires new
disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should
disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value
measurements. In the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about purchases, sales,
issuances, and settlements (that is, on a gross basis rather than as one net number). This update
provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of
disaggregation. A reporting entity should provide fair value measurement disclosures for each class
of assets and liabilities. A class is often a subset of assets or liabilities within a line item in
the statement of financial position. A reporting entity needs to use judgment
15
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and
valuation techniques. A reporting entity should provide disclosures about the valuation techniques
and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.
The new disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. The Company is currently evaluating the impact
of this ASU, however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial position, results of operations or cash flows.
In January 2010, the FASB issued an accounting standard update to address implementation issues
related to the changes in ownership provisions in the ConsolidationOverall Subtopic (Subtopic
810-10) of the FASB Accounting Standards Codification, originally issued as FASB Statement No.
160, Noncontrolling Interests in Consolidated Financial Statements. Subtopic 810-10 establishes the
accounting and reporting guidance for noncontrolling interests and changes in ownership interests
of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity
recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary
at fair value. The gain or loss includes any gain or loss associated with the difference between
the fair value of the retained investment in the subsidiary and its carrying amount at the date the
subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in its
ownership interest of a subsidiary that does not result in a change of control of the subsidiary as
an equity transaction.
While Subtopic 810-10 provides general guidance on accounting for the decreases in ownership of a
subsidiary, including a deconsolidation, some constituents raised concerns that the guidance
appears to conflict with the gain or loss treatment or derecognition criteria of other U.S.
generally accepted accounting principles, such as the guidance for sales of real estate, transfers
of financial assets, conveyances of oil and gas mineral rights, and transactions with equity method
investees.
Some constituents also questioned whether the FASB intended for the decrease in ownership
provisions of Subtopic 810-10 to apply to all entities because a subsidiary is defined as an
entity, including an unincorporated entity such as a partnership or trust, in which another entity,
known as its parent, holds a controlling financial interest. Those constituents were concerned that
such an interpretation could result in the accounting for a transaction being driven by its form
rather than its substance. For example, different accounting might be applied to a transaction
involving the same underlying assets depending on whether those assets were transferred in asset or
entity form. The amendments in this update are effective beginning in the period that an entity
adopts Subtopic 810-10. If an entity has previously adopted Subtopic 810-10 as of the date of the
amendments in this update are included in the Accounting Standards Codification, the amendments in
this update are effective beginning in the interim or annual reporting period ending on or after
December 31, 2009. The amendments in this update should be applied retrospectively to the first
period upon adoption. The adoption of this update for the changes in the accounting and reporting
guidance for noncontrolling interests and changes in ownership interests of a subsidiary, as
codified in ASC 810-10, did not have any impact on the Companys financial position, results of
operations or cash flows..
Other recent accounting pronouncements issued by the FASB, the American Institute of Certified
Public Accountants AICPA, and the Securities and Exchange Commission did not or are not believed by
management to have a material impact on the Companys present consolidated financial statements.
Reclassifications
Certain prior year items have been reclassified to conform to the current year presentation. These
reclassifications had no impact on the Companys consolidation financial statements.
16
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
NOTE 3 INVENTORY
Cemetery plots and other inventories, net of reserves, at March 31, 2010 and 2009, consist of the
following:
2010 | 2009 | |||||||
Basic plots |
$ | 981,764 | 1,885,623 | |||||
Standard plots |
6,842,800 | 1,818,225 | ||||||
Deluxe plots |
1,929,406 | 1,904,877 | ||||||
Artist plots |
1,437,490 | 565,963 | ||||||
Small tools and supplies |
3,445 | 3,494 | ||||||
Total |
$ | 11,194,905 | $ | 6,178,182 | ||||
NOTE 4 PREPAID LEASE EXPENSE
Prepaid lease expense consists of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Prepaid Lease expenses |
$ | 787,412 | $ | 828,124 | ||||
During 2009, the Company leased land use rights for an additional 377,634 square meters from a
group of local farmers and villagers for a period of 20 years, subject to renewals, in exchange for
a cash payment of approximately $836,000. Pursuant to the agreement, the payment was made to the
PRC government for the benefit of the local farmers and villagers. The Company is also obligated
to pay an annual fee of approximately $23,000 for the duration of the lease to the farmers. (Note
17)
None of this land area was developed as of March 31, 2010. The Company has presented this amount as
prepaid lease expense on the consolidated balance sheet. The villagers and farmers were originally
located in Longqiao and Qianfo villages. The cash received by the PRC from the Company is expected
to be redistributed to the local farmers and villagers by the Government as a payment for
relocating them to ChangShou Jiang Nan. The Company also agreed to clear land for the building of
these homes at the relocated site.
