Attached files
file | filename |
---|---|
EX-4.4 - China For-Gen Corp. | v190340_ex4-4.htm |
EX-4.5 - China For-Gen Corp. | v190340_ex4-5.htm |
EX-5.1 - China For-Gen Corp. | v190340_ex5-1.htm |
EX-99.4 - China For-Gen Corp. | v190340_ex99-4.htm |
EX-99.6 - China For-Gen Corp. | v190340_ex99-6.htm |
EX-99.7 - China For-Gen Corp. | v190340_ex99-7.htm |
EX-99.5 - China For-Gen Corp. | v190340_ex99-5.htm |
EX-99.3 - China For-Gen Corp. | v190340_ex99-3.htm |
EX-10.5 - China For-Gen Corp. | v190340_ex10-5.htm |
EX-23.1 - China For-Gen Corp. | v190340_ex23-1.htm |
EX-99.1 - China For-Gen Corp. | v190340_ex99-1.htm |
EX-99.2 - China For-Gen Corp. | v190340_ex99-2.htm |
As filed
with the Securities and Exchange Commission
on ,
2010
Registration
No. 333-166868
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
S-1/A
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
FOR-GEN CORP.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
800
(Primary
Standard Industrial Classification Code Number)
11-3840621
(IRS
Employer Identification No.)
Tengao
District, Haicheng City
Liaoning
Province, P.R.China 114000
+0412-2988160
( Address, including zip code, and
telephone number,
including area code, of
registrant’ s principal
executive offices )
Sherry
Li
c/o
China For-Gen Corp.
87
Dennis Street
Garden
City Park, NY 11040
(212)
240-0707
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies to
:
|
Copies to
:
|
|
Barry
I. Grossman, Esq.
|
Mitchell
Nussbaum, Esq.
|
|
Adam
Mimeles, Esq.
|
Giovanni
Caruso, Esq.
|
|
Ellenoff
Grossman & Schole LLP
|
Loeb
& Loeb LLP
|
|
150
East 42 nd
Street
|
345
Park Avenue
|
|
New
York, NY 10017
|
New
York, NY 10154
|
|
Tel:
(212) 370-1300
|
Tel:
(212) 407-4159
|
|
Fax:
(212) 370-7889
|
Fax:
(212) 407-4990
|
Approximate date of commencement of
proposed sale to the public: As soon as practicable after the
Registration Statement has been declared effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box: x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated filer (Do not check if a smaller
reporting company) ¨
|
Smaller reporting company x
|
CALCULATION OF REGISTRATION FEE
Title of each class of
securities to be registered
|
Amount to be
Registered(1)
|
Proposed
maximum
offering
price per
share(1)
|
Proposed
maximum
aggregate
offering price
(1)
|
Amount of
registration
fee
|
||||||||||||
Common
stock, par value $0.001 per share
|
4,600,000
|
(2)
|
$
|
5.00
|
$
|
23,000,000
|
$
|
1,639.90
|
||||||||
Common
stock, par value $0.001 per share (3)
|
6,318,532
|
5.00
|
31,592,660
|
2,252.56
|
||||||||||||
Representative’s
Warrant
|
1
|
—
|
—
|
—
|
||||||||||||
Common
stock, par value $0.001 per share, underlying warrants held by the
Representative (4)(5)
|
360,000
|
5.00
|
1,800,000
|
128.34
|
||||||||||||
Total
|
11,278,533
|
—
|
$
|
56,392,660
|
$
|
4,020.80
|
(6)
|
(1)
|
The registration fee for
securities to be offered by the Registrant is based on an estimate of the
Proposed Maximum Aggregate Offering Price of the securities, and such
estimate is solely for the purpose of calculating the registration fee
pursuant to Rule 457(o). Includes shares which the underwriter has
the option to purchase to cover
over-allotments.
|
(2)
|
Includes 600,000 shares of common
stock, which may be sold upon exercise of a 45-day option granted to the
Underwriter to cover over-allotments if
any.
|
(3)
|
Reflects shares of common stock
being registered for resale by the selling stockholders set forth
herein.
|
(4)
|
The 360,000 shares of common
stock being registered in this registration statement consist of shares
issuable by the registrant upon the exercise of the Representative’s
common stock purchase warrants issued in connection with this
offering.
|
(5)
|
Pursuant to Rule 416, this
registration statement also covers such number of additional ordinary
shares to prevent dilution resulting from stock splits, stock dividends
and similar transactions.
|
(6)
|
Previously
paid.
|
The
Registrant amends this registration statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this registration statement shall
hereafter become effective in accordance with Section 8(a) of the Securities Act
of 1933, or until the registration statement shall become effective on such date
as the Securities and Exchange Commission, acting pursuant to Section 8(a),
may determine.
Explanatory
Note
This
Registration Statement contains two prospectuses, as set forth
below.
|
•
|
Public
Offering Prospectus. A prospectus to be
used for the public offering by the Registrant of up to 4,000,000 shares
of the Registrant’s common stock (in addition, up to 600,000 shares of the
Registrant’s common stock may be sold upon exercise of the underwriters’
over-allotment option and 360,000 shares of the Registrant’s common stock
may be sold upon exercise of the Representative’s Warrant) (the “Public
Offering Prospectus”) through the underwriter named on the cover page of
the Public Offering
Prospectus.
|
|
•
|
Resale
Prospectus. A prospectus to be
used for the resale by the selling stockholders set forth therein of an
aggregate of 6,318,532 shares of the Registrant’s common stock, all of
which are currently issued and outstanding (the “Resale
Prospectus”).
|
The
Resale Prospectus is substantively identical to the Public Offering Prospectus,
except for the following principal points:
|
•
|
they contain different outside
and inside front covers and back
covers;
|
|
•
|
they contain different
offering sections than in the Prospectus Summary section beginning on page
1 (page SS-1);
|
|
•
|
they contain different Use of
Proceeds sections (page
SS-2);
|
|
•
|
a Selling Stockholder section
is included in the Resale Prospectus (page
SS-2);
|
|
•
|
references in the Public Offering
Prospectus to the Resale Prospectus will be deleted from the Resale
Prospectus;
|
|
•
|
the Underwriting section from the
Public Offering Prospectus on page 77 is deleted from the Resale
Prospectus and a Plan of Distribution is inserted in its place;
and
|
|
•
|
the Legal Matters section in
the Resale Prospectus on page SS-7 deletes the reference to counsel for
the underwriters.
|
The
Registrant has included in this Registration Statement a set of alternate pages
after the back cover page of the Public Offering Prospectus (the “Alternate
Pages”) to reflect the foregoing differences in the Resale Prospectus as
compared to the Public Offering Prospectus. The Public Offering Prospectus will
exclude the Alternate Pages and will be used for the public offering by the
Registrant. The Resale Prospectus will be substantively identical to the Public
Offering Prospectus except for the addition or substitution of the Alternate
Pages and will be used for the resale offering by the selling
stockholders.
The
information in this preliminary prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not
permitted.
Preliminary
Prospectus
|
Subject
To Completion,
dated ,
2010
|
CHINA
FOR-GEN CORP.
4,000,000 SHARES OF
COMMON
STOCK
We are
offering 4,000,000 shares of common stock, $0.001 par value per
share. Prior to this offering, there has been no public market for our
securities. The public offering price of the shares was determined by
negotiation between us and the underwriters.
The
public offering price of the common stock is $[ ] per
share. We intend to apply to have our shares listed on the NYSE AMEX
Stock Exchange concurrent with this offering.
The
purchase of the securities involves a high degree of risk. See section
entitled “Risk Factors” beginning on page [ ].
Per Share
|
Total
|
|||||||
Public
offering price
|
$ | $ | ||||||
Underwriting
discounts and commissions
|
$ | $ | ||||||
Non- accountable expense (1)
|
$ | $ | ||||||
Proceeds,
before expenses, to China For-Gen Corp.
|
$ | $ |
(1) The
non-accountable expense allowance of 1.0% of the gross proceeds of the offering
is not payable with respect to the shares sold upon exercise of the
underwriters’ over-allotment option.
We have
agreed to issue to the representative of the underwriters a common stock
purchase warrant to purchase a number of shares of our common stock equal to an
aggregate of 9% of the shares sold in the offering at an exercise price
equal to 110% of the public offering price per share.
The
underwriters have a 45-day option to purchase up to 600,000 additional
shares of common stock from us solely to cover over-allotments, if
any.
The
underwriters expect to deliver the shares to purchasers on or about
[ ],
2010.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Maxim
Group LLC
The
date of this prospectus
is [ ],
2010
i
TABLE
OF CONTENTS
Prospectus
Summary
|
1
|
The
Offering
|
3
|
Summary
Consolidated Financial and Operating Data
|
5
|
Risk
Factors
|
6
|
Cautionary
Note Regarding Forward-Looking Statements and Other Information
Contained in this Prospectus
|
20
|
Use
of Proceeds
|
20
|
Dividend
Policy
|
21
|
Capitalization
|
22
|
Market
Price of and Dividends of Common Equity and Related Stockholder
Matters
|
22
|
Determination
of Offering Price
|
22
|
Dilution
|
24
|
Exchange
Rate Information
|
24
|
Selected
Consolidated Financial and Operating Data
|
25
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
26
|
Industry
Overview
|
32
|
Business
|
38
|
Facilities
|
40
|
Legal
Proceedings
|
44
|
Our
History and Corporate Structure
|
47
|
Directors
and Executive Officers
|
49
|
Executive
Compensation
|
51
|
Security
Ownership of Certain Beneficial Owners and Management
|
53
|
Certain
Relationships and Related Transactions
|
54
|
Description
of Our Securities
|
54
|
Shares
Eligible for Future Sale
|
57
|
Material
PRC Income Tax Considerations
|
58
|
Underwriting
|
61
|
Transfer
Agent and Registrar
|
64
|
Legal
Matters
|
64
|
Plan
of Distribution
|
64
|
Experts
|
65
|
Interests
of Named Experts and Counsel
|
66
|
Service
of Process and Enforcement of Judgments
|
66
|
Where
You Can Find More Information
|
66
|
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
|
66
|
Index
to Financial Statements
|
F-1
|
ii
ABOUT
THIS PROSPECTUS
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with any information or to make any
representations about us, the securities or any matter discussed in this
prospectus, other than the information and representations contained in this
prospectus. If any other information or representation is given or made,
such information or representation may not be relied upon as having been
authorized by us.
The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of our common stock. Neither the delivery of this prospectus nor any
distribution of securities in accordance with this prospectus shall, under any
circumstances, imply that there has been no change in our affairs since the date
of this prospectus. This prospectus will be updated and updated prospectuses
made available for delivery to the extent required by the federal securities
laws.
iii
PROSPECTUS
SUMMARY
This
summary highlights selected information appearing elsewhere in this prospectus.
While this summary highlights what we consider to be the most important
information about us, you should carefully read this prospectus and the
registration statement of which this prospectus is a part in their entirety
before investing in our securities, especially the risks of investing in our
securities, which we discuss later in the section of this prospectus
entitled “Risk Factors,” and our consolidated financial statements and
related notes beginning on page F-1.
Unless
otherwise specified or required by context, references to “we,” “our,” “us” and
the “Company” refer collectively to China For-Gen Corp., a Delaware corporation
(“China For-Gen”), and the subsidiaries of China For-Gen Corp., which are (i)
Liaoning Shengsheng Biotechnological Co., Ltd., a PRC company formerly known as
Anshan Xinfang Gardening Limited Company, which is wholly owned by China
For-Gen, and (ii) Karamai Pusheng Forest and Wood Industry, LLC, a PRC limited
liability company (“Pusheng”), which is wholly owned by Liaoning Shengsheng
Biotechnological Co., Ltd. For convenience, certain amounts in Chinese Renminbi
(“RMB”) have been converted to United States dollars at an exchange rate in
effect at the date of the related financial statements. Assets and
liabilities are translated at the exchange rate as of balance sheet date. Income
and expenditures are translated at the average exchange rate of the
period.
This
prospectus assumes the over-allotment has not been exercised, unless otherwise
indicated. Share numbers included herein reflect the 1:1.5 reverse
stock split of all of the Company’s outstanding common stock, which occurred on
May 12, 2010, unless otherwise indicated.
Our
Company
China
For-Gen is a Delaware corporation formed on February 26, 2008 solely for
the purpose of acquiring all of the equity interests of Liaoning Shengsheng
Biotechnological Co., Ltd. (“Liaoning Shengsheng” or the “WFOE”), a company
incorporated in the People’s Republic of China (“China” or the “PRC”) on
November 24, 2000. Since its inception, Liaoning Shengsheng has been
an agricultural and forestry company engaged in the breeding, cloning and sale
of plant seedlings and specialized transgenic plant seedlings, and the research
and development of seedling breeding technologies.
Based in
Liaoning Province, located in western China, the primary technologies used in
the Company’s business are tissue culture technology and transgenic seedling
technology, a popular type of cell breeding technology used in agriculture which
takes advantage of cell division of the plant’s branches and leaves. By the
appropriate control of temperature and humidity, the Company can increase the
dividing speed of plant cells, thereby cultivating a large amount of plant
seedlings in the shortest possible time. The core products of the
Company are transgenic poplar seedlings, which are low in diseases and are
insect and pest resistant, as certified by the technology bureau of Liaoning
Province in 2002. The poplar seedlings are characterized by fast
growth, maturing in 3-5 years instead of the normal maturation time of thirteen
to fifteen years. Transgenic poplar seedlings researched and
developed by the Company with Dalian Technology University and Shenyang
Agricultural University (“SAU”) won the National Gold Invention Award in 2003,
an award given by the Technology Exposition Committee of the Ministry of Science
and Technology. Plants developed by the Company are used for
re-forestation in western China. For its 2009 fiscal year, the
Company’s two major clients were Karamai Teng Lin
Farming Co., Ltd. and Liaoning Dongran Landscape Engineering Co., Ltd.
(each of which are independent third party distributors), contributing 53.37%
and 29.94%, respectively, of the Company’s 2009 revenues.
The
Company’s primary product is fast growing poplar saplings, which account for 99%
of its business revenue. These trees are grown in the far northwest
regions of China, in Xinjiang province near the city of Karamai. The
Comp any grows two distinct types of poplar saplings: Shengsheng No. 1 and
Shengsheng No. 2. Each product is separated into 5 different
subcategories (1-5 years old trees) according to their age. These
varieties of poplar trees have been genetically modified to achieve quick
growth times, pest resistance, low water requirements and high fiber
strength.
Through
its operating subsidiaries, the Company seeks to become the leading tree
planting company in Xinjiang Province, and to become the largest supplier of
genetically modified poplar seedlings in China.
We seek
to acquire forestry rights by entering into co-forestation agreements with local
governments in provinces throughout western China and then cultivating,
processing and manufacturing those resources to produce our fast growing,
transgenic poplar trees. In our plantation model, we assess the
suitability of land where trees have been recently harvested. If we
find the land to be suitable, we seek to lease the land under long term lease
agreements. For replanting and conversion into fast-growing
high-yielding plantations, we cultivate trees using improved silviculture
techniques and sell the trees as standing timber. We choose to plant trees in
strategically located areas and operate our commercial plantations using
advanced, environmentally prudent plantation management practices. We believe
our advanced plantation management techniques are a competitive advantage in
China, where the commercial tree plantation industry is comparatively
underdeveloped and where there are currently limited large-scale plantations
using advanced plantation management practices. We have leased and will continue
to lease land from the original plantation rights holders and pay the land lease
rent. We started operating our first planted plantation in Karamai in
2002. Our planted plantations consist primarily of poplar trees in
Xinjiang Province. As of December 31, 2009, our planted plantations
under management consisted of approximately 8,300 mu. We also seek to
become a manufacturer of artificial board, or Medium Density Fiberboard
(“MDF”). While we have begun plans for the construction and
development of an MDF manufacturing facility, we do not expect to undertake such
operations until we are able to locate suitable property and receive all
required governmental authorizations to proceed.
1
Our
Industry
The
global forestry industry provides timber resources and processed wood products
for numerous industries. The industry is generally divided into
upstream and downstream activities. Upstream activities focus on forest
resource management, including forest planning, planting, stand tending
and/or management of the forest, as well as harvesting and transportation
of logs. The wood-based downstream activities consist of processing of logs
into products such as sawn timber, plywood, reconstituted panel products,
pulp and paper, as well as further value-added processing activities, including
production of housing and building materials, including flooring and
furniture.
In China,
the State Forestry Administration of the PRC, or the SFA, is the state bureau in
charge of the national forestry industry. Its principal functions include
the formulation of policies and regulations for the national
forestry industry, forest management and forestry resources protection and
the supervision of their implementation. Under the PRC Forest
Law, the PRC strictly implements a quota system for the logging of forest wood.
The forestry bureaus at the provincial level are responsible for compiling
annual logging quotas. The annual quota is reviewed by the local government at
the same level and is submitted to the PRC State Council for
approval. Domestic log supply in China is ultimately determined by
the planted area and standing volume of resources inside China.
All
forest land in the PRC is either owned by the state or rural collective economic
organizations. Ownership of forestry land is not transferable in the
PRC. However, forest land use rights, forest trees use rights and forest trees
ownership rights are transferable as long as the transfer is conducted in
accordance with PRC law (including the requirement that a forest land cannot be
converted into a non-forest land).
Logging
in forests is strictly regulated in the PRC under its forestry laws and
regulations. Forestry bureaus at the national, provincial, municipal,
county and township levels are responsible for checking and organizing the
forestry resources, formulating forestry operation plans, and compiling annual
logging quotas in their area based on these forestry resources and forestry
operation plans.
Under the
PRC Forestry Law, the PRC government strictly implements a quota system for
logging of forest wood, to uphold the overriding principle that the amount of
consumption of timber must be less than that grown. We have and will
continue to work closely with local, provincial and national government
officials in order to continue and expand our business.
Our
Competitive Strengths
The
Chinese forestry industry is highly competitive. While we believe
there are approximately five enterprises in China that have fast-growing poplar
seedling capacity of over 10 million seedlings, we do not believe these are
their main products. Additionally, there is no company in China to
our knowledge that engages in both the seedling breeding and planting aspects
within the forestry industry.
We do not
believe there are any competitors in the provinces in which we conduct business
regarding fast-growing poplar seedlings. Our business model relies on
the fact that seedlings for large-scale forestation projects (more than 10,000
mu) can be bred in a relatively short period of time. Although we are
not the only company that can produce fast-growing poplar seedlings on a
large-scale using tissue culture technology, we believe there are only a few
that have been successful in securing contracts for forestation projects of more
than 10,000 mu.
Further,
we believe we also have a built-in competitive advantage due to the genetic
make-up of our fast-growing poplar seedlings. Finally, we utilize our
currently existing facilities or the facilities of others with which we enter
into research agreements, which reduces the need for us to construct or lease
additional space.
Business
Strategy
Under our
future growth plans, we intend that a substantial percentage of our future
revenues will come from (1) the sales of our seedlings and related service and
(2) the acquisition of several existing wood processing companies, all as
described herein. Our main goals are to become the leading
privately-owned tree planting company in Xinjiang Province, and to become the
largest supplier of genetically modified poplar seedlings in China. We also
intend to construct a manufacturing facility capable of producing medium density
fiberboard ("MDF" or "particleboard") and begin the manufacture and sale of MDF,
although no material efforts in this regard have begun.
Executive
Offices
Our
executive offices are located at Tengao District, Haicheng City, Liaoning
Province, P.R.China 114000 and our telephone number is 0412-2988160. The website
of our primary operating subsidiary is http://www.biosheng.com. Information
contained on or accessed through our website is not intended to constitute and
shall not be deemed to constitute part of this prospectus.
2
THE
OFFERING
Securities
offered:
|
4,000,000
shares of common stock, with an over-allotment option for an additional
600,000 shares, plus an additional 6,318,532 shares to be registered by
the selling stockholders listed herein.
|
|
Common
stock outstanding before the offering:
|
13,854,281
shares
|
|
Common
stock to be outstanding after the offering:
|
18,870,948
shares (1)
|
|
Offering
price:
|
$[ ]
per share
|
|
Use
of proceeds:
|
We
intend to use the net proceeds from the offering substantially as
follows:
|
|
· approximately
$5.03 million to expand our Karamai MDF production facility through
construction of a new facility; and
|
||
· approximately
$3-$5 million to pay the balance for the acquisition of Beijisong, such
price to be determined by an appraisal of Beijisong to be conducted in
2010 (as set forth herein); and
|
||
· approximately
$2.64 million to pay for the acquisition of Yuying (as set forth herein);
and
|
||
· approximately
$1.5 million to be used as working capital for Beijisong and Yuying after
their respective acquisitions; and
|
||
· approximately
$3.18 million to pay the remaining unpaid purchase price to the Shengsheng
Shareholders who shall immediately transfer such amount to Liaoning
Shengsheng for working capital purposes, which may include acquisitions in
the ordinary course of business; and
|
||
· the
remaining balance to expand our poplar seedling business and for working
capital and general corporate purposes.
|
||
The
amount and timing of our actual expenditures will depend on numerous
factors, including the status of our acquisition and development efforts,
sales and marketing activities, and the amount of cash generated or used
by our operations. We may find it necessary or advisable to use
portions of the proceeds for other purposes, and we will have broad
discretion in the application of the net proceeds. Additionally, we may
choose to expand our current business through acquisition of complimentary
businesses using cash or shares, as set forth herein. However,
we have not entered into any negotiations, agreements or commitments with
respect to any such acquisitions at this time. See the section of this
prospectus entitled “Use of Proceeds” for more information on
the use of proceeds.
|
||
Risk
factors:
|
Investing
in our securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the section of this
prospectus entitled “Risk Factors.”
|
Listing
|
We
intend to apply to have our common stock listed on the NYSE AMEX under the
symbol CFG.
|
3
(1) The
number of shares of common stock to be outstanding immediately after this
offering is based on 13,854,281shares of common stock outstanding as of July 12,
2010, and excludes:
|
·
|
444,119 shares of our
common stock issuable upon conversion of Series A Convertible Preferred
Stock issued May 30,
2008;
|
|
·
|
3,603,467 shares of common
stock issuable upon the conversion of those certain Promissory
Notes and warrants issued pursuant to the Note Purchase Agreement
between China For-Gen and certain investors dated February 12, 2010;
and
|
|
·
|
1,650,165 shares of common stock
issuable upon the exercise of an additional investment right pursuant to
the Note Purchase Agreement between China For-Gen and certain investors
dated February 12, 2010.
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4
SUMMARY
CONSOLIDATED FINANCIAL AND OPERATING DATA
The
following table is derived from and summarizes the relevant financial data for
our business and should be read in conjunction with our audited financial
statements and the related notes, which are included elsewhere in this
prospectus and which account for the 1:1.5 reverse stock split of all of the
Company’s outstanding common stock, which occurred on May 12, 2010.
Year ended
December 31,
2009
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Year ended
December 31,
2008
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Sales
revenues
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$ | 23,615,957 | $ | 22,146,254 | ||||
Cost
of goods sold
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$ | 6,351,073 | $ | 10,428,042 | ||||
Gross
profit
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$ | 17,264,884 | $ | 11,718,212 | ||||
Operating
expenses
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Selling
expense
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$ | 3,561,550 | $ | 4,206,849 | ||||
General
and administrative expenses
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$ | 912,870 | $ | 830,813 | ||||
Total
operating expenses
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$ | 4,474,020 | $ | 5,037,662 | ||||
Net
operating income
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$ | 12,790,464 | $ | 6,680,550 | ||||
Other
income
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||||||||
Interest
income
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$ | 5,211 | $ | 8,221 | ||||
Total
other income
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$ | 5,211 | $ | 8,221 | ||||
Net
income before taxes
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$ | 12,796,075 | $ | 6,688,771 | ||||
Taxes
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$ | - | $ | - | ||||
Net
income
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$ | 12,795,675 | $ | 6,688,771 | ||||
Foreign
Currency Translation Adjustment
|
$ | 34,412 | $ | 1,138,567 | ||||
Comprehensive
Income
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$ | 12,830,087 | $ | 7,827,338 |
*note
that the price is derived from the net income before foreign currency
translation adjustment divided by total number of shares.
December 31
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||||||||
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2009
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2008
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||||||
Cash
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$ | 843,358 | $ | 612,971 | ||||
Total Current Assets
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28,258,086 | 21,552,444 | ||||||
Total Assets
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30,981,287 | 24,529,932 | ||||||
Total Liabilities
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1,556,016 | 1,796,182 | ||||||
Total Stockholder's Equity
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29,424,671 | 22,733,750 | ||||||
Total Liabilities &
Shareholder's Equity
|
30,981,287 | 24,529,932 |
5
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus before deciding to invest in our common stock. Our business,
financial condition or results of operations could be materially adversely
affected by any of these risks. The trading price of our securities could
decline due to any of these risks, and you may lose all or part of your
investment.
Risks
Associated With Our Business
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.
We have
only limited audited financial results on which you can evaluate us and our
operations. We have operated our business in our current
corporate structure only since April 2000 and are subject to, and
may be unable to address, the risks typically encountered by companies operating
in a rapidly evolving marketplace, including those risks relating
to:
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●
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the failure to develop brand name
recognition and reputation;
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the failure to achieve market
acceptance of our products;
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an inability to grow and adapt
our business and technology to evolving consumer
demand.
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If we are
unable to address any or all of these or related risks, our business and results
of operations may be materially and adversely affected.
Our operating
results may fluctuate, which makes our results difficult to predict and could
cause our results to fall short of expectations .
Our
operating results may fluctuate as a result of a number of factors, many outside
of our control. As a result, comparing our operating results on a
period-to-period basis may not be meaningful, and you should not rely on our
past results as an indication of our future performance. Our quarterly,
year-to-date and annual expenses as a percentage of our revenues may differ
significantly from our historical or projected rates. Because our
business is changing and evolving, our historical operating results may not be
useful to you in predicting our future operating results.
Our
operating results in future quarters may fall below expectations. Any of these
events could cause our stock price to fall. Each of the risk factors listed
in this prospectus, as well as the following factors, may affect
our operating results:
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our ability to continue to
develop fast growing poplar
saplings;
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the results of the implementation
of our intended business
plan;
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the quality of our
products;
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our ability to generate
revenue;
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the amount and timing of
operating costs and capital expenditures related to the maintenance and
expansion of our businesses, operations and
infrastructure;
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our focus on long-term goals over
short-term results; and
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our ability to keep our
facilities operational at a reasonable
cost.
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We
are dependent on a single product for substantially all of our
revenues.
Our
revenues are substantially dependent on our fast growing poplar saplings, which
account for 99% of our business revenue. These trees are grown in the
far northwest regions of China, in Xinjiang province near the city of Karamai
and we grow two distinct types of poplar saplings: Shengsheng No. 1 and
Shengsheng No. 2. No assurances can be given that customers and
potential customers will continue to seek our genetically modified poplar
saplings. For example, other products may be introduced into the
marketplace which our customers prefer or there may be other reasons, many of
which are expected to be beyond our control, for a switch away from our
products. In the event sales of our saplings decrease, our revenues,
results of operations and future growth prospects can be expected to be
materially harmed. Accordingly, unless and until we diversify and expand
our product offerings, our future success will significantly depend upon our
genetically modified poplar saplings.
6
Because
of the capital-intensive nature of our business, we may have to incur additional
indebtedness or issue new equity securities, and if we are not able to obtain
additional capital our ability to operate or expand our business may be impaired
and our results of operations could be adversely affected.
We
require significant levels of capital to acquire additional forest area, to
finance the development of our facilities and for the construction and
acquisition of new facilities, and we therefore expect we will need additional
capital, over and above what we raise in this offering, to fund our future
growth. If cash from available sources is insufficient or unavailable
due to restrictive credit markets, or if cash is used for unanticipated needs,
we may require additional capital sooner than anticipated. Our ability to obtain
additional capital on acceptable terms or at all is subject to a variety of
uncertainties, including:
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investors’ perceptions of, and
demand for, companies in the Chinese timber
industry;
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investors’ perceptions of, and
demand for, companies operating in
China;
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conditions of the U.S. and other
capital markets in which we may seek to raise
funds;
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our future results of operations,
financial condition and cash
flows;
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governmental regulation of
foreign investment in China;
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economic, political and other
conditions in the United States, China, and other countries;
and
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governmental policies relating to
foreign currency borrowings.
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In the
event we are required or choose to raise additional funds, we may be unable to
do so on favorable terms or at all.
We may be
required to pursue sources of additional capital through various means,
including joint venture projects and debt or equity financings. There
is no assurance we will be able to secure suitable financing in a timely fashion
or at all. In addition, there is no assurance we will be able to
obtain the capital we require by any other means. Future financings
through equity investments are likely to be dilutive to our existing
stockholders. Also, the terms of securities we may issue in future
capital transactions may be more favorable for our new
investors. Newly issued securities may include preferences, superior
voting rights, the issuance of warrants or other derivative securities, and the
issuances of incentive awards under equity employee incentive plans, which may
have additional dilutive effects. Further, we may incur substantial
costs in pursuing future capital and/or financing, including investment banking
fees, legal fees, accounting fees, printing and distribution expenses and other
costs. We may also be required to recognize non-cash expenses in
connection with certain securities we may issue, such as convertible notes and
warrants, which will adversely impact our financial condition.
If we
cannot raise additional funds on favorable terms or at all, we may not be able
to carry out all or parts of our strategy to maintain our growth and
competitiveness or to fund our operations. If the amount of capital
we are able to raise from financing activities, together with our revenues from
operations, is not sufficient to satisfy our capital needs, even to the extent
that we reduce our operations accordingly, we may be required to cease
operations.
Our
revenues are highly dependent on a limited number of customers and the loss of
any one of our major customers could materially and adversely affect our growth
and our revenues.
During
the years ended December 31, 2009 and 2008, our two largest customers
collectively accounted for 87% and 69%, respectively, of our accounts receivable
and 81% and 94% of sales, respectively. As a result of our reliance
on a limited number of customers, we may face pricing and other competitive
pressures which may have a material adverse effect on our growth and our
revenues. We do not have an exclusivity arrangement with any of our
customers. In addition, there are a number of factors, other than our
performance, that could cause the loss of a customer or a substantial reduction
in revenue from any single customer and that may not be
predictable. For example, the government could determine not to make
utilization of forestry resources a high priority or may reduce the sale and
license of forestry resources to private businesses. The loss of any
one of our major customers can be expected to result in a decrease in our sales
volume and could materially adversely affect our growth and our
revenues. Moreover, the loss of any one of our major customers could
require us to layoff employees, which in turn could make it more difficult for
us to attract and retain professionals in the future, which could further
materially adversely affect our growth and our revenues. If our
customers seek to negotiate their agreements on terms less favorable to us and
we accept such unfavorable terms, such unfavorable terms may have a material
adverse effect on our business, financial condition and results of
operations. Accordingly, unless and until we diversify and expand our
customer base, our future success will significantly depend upon the timing and
volume of business from our largest customers.
7
We
may not be able to attract and retain a sufficient number of clients to maintain
or expand our business.
Our
business depends on our ability to attract and retain clients, and we cannot
assure you that our marketing efforts will lead to more companies purchasing our
genetically modified saplings. In the event we are successful in
acquiring additional forest area, in developing our timber processing operations
or in our manufacturing of MDF, we will need to find substantial sources of
revenue for each of these business operations as well. There are
numerous factors that could lead to a decline in business or a failure to obtain
clients for our expanded operations, including general economic conditions,
market maturity or saturation, a decline in our ability to deliver quality
products at a competitive price, direct and indirect competition and a decline
in the demand for timber and manufactured wood products. Any decrease
in our client base or any failure to attract clients to our new businesses may
adversely impact our operating margins and future growth prospects.
If
we do not continue to develop new products or if our products do not continue to
appeal to the market, we may not remain competitive, and our revenues and
operating results could suffer.
The
genetically modified saplings that we offer are subject to changing customer
demands. Our future operational and financial performance depends on our ability
to develop and market new services and products and to enhance our existing
services and products, each on a timely basis to respond to new and evolving
customer demands, to achieve market acceptance and keep pace with new
developments. We may be unable to develop, introduce on a timely
basis (or at all) or market any new or enhanced services or products, and we
cannot assure you that any new or enhanced services or products will appeal to
the market. Our failure to develop new services and products and to
enhance our existing services and products or the failure of our services and
products to continue to appeal to the market could have an adverse impact on our
business, financial condition, results of operations and future operating
prospects.
We
may be unable to make acquisitions or enter into joint ventures, which could
impair our growth prospects, and we may be unable integrate, operate or realize
the anticipated benefits of such businesses.
As part
of our growth strategy, we intend to pursue selected acquisitions or joint
ventures. We cannot assure you we will be able to effect these transactions on
commercially reasonable terms, or at all. Any future acquisitions or joint
ventures may require access to additional capital, and we cannot assure you we
will have access to such capital on commercially reasonable terms, or at all.
Even if we enter into these transactions, we may not realize the benefits we
anticipate or we may experience difficulties in integrating any acquired
companies and products into our existing business; attrition of key personnel
from acquired businesses; significant charges or expenses; higher costs of
integration than we anticipate; or unforeseen operating difficulties that
require significant financial and managerial resources that would otherwise be
available for the ongoing development or expansion of our existing
operations.
Consummating
these transactions could also result in the incurrence of additional debt and
related interest expense, as well as unforeseen contingent liabilities, all of
which could have a material adverse effect on our business, financial condition
or results of operations. We may also issue additional equity in connection with
these transactions, which would dilute our existing stockholders.
We
face competition from other research and development companies and timber
processing companies which could erode our market share, brand recognition and
profitability.
We face
formidable competition in every aspect of our business, and particularly from
other timber processors and wood products manufacturers. Our
competitors may be better capitalized, have more experience and have more
established or deeper relationships with relevant government authorities,
vendors, suppliers, distributors or customers than us. Our
competitors may make acquisitions or invest more aggressively in marketing or
product development. We cannot assure you our competitors will not
attempt to copy our business model, or portions thereof, and that this will not
erode our market share and brand recognition, and impair our growth rate and
profitability. If our competitors are able to provide similar or
better services and products than ours, we could experience a significant
decline in revenue. Any such decline could negatively affect our
profitability and future growth prospects.
Third
parties may infringe on our brand and other intellectual property rights, and we
may be unable to protect ourselves against such infringement for competitive and
legal reasons, any of which could have a material adverse impact on our
business.
We do not
currently hold any registered trademarks or patents for our products, names or
symbols. Moreover, intellectual property rights and related laws in China are
still developing, and there are uncertainties involved in the protection and the
enforcement of such rights. There is a risk that third parties may
infringe on, misappropriate or misuse our brand and other intellectual property
rights. If we are unable to protect or enforce our intellectual
property rights, the value of our brand, services and products could be
diminished and our business may suffer. Our precautions may not
prevent misappropriation of our intellectual property. Any legal action that we
may bring to protect our brand and other intellectual property may not achieve
the desired results, may be very expensive and could divert management’s
attention from other business concerns.
8
Our
failure to protect our intellectual property rights under applicable law could
lead to the loss of a competitive advantage that could not be compensated by our
damages award.
We
may be sued by third parties who claim that our products, and formulations,
methods of manufacture or methods of use infringe on their intellectual property
rights.
We may be
exposed to future litigation by third parties based on claims that our
technologies, processes, formulations, methods or products infringe the
intellectual property rights of others or that we have misappropriated the trade
secrets of others. Any litigation or claims against us, whether or
not valid, would result in substantial costs, could place a significant strain
on our financial and human resources and could harm our
reputation. Such a situation may force us to do one or more of the
following:
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•
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incur significant costs in legal
expenses for defending against an intellectual property infringement
suit;
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•
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cease selling, making, importing,
incorporating or using one or more or all of our technologies and/or
formulations or products that incorporate the challenged intellectual
property, which would adversely affect our
revenue;
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•
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obtain a license from the holder
of the infringed intellectual property right, which license may be costly
or may not be available on reasonable terms, if at all;
or
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•
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redesign our formulations or
products, which would be costly and
time-consuming.
|
Moreover,
the possibility exists that a patent could be issued that would cover one or
more of our products, requiring us to defend a patent infringement suit or
necessitating a patent validity challenge that would be costly, time consuming
and possibly unsuccessful. If a
lawsuit were to be filed against us for patent infringement, we would incur
significant legal costs to defend ourselves.
If
we fail to effectively manage our anticipated growth, our business and operating
results could be adversely effected.
We intend
to pursue a strategy of growth and expansion that is expected to place strain on
our management personnel, systems and resources. To accommodate our
intended growth, we anticipate that we will need to implement a variety of new
and upgraded research and development, manufacturing and processing and other
operational facilities, as well as financial systems, procedures and
controls and the improvement of our accounting and other internal management
systems, all of which require substantial management efforts and financial
resources. We will also need to continue to expand, train, manage and
motivate our workforce, and develop and manage our relationships with our
existing and target client base. All of these endeavors will require
substantial management effort and skills, and the incurrence of additional
expenditures. We cannot assure you we will be able to efficiently or
effectively implement our growth strategies and manage the growth of our
operations, and any failure to do so may limit our future growth and hamper our
business strategy.
We
depend on key personnel and our business may be severely disrupted if we lose
the services of our key executives and employees.
Our
future prospects are heavily dependent upon the continued service of our key
executives, particularly Mr. Wang Baoquan, our President and Chairman, and a
major shareholder of our company. We rely on his expertise in our business
operations, and on the personal relationships he has with the relevant
regulatory authorities, customers and suppliers. On
January 1, 2010 we renewed employment agreements with our key
officers through December 31, 2012, but we have not entered into
non-competition or non-solicitation agreements with our officers. If one or
more of our key executives and employees are unable or unwilling to continue in
their present positions, we may not be able to replace them easily and our
business may be severely disrupted. In addition, if any of our key executives or
employees joins a competitor or forms a competing company, we may lose customers
and suppliers and incur additional expenses to recruit and train personnel.
Further, we do not maintain key-man life insurance for any of our key
executives.
We
rely on highly skilled personnel and if we are unable to retain or motivate key
personnel or hire qualified personnel, we may not be able to grow
effectively.
Our
performance largely depends on the talents and efforts of highly skilled
individuals. Our continued ability to compete effectively depends on
our ability to attract, retain and motivate our existing
personnel. The market for highly skilled personnel is highly
competitive as a result of the limited availability of such personnel. The
inability to hire or retain such qualified personnel may hinder our ability to
implement our business strategy and may harm our business.
9
We
rely on third party service or product providers and research partners and the
failure of these third parties to deliver high level of service and support
required in our business or the loss of a relationship with them will adversely
impact our business and future operating prospects.
Our
ability to increase sales, retain current and future memberships and strengthen
our brand will depend in part upon our relationships with third parties,
including the various government agencies that purchase our
services. The termination of these relationships could lead to the
loss of a competitive advantage or even the loss of customers and
revenue. Moreover, if such third parties are unable to satisfy their
commitments to us, our business would also be adversely
affected. Additionally, due to our association with such third
parties, poor performance by our strategic partners outside of their
relationship with us, a decline in the quality of the products supplied by them
or deterioration of their reputation or other negative publicity about them
could adversely impact our reputation and business performance.
Because
we may not be able to obtain business insurance in the PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in the PRC and we may suffer a loss of a type
which would normally be covered by insurance in the United States, such as
business interruption insurance and third party liability insurance to cover
claims related to personal injury, or property damage arising from
accidents during our operations. We would incur significant expenses in both
defending any action and in paying any claims that result from a settlement or
judgment. We have not obtained fire or casualty insurance, and there
is no insurance coverage for our equipment, furniture and buildings in
China. Any losses incurred by us will have to be borne by us without
any assistance, and we may not have sufficient capital to cover material damage
to, or the loss of, our facility due to fire, severe weather, flood or other
cause, and such damage or loss would have a material adverse effect on our
financial condition, business and prospects.
We
could be subject to claims related to health or safety risks.
Our
timber harvesting, processing and manufacturing business, if and when entered
into, may pose potential health or safety risks to our employees and there is a
risk that claims will be asserted against us for injury or
death. Personal injury claims and lawsuits can result in significant
legal defense costs, settlement amounts and awards, and could have an adverse
effect on our business, financial condition and result of operations or cash
flow. In addition to the risks of liability exposure and increased
costs of defense, claims may produce publicity that could hurt our reputation
and business.
If we fail to
establish and maintain an effective system of internal controls, we may not be
able to report our financial results accurately or to prevent
fraud. Any inability to report and file our financial results
accurately and timely could harm our business and adversely impact the trading
price of our common stock.
We are
required to establish and maintain internal controls over financial reporting,
disclosure controls, and to comply with other requirements of the Sarbanes-Oxley
Act of 2002 (the “Sarbanes-Oxley Act”) and the rules promulgated by the SEC
thereunder. Our management, including our Chief Executive Officer and Chief
Financial Officer, cannot guarantee that our internal controls and disclosure
controls will prevent all possible errors or 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. In
addition, the design of a control system must reflect the fact that there are
resource constraints and the benefit of controls must be relative to their
costs. Because of the inherent limitations in all control systems, no system of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within our company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Further, controls can
be circumvented by individual acts of some persons, by collusion of two or more
persons, or by management override of the controls. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time, a
control may become inadequate because of changes in conditions or the degree of
compliance with policies or procedures may deteriorate. Because of inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and may not be detected.
As of
March 31, 2010, our management has not conducted a comprehensive review to
determine whether our internal control over financial reporting has significant
deficiencies. However, we lack sufficient personnel with the
appropriate level of knowledge, experience and training in the application of US
generally accepted accounting principles (“GAAP”) standards, especially related
to complicated accounting issues. This could cause us to be
unable to fully identify and resolve certain accounting and disclosure issues
that could lead to a failure to maintain effective controls over preparation,
review and approval of certain significant account reconciliation from Chinese
GAAP to US GAAP and necessary journal entries. We have a relatively complicated
corporate structure, which consists of multiple facilities and subsidiaries. The
relatively small number of professionals we employ in our bookkeeping and
accounting functions prevents us from appropriate segregating duties within our
internal control system. The inadequate segregation of duties is a
weakness because it could lead to the untimely identification and resolution of
accounting and disclosure matters or could lead to a failure to perform timely
and effective reviews.
To date,
we have not determined whether our internal controls over financial reporting
are sufficient, nor have we undertaken any remedial steps to remedy the
deficiencies set forth above. In the event our review demonstrates
further internal control deficiencies, any remedial measures we undertake may be
insufficient to address our material weaknesses, and there can be no assurance
that significant deficiencies or material weaknesses in our internal controls
over financial reporting will not be identified or occur in the
future. If additional material weaknesses or significant deficiencies
in our internal controls are discovered or occur in the future, we may fail to
meet our future reporting obligations on a timely basis, our consolidated
financial statements may contain material misstatements, we may be required to
again restate our prior period financial results, we may be subject to
litigation and/or regulatory proceedings, and our business and operating results
may be harmed.
10
The
legal requirements associated with being a public company, including those
contained in and issued under the Sarbanes-Oxley Act, may make it difficult for
us to retain or attract qualified officers and directors, which could adversely
affect the management of our business and our ability to obtain or retain
listing of our common stock.
We may be
unable to attract and retain qualified officers, directors and members of our
board of directors and committees required to provide for our effective
management because of the rules and regulations that govern publicly held
companies, including, but not limited to, certifications by principal executive
officers. The actual and perceived personal risks associated with
compliance with the Sarbanes-Oxley Act and other public company requirements may
deter qualified individuals from accepting roles as directors and executive
officers. Further, the requirements for board or committee
membership, particularly with respect to an individual’s independence and level
of experience in finance and accounting matters, may make it difficult to
attract and retain qualified board members. If we are unable to
attract and retain qualified officers and directors, the management of our
business and our ability to obtain or retain the listing of our common stock on
any stock exchange (assuming we are able to obtain such listing) could be
adversely affected.
Our
business will suffer if we cannot obtain, maintain or renew necessary permits or
licenses.
All PRC
enterprises in the timber industry are required to obtain from various PRC
governmental authorities certain permits and licenses, including, without
limitation, a License of Forest Seed Distribution, a License of Forest Seed
Production and an Urban Landscaping Enterprise Qualification
Certificate. We have obtained permits and licenses required for
Forest Seed Distribution and Production and Urban
Landscaping. Failure to obtain all necessary approvals/permits may
subject us to various penalties, such as fines or being required to vacate from
the facilities where we currently operate our business or even cease
operations.
These
permits and licenses are subject to periodic renewal and/or reassessment by the
relevant PRC government authorities and the standards of compliance required in
relation thereto may from time to time be subject to change. We intend to apply
for renewal and/or reassessment of such permits and licenses when required by
applicable laws and regulations; however, we cannot assure you we can obtain,
maintain or renew the permits and licenses or accomplish the reassessment of
such permits and licenses in a timely manner. Any changes in compliance
standards, or any new laws or regulations that may prohibit or render it more
restrictive for us to conduct our business or increase our compliance costs may
adversely affect our operations or profitability. Any failure by us to obtain,
maintain or renew the licenses, permits and approvals, may have a material
adverse effect on the operation of our business. In addition, we may not be able
to carry on business without such permits and licenses being renewed and/or
reassessed.
There
are unique risks in the MDF industry that we may not face in the seedling and
harvesting industries.
In
addition to investing in the construction of manufacturing facilities, there are
also other investments related to land acquisition, environmental impact
assessment, infrastructure construction, transportation, product and
environmental testing and quality assurance, among
others. Accordingly, entering the MDF processing industry involves
financial risks and unique obstacles than the other industries in which we are
already active, i.e. the forestry and seedling industries.
Risks
Relating to the Our Corporate Structure
Our
corporate structure is subject to significant risks, as set forth in the
following risk factors.
We
are a holding company that depends on cash flow from its subsidiaries to meet
our obligations.
We are a
holding company with no material assets other than the stock of Liaoning
Shengsheng, which conducts all our operations. We currently expect
that the earnings and cash flow of Liaoning Shengsheng will primarily be
retained and used for their continued business operations.
Our
controlling shareholder has potential conflicts of interest with our company
which may adversely affect our business.
Mr. Wang
Baoquan is our primary controlling shareholder as well as our chairman and
president. Given his significant interest in our company, there is a
risk that when conflicts of interest arise, Mr. Wang will not act completely in
the best interests of our stockholders (as opposed to his personal interest) or
that conflicts of interests will be resolved in our favor.
Additionally,
in the event you believe your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against us or our
officers or directors who reside within China. Even if you are
successful in bringing an action, the laws of the PRC may render you unable to
enforce a judgment against our assets and management, all of which are located
in China.
11
Risks
Associated With Doing Business in China
Our
operations and assets in China are subject to significant political and economic
uncertainties over which we have little or no control, and we may be unable to
alter our business practice in time to avoid the possibility of reduced
revenues.
Doing
business outside the United States, particularly in China, subjects us to
various risks including changing economic and political conditions, major work
stoppages, exchange controls, currency fluctuations, armed conflicts and
unexpected changes in United States and foreign laws relating to tariffs, trade
restrictions, transportation regulations, foreign investments and
taxation. Changes in the PRC laws and regulations, or their
interpretation, or the imposition of confiscatory taxation, restrictions on
currency conversion, imports and sources of supply, devaluations of currency or
the nationalization or other expropriation of private enterprises could have a
material adverse effect on our business, results of operations and financial
condition. Under its current leadership, the Chinese government has
been pursuing economic reform policies that encourage private economic
activities and greater economic decentralization. There is no
assurance, however, that the Chinese government will continue to pursue these
policies, or that it will not significantly alter these policies from time to
time without notice. We have no control over most of these risks and may be
unable to anticipate changes in international economic and political
conditions. Therefore, we may be unable to alter our business
practice in time to avoid the possibility of reduced revenues.
We
derive all of our sales in China and a slowdown or other adverse developments in
the PRC economy may materially and adversely affect our business.
All of
our assets are located in China and all of our revenue is derived from our
operations in China. We anticipate that our revenues generated in China will
continue to represent all of our revenues in the near future, including upon the
expansion of our business. Accordingly, our results of operations and
prospects are subject, to a significant extent, on the economic, political and
legal developments in China. We are therefore subject to the risks
associated with an economic slowdown or other adverse developments in the
PRC. Moreover, the industry in which we are involved in the PRC is
growing and transitioning from government-owned to privately owned so we cannot
be sure of the laws, rules, regulations, policies and processes the various PRC
government entities may impose as our industry evolves. In addition, the
Chinese government also exercises significant control over Chinese economic
growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts
by the Chinese government to slow the pace of growth of the Chinese economy
could result in reduced demand for our services and products. A
slowdown in overall economic growth, an economic downturn or recession or other
adverse economic developments in the PRC may materially reduce the demand for
our products or otherwise materially and adversely affect our business, results
of operations and future growth prospects.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
We are
dependent on our relationship with the local governments in the provinces in
which we operate our business. The Chinese government has exercised
and continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Our ability
to operate in China may be harmed by changes in its laws and regulations,
including those relating to taxation, environmental regulations, land use
rights, property and other matters. The central or local governments
of the various PRC jurisdictions may impose new, stricter regulations or
interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations. Accordingly, government actions in
the future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof, and could
require us to divest ourselves of any interest we then hold in Chinese
properties.
If
relations between the United States and China worsen, investors may be unwilling
to hold or buy our stock and our stock price may decrease.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our common
stock.
Inflation
in China may inhibit our ability to conduct business in China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. Rapid economic growth can lead to growth in the
money supply and rising inflation. If prices for our services
and products rise at a rate that is insufficient to compensate for the rise
in the costs of supplies, it may have an adverse effect on
profitability. These factors have led to the adoption by the Chinese
government, from time to time, of various corrective measures designed to
restrict the availability of credit or regulate growth and contain
inflation. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for
our services and products.
12
Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese Renminbi into
foreign currencies and, if Chinese Renminbi were to decline in value, reducing
our revenue in U.S. dollar terms.
Our
reporting currency is the U.S. dollar and our operations in China use their
local currency as their functional currencies. Substantially all of our revenue
and expenses are in Chinese Renminbi. We are subject to the effects
of exchange rate fluctuations with respect to these currencies. For
example, the value of the Renminbi depends to a large extent on Chinese
government policies and China’s domestic and international economic and
political developments, as well as supply and demand in the local market. Since
1994, the official exchange rate for the conversion of Renminbi to the U.S.
dollar had generally been stable and the Renminbi had appreciated slightly
against the U.S. dollar. However, on July 21, 2005, the Chinese
government changed its policy of pegging the value of Chinese Renminbi to the
U.S. dollar. Under the new policy, Chinese Renminbi may fluctuate
within a narrow and managed band against a basket of certain foreign currencies.
It is possible that the Chinese government could adopt a more flexible currency
policy, which could result in more significant fluctuation of Chinese Renminbi
against the U.S. dollar. We can offer no assurance that Chinese
Renminbi will be stable against the U.S. dollar or any other foreign
currency.
Our
financial statements are translated into U.S. dollars at the average exchange
rates in each applicable period. To the extent the U.S. dollar
strengthens against foreign currencies, the translation of these foreign
currency denominated transactions results in reduced revenue, operating expenses
and net income for our international operations. Similarly, to the
extent the U.S. dollar weakens against foreign currencies, the translation of
these foreign currency denominated transactions results in increased revenue,
operating expenses and net income for our international
operations. We are also exposed to foreign exchange rate fluctuations
as we convert the financial statements of our foreign consolidated subsidiaries
into U.S. dollars in consolidation. If there is a change in foreign
currency exchange rates, the conversion of the foreign consolidated
subsidiaries’ financial statements into U.S. dollars will lead to a translation
gain or loss which is recorded as a component of other comprehensive
income. Changes in the functional currency value of these assets and
liabilities create fluctuations that will lead to a transaction gain or
loss. We have not entered into agreements or purchased instruments to
hedge our exchange rate risks, which could leave us exposed to the potential
adverse effects of currency fluctuations. Moreover, the availability
and effectiveness of any hedging transaction, should such transactions be
available to us on reasonable terms and should we choose to engage in such
transactions (of which no assurances can be given), may be limited and we may
not be able to hedge our exchange rate risks.
The
State Administration of Foreign Exchange (“SAFE”) restrictions on currency
exchange may limit our ability to receive and use our sales revenue effectively
and to pay dividends.
All of
our sales revenue and expenses are denominated in Chinese
Renminbi. Under PRC law, the Renminbi is currently convertible under
the “current account,” which includes trade and service-related foreign exchange
transactions and dividends, but not under the “capital account,” which includes
foreign direct investments and loans. Currently, our PRC operating
subsidiaries may purchase foreign currencies for settlement of current account
transactions, including for payment of dividends to us, without the approval of
SAFE, by complying with certain procedural requirements. However, the
relevant PRC government authorities may limit or eliminate our ability to
purchase foreign currencies in the future. Since a significant amount
of our future revenue will be denominated in Renminbi, any existing and future
restrictions on currency exchange may limit our ability to pay dividends or
utilize revenue generated in Renminbi to fund any business activities outside
China that are denominated in foreign currencies.
Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including
SAFE. These limitations could affect our PRC operating subsidiaries’
ability to obtain foreign exchange through debt or equity
financing. If the foreign exchange control system prevents us from
obtaining foreign currency, we may be unable to pay the interest and principal
on any debentures we may issue, pay dividends on our equity or meet obligations
that may be incurred in the future that require payment in foreign
currency.
The PRC
government also may at its discretion restrict access in the future to foreign
currencies for current account transactions.
Because
our principal assets are located outside of the United States and a majority of
our directors and our officers will reside outside of the United States, it may
be difficult for you to enforce your rights based on the United States federal
securities laws against us and our officers and directors in the United States
or to enforce judgments of United States courts against us or them in the
PRC.
All of
our officers and directors reside outside of the United States. In addition, our
operating subsidiaries are located in the PRC and all of their assets are
located outside of the United States. China does not have a treaty
with United States providing for the reciprocal recognition and enforcement of
judgments of courts. It may therefore be difficult for investors in
the United States to enforce their legal rights based on the civil liability
provisions of the United States federal securities laws against us in the courts
of either the United States or the PRC, and even if civil judgments are obtained
in courts of the United States, to enforce such judgments in the PRC
courts. Further, it is unclear if extradition treaties now in effect
between the United States and the PRC would permit effective enforcement of
criminal penalties against us or our officers and directors under the United
States federal securities laws or otherwise.
13
The
PRC legal system contains uncertainties which could limit the legal protections
available to us and you, or could lead to penalties on us.
The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential
value. In 1979, the PRC government began to promulgate a
comprehensive system of laws and regulations governing economic matters in
general. Our PRC operating subsidiaries are subject to laws and regulations
applicable to foreign investment in China. In addition, all of our subsidiaries
are incorporated in China and subject to all applicable Chinese laws and
regulations. Because of the relatively short period for enacting such a
comprehensive legal system, it is possible that the laws, regulations and legal
requirements are relatively recent, and their interpretation and enforcement
involve uncertainties. These uncertainties could limit the legal protections
available to us and other foreign investors, including you, and may lead to
penalties imposed on us because of the different understanding between the
relevant authority and us. In addition, we cannot predict the effect
of future developments in the PRC legal system, including the promulgation of
new laws, changes to existing laws or the interpretation or enforcement thereof,
or the preemption of local regulations by national laws.
We
may have limited legal recourse under the PRC laws if disputes arise under our
contracts with third parties.
The
Chinese government has enacted significant laws and regulations dealing with
matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. However, their experience in
implementing, interpreting and enforcing these laws and regulations is limited,
and our ability to enforce commercial claims or to resolve commercial disputes
is unpredictable. If our new business ventures are unsuccessful, or
other adverse circumstances arise from these transactions, we face the risk that
the parties to these ventures may seek ways to terminate the transactions, or
may hinder or prevent us from accessing important information regarding the
financial and business operations of these acquired companies. The
resolution of these matters may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the
legal merits of a particular matter or dispute may influence their
determination. Any rights we may have to specific performance, or to seek an
injunction under the PRC laws, in either of these cases, are severely limited,
and without a means of recourse by virtue of the Chinese legal system, we may be
unable to prevent these situations from occurring. The occurrence of
any such events could have a material adverse effect on our business, financial
condition and results of operations. Although legislation in China
over the past 30 years has significantly improved the protection afforded to
various forms of foreign investment and contractual arrangements in China, these
laws, regulations and legal requirements are relatively new and their
interpretation and enforcement involve uncertainties, which could limit the
legal protection available to us, and foreign investors, including
you. The inability to enforce or obtain a remedy under any of our
future agreements could result in a significant loss of business, business
opportunities or capital and could have a material adverse impact on our
operations.
PRC
regulations relating to acquisitions of PRC companies by foreign entities may
create regulatory uncertainties that could restrict or limit our ability to
operate.
In
November 2005, SAFE issued a public notice, known as Circular 75, concerning the
use of offshore holding companies in mergers and acquisitions in China. The
public notice provides that if an offshore company controlled by PRC residents
intends to acquire a PRC company, such acquisition will be subject to
registration with the relevant foreign exchange authorities. The public notice
also suggests that registration with the relevant foreign exchange authorities
is required for any sale or transfer by the PRC residents of shares in an
offshore holding company that owns an onshore company. The PRC residents must
each submit a registration form to the local SAFE branch with respect to their
ownership interests in the offshore company, and must also file an amendment to
such registration if the offshore company experiences material events, such as
changes in the share capital, share transfer, mergers and acquisitions, spin-off
transactions or use of assets in China to guarantee offshore
obligations.
On August
8, 2006, MOFCOM, joined by the State-owned Assets Supervision and Administration
Commission of the State Council, the State Administration of Taxation, the State
Administration for Industry and Commerce, the China Securities Regulatory
Commission and SAFE, released a substantially amended version of the Provisions
for Foreign Investors to Merge with or Acquire Domestic Enterprises (the
“Revised M&A Regulations”), which took effect September 8, 2006. These new
rules significantly revised China’s regulatory framework governing
onshore-to-offshore restructurings and foreign acquisitions of domestic
enterprises. These new rules signify greater PRC government attention to
cross-border merger, acquisition and other investment activities, by confirming
MOFCOM as a key regulator for issues related to mergers and acquisitions in
China and requiring MOFCOM approval of a broad range of merger, acquisition and
investment transactions. Further, the new rules establish reporting requirements
for acquisition of control by foreigners of companies in key industries, and
reinforce the ability of the Chinese government to monitor and prohibit foreign
control transactions in key industries.
Among
other things, the revised M&A Regulations include new provisions that
purport to require that an offshore special purpose vehicle, or SPV, formed for
listing purposes and controlled directly or indirectly by PRC companies or
individuals must obtain the approval of the CSRC prior to the listing and
trading of such SPV’s securities on an overseas stock exchange. On
September 21, 2006, the CSRC published on its official website procedures
specifying documents and materials required to be submitted to it by SPVs
seeking CSRC approval of their overseas listings. However, the
application of this PRC regulation remains unclear with no consensus currently
existing among the leading PRC law firms regarding the scope and applicability
of the CSRC approval requirement.
14
We were
advised by our PRC counsel that our restructuring is not subject to CSRC
approval. However, we cannot exclude the possibility that the CSRC or
another PRC regulatory agency subsequently determines that CSRC approval was
required for our restructuring. If the CSRC or another PRC regulatory
agency subsequently determines that CSRC approval was required for our
restructuring, we may face regulatory actions or other sanctions from the CSRC
or other PRC regulatory agencies. These regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, or take other actions that could have a material adverse effect on our
business, financial condition, results of operations, reputation and prospects,
as well as the trading price of our common stock.
If later
the CSRC requires that we obtain its approval, we may be unable to obtain a
waiver of the CSRC approval requirements, if and when procedures are established
to obtain such a waiver. Any uncertainties and/or negative publicity regarding
this CSRC approval requirement could have a material adverse effect on the
trading price of our common stock. Furthermore, published news reports in China
recently indicated that the CSRC may have curtailed or suspended overseas
listings for Chinese private companies.
It is
uncertain how our business operations or future strategy will be affected by the
interpretations and implementation of Circular 75 and its internal implementing
guidelines and the Revised M&A Regulations. It is anticipated that
application of the new rules will be subject to significant administrative
interpretation, and we will need to closely monitor how MOFCOM and other
ministries apply the rules to ensure that our domestic and offshore activities
continue to comply with PRC law. Given the uncertainties regarding
interpretation and application of the new rules, we may need to expend
significant time and resources to maintain compliance.
Our
partial payment of the acquisition price paid for Liaoning Shengsheng creates
regulatory restrictions that limit Liaoning Shengsheng’s ability to pay
dividends to us and may result in other regulatory restrictions.
Generally
there is no SAFE approval required prior to remitting dividends of a foreign
invested enterprise. However, according to the Notice
on Relevant Issues concerning Improving Foreign Direct Investment Foreign
Exchange Administration by SAFE, effective as of April 1, 2003, before the
acquisition price of an acquisition of a PRC company by a foreign investor has
been paid off, any dividend remittance abroad by such PRC company may only be in
proportion to the actual payments made by such foreign
investor. Since we have only paid $1.28 million of $5.12 million
consideration due to the Liaoning shareholders, Liaoning Shengsheng can only
remit 25% of its dividends or profits to us until we have paid all the
acquisition consideration. This restriction is not affected by the timing of the
exercise of the call option granted from Sherry Li to the original Shengsheng
shareholders pursuant to the Amended and Restated Call Option Agreement dated
May 12, 2010.