Payments made to the Government for the building of homes and relocation of farmers is the cost to
the Company to lease the land use rights for the development and sale of the cemetery plots. The
Company capitalizes any direct and incremental costs associated with the development of the project
and amortizes over the estimated future benefit period as cost of the plots. When the plots are
sold, the related carrying costs are charged off to the statement of income.
The prepaid expenses are amortized over 20 years per the terms of the contract. For the years
ended March 31, 2010 and 2009, the Company had recorded approximately $41,000 and $8,000 which was
recorded as an operating expense.
NOTE 5 RELATED PARTY RECEIVABLE
Related party receivable consists of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Prepayments on contracts on behalf of related party |
$ | 1,408,320 | $ | 1,406,400 |
17
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
In April 2008, the Company recorded a prepayment on behalf of a related party for a purchase
commitment in the amount of $1,403,400 (87% of the contract) for cemetery headstones to Chongqing
Kun Yu Stone Wood Company (Kun Yu). Under the terms of the contract, Kun Yu is obligated
to finish the production of, and deliver the headstones at the specified time defined by the
related party affiliate for inspection and performance of quality control functions. Kun Yu is
obligated to fix any product related damages and allow the Companys representative to perform a
final inspections prior to acceptance. The related party affiliate of the Company is to pay upon
final inspection the remaining balance within one month after delivery of the headstones to the
Company. As of March 31, 2010, the related party affiliate had not taken possession of the
headstones.
NOTE 6-COSTS INCURRED WITH REAL ESTATE PROJECTS IN PROGRESS
Real estate projects in progress consist of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Costs incurred with real estate projects in progress |
$ | 10,122,300 | $ | 4,101,970 | ||||
In February 2009, the Company recorded a prepayment related to a contract in the amount of
$4,101,970 (7% of the contract), for the construction of entertainment boats. Chongqing Bo Goa
Tourism Company (Bo Goa), an unrelated third party, and the Company were going to jointly
develop the Liang Jiang Yu project. In September 2009, the Company took over as the sole
developer on this project. This project includes development of a park near the Longqiao Lake as a
way to attract more tourism in the Changshou area near the Companys cemetery site. The scope of
the project currently contemplates 10 to 20 entertainment boats, a welcome center, a large sailboat
and nine docks. As of March 31, 2010, the Companys total prepayment for this project is
$10,122,300. The total price of the contract is approximately $63,961,200.
NOTE 7 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Buildings and structures |
$ | 8,052,142 | $ | 8,041,165 | ||||
Machinery and equipment |
858,529 | 855,542 | ||||||
Office equipment |
6,269 | 8,077 | ||||||
Less: accumulated depreciation |
(1,675,766 | ) | (1,275,442 | ) | ||||
Total Property and equipment |
$ | 7,241,174 | $ | 7,629,342 | ||||
Depreciation expense for the years ended March 31, 2010 and 2009 were approximately $399,000 and
$414,000, respectively.
NOTE 8 INTANGIBLE ASSETS
Land use rights are stated at the estimated fair value on the contribution date less accumulated
units of production costs and any impairment losses. The land use rights are expensed on ratable
basis based on the number of plots developed over the life of the rights.
During 2005, the Company received land use rights for 339,444 square meters for a period of 20
years, subject to four 20-year renewals, which were contributed by the PRC government for no
consideration. The Company recorded this transaction at fair value of approximately $13.2 million
as determined by management after consultation with PRC counsel and consultants. The land use
rights include the
18
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Companys cemetery site located in Changshou. Under PRC regulations, all land in the PRC is
state-owned. The Companys management determined the fair market value of the land use rights
based upon the actual square meters of useable land underlying the land use rights. The Company
expects approximately 210,000 plots can be developed and sold from the 339,444 square meters of
land.
The Company leased land use rights for an additional 377,634 square meters from a group of local
farmers and villagers for a period of 20 years, subject to renewals, in exchange for a cash payment
of approximately $836,000. Pursuant to the agreement, the payment was made to the PRC government
for the benefit of the local farmers and villagers. The Company is also obligated to pay an annual
fee of approximately $23,000 for the duration of the lease to the farmers. None of this land area
was developed as of March 31, 2010. The Company has presented this amount as prepaid lease expense
on the consolidated balance sheet.