Our
labor costs are likely to increase as a result of changes in Chinese labor
laws.
We expect
to experience an increase in our cost of labor due to recent changes in Chinese
labor laws which are likely to increase costs further and impose restrictions on
our relationship with our employees. In June 2007, the National People’s
Congress of the PRC enacted new labor law legislation called the Labor Contract
Law and more strictly enforced existing labor laws. The new law,
which became effective on January 1, 2008, amended and formalized workers’
rights concerning overtime hours, pensions, layoffs, employment contracts and
the role of trade unions. In addition, under the new law, employees
who either have worked for a company for 10 years or more or who have had two
consecutive fixed-term contracts should be given an “open-ended employment
contract” upon the request of such employee that, in effect, constitutes a long
term contract which is only terminable under certain limited
circumstances. Should we become subject to such open-ended employment
contracts, our employment related risks could increase significantly and we may
be limited in our ability to downsize our workforce in the event of an economic
downturn. No assurance can be given that we will not in the future be subject to
labor strikes or that it will not have to make other payments to resolve future
labor issues caused by the new laws. Furthermore, there can be no
assurance that the labor laws will not change further or that their
interpretation and implementation will vary, which may have a negative effect
upon our costs and results of operations.
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some of our competitors, are
not subject to these prohibitions. Corruption, extortion, bribery,
pay-offs, theft and other fraudulent practices occur from time to time in
China. If our competitors engage in these practices, they may receive
preferential treatment or other advantage in securing business or from
government officials who might give them priority in obtaining new licenses,
which would put us at a disadvantage. Such disadvantage can be
expected to have a material adverse impact on our business, growth prospects and
results of operations. Although we inform our personnel that such
practices are illegal, we do not yet have an official policy in place and, even
once such a policy is implemented, we cannot assure you 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, which could be
expected to have a material adverse effect on our reputation, share price and
future operating prospects.
15
If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with SAFE. We may also face regulatory
uncertainties that could restrict our ability to adopt equity compensation plans
for our directors and employees and other parties under PRC laws.
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 know 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, such as our company,
after April 6, 2007, Circular 78 requires all participants who are PRC citizens
to register 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 company’s covered equity compensation plan
prior to April 6, 2007. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time
consuming.
In the
future, we may adopt an equity incentive plan and make numerous stock option
grants under the plan to our officers, directors and employees, some of whom are
PRC citizens and may be required to register with SAFE. 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.
Due
to various restrictions under PRC laws on the distribution of dividends by our
PRC operating companies, we may not be able to pay dividends to our
shareholders.
The
Wholly-Foreign Owned Enterprise Law (1986), as amended and the Wholly-Foreign
Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law
of the PRC (2006) contain the principal regulations governing dividend
distributions by wholly foreign owned enterprises. Under these regulations,
wholly foreign owned enterprises (“WFOE”) may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. Additionally, a WFOE is required to set aside a
certain amount of their accumulated profits each year, if any, to fund certain
reserve funds. These reserves are not distributable as cash dividends
except in the event of liquidation and cannot be used for working capital
purposes.
Furthermore,
if our consolidated subsidiaries in China incur debt on their own in the future,
the instruments governing the debt may restrict its ability to pay dividends or
make other payments. If we or our consolidated subsidiaries are unable to
receive all of the revenues from our operations due to these contractual or
dividend arrangements, we may be unable to pay dividends on our common
stock. In addition, under current PRC law, we must retain a reserve
equal to 10 percent of net income after taxes each year, with the total amount
of the reserve not to exceed 50 percent of registered
capital. Accordingly, this reserve will not be available to be
distributed as dividends to our shareholders. We presently do not
intend to pay dividends in the foreseeable future. Our management intends to
follow a policy of retaining all of our earnings to finance the development and
execution of our strategy and the expansion of our business.
As
all of our operations and personnel are in the PRC, we may have difficulty
establishing adequate western style management, legal and financial
controls.
The PRC
historically has been deficient in western style management and financial
reporting concepts and practices, as well as in modern banking, and other
control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a
result of these factors, and especially given that we expect to be a publicly
listed company in U.S. and subject to regulation as such, we may experience
difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet western
standards. We may have difficulty establishing adequate management,
legal and financial controls in the PRC. Therefore, we may, in turn,
experience difficulties in implementing and maintaining adequate internal
controls as required under Section 404 of the Sarbanes-Oxley Act and other
applicable laws, rules and regulations. 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. Any such deficiencies, weaknesses or lack of
compliance could have a materially adverse effect on our business and the public
announcement of such deficiencies could adversely impact our stock
price.
An
outbreak of a pandemic avian influenza, SARS or other contagious disease may
have an adverse effect on the Chinese economy which may adversely affect our
results of operations.
During
the past four years, large parts of Asia experienced unprecedented outbreaks of
avian influenza. Currently, no fully effective avian flu vaccines
have been developed and there is evidence that the H5N1 virus is
evolving. An effective vaccine may not be discovered in time to
protect China against an avian flu pandemic. Also, in the first half of 2003,
certain countries in Asia experienced an outbreak of severe acute respiratory
syndrome, or SARS, a highly contagious form of atypical pneumonia, which
seriously interrupted the economic activities in the affected
regions.
16
An
outbreak or perceived outbreak of avian flu, SARS, swine flu or other contagious
disease may seriously interrupt our operations, which may have a materially
adverse effect on our financial results.
Our
bank accounts are not insured or protected against loss.
We
maintain our cash with various banks and trust companies located in China. Our
cash accounts are not insured or otherwise protected. Should any bank or trust
company holding our cash deposits become insolvent, or if we are otherwise
unable to withdraw funds, we would lose the cash on deposit with that particular
bank or trust company.
Under
the PRC EIT Law, we may be classified as a “resident enterprise” of the PRC.
Such classification could result in PRC tax consequences to us and our non-PRC
resident enterprise shareholders.
On March
16, 2007, the National People’s Congress approved and promulgated a new tax law,
the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1,
2008. Under the EIT Law, enterprises are classified as resident enterprises and
non-resident enterprises. An enterprise established outside of China with “de
facto management bodies” within China is considered a “resident enterprise,”
meaning that it can be treated in a manner similar to a Chinese enterprise for
enterprise income tax purposes. The implementing rules of the EIT Law define “de
facto management bodies” as a managing body that in practice exercises
“substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the enterprise; however,
it remains unclear whether the PRC tax authorities would deem our managing body
as being located within China. Due to the short history of the EIT
Law and lack of applicable legal precedents, the PRC tax authorities determine
the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case
basis.
If the
PRC tax authorities determine we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25 percent on our
worldwide taxable income, as well as PRC enterprise income tax reporting
obligations. Second, under the EIT Law and its implementing rules, dividends
paid between “qualified resident enterprises” are exempt from enterprise income
tax. As a result, if we are treated as a “qualified resident enterprise,” all
dividends that we receive from Liaoning Shengsheng (assuming such dividends are
considered sourced within the PRC) should be exempt from PRC tax. If we are
treated as a “non-resident enterprise” under the EIT Law, then dividends that we
receive from Liaoning Shengsheng (assuming such dividends are considered sourced
within the PRC) may be subject to a 10 percent PRC withholding tax. Any such tax
on dividends could materially reduce the amount of dividends, if any, we could
pay to our shareholders.
Finally,
the new “resident enterprise” classification could result in a situation in
which a 10 percent PRC tax is imposed on dividends we pay to our enterprise, but
not individual, investors that are not tax residents of the PRC (“non-resident
investors”) and gains derived by them from transferring our common stock, if
such income is considered PRC-sourced income by the relevant PRC tax
authorities. In such event, we may be required to withhold a 10 percent PRC tax
on any dividends paid to our non-resident investors. Our non-resident investors
also may be responsible for paying PRC tax at a rate of 10 percent on any gain
realized from the sale or transfer of our common stock in certain circumstances.
We would not, however, have an obligation to withhold PRC tax with respect to
such gain under the PRC tax laws.
Moreover,
the State Administration of Taxation (“SAT”) released Circular Guoshuihan No.
698 (“Circular 698”) on December 10, 2009 that reinforces the taxation of
certain equity transfers by non-resident investors through overseas holding
vehicles. Circular 698 addresses indirect equity transfers as well as other
issues. Circular 698 is retroactively effective from January 1, 2008. According
to Circular 698, where a non-resident investor who indirectly holds an equity
interest in a PRC resident enterprise through a non-PRC offshore holding company
indirectly transfers an equity interest in a PRC resident enterprise by selling
an equity interest in the offshore holding company, and the latter is located in
a country or jurisdiction where the actual tax burden is less than 12.5 percent
or where the offshore income of its residents is not taxable, the non-resident
investor is required to provide the PRC tax authority in charge of that PRC
resident enterprise with certain relevant information within 30 days of the
transfer. The tax
authorities in charge will evaluate the offshore transaction for tax purposes.
In the event that the tax authorities determine that such transfer is abusing
forms of business organization and a reasonable commercial purpose for the
offshore holding company other than the avoidance of PRC income tax liability is
lacking, the PRC tax authorities will have the power to re-assess the nature of
the equity transfer under the doctrine of substance over form. A reasonable
commercial purpose may be established when the overall international (including
U.S.) offshore structure is set up to comply with the requirements of
supervising authorities of international (including U.S.) capital markets. If
the SAT’s challenge of a transfer is successful, it may deny the existence of
the offshore holding company that is used for tax planning purposes and subject
the seller to PRC tax on the capital gain from such transfer. Since Circular 698
has a short history, there is uncertainty as to its application. We (or a
non-resident investor) may become at risk of being taxed under Circular 698 and
may be required to expend valuable resources to comply with Circular 698 or to
establish that we (or such non-resident investor) should not be taxed under
Circular 698, which could have a material adverse effect on our financial
condition and results of operations (or such non-resident investor’s investment
in us).
If any
PRC tax applies to a non-resident investor, the non-resident investor may be
entitled to a reduced rate of PRC tax under an applicable income tax treaty
and/or a deduction for such PRC tax against such investor’s domestic taxable
income or a foreign tax credit in respect of such PRC tax against such
investor’s domestic income tax liability (subject to applicable conditions and
limitations). Investors are urged to consult their own tax advisors regarding
the applicability of any such taxes, the effects of any applicable income tax
treaties, and any available deductions or foreign tax credits. For a
further discussion of these issues, see the section of this prospectus captioned
“Material PRC Income Tax Considerations,” below.
17
Risks
Associated With Our Common Stock
Shares
of our common stock lack a significant trading market.
We will
seek to list our common stock on the NYSE AMEX under the symbol
CFG. There can be no assurance that an active trading market in our
common stock will develop, or if such a market develops, that it will be
sustained. The price at which investors purchase shares of our common
stock may not be indicative of the price that will prevail in the trading
market. Investors may be unable to sell their shares of common stock at or above
their purchase price, which may result in substantial losses.
The
market price for our stock may be volatile.
The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:
|
●
|
liquidity of the market for the
shares;
|
|
●
|
actual or anticipated
fluctuations in quarterly operating
results;
|
|
●
|
Sales of substantial amounts of
our common stock, or the perception such sales might
occur;
|
|
●
|
changes in financial estimates by
securities research
analysts;
|
|
●
|
conditions in PRC and
international timber and wood processing
markets;
|
|
●
|
changes in the economic
performance or market valuations of other companies in the
industry;
|
|
●
|
announcements by us or our
competitors of new products, acquisitions, strategic partnerships, joint
ventures or capital
commitments;
|
|
●
|
addition or departure of key
personnel;
|
|
●
|
fluctuations of exchange rates
between RMB and the U.S.
dollar;
|
|
●
|
intellectual property
litigation;
|
|
●
|
our dividend policy;
and
|
|
●
|
general economic or political
conditions in China.
|
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also
materially and adversely affect the market price of our stock.
The
future sale of a substantial amount of outstanding stock in the public
marketplace could reduce the price of our common stock.
We cannot
predict the effect, if any, that market sales of shares of our common stock or
the availability of shares of common stock for sale will have on the market
price prevailing from time to time. Sales of shares of our common stock in the
public market covered under an effective registration statement, or the
perception that those sales may occur, could cause the trading price of our
common stock to decrease or to be lower than it might be in the absence of those
sales or perceptions.
18
We may issue
additional shares of our capital stock or debt securities to raise capital or
complete acquisitions, which would reduce the equity interest of our
stockholders.
Our
certificate of incorporation authorizes the issuance of up to 50,000,000 shares
of common stock, $.001 par value per share, and 2,000,000 shares of preferred
stock, $.001 par value per share. There are currently 13,854,281
shares of our common stock, and 500,000 shares of our preferred stock,
outstanding. An additional 4,714,253 shares of common stock are
reserved for issuance upon the exercise of outstanding warrants, conversion of
the Series A Convertible Preferred Stock and conversion of outstanding
promissory notes. As a result, there are approximately 31,431,466
authorized and unissued shares of our common stock and 1,500,000 shares of our
preferred stock which have not been reserved and are available for future
issuance. Although we have no commitments as of the date of this offering to
issue our securities other than as set forth herein, we may issue a substantial
number of additional shares of our securities to complete a business combination
or to raise capital. We registered many shares under the registration
statement of which this prospectus is a part for the benefit of certain selling
stockholders, many of which are shares of common stock underlying notes,
preferred stock and warrants. Accordingly, such shares are not yet
issued and outstanding, but the registration of such shares may make it more
likely such securities will be converted or exercised (as applicable) and such
additional shares of common stock issued to such investors. The
issuance of additional shares of our securities may cause economic and
percentage dilution to our stockholders and may adversely affect prevailing
market prices for our common stock.
Additionally,
those investors who purchased convertible promissory notes and warrants in our
February 2010 private placement have the right, exercisable any time prior to
the effectiveness of the registration statement of which this prospectus is a
part, to purchase up to an additional $2,500,000 of notes and warrants on terms
identical to those in the February 2010 offering. See “Description of
Our Securities – February 2010 Private Placement” included herein for a complete
description of the February 2010 Private Placement.
Our management
and directors own a significant amount of our common stock or options to
purchase a significant amount of our common stock, giving them influence or
control in corporate transactions and other matters, and their interests could
differ from those of other stockholders.
As of the
date of this prospectus, our management and directors as a group have the right
to control 86.61% of our outstanding common stock. As a result, they
are in a position to significantly influence the outcome of matters requiring a
stockholder vote, including the election of directors, the adoption of any
amendment to our articles of incorporation or bylaws, and the approval of
significant corporate transactions. Their control may delay or prevent a change
of control on terms favorable to our other stockholders and may adversely affect
your voting and other stockholder rights.
Risks
Related to an Investment in Our Securities
No
cash dividends on our common stock are expected to be paid in the foreseeable
future.
While we
do pay dividends on our Series A Preferred Stock at a rate of 11% per annum, 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
in the event we choose to do so. Even if the funds are legally
available for distribution, we may nevertheless decide not to pay any dividends.
Furthermore, the terms of our Series A Preferred Stock prohibit the payment of
dividends on our common stock while any Series A Preferred Stock is
outstanding. We intend to retain all earnings for our
operations. As a result, investors in our common stock should not
rely on an investment in our securities if they require the investment to
produce dividend income. Capital appreciation, if any, of our shares may be
investors’ sole source of gain for the foreseeable future. Moreover,
investors may not be able to resell their shares of the Company at or above the
price they paid for them.
Volatility
in our common share price may subject us to securities litigation.
The
market for our common stock may be characterized by significant price
volatility, and we expect that our share price will continue to be more volatile
than a seasoned issuer for the indefinite future. In the past,
plaintiffs have often initiated securities class action litigation against a
company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar
litigation. Securities litigation could result in substantial costs and
liabilities and could divert management's attention and resources.
Our
common stock may be thinly traded and you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
We intend
to apply to have our common stock listed on the NYSE AMEX. Our common
stock may be “thinly-traded”, meaning that the number of persons interested in
purchasing our common stock at or near bid prices at any given time may be
relatively small or non-existent. This situation may be attributable
to a number of factors, including the fact that we are a small company which is
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 might 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. As a consequence, 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 broad or
active public trading market for our common stock will develop or be
sustained.
19
The
elimination of liability of our directors, officers and employees under Delaware
law and the existence of indemnification rights to our directors, officers and
employees may result in substantial expenditures by our company and may
discourage lawsuits against our directors, officers and employees.
Our
certificate of incorporation contains provisions that eliminate the liability of
our directors to our company and stockholders to the extent allowed under
Delaware law, and we are prepared to give such indemnification to our directors
and officers to the extent provided by Delaware law. The foregoing
indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors
and officers, which we may be unable to recoup. These provisions and
resultant costs may also discourage our company from bringing a lawsuit against
directors and officers for breaches of their fiduciary duties, and may similarly
discourage the filing of derivative litigation by our stockholders against our
directors and officers even though such actions, if successful, might otherwise
benefit our company and stockholders.
Shares
eligible for future sale may adversely affect the market.
From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144 of the Securities Act, subject to certain
limitations. In general, pursuant to amended Rule 144, non-affiliate
stockholders may sell freely after six months subject only to the current public
information requirement (which disappears after one year). Affiliates
may sell after six months subject to the Rule 144 volume, manner of sale (for
equity securities), current public information and notice
requirements. Any substantial sale of our common stock pursuant to
Rule 144 or pursuant to any resale prospectus may have a material adverse effect
on the market price of our common stock. In addition we are
registering for resale 6,318,572 shares of common stock from our private
placements on the Registration Statement relating to this
prospectus. Such shares will be freely tradable with no restrictions
after registration.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS
This
prospectus contains forward-looking statements. Forward-looking statements give
our current expectations or forecasts of future events. You can identify
these statements by the fact that they do not relate strictly to historical or
current facts. Forward-looking statements involve risks and uncertainties.
Forward-looking statements include statements regarding, among other things, (a)
our projected sales, profitability and cash flows, (b) our growth strategies,
(c) anticipated trends in our industries, (d) our future financing plans and (e)
our anticipated needs for working capital. They are generally identifiable by
use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,”
“potential,” “projects,” “continuing,” “ongoing,” “expects,” “management
believes,” “we believe,” “we intend” or the negative of these words or other
variations on these words or comparable terminology. In particular, these
include statements relating to future actions, future performance, sales
efforts, expenses, the outcome of contingencies such as legal proceedings, and
financial results.
Any or
all of our forward-looking statements in this prospectus may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially as a
result of various factors, including, without limitation, the risks outlined
under “Risk Factors” and matters described in this prospectus generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur and you
should not place undue reliance on these forward-looking
statements.
USE
OF PROCEEDS
We
estimate that the net proceeds from the sale of the 4,000,000 shares
of common stock in the offering at an offering price of
$[ ] per share will be approximately
$[ ] million after deducting the underwriting discounts and
commissions and estimated offering expenses. Our net proceeds will be
approximately $[ ] million if the underwriter
exercises its over-allotment option to purchase additional shares of common
stock from us in full.
We intend
to use the net proceeds from the offering for the following purposes subject to
our application for and obtaining of applicable registrations and approvals
under PRC laws and regulations:
|
•
|
approximately
$5.03 million to expand our Karamai MDF production facility through
construction of a new facility; and
|
|
•
|
approximately
$3-$5 million to pay the balance for the acquisition of Beijisong, such
price to be determined by an appraisal of Beijisong to be conducted in
2010 (as set forth herein); and
|
|
•
|
approximately
$2.64 million to pay for the acquisition of Yuying (as set forth herein);
and
|
|
•
|
approximately
$1.5 million to be used as working capital for Beijisong and Yuying after
their respective acquisitions; and
|
|
•
|
approximately
$3.18 million to pay the remaining unpaid purchase price to the Shengsheng
Shareholders following the initial closing of this offering, who shall
immediately transfer such amount to Liaoning Shengsheng as working
capital, which may include use for potential acquisitions in ordinary
course of business; and
|
20
|
•
|
the
remaining balance to expand our poplar seedling business and for working
capital and general corporate
purposes.
|
The
amount and timing of our actual expenditures will depend on numerous factors,
including the status of our acquisition and development efforts, sales and
marketing activities, and the amount of cash generated or used by our
operations. We may find it necessary or advisable to use portions of
the proceeds for other purposes, and we will have broad discretion in the
application of the net proceeds. Additionally, we may choose to expand our
current business through acquisition of complimentary businesses using cash
or shares, as set forth herein. Except as set forth herein, we have
not entered into any negotiations, agreements or commitments with respect to any
such acquisitions at this time.
DIVIDEND
POLICY
Although
we will continue paying required dividends of 11% per annum with respect to our
outstanding Series A Preferred Stock, we have not paid, and do not currently
intend to pay, cash dividends on our common stock in the foreseeable
future. Liaoning Shengsheng, the Company’s subsidiary, declared
a one time dividend in the amount of $6,139,166 in 2008 (prior to our
acquisition of Liaoning Shengsheng), and paid such dividends to the original
Shengsheng shareholders in 2009. On
March 21, 2010, Liaoning Shengsheng declared a one time dividend to the original
Liaoning Shengsheng shareholders in the amount of RMB55,300,000 (approximately
$8,000,000). This dividend will be paid when Liaoning Shengsheng has sufficient
cash flow.
Our policy is to retain all earnings, if any, to provide funds for
operation and expansion of our business. We are a holding company incorporated
in the State of Delaware and do not have any assets or conduct any business
operations other than our investments in our subsidiaries. As a
result of our holding company structure, we rely entirely on dividend payments
from our PRC subsidiaries. PRC accounting standards and regulations
currently permit payment of dividends only out of accumulated profits, a portion
of which is required to be set aside for certain reserve funds. Our
inability to receive all of the revenues from our PRC subsidiaries' operations
may provide an additional obstacle to our ability to pay dividends if we so
decide in the future. The declaration of dividends, if any, will be
subject to the discretion of our board of directors, which may consider such
factors as our results of operations, financial condition, capital needs and
acquisition strategy, among others.
Generally
there is no prior SAFE approval required for remitting dividends of a foreign
invested enterprise. However, according to Notice on Relevant Issues
concerning Improving Foreign Direct Investment Foreign Exchange
Administration by
SAFE , effective as of April 1, 2003, before the acquisition price of an
acquisition of a PRC company by a foreign investor has been paid off, any
dividend remittance abroad by such PRC company may only be in proportion to the
actual payments made by such foreign investor. Since we have only
paid $1.28 million of $5.12 million consideration due to the Liaoning
shareholders, Liaoning Shengsheng can only remit 25% of its dividends or profits
to us until we have paid all the acquisition consideration. This restriction is
not affected by the timing of the exercise of the call option granted from
Sherry Li to the original Shengsheng shareholders pursuant to the Amended and
Restated Call Option Agreement dated May 12, 2010.
21
CAPITALIZATION
The
following table summarizes our capitalization as of March 31, 2010, after taking
into account the Reverse Split, on an actual basis and as adjusted basis to
reflect our receipt of estimated net proceeds from the sale
of 4,000,000 shares of common stock (excluding
the 600,000 shares of common stock which the underwriter has the
option to purchase to cover over-allotments, if any) in this offering at an
offering price of $[ ] per share, and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses of approximately $[ ] per share.
You
should read this table in conjunction with the sections of this prospectus
entitled “Use of Proceeds,” “Summary Consolidated Financial Information,”
“Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial
statements and related notes included elsewhere in this
prospectus.
March 31, 2010 (1)
|
||||||||
Actual
|
As Adjusted
|
|||||||
Stockholders’
equity:
|
||||||||
Common
stock, $0.001 par value, 52,000,000 shares authorized,
13,854,281 shares outstanding at March 31, 2010(1) actual and as
adjusted
|
$ | 14,271 | $ | |||||
Preferred
stock, $0.001 par value, 2,000,000 shares authorized, 500,000 issued and
outstanding at March 31, 2010
|
500 | |||||||
Additional
paid-in capital
|
5,541,740 | |||||||
Statutory
reserves
|
— | |||||||
Accumulated
other comprehensive income
|
2,556,144 | |||||||
Retained
earnings (accumulated deficit)
|
12,812,574 | |||||||
Total
stockholders’ equity (deficiency)
|
20,925,224 | |||||||
Total
capitalization
|
$ | 32,627,963 | $ |
(1)
The table above excludes, as of March 31, 2010:
·
|
shares of our
common stock issuable upon the conversion of Series A Convertible
Preferred Stock at a one to one conversion ratio pursuant to the
Securities Purchase Agreement between China For-Gen Corp. and Professional
Offshore Opportunity Fund, Ltd. in May 2008;
and
|
·
|
shares of common
stock issuable upon the conversion of those certain Promissory Notes and
warrants issued pursuant to the Note Purchase Agreement between China
For-Gen and certain investors in February
2010.
|
MARKET
PRICE OF COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market
Information
There is
currently no public market for our common stock. We intend to apply
to have our common stock listed on the NYSE AMEX under the symbol
CFG.
Holders
As of
July 12, 2010, there were 13 holders of record of our common stock.
Equity
Compensation Plan Information
DETERMINATION
OF OFFERING PRICE
The
representative has advised us that the underwriters propose to offer the common
stock directly to the public at the public offering price that appears on the
cover page of this prospectus. Prior to this offering, there was no public
market for any of our securities. The public offering price of our common stock
was determined by negotiation between us and the underwriters. The principal
factors considered in determining the public offering price of the common stock
included:
22
•
|
the information in this
prospectus and otherwise available to the
underwriters;
|
•
|
the history and the prospects for
the industry in which we
compete;
|
•
|
the ability of our
management;
|
•
|
the prospects for our future
earnings;
|
•
|
the present state of our
development and our current financial
condition;
|
•
|
the general condition of the
economy and the securities markets in the United States at the time of
this offering;
|
•
|
the recent market prices of, and
the demand for, publicly-traded securities of generally comparable
companies; and
|
•
|
other factors as were deemed
relevant.
|
We cannot
be sure the public offering price will correspond to the price at which our
common stock will trade in the public market following this offering or that an
active trading market for our common stock will develop or continue after this
offering.
23
DILUTION
If you
invest in our securities, your investment will be diluted immediately to the
extent of the difference between the public offering price per share of common
stock you pay in this offering, and the pro forma net tangible book value per
share of common stock immediately after this offering.
Pro forma
net tangible book value represents the amount of our total tangible assets
reduced by our total liabilities after giving effect to the sale of four million
shares of common stock in this offering.. Tangible assets equal our total assets
less goodwill and intangible assets. Pro forma net tangible book value per share
represents our pro forma net tangible book value divided by the number of shares
of common stock outstanding after giving effect to the conversion of 500,000
shares of Series A Convertible Preferred Stock. As of March 31, 2010,
our pro forma net tangible book value was $[ ] million and our
pro forma net tangible book value per share was
$[ ].
After
giving effect to the sale of 4,000,000 shares of common stock in the offering at
a public offering price of $[ ] per share, and after
deducting the underwriting discount and commission and estimated offering
expenses, our adjusted pro forma net tangible book value as of March 31, 2010
would have been $[ ] million, or
$[ ] per share. This represents an immediate
increase in pro forma net tangible book value of $[ ] per share to
existing stockholders and immediate dilution of $[ ] per
share to new investors purchasing shares in this offering.
The
following table illustrates this per share dilution:
As of March 31,
2010
|
As Adjusted
|
|||||||
Public
offering price per share
|
$ | 5.00 | ||||||
Pro
forma net tangible book value per share as of March 31,
2010
|
$ | [ | ] | |||||
Increase
in pro forma net tangible book value per share attributable to new
investors
|
[ | ] | ||||||
Adjusted
pro forma net tangible book value per share after the
offering
|
[ | ] | ||||||
Dilution
in net tangible book value per share to new investors
|
$ | [ | ] |
The
information above is as of March 31, 2010 and excludes the
following:
|
•
|
444,119 shares of common stock
(as adjusted pursuant to both its terms and the Reverse Split) issuable
upon the conversion of Series A Convertible Preferred Stock owned by a
single investor, as such investor’s ownership of our common stock would
have exceeded the cap of 4.9% if such shares of Series A Convertible
Preferred Stock were also converted to common stock. According to the
terms of our Preferred Stock, holders of our Series A Convertible
Preferred Stock are restricted from converting to common stock if the
number of shares of common stock to be issued pursuant to such conversion
would cause the number of shares of common stock owned by such holder and
its affiliates at such time to equal or exceed 4.9% of our then issued and
outstanding common stock;
|
|
•
|
2,950,001 shares of common stock
issuable upon the exercise of warrants outstanding at March 31, 2010 with
a weighted average exercise price of $[ ] per share;
and
|
Our
adjusted pro forma net tangible book value after the offering, and the dilution
to new investors in the offering, will change from the amounts shown above if
the underwriters’ over-allotment option is exercised.
A $1.00
increase or decrease in the assumed public offering price per share would
increase or decrease our adjusted pro forma net tangible book value per share
after this offering by approximately [$ ], and dilution per
share to new investors by approximately $[ ], after deducting
the underwriting discount and estimated offering expenses payable by
us.
EXCHANGE
RATE INFORMATION
Our
business is primarily conducted in China and all of our revenues are denominated
in RMB. Capital accounts of our consolidated financial statements are translated
into United States dollars from RMB at their historical exchange rates when the
capital transactions occurred. Assets and liabilities are translated at
the exchange rates as of the balance sheet date. Income and expenditures
are translated at the average exchange rate of the period. RMB is not
freely convertible into foreign currency and all foreign exchange transactions
must take place through authorized institutions. No representation is made
that the RMB amounts could have been, or could be, converted into United States
dollars at the rates used in translation.
The
following table sets forth information concerning exchange rates between the RMB
and the United States dollar for the periods indicated.
24
Year Ended December 31
,
|
Year End (1)
|
Yearly
Average (2)
|
||||||
|
||||||||
2007
|
7.2946
|
7.5806
|
||||||
2008
|
6.8225
|
6.9193
|
||||||
2009
|
6.8282
|
6.8314
|
||||||
2010 (through July 12, 2010)
|
6.77108 |
(1)
|
The exchange rates reflect the
noon buying rates as reported by the Federal Reserve Bank of New
York.
|
(2)
|
Annual averages are calculated
from month-end rates. Monthly averages are calculated using the average of
the daily rates during the relevant
period.
|
SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA
The
selected consolidated statement of income data for the fiscal years ended
December 31, 2009 and 2008 and the consolidated balance sheet data as of
December 31, 2009 and 2008 have been derived from our audited consolidated
financial statements of included elsewhere in this prospectus. The
results of operations for past accounting periods are not necessarily indicative
of the results to be expected for any future periods.
Year ended
December 31,
2009
|
Year ended
December 31,
2008
|
|||||||
Sales
revenues
|
$
|
23,615,957
|
$
|
22,146,254
|
||||
Cost
of goods sold
|
$
|
6,351,073
|
$
|
10,428,042
|
||||
Gross
profit
|
$
|
17,264,884
|
$
|
11,718,212
|
||||
Operating
expenses
|
||||||||
Selling
expense
|
$
|
3,561,550
|
$
|
4,206,849
|
||||
General
and administrative expenses
|
$
|
912,870
|
$
|
830,813
|
||||
Total
operating expenses
|
$
|
4,474,020
|
$
|
5,037,662
|
||||
Net
operating income
|
$
|
12,790,464
|
$
|
6,680,550
|
||||
Other
income
|
||||||||
Interest
income
|
$
|
5,211
|
$
|
8,221
|
||||
Total
other income
|
$
|
5,211
|
$
|
8,221
|
||||
Net
income before taxes
|
$
|
12,796,075
|
$
|
6,688,771
|
||||
Taxes
|
$
|
-
|
$
|
-
|
||||
Net
income
|
$
|
12,795,675
|
$
|
6,688,771
|
||||
Foreign
Currency Translation Adjustment
|
$
|
34,412
|
$
|
1,138,567
|
||||
Comprehensive
Income
|
$
|
12,830,087
|
$
|
7,827,338
|
Balance Sheet Data (at end of Period)
|
December 31
|
|||||||
2009
|
2008
|
|||||||
Cash
|
$
|
843,358
|
$
|
612,971
|
||||
Total
Current Assets
|
28,258,086
|
21,552,444
|
||||||
Total
Assets
|
30,981,287
|
24,529,932
|
||||||
Total
Liabilities
|
1,556,016
|
1,796,182
|
||||||
Total
Stockholder's Equity
|
29,424,671
|
22,733,750
|
||||||
Total
Liabilities & Shareholder's Equity
|
30,981,287
|
24,529,932
|
25
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of
operations relates to the operations and financial condition reported in the
consolidated financial statements of the Company for the two years ended
December 31, 2009 and 2008, and the three months ended March 31, 2010 and 2009,
and should be read in conjunction with such financial statements and related
notes included in this prospectus. Those statements in the following
discussion that are not historical in nature should be considered to be forward
looking statements that are inherently uncertain. Actual results and the timing
of the events may differ materially from those contained in these forward
looking statements due to a number of factors, including those discussed in the
“Cautionary Note on Forward Looking Statements” set forth elsewhere in this
prospectus.
Overview
We
were incorporated under the laws of the State of Delaware on February 26,
2008. The core activities of our business include the sale of
transgenic poplar seedlings and trees, and the planting, harvesting, processing,
forestation, and cloning of such seedlings and trees. We are based in
Anshang City of Liaoning Province, China.
Through
joint research with specialized universities, we have developed transgenic
poplar seedlings that are fast-growing, highly pest and drought-resistant and
high in fiber density. As a result, our seedlings are ultimately
purchased by government departments and other organizations responsible for tree
planting.
Operating
Results
The
following selected comparative financial information for the three months ended
March 31, 2010 and 2009, and the years ended December 31, 2009 and 2008 have
been derived from and should be read in conjunction with the financial
statements of the Company for the three months ended March 31, 2010 and 2009,
and the fiscal years ended December 31, 2009 and 2008 included as exhibits to
this prospectus. Because the Company is categorized as in a farm and
forest industry, it is entitled to participate in a government subsidy program
for its sapling business. Under the program, the Company collects
value added tax (VAT) from customers in an amount equal to 3% of sales during
the year ended December 31, 2009 and 6% of sales during the year ended December
31, 2008. This amount is not required to be remitted to the government. VAT,
which is included in revenue, was $682,735 and $1,251,786 for the years ended
December 31, 2009 and 2008 respectively.
Comparison
of Three Months Ended March 31, 2010 and 2009
Three months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Sales
revenues
|
$ | 5,575 | $ | 6,992 | ||||
Cost
of goods sold
|
2,134 | 1,993 | ||||||
Gross
profit
|
3,441 | 4,999 | ||||||
Operating
expenses
|
||||||||
Selling
expense
|
2,853 | 2,498 | ||||||
General
and administrative expenses
|
428,516 | 164,856 | ||||||
Total
operating expenses
|
431,369 | 167,354 | ||||||
Operating
loss
|
(427,928 | ) | (162,355 | ) | ||||
Other
income (expense)
|
||||||||
Interest
income
|
646 | 781 | ||||||
Gain
on change of fair value of derivative liabilities
|
20,246 | - | ||||||
Interest
expense
|
(57,599 | ) | - | |||||
Total
other income (expenses)
|
(36,707 | ) | 781 | |||||
Net
income
|
(464,635 | ) | (161,574 | ) | ||||
Foreign
Currency Translation Adjustment
|
(39,578 | ) | 38,281 | |||||
Comprehensive
Income
|
$ | (504,213 | ) | $ | (123,293 | ) |
The
Company experiences strong seasonality in the sales of poplar saplings, its main
product. The majority of sales are executed in April, May, October and November
each year. During the first quarter, the Company’s sales
revenue was derived from sales of vegetables and flowers. The revenue
from sales of vegetables and flowers historically does not account for more than
1% of total revenue of the company each year. The price of vegetables and
flowers we sell and the related expenses have been relatively stable over
the past several years. The sale of vegetables and flowers has no big
impact on the Company’s operating results.
Sales
Revenue
Sales
for the three months ended March 31, 2010 and 2009 were $5,575 and $6,992
respectively, a decrease of approximately $1,417 or 20%. The decrease
was primarily due to the renovation of one of our greenhouses in January,
2010. Since the company grows flowers and vegetable in the
greenhouse, the company planted less vegetables and flowers during the first
quarter of 2010.
Cost
of Goods Sold
Cost
of goods sold for the three months ended March 31, 2010 and 2009 was $2,134 and
$1,993 respectively, an increase of approximately $141 or 7.1%. The
increase was primarily due to an increase in salaries.
Gross
Profit
Gross
profit decreased $1,558, or 31%, in the three months ended March 31, 2010,
compared to the same period of 2009. The decrease was primarily due to an
increase in fixed cost and production material costs.
26
Selling
Expenses
Selling
expenses for the three months ended March 31, 2010 and 2009 were $2,853 and $
2,498, respectively. This increase of $355, or 14.2%, was primarily
due to a decrease in salaries.
General
and Administrative Expenses
General
and administrative expenses for the three months ended March 31, 2010 and 2009
was $428,516 and $164,856, respectively. This increase of $263,660, or
160%, primarily reflects an increase in professional fees.
Net
Loss
Net
loss for the three months ended March 31, 2010 and 2009 was $464,635 and
$161,574, respectively. This increase of $303,061, or 188%, in net loss
before taxes was mainly attributed to the increase in general and administrative
expenses.
Taxes
The
company incurred no income taxes for the three months ended March 31, 2010
and 2009, since the company had net loss for the three months ended March 31,
2009 and 2008.
Foreign
Currency Translation Adjustment
The
accompanying financial statements are presented in U.S. Dollars. The Company's
functional currency is the Renminbi ("RMB") of the PRC. The financial
statements are translated into U.S. Dollars from RMB at period-end exchange
rates for assets and liabilities, and weighted average exchange rates for
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred. For the three
months ended March 31, 2010, we recognized a foreign currency translation loss
of $39,578. For the three months ended March 31, 2009, we recognized
a foreign currency translation gain of $38,281.
Comprehensive
loss
Comprehensive
loss for the three months ended March 31, 2010 and 2009 was $504,213 and
$123,293, respectively. The primary reason for this decrease of $ 380,920, or
309%, is due to the foreign currency translation adjustment and an increase in
net loss.
Comparison
of Fiscal Years Ended December 31, 2009 and 2008
Year ended
December 31, 2009
|
Year ended
December 31, 2008
|
|||||||
Sales
revenues
|
$
|
23,615,957
|
$
|
22,146,254
|
||||
Cost
of goods sold
|
$
|
6,351,073
|
$
|
10,428,042
|
||||
Gross
profit
|
$
|
17,264,884
|
$
|
11,718,212
|
||||
Operating
expenses
|
||||||||
Selling
expense
|
$
|
3,561,550
|
$
|
4,206,849
|
||||
General
and administrative expenses
|
$
|
912,870
|
$
|
830,813
|
||||
Total
operating expenses
|
$
|
4,474,020
|
$
|
5,037,662
|
||||
Net
operating income
|
$
|
12,790,464
|
$
|
6,680,550
|
||||
Other
income
|
||||||||
Interest
income
|
$
|
5,211
|
$
|
8,221
|
||||
Total
other income
|
$
|
5,211
|
$
|
8,221
|
||||
Net
income before taxes
|
$
|
12,795,675
|
$
|
6,688,771
|
||||
Taxes
|
$
|
-
|
$
|
-
|
||||
Net
income
|
$
|
12,795,675
|
$
|
6,688,771
|
||||
Foreign
Currency Translation Adjustment
|
$
|
34,412
|
$
|
1,138,567
|
||||
Comprehensive
Income
|
$
|
12,830,087
|
$
|
7,827,338
|
Sales
Revenue
Sales
for the year ended in December 31, 2009 and 2008 was $23,615,957 and $22,146,254
respectively, an increase of $1,469,703 or 6.64%. The increase was primarily due
to the fact that approximately 8 million more saplings were sold than the prior
year.
Cost
of Goods Sold
Cost
of goods sold in 2009 and 2008 was $6,351,073 and $10,428,042
respectively. The cost of goods sold in year 2009 showed a decrease
of approximately $4,076,969, or 39.1%. Our sales includes both saplings
grown internally and semi-mature saplings (e.g. year old saplings) purchased
from other suppliers. The cost of internally grown saplings is lower than
semi-mature saplings purchased for growing and resale. In 2009,
our sales included a majority of internally grown saplings, lowering the
cost of sales.
Gross
Profit
Gross
profit increased from $11,718,212 in 2008 to $17,264,884 in 2009, an increase of
$5,546,672, or 47.33%. This increase was primarily due to the decrease in cost
of goods sold.
Selling
Expenses
Selling
expenses were $4,206,849 in 2008 and $3,561,550 in 2009. This decrease of
$645,299, or 15.34%, is primarily due to a decrease in selling
costs.
General
and Administrative Expenses
General
and administrative expenses were $830,813 in 2008 and $912,870 in 2009.
This increase of $82,057, or 9.88%, reflects a proportionate increase in
administrative expenses, such as utilities, as business activity
increased.
27
Government
Subsidies
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling
business. Under the program, the Company collects value added tax
(VAT) from customers in an amount equal to 3% of sales during the year ended
December 31, 2009 and 6% of sales during the year ended December 31, 2008. This
amount is not required to be remitted to the government. VAT, which is included
in revenue, was $682,735 and $1,251,786 for the years ended December 31, 2009
and 2008 respectively. The subsidy rate is applicable on qualified
revenues, which for us includes the sale of the saplings, but not landscaping
projects.
Net
Income Before Taxes
Net
income was $12,795,675 in 2009 and $6,688,771 in 2008. This increase of
$6,106,904, or 91.3%, in net income before taxes was mainly attributed to the
increase in gross profit.
Taxes
Taxes
were zero in 2009 and in 2008. According to the PRC income tax regulations, our
income from the sale of tree saplings is tax exempt in the
PRC.
Net
Income
Net
income was $12,795,675 in 2009 and $6,688,771 in 2008. This increase of
$6,106,904, or 91.3%, was primarily due to the increase in gross
profit.
Foreign
Currency Translation Adjustment
The
accompanying financial statements are presented in U.S. Dollars. The Company's
functional currency is the Renminbi ("RMB") of the PRC. The financial statements
are translated into U.S. Dollars from RMB at year-end exchange rates for assets
and liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred. During the fiscal period ended December 31, 2009,
the RMB steadily appreciated against the U.S. dollar, and we recognized a
foreign currency translation gain of $34,412.
Comprehensive
Income
Comprehensive
income was $12,830,087 in 2009 and $7,827,338 in 2008. The primary reason for
this increase of $ 5,002,749, or 63.9%, is due to the combined effect of higher
revenues, slightly lower operating expenses, and, most importantly, a
significant decrease in cost of sales that led to a higher gross
profit.
Liquidity
and Capital Resources
Three
Months Ended March 31, 2010 and 2009
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
cash (used in) operating activities
|
$ | (575,253 | ) | $ | (3,208 | ) | ||
Net
cash (used in) investing activities
|
$ | (45,630 | ) | $ | (5,823 | ) | ||
Net
cash provided by financing activities
|
$ | 1,935,150 | $ | 968,131 |
The
Company experiences strong seasonality in the sales of poplar saplings, its main
product. The majority of sales are executed in April, May, October and November
of each year. 11.41%, 43.68%, 48.91% and 8.90% of the sales were made in April,
May, October and November, respectively, in 2009. Mainly because of the
seasonality in its current business, the Company has relatively higher than
average accounts receivable on its year-end balance sheets. All
outstanding accounts receivables are expected to be received from customers
within a year after the delivery date of the products specified in the relevant
sales contracts. The Company has experienced no bad debts in its history and
expects all of its customers to make their required payments. All sales made
within the first half of fiscal year 2009 were collected within a year of the
date of product delivery.
The
Company’s current and long-term liquidity is very high as its current poplar
sapling business requires relatively low investment in fixed
assets. Short-term liquidity continues to improve as the Company’s
current ratio has increased year-over-year since 2007, from 3.9 in 2007 to 10.65
in 2009. The MDF business the Company intends to enter requires a relatively
high investment in fixed assets, such as manufacturing facilities, land and
machinery. The Company expects the impact would be insignificant as it believes
there is very high demand in China for MDF. The Company expects to develop
good relationships with its MDF customers and suppliers, and expects timely
payments from its customers.
On
April 28, 2009, the Company entered into an acquisition agreement with Liaoning
Shengsheng. Pursuant to the terms of such agreement, the Company acquired
Liaoning Shengsheng in consideration for $5.12 million. The Company paid $1.28
million to the Liaoning Shengsheng shareholders at the closing. The
Company’s long-term payable is $3.84 million for this transaction and is
expected to be satisfied using the proceeds of this offering.
On May
13, 2009, Liaoning Shengsheng and Tuqiang Forestry Bureau of Daxinganling (the
“Tuqiang Forestry Bureau”) entered into an acquisition agreement pursuant to
which Liaoning Shengsheng has the right to acquire up to 80% of the outstanding
equity of Beijisong for total consideration equal to 80% of the appraised value
of Beijisong. Liaoning Shengshseng has made payments of $877,693
for the Beijisong acquisition. No further payments are due until an
appraisal of Beijisong has been completed and a final purchase price has been
determined. We anticipate such appraisal will be concluded in 2010, although no
assurances thereof can be given. A portion of the proceeds of this offering are
intended to be used for such remaining payment following completion of the
appraisal of Beijisong. We cannot determine the full extent of our
short-term or long-term payables as the appraisal of Beijisong has not yet been
completed. The timing and result of such appraisal can be expected to impact the
timing and amount of our current and future payables.
We
anticipate that we will require approximately $100 million to fund our 3-5 year
growth strategy. We expect to source a majority of these funds from the
capital markets. One of our strategic growth areas is to enter into the business
of manufacturing MDF by making strategic acquisitions in the northeast areas
of China.
We
plan to expand our existing plantation base in Xinuang Village, Dongsi Fangtai
Town, and acquire new plantation bases to support our product growth strategy.
This growth strategy requires approximately $16 million. Approximately $14
million will be used to fund a new research and development center and a new
facility for wild plantation breeding and cultivation in the Daxinganling
area.
Operating
Activities
Net
cash used in operating activities for the three months ended March 31, 2010 was
$575,253. This is primarily due to a net loss of $464,635, adjusted by
non-cash related expenses, including depreciation and amortization of
$49,856, gain on the change of fair value of derivative liabilities of
$20,246 and amortization of discount debt of $27,321, offset by a net increase
in working capital of $417,580. The net increase in working capital items
was mainly due to an increase in advances to suppliers, inventories and
prepaid expenses. The increase in accounts payable and accrued expenses
also contributed to the net increase in working capital items. The net
decrease in working capital items was partially offset by the decrease in
accounts receivable and other payable.
28
Net
cash used by operating activities for the three months ended March 31, 2009 was
$3,208. This is primarily due to a net loss of $161,574, adjusted by
non-cash related expenses, including depreciation and amortization of $49,603,
offset by a net increase in working capital of $108,763. The net increase in
working capital was mainly due to decrease in accounts receivable, inventories
and prepaid expenses. The decrease in accounts payable, accrued expenses
and other payables also contributed to the net increase in working capital
items. The net increase in working capital items was partially offset by
the increase in advance from customer.
Investing
Activities
Net
cash used by investing activities for the three months ended March 31, 2010 was
$45,630. This is primarily due to $45,630 of capital expenditures
for office equipment. Net cash used in investing activities for the
three months ended March 31, 2009 was $5,823, consisting of capital
expenditures on construction in progress.
Financing
Activities
Net
cash provided by financing activities for the three months ended March 31, 2010
was $1,935,150. This is primarily due to net proceeds of $1,871,750
from the issuance of convertible notes and gross proceeds of $2,000,000 offset
by the financial costs of $128,250, and short-term loan of $63,400 from a
shareholder of the Company who advanced certain expenses on behalf of the
Company. The $63,400 payable due to such shareholder has no stated
interest.
Net cash provided by financing
activities for the three months ended March 31, 2009 was $968,131, representing
funds borrowed from Wang Baoquan, our President and Chairman and one of our
stockholders.
For
the Year Ended December 31, 2009 and 2008
Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
cash provided by operating activities
|
$
|
6,419,755
|
$
|
648,988
|
||||
Net
cash (used in) investing activities
|
$
|
(2,923
|
)
|
$
|
(106,146
|
)
|
||
Net
cash (used in) financing activities
|
$
|
(6,187,557
|
)
|
$
|
(
749,506
|
)
|
Operating
Activities
Our
net operating cash flow for 2009 was $6,419,755 and $648,988 for
2008. This was primarily attributable to a significant increase in
net income, $12,795,675 compared to $6,688,771 in 2008. The rise in net
income was mainly due to the increase in gross profit as our cost of sales
decreased.
Investing
Activities
Cash
used in investing activities in 2009 was $2,293 compared to $106,146 in 2008.
The primary reason for this decrease was because there were no significant
purchases of plant or equipment in 2009. Our purchases in 2009 included
partial payments for MDF manufacturing equipment in anticipation of our intended
expansion of our business. No additional land purchases, leases or
construction was made.
Financing
Activities
Cash
used in financing activities in 2009 was $6,187,557, compared to $749,506 in
2008. The primary reason for the increase was an increase in dividends
paid. No additional funds were provided from bank
financing.
Liaoning
Shengsheng, the Company’s subsidiary, declared a one time dividend in the amount
of $6,139,166 in 2008 (prior to our acquisition of Liaoning Shengsheng), and
paid such dividends to the original Shengsheng shareholders in 2009. On March
21, 2010, Liaoning Shengsheng declared a one time dividend to the original
Liaoning Shengsheng shareholders in the amount of RMB55,300,000 (approximately
$8,000,000). This dividend will be paid when Liaoning Shengsheng has sufficient
cash flow.
Capital
Expenditures
Capital
expenditures were approximately $2,923 in 2009 and $106,146 in 2008, reflecting
a decrease of $103,223, or 97.2%. Rent paid for real estate was a
major component of our capital expenditures in 2008, accounting for
approximately 92% of total capital expenditures. The main reason for
the decrease is that such rent was prepaid in 2008 for both 2008 and
2009. Accordingly, no rent payments were made in
2009.
Capital
Resources
Capital
resources were $4,295,887 in 2009 and $4,288,938 in 2008. This
increase of $6,949, or approximately 0.16%, reflects normal equipment purchases,
specifically additional computers and building improvements added in
2009. These figures were calculated as follows:
Capital resources
|
December 31, 2009
|
December 31, 2008
|
||||||
Buildings
|
$ | 2,932,790 | $ | 2,930,043 | ||||
Machinery
and equipment
|
1,130,164 | 1,129,106 | ||||||
Vehicles
|
139,306 | 139,175 | ||||||
Computer
equipment
|
83,917 | 80,912 | ||||||
Office
equipment
|
9,710 | 9,701 | ||||||
Total
|
$ | 4,295,887 | $ | 4,288,938 |
Contractual
Obligations
We
have one contractual obligation for the purchase of equipment. We
engaged an MDF equipment manufacturer in April 2009 to design, build and install
an MDF production line for us in Karamai. The total cost is
approximately $9,004,392 and 80% of the total has been paid. Contract
terms allow the Company to pay the remaining balance as follows: 15% upon
completion of installation and 5% to be retained by the Company as maintenance
and support fees. Currently we are surveying suitable land space for the
production line and equipment.
Market
Risks
We are
exposed to various types of market risks, including changes in foreign exchange
rates, commodity prices and inflation in the normal course of
business.
Interest
rate risk
We are
subject to risks resulting from fluctuations in interest rates on our bank
balances. A substantial portion of our cash is held in China in
interest bearing bank deposits and denominated in RMB. To the extent
we may need to raise debt financing in the future, upward fluctuations in
interest rates will increase the cost of new debt. We do not
currently use any derivative instruments to manage our interest rate
risk.
29
Commodity
price risk
We are not exposed to any commodity
price risk. We do not speculate on commodity
prices. We did not
have any commodity price
derivatives or hedging arrangements outstanding at March 31,
2010 and did not employ
any commodity price
derivatives during the three months ended March 31, 2010.
Foreign
exchange risk
We
carry out all of our transactions in Renminbi. Therefore, we have limited
exposure to foreign exchange fluctuations. A substantial portion of
our cash is held in China in interest bearing bank deposits and denominated in
RMB. The Renminbi is not a freely convertible currency. The PRC
government may take actions that could cause future exchange rates to vary
significantly from current or historical exchange rates. Fluctuations in
exchange rates may adversely affect the value of any dividends we
declare.
Inflation
risk
In
recent years, China has not experienced significant inflation or deflation and
thus inflation and deflation have not had a significant effect on our business
during the past three years. According to the National Bureau of
Statistics of China, inflation as measured by the consumer price index in China
was 1.5%, 4.8% and 5.9% in 2006, 2007 and 2008, respectively.
Seasonality
The
majority of our sales occur in the months of April, May, October and
November. Accordingly, the Company has extreme seasonal fluctuations
in its revenue, operating income and cash flows.
Off-Balance
Sheet Arrangements
We do
not have any off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our
investors.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. Our financial statements reflect the selection and
application of accounting policies, which require management to make significant
estimates and judgments. We believe the following paragraphs reflect
the more critical accounting policies that currently affect our financial
condition and results of operations.
Impairment
We
account for impairment of long-lived assets including property, plant and
equipment, and amortizable intangible assets in accordance with SFAS No.144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which requires
an impairment loss to be recognized when the carrying amount of a long-lived
asset or asset group exceeds its fair value and is not recoverable (when
carrying amount exceeds the gross, undiscounted cash flows from use and
disposition). The impairment loss is measured as the excess of the carrying
amount over the assets’ (or asset group’s) fair value.
Revenue
recognition
Our
revenues consist of sales of genetically modified saplings. Sales are recognized
in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104 included in the
codification as ASC 605, Revenue Recognition, when the following four revenue
criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the selling price is fixed or determinable and collectability is
reasonably assured. No return allowance is made as products are normally not
returnable upon acceptance by the customers.
The
price at which we sell fast-growing poplar seedlings is based on numerous
factors, including: market price changes of fast-growing poplar seedlings;
regional supply of fast-growing poplar seedlings; seasonal availability of
seedlings and demand for fast-growing poplar seedlings. Generally, it takes 20
days for a single transaction to be consummated. This time frame includes
negotiation of terms, execution of contract, preparation, delivery,
transportation, planting of products and receipt of payment. For larger
transactions, it can take up to one year for the last payment to be
made.
Our
revenue recognition policies are in compliance with Staff accounting bulletin
(SAB) 104, included in the Codification as ASC 605, Revenue Recognition. Sales
revenue is recognized at the date of shipment or delivery to customers when a
formal arrangement exists, the price is fixed or determinable, no other
significant obligations of the Company exist and collectibility is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as unearned revenue. No return allowance
is made as products are normally not returnable upon acceptance by the
customers.
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling business. Under the
program, the Company collects value added tax (VAT) from customers in an amount
equal to 3% of sales during the year ended December 31, 2009 and 6% of sales
during the year ended December 31, 2008. This amount is not required to be
remitted to the government. VAT, which is included in revenue, was $682,735 and
$1,251,786 for the years ended December 31, 2009 and 2008
respectively.
Foreign
currency translation
The
reporting currency of the Company is United States Dollars. All assets and
liabilities accounts have been translated into United States Dollars using the
current exchange rate at the balance sheet date. Capital stock is
recorded at historical rates. Revenue and expenses are translated using the
average exchange rate in the year. The resulting gain and loss has
been reported as other comprehensive income (loss) within the shareholder’s
equity.
Use
of estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates. Significant
estimates include estimates of accruals and inventory
valuation.
The
fair value of the Warrants was determined using the Black-Scholes option pricing
method with the following assumptions (not accounting for the Reverse Split and
any adjustment in the exercise price such Warrants as a result
thereof):
30
Three Months Ended
|
Year Ended December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
Estimated
dividends
|
11 | % | 11 | % | 11 | % | ||||||
Expected
volatility
|
54 | % | 54 | % | 54 | % | ||||||
Risk-free
interest rate
|
1.64 | % | 3 | % | 3 | % | ||||||
Expected
term
|
4.87
years
|
3.3
years
|
4.3
years
|
Stock
based compensation
We
adopted SFAS No. 123R effective January 1, 2006, and are using the modified
prospective method, in which compensation cost is recognized beginning with the
effective date based on the requirements of SFAS No. 123R for all share-based
payments granted after the effective date that remain unvested on the effective
date. We account for stock option and warrant grants issued and
vesting to non-employees in accordance with EITF No. 96-18: “Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF No. 00-18 “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees” whereas the value of the stock compensation is based upon
the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete.
Recently
issued accounting pronouncements
In
June 2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles
effective for interim and annual reporting periods ending after September 15,
2009. The FASB accounting standards codification (“ASC,
“Codification”) has become the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in accordance with GAAP. All existing
accounting standard documents are superseded by the Codification and any
accounting literature not included in the Codification will not be
authoritative. However, rules and interpretive releases of the SEC issued under
the authority of federal securities laws will continue to be sources of
authoritative GAAP for SEC registrants. The Codification does not
change or alter existing GAAP and, therefore, it does not have an impact on our
financial position, results of operations and cash flows.
We
also adopted authoritative guidance issued by the FASB on business combinations.
The guidance retains the fundamental requirements that the acquisition method of
accounting (previously referred to as the purchase method of accounting) be used
for all business combinations, but requires a number of changes, including
changes in the way assets and liabilities are recognized and measured as a
result of business combinations. It also requires the capitalization of
in-process research and development at fair value and requires the expensing of
acquisition-related costs as incurred. We will apply this guidance to
business combinations completed after July 1, 2009. Adoption of the new
guidance did not have a material impact on our financial
statements.
In
June 2009, the FASB made an update to consolidation of variable
interest entities. Among other things, the update replaces the calculation
for determining which entities, if any, have a controlling financial interest in
a VIE from a quantitative based risks and rewards calculation, to a qualitative
approach that focuses on identifying which entities have the power to direct the
activities that most significantly impact the VIE’s economic performance and the
obligation to absorb losses of the VIE or the right to receive benefits from the
VIE. The update also requires ongoing assessments as to whether an entity is the
primary beneficiary of a VIE (previously, reconsideration was only required upon
the occurrence of specific events), modifies the presentation of consolidated
VIE assets and liabilities, and requires additional disclosures about a
company’s involvement in VIEs. This update will be effective for
fiscal years beginning after November 15, 2009. The Company does not
currently believe the adoption of this update will have any effect on its
consolidated financial position and results of operations.
In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition. We believe the adoption of this new guidance will
not have a material impact on our financial statements.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
31
INDUSTRY
OVERVIEW
The
global forestry industry provides timber resources and processed wood products
for numerous industries. The industry is generally divided into
upstream and downstream activities. Upstream activities focus on forest
resource management, including forest planning, planting, stand tending
and/or management of the forest, as well as harvesting and transportation
of logs. The wood-based downstream activities consist of processing of logs
into products such as sawn timber, plywood, reconstituted panel products,
pulp and paper, as well as further value-added processing activities, including
production of housing and building materials, including flooring and
furniture.
In China,
the State Forestry Administration of the PRC, or the SFA, is the state bureau in
charge of the national forestry industry. Its principal functions include
the formulation of policies and regulations for the national
forestry industry, forest management and forestry resources protection and
the supervision of their implementation. Under the PRC Forest
Law, the PRC strictly implements a quota system for the logging of forest wood.
The forestry bureaus at the provincial level are responsible for compiling
annual logging quotas. The annual quota is reviewed by the local government at
the same level and is submitted to the PRC State Council for
approval. Domestic log supply in China is ultimately determined by
the planted area and standing volume of resources inside China. Increases in
planted area and standing volume are ultimately going to affect allowable
quotas.
According
to the FAO’s Global Forest Resources Assessment 2005 and the website of the
State Forestry Administration Bureau of the PRC, China ranks fifth in the world
with approximately 195 million hectares of forest. However, China’s
forest area per capita is approximately 0.145 hectare, only about 22.2% of the
global average. China’s forest area, in terms of percentage of land
area, is 18.21%, which is lower than the world average of 30.3%. The forest
growing stock in China is, by area, 67 m3 per
hectares, which is only about 60.9% of the global average. As a
result, China has become the second largest timber-importer in the
world.
At
present, China’s comprehensive utilization rate of timber (the percentage of
harvested forest actually used to make saleable products) is only 60%, while it
is 80% to 90% in developed countries. Increasing the comprehensive
utilization rate of timber, especially by utilizing MDF, not only increases the
comprehensive utilization rate of timber and saves forest resources, but it also
provides various high value-added wood products, with large-size, multiple
specifications and wide application.