The Company has yet to receive the rights to use the land surrounding the Longqiao Lake for
approximately 1,196,000 square meters (which have been committed to the Company), and therefore,
the Company has yet to incur any costs related to these rights and land usage. If and when the
Company receives these rights, management will evaluate the estimated useful life based on the
facts that exists at the moment and continue to re-evaluate periodically.
Intangible assets consist of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Land use rights |
$ | 13,345,299 | $ | 13,236,805 | ||||
Less: Accumulated units of production costs |
1,557,396 | 916,912 | ||||||
Total |
$ | 11,787,903 | $ | 12,319,893 | ||||
At March 31, 2010 and 2009, the Company reviewed the land use rights for impairment and concluded
that no impairment existed. The land use rights contributed by the PRC government are expensed
based upon the number of cemetery plots capitalized in inventory using the units of production
method. During the year ended March 31, 2010 and 2009, the Company expensed $640,484 and $172,890,
respectively, which was included in the capitalized cost of inventory. Cemetery plots sold are
then expensed through cost of goods sold.
NOTE 9 ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables consist of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Welfare payable |
$ | 97,064 | $ | 96,932 | ||||
Taxes payable |
1,441,490 | 845,525 | ||||||
Other accrued payables |
76,507 | 54,523 | ||||||
Total |
$ | 1,615,061 | $ | 996,980 | ||||
These expenses are accrued by the Company over time and paid to the PRC government.
NOTE 10 DEFERRED REVENUE
At December 31, 2005, the Company recorded deferred revenue related to land use rights that were
contributed to the Company by the PRC government. As the Company sells cemetery plots, a portion
of the deferred revenue is recognized as a reduction of cost of the land use rights based on the
number of
19
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
cemetery plots that the Company sells during the year. As of March 31, 2010 and 2009, the Company
recorded $427,510 and $255,893 of income, respectively as other income.
NOTE 11 SHORT-TERM NOTES PAYABLE
Short term notes payable represent amounts due to a bank normally due within one year. The
principal balance of the loans is due at maturity and the loans can be renewed each year.
Short-term note payable Chongqing Rural Commercial Bank, is secured by Chongqing bowling museum
building, is due on demand, bears interest at an annual rate of 8.4% and matures in March 2011. The
company is responsible for all economic disputes or liabilities related to this property. If any
terms of the contract were breached the company would have to pay a penalty of approximately
$37,000. As of March 31, 2010 and 2009, the Company had short-term notes payable in the amount of
$440,100 and $439,500, respectively. The company paid off the outstanding loan balance in May
2010.
Short-term note payable Chongqing Rural Commercial Bank, is secured by approximately 123,334
square meters of land use rights valued at approximately $882,353 at inception, is due on demand,
bears interest at an annual rate of 9.6% and matures in March 2011. In the event of default on
this short-term notes payable, the interest rate is calculated at annual rate of 9.6%. As of March
31, 2010 and 2009, the Company had a loan payable of $2,034,729 and $2,031,955, respectively. This
short-term notes payable contain covenants that restrict the use of proceeds to developing cemetery
plots. If the Company uses the money in breach of these covenants, the interest rate is calculated
at 19.2%. As of March 31, 2010 and 2009, the Company was in compliance with these covenants.
As of March 31, 2010 and 2009, interest expense was $235,240 and $235,208, respectively.
NOTE 12 RENTAL INCOME FROM OPERATING LEASE
Rental income consists of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Rental income |
$ | 337,859 | $ | 335,969 | ||||
Less Depreciation of building |
(76,109 | ) | (75,683 | ) | ||||
Net rental income |
$ | 261,750 | $ | 260,286 | ||||
The Company rents its excess office space in Changshou to an unrelated third party under a
cancellable operating lease that is on a month to month basis. The third party is responsible for
all expenses related to the occupancy of the office space. As of March 31, 2010 and 2009, the lease
called for monthly rental of approximately $28,000 and $28,000, respectively.
NOTE 13 STOCKHOLDERS EQUITY
Preferred Stock
The Company is authorized to issue 20,000,000 shares of preferred stock, par value $0.001 per
share. At March 31, 2010 and 2009, no shares were issued and outstanding.
Common Stock
The Company is authorized to issue 100,000,000 shares of common stock, par value $0.001 per share.