FORESTRY
POLICIES IN THE PRC
The
following is a brief overview of certain recent forestry policies in the
PRC:
|
·
|
According to the Guiding
Catalogue for Industry Restructuring promulgated by NDRC which took effect
on December 2, 2005, the planting of forest trees falls within the
category of industries encouraged by the PRC government. The
PRC government also has formally encouraged foreign investments in the
business of planting forest
trees.
|
·
|
According to the Outline of
Policy on Forest Industry promulgated by seven state bureaus of the PRC
including the SFA on August 10, 2007, (1) development of essential
technology, equipments and products which could speed the improvement of
forest industrial structure are encouraged; (2) forest resource
development and international cooperation are encouraged; (3) non-public
ownership within the forest industry is encouraged; (4) preferential tax
policies on forestry shall be implemented; and (5) government support
policies on forestry insurance shall be
established.
|
|
·
|
According to the Opinion on
Comprehensively Promoting the Reform of the System of Collectively-owned
Forestry Rights (“Opinion”) issued by the Central Committee of the
Communist Party of China and the State Council on June 8, 2008, the PRC
government will promote the reform of the system of collectively-owned
forestry rights. The reform does not change the ownership of the forest
land and the collectively-owned forest land will continue to be owned by
the collectives, while the ownership of forest trees and the use right of
forest land with a period of 70 years should be granted with clearly
established ownership and rights. The Opinion also provides
that those who are entitled to the forestry rights have the right to
dispose of these rights in accordance with PRC laws, including by way of
subcontracting, lease, transfer, mortgage and using them for contributing
to the capital of a company, provided that the use of the forestry land
remains unchanged. Furthermore, the PRC will simplify the legal
formalities for management of logging activities and the approval
procedures, and will support the establishment of leading forestry
enterprises and promote large-scale forestry production and
standardization of forestry management. On December 26, 2008,
the SFA promulgated the Notice about the Pilot Implementation of
Forestry Deforestation Management Reform, according to which, the SFA will
gradually reform the forestry deforestation system, simplify the approval
procedures, establish a convenient and efficient deforestation approval
system, and ultimately change the current standards-based control
system to a sustainable operation management
system.
|
|
·
|
In
addition to reducing the Forest Maintenance Fee (a fee required to be paid
when a logging permit is applied for in the PRC) from 20% of relevant
sales value to less than 10%, the PRC government will expand both domestic
and international markets, accelerate technological innovation, strengthen
brand construction, assist in the expansion of leading enterprises,
support the small and medium enterprises and promote forestry
reform.
|
32
Forest
management
All
forest land in the PRC is either owned by the state or rural collective economic
organizations. Ownership of forestry land is not transferable in the
PRC. However, forest land use rights, forest trees use rights and forest trees
ownership rights are transferable as long as the transfer is conducted in
accordance with PRC law (including the requirement that a forest land cannot be
converted into a non-forest land).
Forests
are divided into the following five categories:
(1)
Forests for special uses: forests and trees mainly aimed at national defense,
environmental protection and scientific experiments.
(2)
Protection forests: forests, trees and bushes mainly aimed at protection,
inclusive of water source storage forests, forests for water and soil
conservation, wind protection and sand bind forests, forests for farmland
and grassland protection, river bank protective belts and road protection
belts;
(3)
Timber stands: forests and trees mainly aimed at timber production, inclusive
of bamboo groves mainly aimed at bamboo production;
(4)
Economic forests: trees mainly aimed at the production of fruits; edible oils,
soft drinks and ingredients; industrial raw materials; and medicinal materials;
and
(5)
Firewood forests: trees mainly aimed at the production of fuels.
Only the
timber stands, economic forests and firewood forests and the forest land
use right thereof and the forest land use right of other forests, trees and
other woodlands stipulated by the State Council, are transferable under the
PRC laws. Moreover, according to the PRC laws, they can be priced and
converted into shares or used as capital contribution for equity joint
ventures or cooperation conditions for cooperative joint ventures. However,
forest lands may not be converted into non-forest lands.
According
to the PRC Forestry Law enacted by SCNPC on September 20, 1984 and amended
on April 29, 1998, and the Implementation Regulations of PRC Forestry Law
effective as of January 29, 2000, the State adopted a registration system
of forest, forest wood and forest land. All forest, forest wood or forest
land is to be registered by local governments at or above the county level and
records maintained and certificates issued confirming the ownership or right to
use.
Logging
in forests is strictly regulated in the PRC under its forestry laws and
regulations. Forestry bureaus at the national, provincial, municipal,
county and township levels are responsible for checking and organizing the
forestry resources, formulating forestry operation plans, and compiling annual
logging quotas in their area based on these forestry resources and forestry
operation plans.
Logging
quotas
Under the
PRC Forestry Law, the PRC government strictly implements a quota system for
logging of forest wood, to uphold the overriding principle that the amount of
consumption of timber must be less than that grown.
Each
year, the forestry bureaus at the lower levels of government (mainly the county
level), based on their regular check on conditions (including the maturity
of trees and the forestry resources) and the forestry operation plans of all
forestry lands within their respective area, prepare proposed annual logging
quotas. The annual quota is reviewed by the local governments at the same level
and submitted to the forest bureau at the provincial level. The forestry bureaus
at the provincial level are then responsible for compiling annual logging quotas
by adjusting the proposed logging quotas submitted by the lower level forestry
bureaus and submitting them to the PRC State Council for final
approval.
According
to the Implementation Regulations, the annual quota for certain key forest zones
will be approved by the PRC State Council and the quota will be set every five
years. The Implementation Regulations of the PRC Forestry Law (which was enacted
on September 20, 1984 and amended on 29 April 1998) further stipulate that the
logging of a foreign-invested timber forest up to a certain scale is subject to
the approval of the forestry bureaus at the provincial level within the annual
forest logging quota approved by the PRC State Council and is to be listed
separately in respect of the logging quota.
Annual
logging quotas are subject to review and strictly implemented by the different
levels of forestry bureaus. In order to ensure logging quotas are strictly
implemented: (1) before logging, forestry operators are required to obtain the
pre-approval and logging permits from the relevant forest bureaus; (2) during
logging, the local forest bureaus selectively conduct on-site investigation and
supervise the logging activities of the forest operators; (3) after logging, the
transportation of the timber out of the forestry zone requires a separate
transportation permit from the forestry bureau; and (4) in respect of
transportation, timber inspection posts are set up along the roads heading out
from the forestry zones to inspect the timber transport and stop the transport
of timber without permit.
33
Logging
permits
The PRC
Forestry Law provides that logging of trees requires logging permits. When
a state-owned forestry enterprise or institution applies for a logging permit,
it is required to develop a logging area survey, design document and
logging and renewal verification proof of the previous year. For
non-state-owned forestry operators, they must apply for a logging permit
with a document that contains contents such as logging objectives, location,
tree species, tree situation, area, stock, approach and reforestation
measures.
Upon
receipt of an application of logging permit from a forest operator, the
respective forestry bureau at the county level will examine the application
and assess whether the accumulated area/volume of timber to be harvested
will exceed the logging quota for the year initially allocated to the
specific piece of forestry land based on its own annual assessment reports
on the relevant forestry land, or the aggregate logging quota for the
year allocated to the whole county.
Logging
permits will not be issued to the applicant:
|
·
|
if the applicant has not
replanted forest wood logged in the previous year;
or
|
|
·
|
if there were any large scale
forest fires, significant unlawful logging or large scale destruction
caused by pests in the previous year and the applicant has not adopted
appropriate preventive measures or improved measures to prevent such
occurrences.
|
The
logging permits usually contain details of logging, including the location, the
species of trees, its origin, ownership, logging method, intensity of logging,
area for logging, the amount of timber and the term of validity of the
permit. Forestry operators must carry out the harvesting activities
pursuant to such details specified on the logging permits. After
logging, the forestry bureaus which issued the logging permits examine and
inspect whether the logging activities comply with the terms of the logging
permits. If it is found that the relevant forestry operator has not
conducted logging activities or the re-plantation in accordance with the
requirements of the logging permits, the forestry bureau will not approve
further applications for logging permits.
Violations
Illegal
logging, or logging in excess of timber production plans or logging permits,
is punishable by fines and the confiscation of illegally logged timber and
the proceeds from sales thereof. Illegal loggers may be asked to replant
trees. If any logging unit or individual logger fails to fulfill
reforestation tasks pursuant to the prescribed provisions, the department
issuing the logging permit has the power to stop issuing such permits. In
the case of serious violations, the relevant forestry bureaus may impose
fines and administrative sanctions.
Processing
of timber in forest zones
Timber
processing in forest areas must be approved by the forestry bureau at the
county or higher level. The current PRC Forestry Law and its implementation
regulations do not stipulate detailed requirements for timber processing in
forest zones. Generally, anyone who is engaged in timber processing can
apply for approval by submitting the application form and relevant
documents. However, there is a limit, depending on the volume of the
local forestry resources, for the total number of approved timber processors
within a forest. Any unapproved timber processing in a forest zone will be
subject to penalties including the confiscation of illegal proceeds generated
therefrom and a fine of not more than 2 times the proceeds.
Transportation
of timber
Other
than the logging quotas and logging permits, timber transportation permit is
another measure implemented by the PRC government to further monitor the logging
activities in the PRC.
According
to the PRC Forestry Law and its implementation regulations, transportation
of timber (unless the timber is uniformly allocated and transferred by the
state) out of forestry zones to destination points requires a transportation
permit to be issued by the forestry bureau at the county level or above. No
entity or individual carrier may transport any timber without a timber
transportation permit. To apply for a timber transportation permit, the
applicant must submit the relevant forest logging permit, the quarantine
certificate and other documents as may be required by the forestry bureau at the
provincial level. The competent forestry bureau shall, within 3 days after it
has received an application, issue to the applicant a timber transportation
permit which specifies the total volume of timber permitted to be
transported.
The local
forestry bureau sets up timber inspection stations in forest zones for the
inspection of timber transportation. For any timber transportation without any
permit, the timber inspection station must stop it, and may temporarily detain
the timber not covered by a transportation permit and immediately report it to
the competent forestry bureau at the county or higher level. When anyone
transports any timber without any permit or using a forged or altered timber
transportation permit or in excess of the approved timber amount stated in the
timber transportation permit, the law provides that (i) the timber may be
confiscated; (ii) a fine of up to 50% of the price of the timber may be imposed
on the owner; (iii) the transportation fee paid to the carrier may be
confiscated; and (iv) a fine up to one to three times of the transportation fee
may be imposed on the carrier.
34
Environmental
impact assessment
According
to the PRC Environmental law, the PRC Environmental Impact Assessment Law and
other relevant regulations, if an entity performs clear logging, an
environmental impact report must be prepared to provide a comprehensive
assessment of the resulting environmental impact; if an entity plants in the
environmental non-sensitive area, an environmental impact registration form must
be filled in and submitted to the relevant environmental bureau.
Environmentally
sensitive areas include the following:
|
·
|
the areas stipulated under the
national and local laws that need special protection, such as water source
protection areas, scenic spots, nature reserves, forest parks, key
national heritage, historical and cultural preservation areas, soil
erosion protection areas and basic farmland protection
areas;
|
|
·
|
the ecologically sensitive and
vulnerable areas, such as key soil erosion areas that need special
governance and supervision, natural wetlands and habitats of rare or
special ecological environment and naturally regenerated forests, tropical
rain forests, mangroves, coral reefs, spawning grounds, fisheries and
other important ecosystems;
and
|
|
·
|
the areas of social concern, such
as cultural and educational areas, resorts, hospitals and other protection
areas with regional and historical, scientific, national or cultural
significance.
|
An
environmental impact report generally is required to cover the
following:
1. a
brief introduction to the construct project;
2. the
existing environment of the construction project;
3. an
analysis, prediction and assessment of the environmental effects from the
construction project;
4. the
protective measures for the environment of the construction project, and the
technical and economic demonstrations of such measures;
5. an
analysis of the environmental effects from the economic losses and benefits of
the construction project;
6. a
proposal for monitoring the environment of the construction project;
and
7. a
conclusion on the evaluation of environmental effects.
According
to the contents and format promulgated by SFA, the environmental
impact report form must contain the following contents:
1. the
project name, location, types of industry and total investment
amount;
2. the
main targets of the environmental protection which may be the resident area, the
school, hospital, cultural relic, landscape area, water resources or other
sensitive points;
3. the
analysis of the impact and suggestions or measures to protect the
environment; and
4. the
conclusion on the evaluation of environmental effects.
An
environmental impact report is for a construction project which may have more
significant environmental impact and therefore is required to contain a more
comprehensive assessment of the environmental impact. The
environmental impact report is to be submitted by an enterprise which is engaged
in construction activity, (1) if a feasibility study of the relevant
construction project is required by PRC laws and regulation, at the time it
conducts such feasibility study; and (2) if such feasibility study is not
required by PRC laws and regulations, before it commences the construction or
obtains the business license (if required).
35
Pusheng
has conducted environmental impact assessments for its MDF project (as described
below) and same was approved by the Environmental Protection Bureau of the
Karamai municipality. Additional government approvals are still
required in order to continue with its MDF project.
Reforestation
In order
to protect forests, the PRC Forestry Law and the Implementation Regulations of
PRC Forestry Law provide that entities and individuals that have harvested the
forest must, according to the area, number of trees, tree species and period of
time specified in the logging permits, plant a number of trees equal to the ones
logged. After the planting of saplings is completed, the forestry bureaus
which issue logging permits examine the area and quality of reforestation and
issue an Acceptance Certificate of Reforestation.
Should
forest logging entities or individuals fail to finish the reforestation task in
compliance with the relevant requirements, the authorities which have issued the
logging permit may stop issuing further logging permits to them until they have
completed their reforestation tasks. Under any of the following circumstances,
the local forestry bureau may order the forest logging entities or individuals
to complete the reforestation task within a prescribed period, and if they
fail to do so, a fine of not more than 2 times the expenses required for
completing the uncompleted reforestation task, may be imposed: (1) the forest
logging entities or individuals fail to complete the reforestation in two
consecutive years; (2) the reforestation area completed within the current year
is less than 50% of the area of reforestation required; (3) except for the arid
or semi-arid areas as specially provided for by the state, the reforestation
survival rate of the year is less than 85%; or (4) the forest logging entities
or individuals fail to complete the reforestation task as scheduled in
accordance with applicable requirements. The poplar saplings grown by
the Company regenerate after harvesting if they are cut at the base, rather then
removed at the root level. The Company plans to meet the
reforestation requirements by doing the last harvest as cut trees so no
additional costs are expected to be incurred for reforestation.
Taxation
According
to the PRC EIT Law and its implementing rules, both domestic and
foreign-invested enterprises are now subject to a uniform enterprise income tax
rate of 25%. Income generated from the cultivation of forest trees
and the gathering of forest products, however, is exempt from the enterprise
income tax pursuant to relevant PRC EIT Law, which became effective in 2008.
Therefore we paid
this income tax for 2008 and will be reimbursed by the Chinese government in
2010.
In
addition, under the EIT Law, an enterprise incorporated outside of the PRC may
be deemed to be a “non-resident enterprise” or “resident enterprise” according
to their definitions thereunder. If that enterprise is deemed to be a
“non-resident enterprise” without an establishment or place of business in the
PRC, a withholding tax at the rate of 10% may be applicable to any dividends it
receives from a resident enterprise, unless it is entitled to reduction or
exemption of such tax, for example, pursuant to relevant tax
treaties. On the other hand, if that enterprise has “de facto
management bodies” located within the PRC territory, it may be considered a
“resident enterprise” under the EIT Law, and: (i) its worldwide taxable income
will normally be subject to the enterprise income tax at the rate of 25%; and
(ii) any dividends it pays to its non-PRC resident shareholders and any gains
realized by such shareholders from the sale or other transfer of the shares of
that enterprise may be regarded as China-sourced income, and as a result, be
subject to a PRC income tax at a rate up to 10%.
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling business. Under the
program, the Company collects value added tax (VAT) from customers in an amount
equal to 3% of sales during the year ended December 31, 2009 and 6% of sales
during the year ended December 31, 2008. This amount is not
required to be remitted to the government. VAT, which is included in revenue,
was $682,735 and $1,251,786 for the years ended December 31, 2009 and 2008
respectively.
MDF
MDF and
particleboard are wood products produced from sub-quality and small fuel wood, a
process encouraged as part of the government’s national timber industry
policy. Pursuant to the MDF sector investment outlook forecast for
2010 to 2015 published by the Chinese government, it is estimated that in 2010,
the demand for MDF in China will be 27 million m3 but the
production will only be 24 million m3. In
2015, the annual demand for MDF in China is expected to be 35 million m3. Since
2000, China has been importing more than 1 million m3 of MDF
each year.
MDF in
China is widely used in the following industries:
|
1.
|
65% of total MDF is used in
furniture industry;
|
|
2.
|
15% is used in
building;
|
|
3.
|
8% is used in floor
board
|
|
4.
|
5% is used in packaging;
and
|
|
5.
|
7% is used in household
appliances, vehicles, ships and musical
instruments.
|
36
We
believe access to raw timber is critical to the success of any MDF
manufacturer. Some MDF producers have been forced to stop production,
and some have had to declare bankruptcy due to a shortage of raw
materials. The Company has been creating the raw materials planting
base for the last 5 years through plantings of its genetically modified
saplings. Even with so many competitors in the current domestic
market, there is only one MDF manufacturing plant in Xinjiang Province which has
its own raw materials planting base. Once our planting base matures to the point
where we can harvest and utilize the timber, and once our MDF manufacturing
facilities are operational, we believe we will have a competitive advantage in
Xinjiang Province as we expect our raw material costs to be 10% to 15% lower
than our competitors who do not have their own supply of raw
materials.
Demand
of Real Estate Market and Building Decoration Industry
The
annual timber consumption of China’s building industry is 65 million m2, which
is 21.3% of the total national timber consumption. Currently, MDF is
used in for approximately 25% of the Chinese building industry’s timber
needs.
Pursuant
to the Current Status and Development and Trends of China Wood Floor published
by the Chinese State Forestry Administration in 2006, the predicted annual
demand of MDF for decoration material is more than RMB 30 billion Yuan
(approximately $44.13 billion using the conversion rate in effect on June 21,
2010 of 1:6.7976). Floor board is the No.1 interior decoration
material in China, with annual floor board production of over 200 million m2 and
sales of more than RMB 30 billion Yuan ($4.41 billion as of June 21,
2010). Approximately 60% (120 million m2) of the
floor board is long-wearing intensified floor, which is mainly made from MDF. In
2010, the production of long-wearing intensified floor is expected to be 200
million m2.
We
believe that in order to be successful in the MDF industry in China, companies
must, among other things, increase production capacity and improve product
quality. With the overall development of the Chinese economy,
increases in national per capita income level and urban and rural residents’
increasing improved housing conditions, we believe there will continue to be
increasing demand for MDF.
We
believe the key for rapid development of the MDF processing industry is the
accessing of raw materials. However, as a result of the Chinese
government’s strict controls on logging, the development of the MDF processing
industry may be slowed for those companies who do not own and control the raw
materials and who are not well capitalized. For those that are, they
have the ability to more successfully develop and profit from large scale MDF
production capabilities.
We
believe establishing an annual production capacity of 15,000 m3 MDF
requires a more than RMB 20 million Yuan (approximately $2.96 million as of June
21, 2010) investment in equipment and other ancillary facilities, and an
additional RMB 50 million Yuan (approximately $17.87 million as of June 21,
2010) for the improvement of conditions in these facilities. Although
we seek to construct such a facility in the future, we have not made any
material efforts in this regard to date.
New and
larger production lines must be built to support the expected increase in
demand. Further, existing MDF facilities are located primarily other
than in Western China where we are focusing our efforts. We believe
this gives us a unique opportunity to establish a modern facility designed to
meet MDF production needs.
With the
rapid economic and social development and increase in people’s living standards,
China's demand for wood products continues to grow. We believe raw
materials supply, production scale, product quality and management will be the
key elements in establishing our competitiveness.
Competition
in the MDF industry in China is mainly reflected in the purchase of raw
materials, particularly by the large-scale production lines. We
expect this pattern to continue in the future, as the demand for raw materials
by the wood processing industry continues to outpace supply. In
short, we believe the continuous and stable supply of raw materials will be key
to survival of any company involved in MDF production.
Another
key competitive factor in China's MDF industry is the quality of the products.
In 2005, the Comprehensive Medium Density Fiberboard Quality Integrated pass
rate in China was 73%. This is a large difference compared with
foreign advanced technology. In particular, many of China's MDF exports cannot
meet the quality certification standards in European countries. The
increase in environmental standards around the world has presented challenges to
existing Chinese MDF manufacturers as they must expend resources getting their
facilities and products up to international quality certification
standards. We feel we will have a distinct advantage over existing
competitors in this regard as our facilities are intended to be built in order
to comply with ever-stricter international standards.
37
BUSINESS
Overview
China
For-Gen Corp. is a Delaware corporation formed on February 26, 2008 for the
purpose of acquiring all of the equity interests of Liaoning Shengsheng
Biotechnological Co., Ltd. (“Liaoning Shengsheng”), a limited liability company
incorporated in the People’s Republic of China (the “PRC”) on November 24,
2000. Since its inception, Liaoning Shengsheng has been an
agricultural and forestry company engaged in the breeding, cloning and sale of
plant seedlings and specialized transgenic plant seedlings, and the research and
development of seedling breeding technologies.
Based in
Liaoning Province, located in western China, the primary technologies used in
the Company’s business are tissue culture technology and transgenic seedling
technology, a popular type of cell breeding technology used in agriculture which
takes advantage of cell division of a plant’s branches and leaves. By the
appropriate control of temperature and humidity, the Company can increase the
dividing speed of plant cells, thereby cultivating a large amount of plant
seedlings in the shortest possible time. The core products of the
Company are transgenic poplar seedlings, which are disease, insect and pest
resistant. The poplar seedlings are characterized by fast growth,
maturing in 3-5 years instead of the normal maturation time of 13-15 years for
regular poplar seedlings and 8 years for transgenic poplar
seedlings.
The
Company’s primary product is fast growing poplar saplings, which account for 99%
of its business revenue. These trees are grown in the far northwest
regions of China, in Xinjiang province near the city of Karamai. The
Company grows two distinct types of poplar saplings: Shengsheng No. 1 and
Shengsheng No. 2. Each product is separated into 5 different
subcategories (1-5 years old trees) according to their age. These
varieties of poplar trees have been genetically modified to achieve quick growth
times, pest resistance and low water requirements.
Through
its operating subsidiaries, the Company seeks to become a leading supplier of
poplar seedlings and saplings, as well as a leading tree planting and wood
processing company, in Xinjiang Province, although no material efforts have been
made towards furthering our wood processing capabilities. Through its
intended expansion of operations, the Company also seeks to become the largest
supplier of wood products (including MDF and particleboard) and plant seedlings
in China.
From
September 25, 2001 through September, 2003 and through October 2002 to June
2004, Liaoning Shengsheng conducted research projects together with Dalian
Technology University (“DTU”), pursuant to various Technology Development
Contracts, regarding transgenic poplar research, including cellulose synthase
transgenic research. As a result of such cooperation, the Company was
able to develop Shengsheng No.1 and No.2 transgenic poplar
seedlings. The resulting technology is co-owned by both
parties. Liaoning Shengsheng and DTU are entitled to 70% and 30% of
the profit, respectively, resulting from the use of the patent received on such
technology by either party. However, as no patent was ever applied
for, the Company has not paid, and is not obligated to make any payment to, DTU
for any profit received. DTU is not currently commercializing this
technology and, to our knowledge, has no plans to do so. The Company
now markets and sells Shengsheng No. 1 and No. 2 transgenic seedlings as a
result of such development efforts. Pursuant to a confirmation letter issued by
DTU dated May 28, 2010, DTU has waived its right to apply for any intellectual
property protection of such research results, as well as its rights in any
products resulting from this cooperative project.
Liaoning
Shengsheng also entered into a Technology Development Contract with
Shenyang Agriculture University Biotechnology Co., Ltd. (“SAU”) regarding
cloning and insect and pest resistant transgenic poplar research project,
providing that SAU would provide complete information (including research data
and materials) relating to the transgenic seedling technology and Liaoning
Shengsheng would reimburse SAU’s research in consideration
therefor. The agreement provides that Liaoning Shengsheng would own
all technologies and intellectual properties produced from the project and would
have the exclusive right to commercialize and transfer such intellectual
properties. On March 31, 2010, the Plant Tissue Culture Laboratory of
Shenyang Agriculture University, an affiliate of SAU, issued a confirmation
letter stating that Liaoning Shengsheng has the sole right to commercialize the
technical achievements and is entitled to all of the economic benefit
generated therefrom.
Transgenic
poplar seedlings collectively researched and developed by Shengsheng with DTU
and SAU won the National Gold Invention Award in 2003, an award given by the
Technology Exposition Committee of the Ministry of Science and
Technology. Plants developed by the Company are used for forestation
in western China. Major clients include departments in the Chinese
government (at the provincial and local levels) and other social organizations
responsible for tree planting in China.
The
Company’s current business is its tissue culture technology and transgenic
seedling technology. Its non-proprietary cell breeding technology
increases the speed of cell division of a plant’s branches and leaves through
the appropriate control of temperature and humidity. In this manner,
a large amount of plant seedlings can be cultivated in a short period of time
all year round.
The
Company’s primary product is fast growing poplar saplings, which account for 99%
of its business revenue. These trees are grown in the far northwest
regions of China, in Xinjiang province near the city of Karamai. The
Company grows two distinct types of poplar saplings: Shengsheng No. 1 and
Shengsheng No. 2. Each product is separated into 5 different
subcategories (1-5 years old trees) according to their age. These
varieties of poplar trees have been genetically modified to achieve quick growth
times, pest resistance, and low water requirements. The
characteristics of the two types of trees are as follows:
|
·
|
Shengsheng No. 1: the distinct
features of these saplings are that they are highly pest and drought
resistant, with a growth period of 5 years, which is very short for
saplings of this kind. According to the National Weather
Service Bureau, the annual rainfall of the western region is less than 10%
of that in eastern China, and as a result many types of trees cannot
survive in the region, with poplar being a major exception.
The survival rate of Shengsheng No.1 is very high, at over 96%, in the
western regions of China.
|
38
|
·
|
Shengsheng No. 2: the distinct
feature is large plant fiber density. Under normal circumstances, poplar
fiber is very loose, and therefore is generally used only in low quality
paper making and as firewood. However, the genetically modified
fast-growing poplar trees have high fiber density. As a result,
the paper making utilization rate is higher, and the wood can also be used
in other commercial applications. The growth period is also only 5 years
for this variety, and the survival rate is also high, at over 96% in the
western regions of China.
|
The
Company sells the unprocessed seedlings to its customers through a network of
independent sales agents.
Recent
Developments
On May
10, 2009, Liaoning Shengsheng and Tuqiang Forestry Bureau of Daxinganling (the
“Tuqiang Forestry Bureau”) entered into an acquisition agreement (the “Beijisong
Agreement”) pursuant to which Liaoning Shengsheng has the right to acquire
67.74% of the outstanding equity of Daxinganling Tuqiang Beijisong Wooden Boards
Industry Co., Ltd. (“Beijisong”), a manufacturer of MDF, in exchange for 21
million RMB, or approximately $5.12 million. On May 13, 2009, the Company
and Tuqiang Forestry Bureau executed an amendment to the Beijisong Agreement
pursuant to which Liaoning Shengsheng has the right to acquire up to
80% of the outstanding equity of Beijisong for a total consideration equal
to 80% of the appraised valuation of Beijisong. Liaoning Shengsheng
has made payments of $877,693 for the Beijisong
acquisition. No further payments are due at this time and a portion
of the proceeds of this offering are intended to be used for such remaining
payment when the appraisal of Beijisong has been completed. We
anticipate such appraisal will be concluded in 2010, although no assurances
thereof can be given.
Products
and Services
Our
current major product is its Shengsheng Fast-Growing Poplar Seedlings. We have
different types of cloned seedlings (bottle seedlings), seedlings, one-year old
seedlings, one-year old cutting seedlings, two-year old seedlings and three-year
old seedlings. Our transgenic fast-growing poplar seedlings have the
following features:
|
1)
|
Resistance to diseases and
pests;
|
|
2)
|
Drought tolerance;
and
|
|
3)
|
Dense plant
fiber.
|
In 2002,
we co-developed anti-insect-and-disease poplar seedlings and dense plant fiber
seedlings in conjunction with SAU and DTU, respectively. We began
pilot planting of these new seedlings in 2003 in Xinjiang Province.
We clone and cultivate the seedlings in a greenhouse environment for
transplantation into the ground. Each seedling can be cut into about
10 pieces, and each piece can be cultivated as a new seedling.
We have
two other ancillary revenue streams that it generates from its facilities
located near Anshan City in Liaoning province:
|
·
|
Landscape Engineering: we have
received a “Park Virescence Project” construction certificate which
authorizes us to perform park greenery and landscaping
services. We purchase the majority of the plants, trees and
other landscape supplies required for the project from other suppliers,
and a small portion of the materials are from our own Anshan facility. The
projects are mainly located in Shenyang and Anshan. Total
revenue from this business is approximately RMB 500,000 per year
(approximately $73,555 as of June 21,
2010).
|
|
·
|
Pollution-free vegetables: we
grow pollution-free (organic) vegetables in the greenhouses at our Anshan
facility. Total revenue from this endeavor is only
approximately RMB 100,000 per year (approximately $14,711 as of June 21,
2010).
|
Resources
and Raw Material Supply
We do not
need to purchase large amounts of raw materials. The seedlings, being
the critical material, are cloned in a greenhouse and can be mass cultivated at
our headquarters in Dongsifangtai, Haicheng City, or at a project site according
to demands. Other major production costs include irrigation (twice a
year), labor costs such as planting, cutting, digging, watering and leveling off
the site, and lease expenses.
According
to the PRC Agriculture Network published by the State Agriculture Department in
2001, the primary resources needed for our business are land and
water. Land is used mainly for nursery purposes. For every
mu, 6,000-8,000 saplings can be planted. A “mu” is a measurement of
area used in the PRC and is equal to 1/15 of a hectare. For
greenhouses, 20,000-28,000 plants (seedlings) can be planted for every
mu. Other raw materials include fertilizer, chemicals, nutrient
solutions and general agricultural production materials. These are
all ordinary agricultural production materials that are generally available and
there are numerous suppliers we can turn to in the event of disruption in
business with our current suppliers for any reason. Land can be
rented privately or the Company can choose to rent land offered by the
government.
39
Research
and Product Development
We
currently have limited resources to conduct the development of new
products. We have only 2 employees engaged in research and
development, and we are dependent on our relationships with third party research
and development institutes such as DTU and SAU to perform research and
development for us. There
were no research and development expenses incurred in 2008 or 2009 because we
did not conduct any R&D activities in year 2008 or 2009. There were general
administrative expenses in the amount of $711,507.54 and $775,570.86,
respectively, for fiscal years 2008 and 2009, constituting 3.33% and 3.36% of
the year end revenue.
At
present, provinces in northern China mainly plant fast-growing poplar trees like
Xinjiang poplar, Beijing poplar 107 and 108, and other Chinese
poplar. All these poplar types have large leaves, a short growth
cycle and high survival rate. Their characteristics make them popular
and the best choices for ecological and economic forests. However,
ordinary fast-growing poplar trees are victims of diseases and pests and have
low plant fiber density.
Proceeds
from this offering may be used to further this research, including obtaining the
necessary government approvals. In the event we are able to
successfully develop this gene and commercialize the resulting seedlings, we
believe such seedlings will quickly become one of the more purchased seedlings
throughout China, and will have the added benefit of relatively stable
pricing.
Facilities
Tree
Plantations
We seek
to acquire forestry rights by entering into co-forestation agreements with local
governments in provinces throughout western China and then cultivating,
processing and manufacturing those resources. In our plantation
model, we assess the suitability of land where trees have been recently
harvested. If we find the land to be suitable, we seek to lease the
land under long term lease agreements. For replanting and conversion
into fast-growing high-yielding plantations, we cultivate trees using improved
silviculture techniques and sell the trees as standing timber. We choose to
plant trees in strategically located areas and operate our commercial
plantations using advanced, environmentally prudent plantation management
practices. We believe our advanced plantation management techniques are a
competitive advantage in China, where the commercial tree plantation industry is
comparatively underdeveloped and where there are currently limited large-scale
plantations using advanced plantation management practices. We have leased and
will continue to lease land from the original plantation rights holders and pay
the land lease rent. We started operating our first planted
plantation in Karamai in 2002. Our planted plantations consist
primarily of poplar trees in Xinjiang Province. As of December 31, 2009, our
planted plantations under management consisted of approximately 8,300
mu.
Plantation
Base
The
Company has leased 128 mu (approximately 85,332.48 sq. meters) of land in
Xihuang Village, Dongsi Fangtai Town, from 48 villagers living in Xihuang
Village, as a plantation base at a current rent of RMB 420 per mu per year
(approximately $61.79 as of June 21, 2010), where the Company has established
eleven greenhouses and several warehouses as production
facilities. The term of the lease runs from November 15, 2000 to
November 15, 2030. The initial rent is RMB 300/mu/year (approximately
$44.13 as of June 21, 2010) from year 2000 to 2005 and market rate increases
occur every five years. For 2005 through 2010, rent is RMB
420/mu/year (approximately $61.79 as of June 21, 2010).
On
January 23, 2010, Liaoning Shengsheng, as the leasee, and Karamai Yongheng
Industry Development Co., Ltd., as the lessor, entered into a lease agreement to
rent land in Karamai with total area of 700 mu (about 466,662 sqm) at a rent of
RMB 160/mu/year (approximately $23.54 as of June 21, 2010) from January 1, 2010
to December 31, 2011. This land is used as a nursery for the
Company’s poplar seedlings.
Land Use
Rights
We
currently maintain the following assigned land use right certificates for four
pieces of land located in Xihuang Village, Dongsi Fangtai Town, issued by the
Land Administration Bureau of Haicheng City:
|
·
|
an assigned industrial land use
right certificate issued on April 26, 2001and valid until April 18, 2031
for a piece of land with an area of 12,033 m2 . This land currently is used
for production, greenhouse and growing seedlings and there is no permanent
building on this land;
|
|
·
|
an assigned industrial land use
right certificate issued on April 26, 2001 and valid until October 30,
2051 for a piece of land with the area of 616m2 , which is the Company’s tissue
culture research
building;
|
40
|
·
|
an assigned business service land
use right certificate issued on January 8, 2000 and valid until January 8,
2030 for a piece of land with an area of 1,306 m2 , where the Company’s dormitory
building is located; and
|
|
·
|
an assigned industry land use
right certificate issued on December 26, 2001 and valid until October 30,
2051 for a piece of land with an area of 715m2 , the Company’s office
building.
|
Real Property
Ownership
We
currently own, and maintain the following House Ownership Certificate for, three
real properties located in Xihuang Village, Dongsi Fangtai Town issued by Urban
and Rural Construction Administration Bureau of Haicheng City:
|
·
|
a house ownership certificate
issued on November 7, 2001 of our office building for a construction area
of 2,285.17 m2
;
|
|
·
|
a house ownership certificate
issued on November 7, 2001 of our tissue culture research building for a
construction area of 1,506.82 m2 ;
and
|
|
·
|
a house ownership certificate
issued on January 9, 2001 for our dormitory building for a construction
area of 2,614 m2
.
|
Customers
The
Company’s major clients are distributors who then resell our products to
independent third parties without our knowledge or
participation. Sales are made pursuant to seasonal contracts that are
generally valid for no more than a few months.
We had
two major distributors, Karamai Teng Lin Farming Co., Ltd., and Liaoning Dongran
Landscape Engineering Co., Ltd., that accounted for 81% and 94% of sales
for our fiscal year ended December 31, 2009 and 2008,
respectively. Karamai Teng Lin was responsible for 53.37% of our 2009
revenues and Liaoning Dongran was responsible for 29.94% of our 2009
revenues. Although we do not currently have any contracts or orders
in place with such distributors, we believe our relationship with these (and our
other) distributors is strong.
Sales
and Marketing
We are
engaged in the forestry industry and focused on the construction of ecologically
sustainable and economically profitable forest area through the provision of
quality seedling products and services. We are in an expanding
industry that benefits from the support of many favorable government
policies. We do not utilize mass advertising or conduct general
public outreach.
We do not
sell our products directly to end users, but rather use a network of independent
sales agents. The major agents are separated by region, primarily
from Xinjiang, Gansu, Sichuan and Shanxi. Most of them have long-standing
relationships with the Company. The Company evaluates its agents based on their
ability to coordinate buyers, as well as expected timing of funds collection,
which is usually based on standard practice in the region in which the agent
operates. The Company believes it saves a significant amount on sales
and marketing infrastructure by using this agency system, and the Company
believes it is the most efficient way to match buyers with their products across
China. Most of the Company’s agents operate under an exclusivity
clause whereby they are not allowed to sell similar varieties of fast-growing
poplars. Agent agreements are renewed each year, usually immediately
after the Chinese New Year in the first part of the calendar year.
This is due to the fact there are little to no sales in the winter
months. The Company customarily executes contracts in the late summer
or early fall, and such contracts require performance by all parties in May, at
which time the contracts terminate. Sales revenue is recognized at
the date of shipment or delivery to sales agents as the sales price is either
fixed or determinable and management deems no other significant obligations,
such as warrants or product returns of the Company, exist.
We have
four full-time personnel working in sales and marketing, including our project
team. Employees in our project, marketing and sales department are
provided with incentives of up to 3% of the size of new projects
signed.
Pricing
and Payment
The price
at which we sell fast-growing poplar seedlings is based on numerous factors,
including: market price changes of fast-growing poplar seedlings; regional
supply of fast-growing poplar seedlings; seasonal availability of seedlings and
demand for fast-growing poplar seedlings. Generally, it takes 20 days
for a single transaction to be consummated. This time frame includes
negotiation of terms, execution of contract, preparation, delivery,
transportation, planting of products and receipt of payment. For
larger transactions, it can take up to one year for the last payment to be
made.
Transportation
Distributors
that purchase our products are responsible for all aspects of the transportation
of such products. Soil is the only thing needed when transporting the
seedlings. Long distance transportation does not materially adversely
affect the survival rate of seedlings.
41
Intellectual
Property
We do not
have any patents, trademarks or other intellectual property
protection. Our cell breeding processes can be mastered by ordinary
agricultural technicians. Accordingly, we do not rely on any such
protection, but rather on our experience, our management team and our local
contacts to provide products and services we believe are superior to our
competitors.
The
seedling products use the brand names of “Shengsheng No.1” and “Shengsheng
No.2.” However, these product names have not been
trademarked.
Liaoning
Shengsheng was formerly known as Anshan Xinfang Gardening Co., Ltd., which was
incorporated in April 1997 as a limited liability company with a registered
capital of RMB 10 million (“Anshan Xinfang”). Liaoning Shengsheng
holds the trademark “Xin Fang” registered with PRC Trademark Bureau under the
State Administration for Industry and Commerce on June 21, 1999 and valid until
November 21, 2010. The Company is currently not planning to renew
this trademark.
As of
today, the Company is not aware of:
|
(i)
|
any challenges or disputes
relating to any intellectual property rights owned or used by the Company,
including any challenges to the validity, subsistence or ownership of such
rights including details of any claims or threatened claims by employees
for compensation in respect of any intellectual
property;
|
|
(ii)
|
any actual, prospective or
alleged infringement by third parties of any intellectual property rights
owned or used by the
Company;
|
|
(iii)
|
any circumstances which might
affect the intellectual property rights owned or used by the Company or
the validity, enforceability, subsistence or registration of such
intellectual property; or
|
|
(iv)
|
any suspected or alleged
infringement of third party intellectual property rights by the
Company.
|
Business
Secrets
According
to the Counter Unfair
Competition Law of the PRC , business secrets refer to the technical
and/or operational information which is practical and not known to the public
and can bring economic benefits to the owners, and the owners have
taken measures to keep them confidential. A business
operator may not infringe on business secrets of others via any of (1)
obtaining business secrets by stealing, seduction, threats or other
illegal means; (2) disclosing, using or allowing others to use the business
secrets by the means mentioned in the preceding item (1); (3)
disclosing, using or allowing others to use business secrets by breaching
confidential requirements or obligations. Where a third party obtains,
uses or discloses the business secrets of others, acknowledging or
should have acknowledged the illegal acts above mentioned, the breaching party
is deemed to have infringed on such business secrets too. Where any
party infringes on business secrets, the relevant authority is required to
order it to stop the illegal acts and may, according to circumstances,
impose on the breaching party a fine ranging from RMB 10,000 to RMB 200,000
(from approximately $1,471 to $29,422 as of June 21, 2010). We
currently neither own nor rely on any business secrets to protect our products
or services, but rather on our experienced management team and local contacts to
provide products and services we believe are superior to our
competitors.
Competition
The
Chinese forestry industry is very competitive. Ever since the
implementation of the national policy of encouraging forestation, market entry
restrictions and price controls have been lifted. Currently,
non-state capital investment accounts for 80% of the yearly total investment.
There are approximately five enterprises in China that have fast-growing poplar
seedling capacity of over 10 million seedlings. Though they have the
ability to produce more than 10 million fast-growing poplar seedlings, we do not
believe these are their main products. However, there is no company
in China to our knowledge that engages in both the seedling breeding and
planting aspects of the forestry industry. Further, our research
indicates there is no domestic forestry enterprise that has a nursery capacity
over 1,000 mu (166.7 acres). Assuming the maximum production of each
mu is 8,000 plants, no single company has a production capacity over 10 million
plants. Additionally, while there are companies similar to ours
throughout China, logistical issues prevent companies such as ours from
competing on a national scale.
In the
fast-growing poplar seedling market, we believe our main competitors are Beijing
Forestry University, the National Forestry Academy, Northeastern Forestry
University and Shenyang Agriculture University. However, they are
primarily forestry science and research entities, not production entities, so
the breeding and selling of fast-growing poplar seedlings are not their primary
focus. They have a very low market share of fast-growing poplar
seedlings. We do not believe there are any competitors in the
provinces in which we conduct business regarding fast-growing poplar
seedlings.
There are
numerous other companies engaged in various other aspects of the planting,
harvesting, processing and sale of timber and wood products. Due to
both the expected increase in demand for timber and numerous wood products
across a multitude of industries and the government encouragement of the
development of the domestic forestry industry, we expect to face a growing
number of competitors both within and outside of China.
42
Competitive
Advantages
Our
business model relies on the fact that seedlings for large-scale forestation
projects (more than 10,000 mu) can be bred in a relatively short period of
time. Although we are not the only company that can produce
fast-growing poplar seedlings on a large-scale using tissue culture technology,
there are only a few that have been successful in securing contracts for
forestation projects of more than 10,000 mu.
We
believe we also have a built-in competitive advantage due to the genetic make-up
of our fast-growing poplar seedlings. Further, we utilize our
currently existing facilities or the facilities of others with which we enter
into research agreements, which reduces the need for us to construct or lease
additional space.
Employees
Substantially
all of our employees are located in China. As of July 12, 2010, we had 56
employees, including four sales representatives. There are no
collective bargaining contracts covering any of our employees. We believe our
relationship with our employees is satisfactory.
We have
signed standard employment agreements in a form provided by the Labour and
Social Security Bureau of Anshan Municipal with all employees, including our
directors and senior executives, but excluding interns and temporary
workers.
Insurance
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including medical insurance, unemployment
insurance and job injuries insurance, and a housing assistance fund, in
accordance with relevant regulations. The insurance rate of each type
of insurance is as follows:
Insurance Type
|
Percentage
Payable by
Employer
|
Percentage
Payable
Employee
|
Total
Percentage of
the Salary
|
|||||||||
Pension
|
20
|
8
|
28
|
|||||||||
Unemployment
Insurance
|
2
|
1
|
3
|
|||||||||
Medical
Insurance
|
N/A
|
N/A
|
N/A
|
|||||||||
Occupational
Injury Insurance
|
0.5
|
0
|
0.5
|
|||||||||
Maternity
Insurance
|
0.8
|
0
|
0.8
|
We have
purchased social insurance for all our full-time employees. In the last three
years, we contributed approximately $83,683, $111,549 and $126,430 for the
fiscal years ended December 31, 2007, 2008 and 2009, respectively. We expect the
amount of contribution to the government’s social insurance funds to increase in
the future as we expand our work force and operations.
As of
today, we are not aware of any investigations, prosecutions, disputes, claims or
other proceedings in respect of insurance made by any insurance authority of the
PRC.
The
Company is currently not paying medical insurance for its employees. Currently,
China has not instituted a planned national medical insurance reform. In
accordance of the Decision on
Establishing the Basic Medical Insurance System for Urban Employees by
the State Council and the Tentative Program for Reforming
Basic Medical Insurance System for Urban Employees of Haicheng City, it
is not a compulsive duty for enterprises in Haicheng City where Liaoning
Shengsheng is located to buy medical insurance for its employees.
Environmental
Matters
The
Company is not aware of any investigations, prosecutions, disputes, claims or
other proceedings in respect of environmental protection made by any
environmental administration authorities of the PRC.
Pusheng
has conducted environmental impact assessments for its proposed MDF project (as
described below) which was approved by the Environmental Protection Bureau of
the Karamai municipality. Additional government approvals are still
required in order to proceed with the MDF project, as discussed
herein.
43
Tree
Plantations
As
disclosed in the Risk Factors section hereof, our tree plantations are
subject to certain environmental laws and regulations, particularly with respect
to air emissions and discharges of wastewater and other pollutants into land,
water and air, and the use, disposal and remediation of hazardous substances and
contaminants. We may be required to incur significant expenditures to comply
with applicable environmental laws and regulations. Moreover, some or all of the
environmental laws and regulations to which we are subject in our tree
plantations and manufacturing plants could become more stringent in the future,
which could affect our production costs and results of operations. Any failure
by us to comply with applicable environmental laws and regulations could result
in civil or criminal fines or penalties or enforcement actions, including a
requirement to install pollution control equipment or other mandated actions. As
a result, environmental laws and regulations may adversely affect our business,
financial condition and results of operations.
Government
Approval and Regulation of Our Principal Products or Services
Preferential
policies of Afforestation in Karamai
According
to the Several Policies for
Encouraging Investment and Improving Industry Structure Adjustment in
Karamai and Implementary Rules for Several Policies for Encouraging
Investment and Improving Industry Structure Adjustment in Karamai,
enterprises and individuals who develop and plant ecological-public-interest
forest (including farmland protecting forest), water-maintaining forest, water
and soil maintaining forest, and wind-proof and sand fixing forest, are entitled
to a one-time subsidy of RMB 500/mu (approximately $73.56) and maintenance
subsidy of RMB 50/mu ($7.36) per year for five years, subject to approval of
relevant Karamai government authorities. Enterprises and individuals enjoy a
subsidy of 80% of the water fee for five years after the trees are planted in an
ecological-public-interest forest and 50% of the water fee for five years after
the trees are planted in farmland protecting the forest, subject to approval of
relevant local government authorities. We pay reduced water fees as a
result of our participation in the Karamai project described below and will
continue to pay reduced fees for as long as we operate the
project. We pay RMB 6 Yuan per m³ less than what we would otherwise
be charged.
On
October 26, 2000, the State Council promulgated the Circular regarding Several Policy
Measures for China’s Western Development Program and on January 15, 2004,
the People’s Government of Xinjiang Province promulgated the Opinion concerning Further Improve
and Implement State Land Preferential Policies to Promote the Social and
Economic Sustainable Development in Xinjiang.
According
to the above two regulations with regard to planting forests and grassland on
barren hills and wasteland, and to restoring forests and grassland from
cultivated land of the western regions, local government has implemented a
policy that whoever restores, plants or operates the forest land has the right
to the use of land and the ownership of the forests and
grassland. Corporations and individuals may apply to use barren hills
and wasteland owned by the state and conduct environment protection construction
like restoring vegetation of trees and grasses, on the condition that if such
construction investment and afforestation work be completed, such corporation or
individual has the timber rights for cultivation of state-owned land by paying
an assigned fee to the local government, which may be reduced or exempted. Such
right to the use of land is valid for 25 years subject to renewal upon
application and is transferable by inheritance or contract with
consideration. We have cultivated approximately 11,000 mu and as a
result we are entitled to 25 years of timber rights. Currently, we
have 19 years left on this right.
Preferential
policies of Afforestation in Liaoning
On
September 1, 2009, Liaoning Provincial People’s Government issued the Notice of
Construction Plan of Large-scale Afforestation Projects in Liaoning Province,
with a valid term from 2010 to 2012. According to such notice,
financial subsidies for afforestation are as follows: planting trees on barren
hills and wasteland, RMB 450/mu (approximately $66.20); planting shrubbery, RMB
350/mu (approximately $51.49); enclosing a hill for afforestation, RMB 100/mu
($14.71); aerial seeding, RMB 80/mu ($11.77); afforestation projects with
foreign investment, RMB 500/mu ($73.56); replant open forest land, shrub land
and defective transformation of silkworm field, RMB 200/mu ($29.42); street
trees planning in rural area, RMB 1.5 per tree; non-forest plantation, RMB
350/mu ($51.49). We have not yet begun participation in this program
but intend to do so.
A new PRC
farm subsidized government program provides subsidies of 4,000 RMB per 1 mu to
those involved in pesticide and pollution free vegetable farming. We
intend to begin participation in this program during our fiscal year 2010,
although the extent of such participation has yet to be determined.
Legal
Proceedings
We may be
subject to legal proceedings, investigations and claims incidental to the
conduct of our business from time to time. We are not currently a party to any
legal proceedings. We are also not aware of any legal proceeding, investigation
or claim, or other legal exposure that could have a material adverse effect on
our business, financial condition or results of operations.
44
Business
Strategy
We seek
to continue to sell our transgenic poplar seedlings to third parties and are
continuing our research and development in order to further enhance the benefits
of fast-growing poplar seedlings. We also seek to continue the
expansion of our cultivation, manufacturing and production
businesses. Through the Beijisong acquisition, we believe we can
establish a stronger presence in the Daxinganling Forest, which is one of a few
forests the Chinese government has allocated for private corporations. We
believe the following key initiatives will allow us to successfully execute our
strategy:
|
·
|
expand our geographical locations
by investing in additional tree plantations to gain market share in the
PRC;
|
|
·
|
improve the yields of our tree
plantations and reduce production costs through continuing investment in
research and development and application of advanced forestry management
techniques;
|
|
·
|
practice sustainable and
environmentally responsible forestry and
manufacturing;
|
|
·
|
build integrated manufacturing
operations to supply value-added, wood-based products to the PRC market
and further increase our revenue
streams;
|
|
·
|
strengthen management processes
and information systems to support the growth of our businesses;
and
|
|
·
|
maintain strategic alignment with
the PRC government‘s plans.
|
The
Karamai Project
Karamai,
China is located in Xinjiang Province. Currently, Xinjiang province
does not have an established lumber industry. Local supply is
imported from other provinces and countries and the resulting transportation
costs makes the final product very expensive.
The
Karamai city government established a new fast-growing forest base (the “Forest
Base”) of 100,000 mu (one mu is equal to 1/6 of one acre) for industrial use
located in Xinjiang province. Liaoning Shengsheng established its
wholly foreign owned subsidiary, Karamai Pusheng Forest and Wood Industry, LLC
(“Pusheng”), a limited liability company organized under the laws of the PRC, on
January 25, 2005 in order to engage in timber cultivation and wood processing in
the Karamai region.
On
November 1, 2005, the Karamai Developing Planning Commission approved Pusheng to
establish an MDF facility capable of producing 80,000 cubic meters of MDF using
poplar and other trees provided from the fast-growing forest
base. The total investment for this project is RMB 64,800,000
(approximately $9,532,776 as of June 21, 2010). Although the
government approval to build this plant has expired, the Company believes it
will have the proper authority to build this facility at such time as it is
ready to do so. Because there are few trees that are adaptive in the
western area of China, the Company plans to develop the business of Pusheng as
part of its development plan for penetrating into Gansu Province and the Inner
Mongolia area.
A portion
of the proceeds raised in this offering may be used to prepare the first phase
of construction and execution of the Karamai Project in Karamai Petrochemical
Industry Park, including:
|
·
|
purchasing the land rights and
building the manufacturing
plant;
|
|
·
|
equipment
purchasing;
|
|
·
|
working capital;
and
|
|
·
|
purchasing the rights for logging
a portion of the forest from the Chinese
government.
|
6,300mu Ownership of Trees
and Timber
On
January 5, 2007, Pusheng, as the purchaser, and Karamai Pulin Ecology and
Technology Co., Ltd. (“Pulin”), as the seller, entered into a Forestry Right
Purchase Agreement for Pusheng to buy 11,000 mu (about 7,333,260 sq.
meters) of forest for consideration of RMB 55 million. Pusheng
has paid RMB 43 million to date (approximately $6,326,000 as of June 21,
2010). However, due to the national reform of forestry rights,
Pulin could not fulfill its obligations to sell the forestry right to
Pusheng. Therefore, Pusheng and Pulin entered into a new agreement on
February 25, 2009, pursuant to which Pulin refunded RMB 8,350,000
(approximately $1,228,374 as of June 21, 2010) to Pusheng and
granted Pusheng ownership of trees and timber growing in 6,300 mu (about
4,199,958 sq. meters) forest land within 10 years as compensation for failure to
transfer the initial 11,000 mu of forestry rights to Pusheng. Pusheng
is responsible for maintenance and plantation of forest in such land and intends
to sell the timber from these forests consistent with its prior operating
history.
45
Beijisong
Acquisition
The
Company seeks to expand its business capabilities through the acquisition of
Beijisong. Daxinganling Forest is located in the northern part of
Heilongjiang Province, which is China's northernmost
province. Daxinganling Forest is China's most resource-rich forest
area and, through The Forestry Administration of Daxinganling, is one of the few
forests in China planning for state owned enterprises and private corporations
to work together. The Forestry Administration of Daxinganling,
together with the national Forestry Bureau, has the authority over the
forest. The 11 counties under the Forestry Administration of
Daxinganling each have their own County Forestry Department, each of which
controls several state-owned wood processing enterprises. One of the
county forestry departments is the Tuqiang Forestry Bureau, which owns and
operates Beijisong. Beijisong is a limited liability company
incorporated in the PRC on March 25, 2008. Beijisong has an annual production
capacity of 80,000 cubic meters of MDF and 2008 revenues of more than RMB 35
million ($5.147 Million US Dollars). Its advanced facility covers an
area of about 70,000 square meters. The manufacturing facility is
composed of a main plant, polishing plant, urea plant and power systems,
buildings, plants and a 15,000 square meter construction complex, including a
particleboard production plant with annual production capacity of 15,000 cubic
meters. Beijisong has raw materials inventory of approximately 50,000
cubic meters of wood. The Company intends to use the gross proceeds
of this offering to complete its acquisition of Beijisong.
On May
13, 2009, the Company and Tuqiang Forestry Bureau executed an amendment to the
Beijisong Agreement pursuant to which Liaoning Shengsheng has a right of first
refusal to purchase 80% of the outstanding equity of Daxinganling Yuying Wood
Industry Co., Ltd. (“Yuying”) and Daxinganling Chengyu Wood Industry Co., Ltd.
(“Chengyu”), entities owned by Tuqiang Forestry Bureau, for RMB equal to 80% of
the appraised valuation of Yuying and Chengyu. Yuying is a wood
processing company with annual revenue of RMB 50 Million Yuan ($7.352 million)
that produces a variety of wood lathe board and wood plat side, and also
reprocess wood residues.
The
Company seeks to consummate the acquisition of Beijisong, as well as acquire
Yuying, in an effort to increase its production, manufacturing and sales
capabilities. The proceeds of this offering are intended to be used
for such payment following completion of the appraisal of
Beijisong. We anticipate such appraisal will be concluded in 2010,
although no assurances thereof can be given. The Company does not
intend to acquire Chengyu at this time.
46
OUR
HISTORY AND CORPORATE STRUCTURE
Organizational
History of China For-Gen.
We were
originally incorporated under the laws of the State of Delaware under the name
China For-Gen Corp. on February 26, 2008. Our principal office is located in the
Tengao District, Haicheng City, Liaoning Province, P.R.China
114000.
Pursuant
to the Share Transfer Agreement entered into on April 28, 2009 (the “Share
Transfer”) between the shareholders of Liaoning Shengsheng and the Company, we
acquired all of the outstanding equity securities of Liaoning Shengsheng (the
“Shengsheng Shares”) from all of its shareholders (the “Shengsheng
Shareholders”) in consideration for $5.12 million, equivalent to RMB 35,000,000
(the “Purchase Price”) and the Shengsheng Shareholders transferred and
contributed all of their Shengsheng Shares to us. The closing of the
Share Transfer (the “Closing”) took place on May 6, 2009. At the
Closing we paid $1.28 million to the Shengsheng Shareholders and the remaining
$3.18 million will be paid to the Shengsheng Shareholders from a portion of the
proceeds of this offering. As a result of the Closing, Liaoning
Shengsheng became a wholly foreign-owned subsidiary (“WFOE”) of China
For-Gen. On February 12, 2010, Liaoning Shengsheng and the
shareholders of Liaoning Shengsheng at the time of the Closing entered into an
agreement providing that the Purchase Price would be transferred from the
Shengsheng Shareholders to Liaoning Shengsheng for working capital and general
corporate purposes.
As part of the Share Transfer, on June
8, 2009, certain officers and directors of Lioaning Shengsheng (the “Call Option
Stockholders”) entered into a call option agreement (the “Call Option
Agreement”) with Ms. Sherry Li (“Ms. Li”), then the sole officer, director and
shareholder of China For-Gen, wherein she agreed to transfer a number of shares
of the Company equal to 60% (or approximately 55% in the event the additional
investment right is exercised by those investors who participated in the
February 2010 private placement) of the issued and outstanding shares of
common stock to the Call Option Stockholders after our initial public
offering. The Call Option Agreement became effective upon the closing
of the Share Transfer. The option may be exercised by the Call Option
Stockholders for nominal consideration of $0.001 per share, which would give
them indirect ownership of a significant percentage of our common
stock. The Call Option Agreement provides that Ms. Li may not dispose
of any China For-Gen shares owned by her without the prior written consent of
the Call Option Stockholders. The Call Option Agreement was amended
and restated in its entirety on May 12, 2010 to be in full compliance with PRC
laws, including, without limitation, laws with respect to acquisitions by
foreign entities and ownership by PRC citizens in a foreign enterprise (the
“Amended Call Option Agreement”). The percentage ownership of the
Company to be granted to the Call Option Stockholders remains
unchanged. The Call Option Stockholders have indicated they intend to
exercise their rights under the Amended Call Option Agreement with respect to
50% of the shares subject to the call option on or by December 31, 2010 and on
or by December 31, 2011 with respect to the remaining 50%.
The Call
Option Stockholders are subject to a lockup agreement providing that they shall
not, until the 24 month anniversary of the effectiveness of this registration
statement, without the prior written consent of T Squared Investments LLC,
directly or indirectly: (i) offer, sell, assign, transfer, pledge, contract
to sell, or otherwise dispose of, any shares of Common Stock, securities
convertible into or exercisable or exchangeable for Common Stock (including,
without limitation, shares of Common Stock or any such securities which may be
deemed to be beneficially owned by the undersigned in accordance with the rules
and regulations promulgated under the Securities Act of 1933, as the same may be
amended or supplemented from time to time (such shares or securities, the
“Beneficially Owned Shares”); (ii) establish or increase any “put equivalent
position” or liquidate or decrease any “call equivalent position” (in each case
within the meaning of Section 16 of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder) with respect to
any Beneficially Owned Shares, or otherwise enter into any swap, derivative or
other transaction or arrangement that transfers to another, in whole or in part,
any economic consequence of ownership of any Beneficially Owned Shares, Common
Stock or securities convertible into or exercisable or exchangeable for Common
Stock, whether or not such transaction is to be settled by delivery of
Beneficially Owned Shares, other securities, cash or other consideration; or
(iii) engage in any short selling of any Beneficially Owned Shares, Common
Stock or securities convertible into or exercisable or exchangeable for Common
Stock. Notwithstanding the foregoing, during such 24 month period, an
aggregate of 300,000 shares shall be released from lock-up and shall be allowed
to be disposed of beginning on the one year anniversary of the effectiveness of
this registration statement and an additional 300,000 shares shall be released
from lock-up and shall be allowed to be disposed of beginning on the date that
is the eighteen (18) month anniversary of the effectiveness of this registration
statement. The remaining Beneficially Owned Shares shall continue to
be subject to the lock-up until the 24 month anniversary of the date of
effectiveness of this registration statement.
Mr. Wang
Baoquan was appointed as our President and Chairman of Board and Ms.
Lanfeng Wu was appointed as our Treasurer and Secretary, effective as of May 13,
2010.
Liaoning
Shengsheng Biotechnology Co., Ltd.
Liaoning
Shengsheng is a limited liability company organized under the laws of the PRC,
which is wholly owned by China For-Gen. Liaoning Shengsheng is
engaged in the hi-tech forestry industry (excluding scarce species restricted by
national laws and regulations), including producing vegetables, flowers and
fruit, researching and developing applications of biotechnology; producing
edible fungi and its products (except as otherwise provided by laws and
regulations); and landscaping.