At March 31, 2010 and 2009, the Company had 12,402,262 and 8,800,000 common shares issued and
outstanding, respectively.
20
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
The Companys board of directors has the ability, without seeking stockholder approval, to issue
additional shares of common stock and/or preferred stock in the future for such consideration under
the discretion of board of directors.
On February 19, 2010, the Company initiated a financing transaction with 24 institutional and/or
accredited investors pursuant for which the Company sold $4,599,371 of units of its equity
securities to investors in a private placement. Each unit is comprised of 100,000 shares of the
Companys common stock and warrants to purchase up to 50,000 shares of common stock at a per share
purchase price of $3.28 per share. At the closing of the transaction on February 23, 2010, the
Company issued 1,402,262 shares of common stock and 701,126 four-year warrants with an exercise
price of $4.10 per share. In addition, the Company issued warrants to purchase up to 70,113 shares
of common stock with an exercise price of $4.10 per share to the placement agent and its assignees.
Offering costs of approximately $404,000 was netted against the proceeds.
The Company issued the following warrants at the corresponding exercise price as of March 31, 2010:
Warrants | Exercise Price | |||||||
Outstanding as of March 31, 2009 |
| $ | | |||||
Issued and Vested |
771,239 | $ | 4.10 | |||||
Cancelled or expired |
| $ | | |||||
Exercised |
| $ | | |||||
Outstanding as of March 31, 2010 |
771,239 | $ | 4.10 |
At March 31, 2010, the vested warrants of 771,239 had an aggregate intrinsic value of $347,058.
NOTE 14 CONCENTRATION RISK
Suppliers
The Company obtained approximately 100% of its inventory purchases from two suppliers for the years
ended March 31, 2010 and 2009, respectively. Management believes other suppliers could provide
similar products and services on comparable terms in the area. Although alternate suppliers may
provide identical or similar products, such a change could result in delays and a possible loss of
sales. The Company did have long-term contracts with its suppliers for the years ended March 31,
2010 and 2009.
Customers
The Company did not have concentrations related to any of its customers and revenue for the years
ended March 31, 2010 and 2009.
NOTE 15 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
As described in Note 1 above, the Company controls Foguang through the Contractual Arrangements
between Foguang and Ran Ji, which include a consulting services agreement, an operating agreement,
an equity pledge agreement, an option agreement, and a proxy agreement. As described below, some of
the Companys officers and directors are also management members of Ran Ji and Foguang:
Mr. Yiyou Ran, the Companys chairman and chief executive officer, is also a director of Gold
Industry, Gold Holy, Ran Ji and Foguang. Mr. Jianquan Chen, a member of the Companys board of
directors, is also a director of Gold Industry, Gold Holy, Ran Ji and Foguang. Both Mr. Ran and Mr.
Chen are also shareholders and directors of Holy Golden Industry Limited, which owned approximately
56.4% of the Companys common stock issued and outstanding as of July 9, 2010. The Company does not
have any other relationship with Mr. Ran or Mr. Chen, except as described herein and except for
employer/employee compensation relationship.
21
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
The Company had $1,408,320 and $1,406,400 in prepayments to a related party receivable as of March
31, 2010 and 2009, respectively. (See Note 5)
NOTE 16 INCOME TAXES
The Company uses the asset-liability method of accounting for income taxes prescribed by ASC 740
Income Taxes.
United States
China Redstone Group Inc. is subject to the United States of America Tax law at tax rate of up to
35%. No provision for the US federal income taxes has been made as the Company had no US taxable
income for the years ended March 31, 2010 and 2009 and believes that its earnings are permanently
invested in PRC.
BVI
Gold Industry was incorporated in the Cayman Islands and, under the current laws of the Cayman
Islands, it is not subject to income taxes.
Hong Kong
Gold Holy was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is
subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or
derived from Hong Kong. The applicable statutory tax rate for the fiscal years ended March 31, 2010
and 2009 was 16.5%. The company had no income derived from its Hong Kong subsidiary.
PRC
The Company generated substantially all of its net income from its PRC operations for the year
ended December 31, 2009. The components of income tax consist of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Current Taxes |
||||||||
Chinese Operations |
4,707,364 | 1,689,693 | ||||||
Total |
$ | 4,707,364 | $ | 1,689,693 | ||||
Deferred tax assets and liabilities are provided for significant income and expense items
recognized in different years for tax and financial reporting purposes. The Company did not have
any temporary differences, which give rise to a net deferred tax asset for years end March 31, 2010
and 2009.
The reconciliation of the effective income tax rate to the statutory rate for years ended March 31,
2010 and 2009 is as follows:
2010 | 2009 | |||||||
Statutory income tax rate for funeral
company |
25.0 | % | 33.0 | % | ||||
Tax exemptions |
(1.0 | %) | (4.0 | %) | ||||
Effective income tax rate for funeral chains |
24.0 | % | 29.0 | % | ||||
22
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Beginning January 1, 2008, the PRC Enterprise Income Tax (EIT) law replaced the existing
laws for PRC Domestic Enterprises (DEs) such as Foguang and PRC Foreign Invested
Enterprises (FIEs) such as Ran Ji.
The key changes are:
| The standard PRC EIT rate of 25% replaced the 33% rate then applicable to both DEs and FIEs, except for high-tech companies which pays a reduced rate of 15%; and | ||
| Companies established before March 16, 2007 continue to enjoy tax holiday treatment approved by local government for a grace period of 5 years or until the tax holiday term is completed, whichever is sooner. |
NOTE 17 COMMITMENTS AND CONTINGENCIES
(a) Lease commitments
The Company has a lease commitment in relation to the land use lease rights that were acquired by
the Company through a cash payment of $836,000 from local farmers. The tenure of arable land is 22
years, from January 1, 2005 to December 31, 2027. The tenure of non-arable land is 50 years, from
January 1, 2005 to December 31, 2055. At the end of these terms, the Company will have to
negotiate new lease terms. The Company pays annual lease payment on or before October 31st to the
provincial government in Changshou Chongqing, Peoples Republic of China (PRC) and in turn
the PRC government then pays the sixth villager group, Longqiaohu village according to the terms of
the contract, and the sixth villager group re-distributes the funds to each farmer household. This
is the consideration that was agreed upon by the farmers for relocating in ChangShou Jiang Nan. As
of March 31, 2010 and 2009, lease expense was $22,641 and $22,515, respectively.
The Company leased office space of 1,053 square meters at 239 Jianxi Road in Chongqing, PRC. The
term of the lease was for four and a half years from August 1, 2009 to December 31, 2012, at which
time the Company would have priority to renew it lease under the same conditions, with rent
adjusted based on the market price. If the Company fails to pay the rent on time, a penalty will
be assessed and if rent is due for three months, the counterparty could terminate its lease. As of
March 31, 2010, lease expense was $14,191.
Future minimum operating lease payments relating to the above leases are as follows:
Years Ending | ||||
March 31, | ||||
2010 |
$ | 22,641 | ||
2011 |
43,927 | |||
2012 |
43,927 | |||
2013 |
38,606 | |||
2014 |
22,641 | |||
Thereafter |
294,337 | |||
Total |
$ | 466,079 | ||
(b) Litigation
In the ordinary course of business, the Company is generally subject to claims, complaints, and
legal actions. At March 31, 2010 and 2009, management believes that the Company is not a party to
any action which would have a material impact on its financial condition, operations, or cash
flows.
23
CHINA REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
(c) Economic Environment
Because all of the Companys operations are conducted in the PRC, the Company is subject to special
considerations and significant risks not typically associated with companies operating in the
United States. These risks include, among others, the political, economic and legal environments
and foreign currency exchange. The Companys 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 and remittance abroad, and
rates and methods of taxation, among other things.
The granting of land use rights is a common practice in China as all land is state-owned, and, at
present, no option to purchase land has ever been granted. However, the Company does have very
limited rights in accordance with land use rights for the cemetery plot development and
corresponding sales of the burial spaces.
(d) Retirement Plans
The Company participates in a defined contribution retirement program organized by the relevant
local government authority. Employees of the Company eligible to participate in the retirement plan
are entitled to retirement benefits from the plan. The local government authority is responsible
for the pension liabilities to retired employees. The Company is required to make monthly
contributions to the retirement plan up to the time of retirement of the eligible employees, at 20%
of the local standard basic salaries. As of March 31, 2010 and 2009, the Company had no significant
obligation apart from the contribution as stated above.
Note 18 SUBSEQUENT EVENT
In the three months ended June 30, 2010, the Company issued 220,000 shares of common stock for
consulting services and 50,000 shares of common stock to independent directors as part of their
compensation for a fair value of $1,228,500.
24