47
The
predecessor of Liaoning Shengsheng is Anshan Xinfang Gardening Co., Ltd., which
was incorporated in April 1997 as a limited liability company with a registered
capital of RMB 10 million (“Anshan Xinfang”). Wang Baoquan and Zhao Yaomei
contributed funds of RMB 7.8 million and RMB 0.2 million, respectively, and
Shen Xiaoyang and Na Ningxin contributed their patent of soilless culture
technology at an appraised value of RMB 2 million. In September 2000,
Anshan Xinfang increased it registered capital to RMB 12.5 million, which was
verified by Liaoning Zhenghe Certified Public Accountants Co.,
Ltd. The patent for soilless culture technology expired on February
18, 2005.
On
November 13, 2000, the People’s Government of Liaoning Province (“Liaoning
Government”) approved the incorporation of the Company as a limited liability
company limited by shares through the restructuring of Anshan Xinfang.
The name of the Company changed to “Anshan Shengsheng High-tech Planting
Technology Application Co., Ltd.” The Company obtained its business license from
Liaoning Government on November 24, 2000. The registered capital of
Anshan Shengsheng was RMB 24 million, which was verified by Dalian North
Certified Public Accountants Co., Ltd.
On June
26, 2002, the People’s Government of Liaoning Province approved the increase of
the Company’s registered capital from RMB 24 million to RMB 35 million and the
issuance of 11 million shares to two new shareholders, and the Company changed
its name to the current “Liaoning Shengsheng Biotechnology Co.,
Ltd.” The increased contribution was verified by Liaoning Pan-China
Certified Public Accountants Co., Ltd.
On April
20, 2009, the Foreign Trade and Economic Cooperation Department of Liaoning
Province approved the acquisition of all share equity of
Liaoning Shengsheng by China For-Gen Corp. Liaoning Shengsheng
obtained a Certificate of Approval to become a WFOE on April 20, 2009 and
obtained a new business license on May 6, 2009.
China
For-Gen operates its business through Liaoning Shengsheng.
Karamai
Pusheng Forest and Wood Industry, LLC
On
January 25, 2005, Wang Baoquan and Lanfeng Wu established Karamai Pusheng Forest
and Wood Industry, LLC (“Pusheng”), a limited liability company organized under
the laws of the PRC, with registered capital of RMB 10 million. On September 28,
2007, Liaoning Shengsheng acquired all of the share equity of Pusheng from Wang
Baoquan and Lanfeng Wu, and currently owns 100% of the share equity of
Pusheng. Pusheng currently does not conduct any business operations but is
expected to be used as the primary vehicle for the Company to expand into the
manufacturing of MDF in the future.
Our post
initial public offering organization structure is summarized below:
48
DIRECTORS
AND EXECUTIVE OFFICERS
Our
current executive officers and directors as of the date of this prospectus are
as follows:
Directors and Executive Officers
|
Position/Title
|
Age
|
||
Wang
Baoquan
|
President
and Chairman of the Board
|
44
|
||
Lanfeng
Wu
|
Treasurer
and Secretary
|
35
|
||
Yu
Jia
|
Director
|
39
|
||
Zhang
Daoxu
|
Director
|
70
|
||
Wu
Yuanhua
|
Director
|
46
|
||
Xu
Gang
|
Vice
President and Director
|
53
|
||
Fang
Jun
|
Vice
President
|
50
|
||
Scott
Ogilvie
|
Director
|
56
|
||
Ning
Zhang
|
Director
|
51
|
The
following is a summary of the biographical information of our
directors and officers. Any gap in employment background of an individual
indicates that during the gap, the individual did not obtain work experience
relevant to his or her role as an officer or director.
Wang
Baoquan. Mr. Wang is our Chief Executive Officer. In 1997
Mr. Wang founded Anshan Xinfang Horticulture Co., Ltd., a Chinese company
that provides services to landscape construction and project contracting in the
PRC, and has been the Chief Executive Officer since that time. In 2000,
Mr. Wang restructured the former Xinfang Horticulture Co., Ltd. into
Liaoning Shengsheng and has served as its chairman and president since that
time. Mr. Wang received his master degree in Business
Administration from the Chinese University of Hong Kong in
2000. Mr. Wang has been chosen as a director because he is one
of the founders of our company and we believe his knowledge of our company and
years of experience in our industry give him the ability to guide our company as
a director.
Lanfeng Wu. Ms. Wu
graduated from Liaoning University of Science and Technology with a bachelor’s
degree in International Trading and Economics. Ms. Wu has been
working for the Company since 2000 as the assistant to Wang
Baoquan. Ms. Wu has been chosen as a director because we believe we
can benefit from her intimate knowledge of the business and operations of
Liaoning Shengsheng and her leadership skills.
Yu Jia. Mr. Yu
joined our Board of Directors in 2010. Since 2003, Mr. Yu has worked for Huaying
Rongtong Investment Consulting Co., Ltd. as CEO, a consulting service company
that provides services in valuation, investment advisory services and general
practice surveying. Mr. Yu served as CFO and COO of Oriental Real Ventures
Management Ltd. from 2002 to 2008, and served as vice president of Yihe
Financial Investment Consulting Co. from 2001 to 2003, and served as manager of
government relations of Andersen (Shanghai) Business Consulting Co., Ltd. from
2002 to 2003. Mr. Yu received a bachelors and masters degree in
public relations from the Southern California State University, College of
Communication in 1993 and 1995, respectively. Mr. Yu has been chosen as a
director because we believe we can benefit from his leadership skills and
management experience.
Zhang Daoxu. Mr.
Zhang joined our Board of Directors in 2010. Since 1961, Mr. Zhang has served as
a research scientist for Shenyang Agriculture and Science Research Institute.
Mr. Zhang received a bachelor’s and masters degree in biology and plantation
from Shenyang Agriculture University and Jilin University in 1960 and 1961,
respectively. Mr. Zhang has been chosen as a director because we
believe we can benefit from his leadership skills and management
experience.
Wu Yuanhua. Mr. Wu
joined our Board of Directors in 2010. Since 1995, Mr. Wu has served as a
leading researcher and manager in charge of research and development of Liaoning
Province Key Laboratory of Agricultural Biotechnology, and served as a leading
researcher at the Biotechnology Center of Shenyang Agricultural University. Mr.
Wu received a PhD in plantation protection from Shenyang Agriculture University
in 1987. Mr. Wu has been chosen as a director because we believe
we can benefit from his leadership skills and management
experience.
49
Xu Gang. Mr. Xu has
served as Liaoning Shengsheng’s Vice President of Operations since 2003 and a
director since 2010. Mr. Xu is responsible for the production,
marketing and sale of our products. Mr. Xu served as General Manager
and Discipline Secretary of Anshan Cooler Manufacturer from 2000 to 2003, and
CEO and director of Anshan Transportation Equipment Factory from 1996 to
1998. Mr. Xu received his bachelor’s degree in economics and
management in 1986 from the Liaoning Radio and Television
University. Mr. Xu has been chosen as a director because he is
one of the key employees of our company and we believe we can benefit from his
management experience and marketing skills.
Fang Jun. Mr. Fang has served
as Liaoning Shengsheng’s Vice President of Finance since 2003. Mr. Fang is
responsible for project development, financing and business strategy
planning. Mr. Fang served as deputy manager and vice general manager
of the investment department of Anshan Trust and Investment Co., Ltd. from 1997
to 2002. Mr. Fang served as vice general manager for the investment banking and
business department of ZhongShan Securities, Inc. from 2002 to 2003.
Mr. Fang received his bachelor’s degree in mathematics in 1978 from the
Liaoning University.
Scott
Ogilvie. Mr.
Ogilvie has served as our director since June, 2010. Mr. Ogilvie is
the founder and since 2006 has been the President of AFin International, Inc.,
an international advisory and development company focused in U.S. and
international markets in areas including infrastructure, renewable energy, IT,
energy, entertainment, healthcare and real estate. Mr. Ogilvie is
also the President and CEO of Gulf Enterprises International, Ltd. (“GEI”), a
position he has held since 2006. GEI is an international advisory and
development company that brings Persian Gulf, U.S. and international expertise,
investment capital and operating platforms to Middle East and North Africa
markets in areas such as infrastructure, renewable energy, IT, energy,
entertainment, healthcare and real estate. From 2000 through 2008,
Mr. Ogilvie was the Chief Operating Officer for the CIC Group of
companies. During Mr. Ogilvie’s tenure, CIC sponsored and managed
international investment funds across public equity, private equity and real
estate asset classes. CIC had over $1 billion in assets under
management. Mr. Ogilvie oversaw the company’s investment management
group in New York City, as well as its Kuwait based staff. He also
served on the boards of directors and investment committees of each of CIC’s
funds. Mr. Ogilvie is currently a director of Neuralstem, Inc., a
publicly-traded biotherapeutics company whose mission is to apply stem cell
research and its patented human neural stem cell technology to treat diseases of
the central nervous system. Mr. Ogilvie is also currently a
director of GenSpera, Inc., a publicly traded development stage oncology company
focused on therapeutics that deliver a potent, unique and patented drug directly
to tumors. Mr. Ogilvie received a B.S.B.A. from the University of
Denver and a J.D. from University of California-Hastings College of
Law.
Ning
Zhang. Mr. Zhang
joined our Board of Directors in June, 2010. Mr. Zhang is currently
the chief financial officer of China Financial Services Corp, a company that
provides consulting services in the form of financial analysis, capital markets
advice and guidance and assistance with due diligence investigations of
companies, a position he has held since June 2007. From May 2003 to
May 2007, he was general manager of the auditing department of the Beijing
branch of American Independent Capital Group (AICG), a company providing
financial and consulting services for enterprises seeking capital and potential
investors. He is a graduate of Renmin University, P.R.China, with a
degree in Accounting and Finance.
All of
our directors will hold their positions on the board until our next annual
meeting of the stockholders and until their respective successors have been
elected or appointed. Officers serve at the discretion of the board of
directors.
There are
no family relationships among our directors and executive
officers. There is no arrangement or understanding between or among
our executive officers and directors pursuant to which any director or officer
was or is to be selected as a director or officer, and there is no arrangement,
plan or understanding as to whether non-management stockholders will exercise
their voting rights to continue to elect the current board of
directors.
Our
directors and executive officers have not, during the past ten
years:
|
●
|
filed a petition under the
Federal bankruptcy laws or any state insolvency law by or against, or a
receiver, fiscal agent or similar officer was appointed by a court for the
business or property of such person, or any partnership in which he was a
general partner at or within two years before the time of such filing, or
any corporation or business association of which he was an executive
officer at or within two years before the time of such
filing;
|
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●
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been convicted in a criminal
proceeding or is a named subject of a pending criminal proceeding
(excluding traffic violations and other minor
offenses);
|
|
●
|
been subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction, permanently or temporarily enjoining
him from, or otherwise limiting, the following
activities:
|
|
●
|
Acting
as a futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator, floor broker, leverage transaction
merchant, any other person regulated by the Commodity Futures Trading
Commission, or an associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in or
continuing any conduct or practice in connection with such
activity;
|
|
●
|
Engaging
in any type of business practice;
or
|
|
●
|
Engaging
in any activity in connection with the purchase or sale of any security or
commodity or in connection with any violation of Federal or State
securities laws or Federal commodities
laws;
|
|
●
|
been subject to any order,
judgment or decree, not subsequently reversed, suspended or vacated, of
any Federal or state authority barring, suspending or otherwise limiting
for more than 60 days the right of such person to engage in any activity
described in paragraph (f)(3)(i) of this section, or to be associated with
persons engaged in any such
activity;
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●
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been found by a court of
competent jurisdiction in a civil action or by the SEC to have violated
any Federal or State securities law, and the judgment in such civil action
or finding by the SEC has not been subsequently reversed,
suspended, or vacated;
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50
●
|
found by a court of competent
jurisdiction in a civil action or by the Commodity Futures Trading
Commission to have violated any Federal commodities law, and the judgment
in such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated;
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●
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been the subject of, or a party
to, any Federal or state judicial or administrative order, judgment,
decree, or finding, not subsequently reversed, suspended or vacated,
relating to an alleged violation
of:
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●
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Any Federal or state securities
or commodities law or regulation;
or
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●
|
Any law or regulation respecting
financial institutions or insurance companies including, but not limited
to, a temporary or permanent injunction, order of disgorgement or
restitution, civil money penalty or temporary or permanent
cease-and-desist order, or removal or prohibition order;
or
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●
|
Any law or regulation
prohibiting mail or wire fraud or fraud in connection with any business
entity.
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●
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been the subject of, or a party
to, any sanction or order, not subsequently reversed, suspended or
vacated, of any self-regulatory organization (as defined in Section
3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered
entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7
U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons
associated with a member.
|
Corporate
Governance
Board
of Directors
We have
eight members serving on our Board of Directors, five of which are considered
“independent directors” as defined under the Section 803 of the NYSE Amex
Company Guide. All actions of the Board of Directors require the
approval of either a majority of the directors in attendance at a meeting, duly
called and noticed, at which a quorum is present or the unanimous written
consent of all of the members of the Board of Directors. During the
fiscal year ended December 31, 2009, the Board did not meet but took action by
unanimous written consent twice.
Board
Committees
Prior to
the consummation of this offering, the Board of Directors will form an audit
committee, a nominating committee and a compensation committee and adopt
charters for all of such committees.
Code
of Ethics
Prior to
the consummation of this offering, the Board of Directors of the Company intends
to adopt a code of ethics that applies to our officers, directors and employees,
including our chief executive officer, senior executive officers, principal
accounting officer, and other senior financial officers. A copy of
our code of ethics will also be provided to any person without charge, upon
written request sent to us at our offices located at Tengao District, Haicheng
City, Liaoning Province, P.R.China 114000. A printed copy of the code
of ethics, once adopted, may be obtained free of charge by writing to
us at China For-Gen Corp., Tengao District, Haicheng City, Liaoning Province,
114000, People’s Republic of China.
EXECUTIVE
COMPENSATION
The
following summary compensation table indicates the cash and non-cash
compensation earned for years ended December 31, 2009 and 2008 by our Chief
Executive Officer and each of our other two highest paid executives, whose total
compensation exceeded $100,000 (if any) for the years ended December 31,
2009 and 2008.
SUMMARY COMPENSATION TABLE
|
|||||||||||||||||||||||
Name and
Principal
Position
|
Year
|
Salary
($) (1)
|
Bonus
($) (1) (2)
|
Stock
Awards
( $)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
( $)
|
Total
($)
|
||||||||||||||
Wang
Baoquan,
|
2009
|
12,305
|
119,534
|
131,839
|
|||||||||||||||||||
President
and Chairman
|
2008
|
10,620
|
59,693
|
—
|
—
|
—
|
—
|
—
|
70,313
|
||||||||||||||
Xu
Gang,
|
2009
|
9,668
|
26,954
|
36,622
|
|||||||||||||||||||
Vice
President and Director
|
2008
|
5,186
|
24,112
|
—
|
—
|
—
|
—
|
—
|
29,298
|
||||||||||||||
Fang
Jun,
|
2009
|
9,668
|
26,954
|
36,622
|
|||||||||||||||||||
Vice
President
|
2008
|
5,186
|
24,112
|
—
|
—
|
—
|
—
|
—
|
29,298
|
(1)
|
All
compensation for the years shown was paid in RMB which, for reporting
purposes, has been converted to U.S. dollars at the conversion rate of
6.8225 RMB U.S. dollar for 2009 and 6.8282 RMB to one U.S. dollar for
2008.
|
(2)
|
Bonuses
to its executive officers are determined by the Company’s Board of
Directors and are awarded as a percentage of net
revenue.
|
51
Outstanding Equity Awards at Fiscal Year End
We have
not granted any stock options to our executive officers or directors from
inception through the date hereof.
Director
Compensation
Employee
directors and non-voting observers do not receive any compensation for their
services. Non-employee directors are entitled to receive approximately $730 per
Board of Directors meeting attended. In addition, non-employee directors are
entitled to receive compensation for their actual travel expenses for each Board
of Directors meeting attended.
Executives
Employment Contracts
Except as
described below, 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 officer’s
responsibilities following a change-in-control.
Liaoning
Shengsheng has entered into employment agreements with each of Wang Baoquan, Xu
Gang and Fang Jun. Each of these employment agreements provides for a three-year
term valid until 2012. Under Chinese law, Liaoning Shengsheng is
obligated to pay an employee compensation equal to one month’s salary for each
year Liaoning Shengsheng has employed such employee, up to twelve years, upon
termination (or upon expiration of any applicable employment agreement), except
where (1) the employee has committed a crime or the employee’s actions or
inactions have resulted in a material adverse effect to Liaoning Shengsheng; (2)
the employee is then-receiving a pension; (3) the employee dies or is declared
missing; and (4) Liaoning Shengsheng offers to renew the employment agreement at
equal or higher consideration and the employee does not accept it. If
Liaoning Shengsheng terminates an employment agreement before expiration and
without cause, an employee has the right to either enforce the employment
agreement or require Liaoning Shengsheng to pay twice the compensation due
thereunder.
Indemnification
of Officers and Directors
We are a
Delaware corporation, and accordingly, we are subject to the corporate laws
under the Delaware General Corporation Law. Article Sixth of our
second amended and restated certificate of incorporation contains the following
indemnification provision for our directors and officers:
“The
Corporation shall have the power to indemnify any director, officer, employee or
agent of the Corporation or any other person who is serving at the request of
the Corporation in any such capacity with another corporation, partnership,
joint venture, trust or other enterprise (including, without limitation, any
employee benefit plan) to the fullest extent permitted by the General
Corporation Law of the State of Delaware as it exists on the date hereof or as
it may hereafter be amended, and any such indemnification may continue as to any
person who has ceased to be director, officer, employee or agent and may inure
to the benefit of the heirs, executors and administrators of such a
person.”
52
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information with respect to the beneficial
ownership of our common stock by (i) any person or group owning more than 5% of
each class of voting securities, (ii) each director, (iii) each executive
officers and (iv) all executive officers and directors as a group, as
of July 12, 2010.
Name and Address
of Beneficial Owners (1)(2)
|
Amount
of Beneficial
Ownership
|
Percent
of Class (3)
|
||||||
Wang
Baoquan, President and Chairman
|
3,456,000 | 24.95 | % | |||||
Yu
Jia, Director
|
2,400,000 | 17.32 | % | |||||
Zhang
Daoxu, Independent Director
|
* | — | ||||||
Wu
Yuanhua, Independent Director
|
* | — | ||||||
Scott
Ogilvie, Independent Director
|
* | —- | ||||||
Ning
Zhang, Independent Director
|
* | —- | ||||||
Xu
Gang, Vice President and Director
|
2,933,300 | 21.17 | % | |||||
Fang
Jun, Vice President
|
2,397,900 | 17.30 | % | |||||
Lanfeng
Wu, Secretary and Treasurer
|
812,800 | 5.87 | % | |||||
T
Squared Investments LLC(4)
|
1,914,901 | 12.14 | % | |||||
Silver
Rock II, Ltd.(5)
|
884,200 | 6.00 | % | |||||
All
directors and officers as a group (8 individuals)
|
12,000,000 | 86.62 | % |
* less
than 1%
(1)
|
Unless otherwise noted, the
address for each of the named beneficial owners is: Tengao District,
Haicheng City, Liaoning Province, 114000, People’s Republic of
China.
|
(2)
|
The
Call Option Agreement, as amended and restated, entered into between Ms.
Sherry Li and the Call Option Stockholders results in Ms. Sherry Li not
being the beneficial owner of such Option Shares under Rule 13d-3 of the
Securities Exchange Act of 1934, as amended (the “Act”), pursuant to
which:
|
(1) Ms.
Li will transfer 100% of the 12 million Option Shares within the next 2 years to
the Call Option Stockholders for nominal consideration of
$0.001/share;
(2) Ms.
Li is not permitted to dispose of any of the Option Shares without the Call
Option Stockholders’ prior written consent and may not transfer the Option
Shares to anyone except the Call Option Stockholders; and
(3) The
Call Option Stockholders have sole voting and dispositive power over, and sole
pecuniary interest in, the Option Shares.
(3)
|
Unless otherwise noted, the
number and percentage of outstanding shares of our common stock is based
upon 13,854,281 shares outstanding as of July 12,
2010.
|
(4)
|
The
business address of the named beneficial owner is 1325 Sixth Avenue, New
York, NY 10019. The 1,914, 901 shares of common stock include: (i) 283,200
shares of common stock issued and outstanding as of the date hereof; (ii)
584,159 shares of common stock issuable upon conversion of such holder’s
2010 Notes; (iii) 980,875 shares of common stock issuable upon conversion
of such holder’s 2010 Warrants; and (iv) 66,667 shares of common stock
issuable upon conversion of such holder’s 2008 Warrants. Mark Jensen and
Thomas Suave have voting and investment control over such
securities.
|
(5)
|
The
business address of the named beneficial owner is Sable Trust Road,
Tortola, BVI. The 884,200 shares of common stock include: (i) 330,033
shares of common stock issuable upon conversion of the 2010 Notes; and
(ii) 554,167 shares of common stock issuable upon conversion of the 2010
Warrants. Ezzat Jillad has voting and investment control over
such securities.
|
53
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
As part of the Share Transfer, on June
8, 2009, the Call Option Stockholders entered into the Call Option Agreement
with Ms. Li, then the sole shareholder officer, director and shareholder of
China For-Gen, wherein she agreed to transfer a number of shares of the Company
equal to 60% (or approximately 55% in the event the additional investment right
is exercised by those investors who participated in the 2010 private
placement) of the issued
and outstanding shares of common stock after our initial public
offering. The Call Option Agreement became effective upon the closing
of the Share Transfer. The Call Option Agreement was amended and
restated in its entirety on May 12, 2010 to be in full compliance with PRC laws,
including, without limitation, laws with respect to acquisitions by foreign
entities and ownership by PRC citizens in a foreign
enterprise.
Pursuant
to the Call Option Agreement, as amended and restated, the option may be
exercised by the Call Option Stockholders for nominal consideration of
$0.001/share, which would give them indirect ownership of a significant
percentage of our common stock. The Amended Call Option Agreement
provides that Ms. Li may not dispose of any China For-Gen shares held for the
benefit of the Call Option Stockholders without their prior written
consent. The Call Option Stockholders have indicated they intend to
exercise their rights under the Call Option Agreement with respect to 50% of the
shares subject to the call option on or by December 31, 2010 and on or by
December 31, 2011 with respect to the remaining 50%.
In the
first quarter of 2009, Mr. Wang Baoquan, our President and Chairman, made a loan
to the Company in the amount of $968,131. In the first quarter of
2010, Mr. Baoquan made a loan to the Company in the amount of $63,400. These
loans do not bear interest and are payable on demand.
Except
for the aforementioned transactions, since January 1, 2007, we have not
engaged in any material transactions with our directors, executive officers,
holders of more than five percent (5%) of our voting securities, and affiliates
of our directors, executive officers and five percent stockholders. We are
not a subsidiary of any company.
Procedures
for Approval of Related Party Transactions
Our board
of directors is charged with reviewing and approving all potential related party
transactions. All such related party transactions must then be
reported under applicable SEC rules. We have not adopted other
procedures for review, or standards for approval, of such transactions, but
instead review them on a case-by-case basis.
DESCRIPTION
OF OUR SECURITIES
The
following is a summary description of our capital stock and certain provisions
of our certificate of incorporation and by-laws, copies of which have been filed
as exhibits to this prospectus. The following discussion is qualified in its
entirety by reference to such exhibits.
General
We are
authorized to issue 50,000,000 shares of common stock, par value $0.001 per
share, and 2,000,000 shares of preferred stock, par value $0.001 per
share.
As
of July 12, 2010, we had 13,854,281 shares of common stock, and
500,000 shares of preferred stock (consisting entirely of Series A Convertible
Preferred Stock) issued and outstanding.
The
following is a summary of the material terms of our capital stock.
Common
Stock
Voting: The holders of common
stock are entitled to one vote per share on all matters to be voted on by the
stockholders. Our common stock has no cumulative voting
rights.
Dividends : The holders of
our common stock are entitled to receive such dividends, if any, as may be
declared from time to time by our Board of Directors, in its discretion, from
funds legally available therefor.
Liquidation: In the event of
liquidation or dissolution of the Company, the holders of our common stock are
entitled to receive, pro rata, assets remaining available for distribution to
stockholders.
No Preemptive
Rights: Our common stock has no cumulative voting, preemptive
or subscription rights and is not subject to any future calls.
54
Preferred
Stock
We are
authorized to issue 2,000,000 shares of preferred stock. Other than
with respect to the Series A Preferred Stock (the “Series A Stock”), which is
described below, our board of directors is expressly authorized to provide for
the issuance of all or any of the remaining shares of the preferred stock in one
or more series, and to fix the number of shares and to determine or alter, for
each such series, such voting powers, full or limited, or no voting powers, and
such designations, preferences, and relative, participating optional, or other
rights and such qualifications, limitations, or restrictions thereof, as shall
be stated and expressed in the resolution or resolutions adopted by the board of
directors providing for the issuance of such shares and as may be permitted by
the Delaware General Corporation Law. The board of directors is also
expressly authorized to increase or decrease (but not below the number of shares
of such series then outstanding) the number of shares of any series subsequent
to the issue of shares of that series. In case the number of shares
of any such series shall be so decreased, the shares constituting such decrease
shall resume the status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
On May
30, 2008, we designated all such shares of preferred stock as Series A
Convertible Preferred Stock (the “Series A Stock”) by filing a certificate of
designation with the Secretary of State of Delaware. The Series A
Stock is convertible into shares of our common stock at any time by the holder
at an initial conversion price of $.91 per share.
The
Company has the right at any time to repurchase the Series A Stock at a price of
$1.14 per share. In lieu of exercising such repurchase option, the
Company may make annual distributions to holders of Series A Stock in an amount
equal to two percent (2%) of the net income of the Company, if any.
The
Series A Stock shall be entitled to a dividend in the amount of 11% per annum,
payable monthly. No dividends are permitted to be paid on our common
stock while the Series A Stock is outstanding. The Company is further
prohibited from redeeming or repurchasing any common stock or any other class of
Company securities which is junior to or on parity with the Series A Stock while
the Series A Stock is outstanding.
The
Series A Stock has no voting rights, however, so long as any Series A Stock is
outstanding, the Company shall not, without the prior approval of the holders of
the Series A Stock then outstanding, (a) alter the powers, preferences or rights
of the Series A Stock, (b) authorize or create any class of securities ranking
senior to the Series A Stock as to dividends or distributions of assets, (c)
amend its certificate of incorporation or other charter documents in breach of
any of the provisions of the certificate of designation, (d) increase the
authorized number of shares of Series A Stock or (e) enter into any agreement
with respect to the foregoing.
The
Company shall not effect any conversion of the Series A Stock if after giving
effect to such conversion, such holder would beneficially own in excess of 4.9%
of the number of shares of our common stock outstanding immediately following
such conversion.
Holders
of Series A Stock may be entitled to an additional number of shares of our
common stock under certain circumstances in the event the Company issues common
stock, warrants, options or convertible debt or equity with an exercise or
conversion price that places a valuation of less than $42,500,000.
Warrants
May
2008 Private Placement
On May
30, 2008, the Company conducted a private placement of 333,333 post-reverse
split shares (equivalent to 500,000 pre-reverse split shares at conversion price
of $0.91 per share) of its newly created Series A Convertible Preferred Stock
convertible into 333,333 shares of our common stock and a five-year common stock
purchase warrant to purchase up to 666,667 post-reverse split shares of common
stock or 416,667 post-reverse split shares of common stock upon cashless
exercise of such warrants (equivalent to 1,000,000 pre-reverse split shares) at
an exercise price of $1.88 post-reverse split per warrant (equivalent to $1.25
pre-reverse split per warrant) (the “2008 Warrant”). The
Company received gross proceeds of $455,000 from the private
placement. The 2008 Warrant is exercisable through May 20,
2013. Following the Reverse Split and the February 2010 private
placement, the Series A Convertible Preferred Stock is convertible into 444,119
shares of common stock upon cashless exercise and the 2008 Warrant is
exercisable for up to 666,667 shares of common stock at an adjusted exercise
price of $1.88 per share. The securities were offered pursuant
to exemptions from registration provided by Section 4(2) of the Securities Act
of 1933, as amended, Regulation D and Rule 506.
Registration Rights
Agreement. In connection with the private placement, we
entered into the Registration Rights Agreement to have the shares of common
stock underlying the preferred stock and 2008 Warrant registered for public
resale. The filing of the registration statement of which this
prospectus is a part is intended to satisfy certain of our obligations the
Registration Rights Agreement.
February
2010 Private Placement
On
February 12, 2010, the Company received gross proceeds of $2,000,000 from the
sale of five year Convertible Promissory Notes, bearing interest at ten percent
(10%) per annum (the “Notes”) and common stock Purchase Warrants A and B (each,
the “A Warrants” and “B Warrants” and collectively, the “Warrants”) to various
accredited and institutional investors. Following the Reverse Split,
the Notes are convertible into an aggregate of 1,320,133 shares of our common
stock. The Notes are convertible at any time at the option of the
Note holder.
55
Holders
of the Notes and Warrants are not entitled to convert their Notes or any
Warrants into such number of shares of our common stock which, when added to the
number of shares of common stock beneficially owned by such holder and its
affiliates immediately prior to conversion of such Note or Warrant, would result
in beneficial ownership by such holder and its affiliates of more than 4.99% of
the outstanding shares of our common stock. For the purposes of the
immediately preceding sentence, “beneficial ownership” is determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Rule 13d-3 thereunder. This restriction may be waived or
amended only with the consent of the applicable Note holder and the consent of
holders of a majority of the shares of our outstanding common stock who are not
affiliates of the Company. The securities were offered pursuant
to exemptions from registration provided by Section 4(2) of the Securities Act
of 1933, as amended, Regulation D and Rule 506.
The A
Warrants were exercisable for five years at an exercise price of $1.35 per
share, for up to an aggregate of 1,662,500 shares of our common
stock. The B Warrants were exercisable for five years at an exercise
price of $1.70 per share, for up to an aggregate of an additional 1,662,500
shares of our common stock. Following the Reverse Split, the A
Warrants are exercisable for 1,108,334 shares of common stock at an exercise
price of $2.03 per share and the B Warrants are exercisable for 1,108,333 shares
of common stock at an exercise price of $2.55 per share.
The
exercise price of the A Warrants is subject to further adjustment in the event
the Company fails to meet certain earnings per share projections. In
the event the Company’s net income for the year ended December 31, 2009 is less
than $.4565 per share on a fully-diluted basis, then the exercise price shall be
reduced by a percentage equal to the percentage shortfall (where net income on a
fully diluted basis shall always be defined as earnings from continuing
operations before any non-cash items on a pre-tax fully diluted basis (including
dilution from any options, warrants and convertible securities) as reported for
the fiscal year ended December 31, 2009). The A Warrant exercise price shall be
reduced proportionately by 0% if the earnings are $.4565 per share and by 75% if
the earnings are $.1141 per share. For example, if the Company earns $.3652 per
share, or 20% below $.4565 per share, then the A Warrant exercise price shall be
reduced by 20%. Such reduction shall automatically be in effect at the time the
December 31, 2009 financial results are reported or at any other time that the
initial investor in the Note and the Company have a written and executed
agreement stating otherwise, and shall be made from the starting exercise price
of the warrants being the exercise price of the warrants at that time, and shall
be cumulative upon any other changes to the exercise price of the warrant that
may already have been made.
In the
event the Company’s net income for the year ended December 31, 2010 is less than
$.6163 per share on a fully-diluted basis, then the exercise price shall be
reduced by the percentage shortfall (where net income on a fully diluted basis
shall always be defined as earnings from continuing operations before any
non-cash items on a pre-taxed fully diluted basis (including dilution from any
options, warrants and convertible securities) as reported for the fiscal year
ended December 31, 2010). The A Warrant exercise price shall be reduced
proportionately by 0% if the earnings are $.6163 per share and by 75% if the
earnings are $.1541 per share. For example, if the Company earns $.4930
per share, or 20% below $.6163 per share, then the A Warrant exercise
price shall be reduced by 20%. Such reduction shall automatically be in
effect at the time the December 31, 2010 financial results are reported or at
any other time that the intial investor in the Note and the Company have a
written and executed agreement stating otherwise, and shall be made from the
starting exercise price of the warrants being the exercise price of the warrants
at that time, and shall be cumulative upon any other changes to the exercise
price of the warrant that may already have been made.
The
exercise price of the B Warrants is also subject to further adjustment in the
event the Company fails to meet certain earnings per share projections. In
the event the Company’s net income for the year ended December 31, 2009 is less
than $.4529 per share on a fully-diluted basis, then the B Warrant exercise
price shall be reduced by a percentage equal to the percentage shortfall (where
net income on a fully diluted basis shall always be defined as earnings from
continuing operations before any non-cash items on a pre-tax fully diluted basis
(including dilution from any options, warrants and convertible securities) as
reported for the fiscal year ended December 31, 2009). The B Warrant exercise
price shall be reduced proportionately by 0% if the earnings are $.4565 per
share and by 75% if the earnings are $.1141 per share. For example, if the
Company earns $0.3652 per share, or 20% below $.4565 per share, then the warrant
exercise price shall be reduced by 20%. Such reduction shall automatically be in
effect at the time the December 31, 2009 financial results are reported or at
any other time that the initial investor in the Note and the Company have a
written and executed agreement stating otherwise, and shall be made from the
starting exercise price of the warrants being the exercise price of the warrants
at that time, and shall be cumulative upon any other changes to the exercise
price of the warrant that may already have been made.
In the
event the Company’s net income for the year ended December 31, 2010 is less than
$.6163 per share on a fully-diluted basis, then the B Warrant exercise price
shall be reduced by the percentage shortfall (where net income on a fully
diluted basis shall always be defined as earnings from continuing operations
before any non-cash items on a pre-taxed fully diluted basis (including dilution
from any options, warrants and convertible securities) as reported for the
fiscal year ended December 31, 2010). The warrant exercise price shall be
reduced proportionately by 0% if the earnings are $.6163 per share and by 75% if
the earnings are $.1541 per share. For example, if the Company earns $0.4930 per
share, or 20% below $.6163 per share, then the B Warrant exercise price shall be
reduced by 20%. Such reduction shall automatically be in effect at the time the
December 31, 2010 financial results are reported or at any other time that the
initial investor in the Note and the Company have a written and executed
agreement stating otherwise, and shall be made from the starting exercise price
of the warrants being the exercise price of the warrants at that time, and shall
be cumulative upon any other changes to the exercise price of the warrant that
may already have been made.
Additionally,
those investors who purchased convertible promissory notes and warrants in the
February 2010 private placement have the right to purchase up to an additional
$2,500,000 of notes and warrants on terms identical to those in the February
2010 offering.
56
SHARES
ELIGIBLE FOR FUTURE SALE
As
of the closing of this offering, we will have 18,870,948 shares of common
stock issued and outstanding.
Approximate Number
of Shares Eligible for
Future Sale (1)
|
Date
|
||
10,518,532(1)
|
After
the date of this prospectus, freely tradable shares sold or registered in
this offering.
|
(1) Assumes
the underwriter’s over-allotment option to purchase additional shares is not
exercised.
As of
July 12, 2010, there were (i) 13,854,281 shares of common stock outstanding,
(ii) 10% senior convertible notes convertible into 1,320,133 shares of common
stock; and (iii) warrants to purchase an aggregate of 2,950,001 shares of common
stock. Assuming conversion of all of the 10% senior convertible
notes, conversion of the Series A Convertible Preferred Stock and the exercise
of all of the warrants, there will be 22,668,532 shares of common stock
outstanding. 6,318,532 of these shares have been registered for resale in
the registration statement of which this prospectus forms a part. Many of
our shares (including all of the shares underlying the Preferred Stock) are
currently eligible for resale under Rule 144, subject to the restrictions set
forth therein.
Rule
144
Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 promulgated under the
Securities Act. In general, under Rule 144 as currently in effect, a
person or persons whose shares are aggregated, who has beneficially owned shares
of our common stock for at least six months, including the holding period of any
prior owner, except if the prior owner was one of our affiliates, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
|
•
|
1% of the number of shares of our
common stock then outstanding (which will equal approximately
[ ] shares immediately after this offering);
or
|
|
•
|
the average weekly trading volume
of our common stock during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to the sale, assuming that our common
stock is trading at such
time.
|
Sales by
a person deemed to be our affiliate under Rule 144 are also subject to manner of
sale provisions and notice requirements and to the availability of current
public information about us.
Registration
Rights
We are
obligated to register an aggregate of 4,464,253 shares of common stock issuable
upon conversion of our Series A Convertible Preferred Stock, the Notes, the 2008
Warrant and the Warrants pursuant to multiple Registration Rights
Agreements executed in connection with the private placement of such shares,
notes and warrants. The registration rights agreements require us to
register such shares at such time as we undertake a reverse
merger. The agreement with respect to the Series A Convertible
Preferred Stock also requires there be a simultaneous financing providing gross
proceeds to us of not less than $9,500,000 before we are required to register
such shares. As we do not intend to effectuate a reverse merger, we
are not obligated to register any of such shares at this
time. However, we have determined to include all of such shares in
the registration statement of which this prospectus forms a
part. Accordingly, the registration statement, of which this
prospectus forms a part, registers an additional 4,464,253 shares for resale in
a separate resale prospectus.
Lock-Up
Agreement
All Call
Option Stockholders have entered into a lockup agreement requiring that all such
shares shall be held by such stockholders until the 24 month anniversary of the
effectiveness of this registration statement. Notwithstanding the
foregoing, during such 24 month period, an aggregate of 300,000 shares shall be
released from lock-up and shall be allowed to be disposed of beginning on the
one year anniversary of the effectiveness of this registration statement and an
additional 300,000 shares shall be released from lock-up and shall be allowed to
be disposed of beginning on the date that is the eighteen (18) month anniversary
of the effectiveness of this registration statement. The remaining
shares shall continue to be subject to the lock-up until the 24 month
anniversary of the effectiveness of this registration
statement.
57
MATERIAL
PRC INCOME TAX CONSIDERATIONS
The
following discussion summarizes the material PRC income tax considerations
relating to the acquisition, ownership and disposition of our common stock
following the consummation of this offering. As used in this
discussion, references to “we,” “our” and “us” refer only to China
For-Gen.
Resident
Enterprise Treatment
On March
16, 2007, the Fifth Session of the Tenth National People’s Congress passed the
EIT Law, which became effective on January 1, 2008. Under the EIT Law,
enterprises are classified as “resident enterprises” and “non-resident
enterprises.” Pursuant to the EIT Law and its implementing rules, enterprises
established outside the PRC whose “de facto management bodies” are located in
the PRC are considered “resident enterprises” and subject to the uniform 25%
enterprise income tax rate on their worldwide taxable income. According to the
implementing rules of the EIT Law, “de facto management body” refers to a
managing body that in practice exercises overall management control over the
production and business, personnel, accounting and assets of an
enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice on the Issues
Regarding Recognition of Enterprises that are Domestically Controlled as PRC
Resident Enterprises Based on the De Facto Management Body Criteria, which was
retroactively effective as of January 1, 2008. This notice provides that an
overseas incorporated enterprise that is controlled domestically will be
recognized as a “tax-resident enterprise” if it satisfies all of the following
conditions: (i) the senior management responsible for daily production/business
operations are primarily located in the PRC, and the location(s) where such
senior management execute their responsibilities are primarily in the PRC; (ii)
strategic financial and personnel decisions are made or approved by
organizations or personnel located in the PRC; (iii) major properties,
accounting ledgers, company seals and minutes of board meetings and stockholder
meetings, etc., are maintained in the PRC; and (iv) 50 percent or more of the
board members with voting rights or senior management habitually reside in the
PRC.
Given the
short history of the EIT law and lack of applicable legal precedent, it remains
unclear how the PRC tax authorities will determine the resident enterprise
status of a company organized under the laws of a foreign (non-PRC)
jurisdiction, such as us. If the PRC tax authorities determine we are a
“resident enterprise” under the EIT Law, a number of tax consequences could
follow. First, we could be subject to the enterprise income tax at a rate of 25%
on our worldwide taxable income as well as PRC enterprise income tax reporting
obligations. Second, the EIT Law provides that dividend income
between “qualified resident enterprises” is exempt from enterprise income tax.
As a result, if we are treated as a “qualified resident enterprise,” all
dividends we receive from Liaoning Shengsheng (assuming such dividends are
considered sourced within the PRC) should be exempt from PRC tax.
As of the
date of this prospectus, there has not been a definitive determination as to our
“resident enterprise” or “non-resident enterprise” status. However,
since it is not anticipated that we would receive dividends or generate other
income in the near future, we are not expected to have any income that would be
subject to the 25% enterprise income tax on worldwide taxable income in the near
future. We will make any necessary tax payment if we (based on future clarifying
guidance issued by the PRC), or the PRC tax authorities, determine that we are a
resident enterprise under the EIT Law, and if we were to have income in the
future.
Enterprise
Income Tax
According
to article 27 of the Enterprise Income Law of the PRC, effective as of January
1, 2008, and article 86 of the Implementary Rules of the Enterprise Income Law
of the PRC, we are exempted from enterprise income tax derived from seedlings
and plantation of trees and we receive a 50% deduction on enterprise income tax
from profit derived from planting flowers.
Dividends
From Liaoning Shengsheng
If we are
not treated as a resident enterprise under the EIT Law, then dividends we
receive from Liaoning Shengsheng may be subject to PRC withholding tax. The EIT
Law and the implementing rules of the EIT Law provide that (A) an income tax
rate of 25% will normally be applicable to “non-resident enterprises,” which (i)
have an establishment or place of business inside the PRC, and (ii) the income
in connection with their establishment or place of business is sourced from the
PRC or is earned outside the PRC but has actual connection with their
establishment or place of business inside the PRC, and (B) a PRC withholding tax
at a rate of 10% will normally be applicable to dividends payable to
“non-resident enterprises”, which (i) do not have an establishment or place of
business in the PRC or (ii) have an establishment or place of business in the
PRC, but the relevant income is not effectively connected with such
establishment or place of business, to the extent such dividends are derived
from sources within the PRC.
As
described above, the PRC tax authorities may determine the resident enterprise
status of entities organized under the laws of foreign jurisdictions, on a
case-by-case basis. We are a holding company and substantially all of
our income may be derived from dividends. Thus, if we are considered
a “non-resident enterprise” under the EIT Law and the dividends paid to us are
considered income sourced within the PRC, such dividends received may be subject
to the PRC withholding tax described in the foregoing
paragraph.
58
As of
the date of this prospectus, there has not been a definitive determination as to
our “resident enterprise” or “non-resident enterprise” status. We
will make any necessary tax withholding if, in the future, Liaoning Shengsheng
were to pay any dividends and we (based on future clarifying guidance issued by
the PRC), or the PRC tax authorities, determine that we are a non-resident
enterprise under the EIT Law.
Dividends
that Non-PRC Resident Enterprise Investors Receive From Us; Gain on the Sale or
Transfer of Our common stock
If
dividends payable to (or gains realized by) our enterprise, but not individual,
investors that are not tax residents of the PRC (the “non-resident investors”)
are treated as income derived from sources within the PRC, then the dividends
that non-resident investors receive from us and any such gain derived by such
investors on the sale or transfer of our common stock, may be subject to tax
under PRC tax laws.
Under the
PRC tax laws, PRC withholding tax at the rate of 10% is applicable to dividends
payable to non-resident investors that (i) do not have an establishment or place
of business in the PRC or (ii) have an establishment or place of business in the
PRC but the relevant income is not effectively connected with the establishment
or place of business, to the extent that such dividends have their sources
within the PRC. Similarly, any gain realized on the transfer of our
common stock by such investors is also subject to 10% PRC income tax if such
gain is regarded as income derived from sources within the PRC.
The
dividends paid by us to non-resident investors with respect to our common stock,
or gain non-resident investors may realize from the sale or transfer of our
common stock, may be treated as PRC-sourced income and, as a result, may be
subject to PRC tax at a rate of 10%. In such event, we may be required to
withhold a 10% PRC tax on any dividends paid to non-resident
investors. In addition, non-resident investors in our common stock
may be responsible for paying PRC tax at a rate of 10% on any gain realized from
the sale or transfer of our common stock after the consummation of this offering
if such non-resident investors and the gain satisfy the requirements under the
PRC tax laws. However, under the PRC tax laws, we would not have an
obligation to withhold PRC income tax in respect of the gains that non-resident
investors (including U.S. investors) may realize from the sale or transfer of
our common stock from and after the consummation of this offering.
If we
were to pay any dividends in the future and if we (based on future clarifying
guidance issued by the PRC), or the PRC tax authorities, determine that we must
withhold PRC tax on any dividends payable by us under the PRC tax laws, we will
make any necessary tax withholding on dividends payable to our non-resident
investors. If non-resident investors as described under the PRC tax laws
(including U.S. investors) realize any gain from the sale or transfer of our
common stock and if such gain were considered as PRC-sourced income, such
non-resident investors would be responsible for paying 10% PRC income tax on the
gain from the sale or transfer of our common stock. As indicated above, under
the PRC tax laws, we would not have an obligation to withhold PRC income tax in
respect of the gains that non-resident investors (including U.S. investors) may
realize from the sale or transfer of our common stock from and after the
consummation of this offering.
On
December 10, 2009, the SAT released Circular Guoshuihan No. 698 (“Circular 698”)
that reinforces the taxation of certain equity transfers by non-resident
investors through overseas holding vehicles. Circular 698 addresses indirect
equity transfers as well as other issues. Circular 698 is retroactively
effective from January 1 2008. According to Circular 698, where a non-resident
investor who indirectly holds an equity interest in a PRC resident enterprise
through a non-PRC offshore holding company indirectly transfers an equity
interest in a PRC resident enterprise by selling an equity interest in the
offshore holding company, and the latter is located in a country or jurisdiction
where the actual tax burden is less than 12.5 percent or where the offshore
income of its residents is not taxable, the non-resident investor is required to
provide the PRC tax authority in charge of that PRC resident enterprise with
certain relevant information within 30 days of the transfer. The tax authorities
in charge will evaluate the offshore transaction for tax purposes. In the event
that the tax authorities determine that such transfer is abusing forms of
business organization and a reasonable commercial purpose for the offshore
holding company other than the avoidance of PRC income tax liability is lacking,
the PRC tax authorities will have the power to re-assess the nature of the
equity transfer under the doctrine of substance over form. A reasonable
commercial purpose may be established when the overall international (including
U.S.) offshore structure is set up to comply with the requirements of
supervising authorities of international (including U.S.) capital markets. If
the SAT’s challenge of a transfer is successful, it may deny the existence of
the offshore holding company that is used for tax planning purposes and subject
the seller to PRC tax on the capital gain from such transfer. Since Circular 698
has a short history, there is uncertainty as to its application. We (or a
non-resident investor) may become at risk of being taxed under Circular 698 and
may be required to expend valuable resources to comply with Circular 698 or to
establish that we (or such non-resident investor) should not be taxed under
Circular 698, which could have a material adverse effect on our financial
condition and results of operations (or such non-resident investor’s investment
in us).
Penalties
for Failure to Pay Applicable PRC Income Tax
Non-resident
investors in us may be responsible for paying PRC tax at a rate of 10% on any
gain realized from the sale or transfer of our common stock after the
consummation of this offering if such non-resident investors and the gain
satisfy the requirements under the PRC tax laws, as described
above.
59
According
to the EIT Law and its implementing rules, the PRC Tax Administration Law (the
“Tax Administration Law”) and its implementing rules, the Provisional Measures
for the Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (the “Administration Measures”) and other applicable PRC laws or
regulations (collectively the “Tax Related Laws”), where any gain derived by
non-resident investors from the sale or transfer of our Securities is subject to
any income tax in the PRC, and such non-resident investors fail to file any tax
return or pay tax in this regard pursuant to the Tax Related Laws, they may be
subject to certain fines, penalties or punishments, including without
limitation: (1) if a non-resident investor fails to file a tax return and
present the relevant information in connection with tax payments, the competent
tax authorities shall order it to do so within the prescribed time limit and may
impose a fine up to RMB 2,000, and in egregious cases, may impose a fine ranging
from RMB 2,000 to RMB 10,000; (2) if a non-resident investor fails to file a tax
return or fails to pay all or part of the amount of tax payable, the
non-resident investor shall be required to pay the unpaid tax amount payable, a
surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue
amount, beginning from the day the deferral begins), and a fine ranging from 50%
to 500% of the unpaid amount of the tax payable; (3) if a non-resident investor
fails to file a tax return or pay the tax within the prescribed time limit
according to the order by the PRC tax authorities, the PRC tax authorities may
collect and check information about the income items of the non-resident
investor in the PRC and other payers (the “Other Payers”) who will pay amounts
to such non-resident investor, and send a “Notice of Tax Issues” to the Other
Payers to collect and recover the tax payable and impose overdue fines on such
non-resident investor from the amounts otherwise payable to such non-resident
investor by the Other Payers; (4) if a non-resident investor fails to pay the
tax payable within the prescribed time limit as ordered by the PRC tax
authorities, a fine may be imposed on the non-resident investor ranging from 50%
to 500% of the unpaid tax payable; and the PRC tax authorities may, upon
approval by the director of the tax bureau (or sub-bureau) of, or higher than,
the county level, take the following compulsory measures: (i) notify in writing
the non-resident investor’s bank or other financial institution to withhold from
the account thereof for payment of the amount of tax payable, and (ii) detain,
seal off, or sell by auction or on the market the non-resident investor’s
commodities, goods or other property in a value equivalent to the amount of tax
payable; or (5) if the non-resident investor fails to pay all or part of the
amount of tax payable or surcharge for overdue tax payment, and can not provide
a guarantee to the tax authorities, the tax authorities may notify the frontier
authorities to prevent the non-resident investor or their legal representative
from leaving the PRC.
Value-Added
Tax
According
to article 15 of the Value-Added Tax Interim Regulation and article 35 the
Implementary Rules for Value-Added Tax Interim Regulation, we are exempt from
value-added tax for sales of agriculture products (including flowers, grass,
tress and seedlings) we produce as agricultural producers (including plantation
and forestry).
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling business. Under the
program, the Company collects value added tax (VAT) from customers in an amount
equal to 3% of sales during the year ended December 31, 2009 and 6% of sales
during the year ended December 31, 2008. This amount is not required
to be remitted to the government. VAT, which is included in revenue, was
$682,735 and $1,251,786 for the years ended December 31, 2009 and 2008
respectively.
60
UNDERWRITING
Subject
to the terms and conditions in the underwriting agreement, dated
[ ],
2010, by and between us and Maxim Group LLC, who is acting as the representative
of the underwriters of this offering, each underwriter named below has severally
agreed to purchase from us, on a firm commitment basis, the number of shares of
common stock set forth opposite its name below, at the public offering price,
less the underwriting discount set forth on the cover page of this
prospectus.
Underwriter
|
Number of Shares
|
|||
Maxim
Group LLC
|
[
]
|
|||
Total
|
[
]
|
The
underwriting agreement provides for the purchase of a specific number of shares
of common stock by each of the underwriters. The underwriters’
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares.
The
underwriters have agreed to purchase all of the shares offered by this
prospectus (other than those covered by the over-allotment option described
below) if any are purchased. Under the underwriting agreement, if an
underwriter defaults in its commitment to purchase shares, the commitments of
non-defaulting underwriters may be increased or the underwriting agreement may
be terminated, depending on the circumstances. The underwriting
agreement provides that the obligations of the underwriters to pay for and
accept delivery of the shares are subject to the passing upon certain legal
matters by counsel and certain conditions such as confirmation of the accuracy
of representations and warranties by us about our financial condition and
operations.
The
shares should be ready for delivery on or about
[
],
2010 against payment in immediately available funds. The underwriters
may reject all or part of any order.
We intend
to apply to have our common stock listed on the NYSE AMEX under the
symbol CFG, which listing is expected to be effective concurrent with the
closing of this offering.
Commissions
and Discounts
The
following table provides information regarding the amount of the discount to be
paid to the underwriters by us:
Total
|
||||||||||||
Per Share
|
Without
Over-Allotment
|
With
Over-Allotment
|
||||||||||
Public
offering price
|
$ | [ | ] | $ | [ | ] | $ | [ | ] | |||
Underwriting
discount
|
$ | [ | ] | $ | [ | ] | $ | [ | ] | |||
Non-accountable
expense allowance (1)
|
$ | [ | ] | $ | [ | ] | $ | [ | ] | |||
Proceeds,
before expenses, to us (2)
|
$ | [ | ] | $ | [ | ] | $ | [ | ] |
(1)
|
The
non-accountable expense allowance of 1.0% of the gross proceeds of the
offering is not payable with respect to the shares of common stock sold
upon exercise of the underwriters’ over-allotment
option.
|
(2)
|
We
estimate that the total expense of this offering excluding the
underwriters’ discount and the non-accountable expense allowance, will be
approximately
$[ ].
|
We have
agreed to sell the shares of common stock to the underwriters at the initial
public offering price less the underwriting discount set forth on the cover page
of this prospectus. The underwriting agreement also provides that
Maxim Group LLC the representative of the underwriters, will be paid a
non-accountable expense allowance equal to 1.0% of the gross proceeds from the
sale of the shares of common stock offered by this prospectus
($[ ] of which has been
previously advanced to Maxim Group LLC), exclusive of any common stock purchased
on exercise of the underwriters’ over-allotment option.
61
Pricing
of Securities
The
representative has advised us that the underwriters propose to offer the shares
directly to the public at the public offering price that appears on the cover
page of this prospectus. In addition, the representative may offer
some of the shares to other securities dealers at such price less a concession
of $[ ] per
share. The underwriters may also allow, and such dealers may reallow,
a concession not in excess of $[
] per share to other dealers. After the
shares are released for sale to the public, the representatives may change the
offering price and other selling terms at various times.
Prior to
this offering, there was no public market for our securities. The public
offering price of our common stock was determined by negotiation between us and
the underwriters. The principal factors considered in determining the public
offering price of the shares included:
|
•
|
the information in this
prospectus and otherwise available to the
underwriters;
|
|
•
|
the history and the prospects for
the industry in which we
compete;
|
|
•
|
the ability of our
management;
|
|
•
|
the prospects for our future
earnings;
|
|
•
|
the present state of our
development and our current financial
condition;
|
|
•
|
the general condition of the
economy and the securities markets in the United States at the time of
this offering;
|
|
•
|
other factors we deemed
relevant.
|
We can
offer no assurances that the public offering price in this offering will
correspond to the price at which our shares will trade in the public market
following this offering or that an active trading market for our shares will
develop and continue after this offering.
Over-allotment
Option
We have
granted the underwriters an over-allotment option. This option, which
is exercisable for up to 45 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 600,000 additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this
option, they will purchase shares covered by the option at the public offering
price that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to the
public will be
$[ ]
million and the total proceeds to us will be
$[ ]
million. The underwriters have severally agreed that, to the extent
the over-allotment option is exercised, they will each purchase a number of
additional shares proportionate to the underwriter’s initial amount reflected in
the foregoing table.
Representative’s
Warrant
We have
also agreed to issue to Maxim Group, for $100, a common stock purchase warrant
to purchase a number of shares of our common stock equal to an aggregate of nine
(9%) percent of the shares sold in the offering. The warrant will
have an exercise price equal to 110% of the offering price of the shares sold in
this offering. The warrants are exercisable commencing six (6) months
after the effective date of the registration statement related to this offering,
and will be exercisable for five (5) years thereafter. The warrant is
not redeemable by us, and allows for “cashless” exercise. The warrant
also provides for one demand registration right at our expense, one demand
registration right at the warrant holders’ expense and for unlimited “piggyback”
registration rights at our expense with respect to the underlying shares of
common stock during the five (5) year period commencing six (6) months
after the effective date. Pursuant to the rules of the Financial
Industry Regulatory Authority, Inc., or FINRA, and in particular FINRA Rule
5110, the warrants (and underlying shares) issued to Maxim Group may not be
sold, transferred, assigned, pledged, or hypothecated, or the subject of any
hedging, short sale, derivative, put or call transaction that would result
in the effective disposition of the securities by any person for a period of 180
days immediately following the date of delivery and payment for the shares
offered provided, however, the warrant (and underlying shares) may be
transferred to officers or directors of Maxim Group and members of the
underwriting syndicate and their affiliates as long as the warrants (and
underlying shares) remain subject to the lockup.
Right
of First Refusal
We have
granted the representative of the underwriters a right of first refusal to act
as our lead underwriter or placement agent in any and all of our future public
and private equity offerings for a period of 24 months from the closing of this
offering.
62
Lock-Up
The Call
Option Stockholders have entered into a lockup agreement requiring that all such
shares be held by such stockholders until the 24 month anniversary of the
effectiveness of this registration statement. Notwithstanding the
foregoing, during such 24 month period, an aggregate of 300,000 shares shall be
released from lock-up and shall be allowed to be disposed of beginning on the
one year anniversary of the effectiveness of this registration statement and an
additional 300,000 shares shall be released from lock-up and shall be allowed to
be disposed of beginning on the date that is the eighteen (18) month anniversary
of the effectiveness of this registration statement. The remaining
shares shall continue to be subject to the lock-up until the 24 month
anniversary of the date of effectiveness of this registration
statement. This means that, during the applicable lock-up period
following the date of this prospectus, such persons may not offer, sell, pledge
or otherwise dispose of these securities without the prior written consent of T
Squared Investments LLC, who may also waive the terms of these lock-ups. See
“Shares Eligible for Future Sale.”
T Squared
Investments LLC has no present intention to waive or shorten the lock-up
period; however, the terms of the lock-up agreements may be waived in its
discretion. In determining whether to waive the terms of the lock-up agreements,
T Squared Investments LLC may base its decision on its assessment of the
relative strengths of the securities markets and companies similar to ours in
general, and the trading pattern of, and demand for, our securities in
general.
Representation
on the Board of Directors
Upon
execution of the underwriting agreement, Maxim Group will have the right to
designate one member of our Board of Directors and have one additional Maxim
Group representative attend all meetings of our Board of
Directors. This obligation will continue for three
years. In addition, the Maxim Group designee and representative will
receive the same compensation as the highest paid non-employee director on the
Board of Directors other than the Chairman of the Audit Committee and be
entitled to have expenses reimbursed.
Other
Matters
The
underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments that
may be required to be made with respect to those liabilities. We have
been advised that, in the opinion of the Securities and Exchange Commission,
indemnification liabilities under the Securities Act is against public policy as
expressed in the Securities Act, and is therefore, unenforceable.
A
prospectus in electronic format may be made available on a website maintained by
the representatives of the underwriters and may also be made available on a
website maintained by other underwriters. The underwriters may agree
to allocate a number of shares to underwriters for sale to their online
brokerage account holders. Internet distributions will be allocated
by the representatives of the underwriters to underwriters that may make
Internet distributions on the same basis as other allocations. In
connection with the offering, the underwriters or syndicate members may
distribute prospectuses electronically. No forms of electronic
prospectus other than prospectuses that are printable as Adobe® PDF will be used
in connection with this offering.
The
underwriters have informed us that they do not expect to confirm sales of shares
of common stock offered by this prospectus to accounts over which they exercise
discretionary authority.
Stabilization
Until the
distribution of the shares of common stock offered by this prospectus is
completed, rules of the SEC may limit the ability of the underwriters to bid for
and to purchase our shares of common stock. As an exception to these
rules, the underwriters may engage in transactions effected in accordance with
Regulation M under the Securities Exchange Act of 1934 that are intended to
stabilize, maintain or otherwise affect the price of our common
stock. The underwriters may engage in over-allotment sales,
syndicate covering transactions, stabilizing transactions and penalty bids in
accordance with Regulation M.
|
·
|
Stabilizing transactions permit
bids or purchases for the purpose of pegging, fixing or maintaining the
price of the common stock, so long as stabilizing bids do not exceed a
specified maximum.
|
|
·
|
Over-allotment involves sales by
the underwriters of shares of common stock in excess of the number of
shares of common stock the underwriters are obligated to purchase, which
creates a short position. The short position may be either a covered short
position or a naked short position. In a covered short position, the
number of shares of common stock over-allotted by the underwriters is not
greater than the number of shares of common stock that they may purchase
in the over-allotment option. In a naked short position, the number of
shares of common stock involved is greater than the number of shares in
the over-allotment option. The underwriters may close out any covered
short position by either exercising their over-allotment option or
purchasing shares of our common stock in the open
market.
|
|
·
|
Covering transactions involve the
purchase of securities in the open market after the distribution has been
completed in order to cover short positions. In determining the source of
securities to close out the short position, the underwriters will
consider, among other things, the price of securities available for
purchase in the open market as compared to the price at which they may
purchase securities through the over-allotment option. If the underwriters
sell more shares of common stock than could be covered by the
over-allotment option, creating a naked short position, the position can
only be closed out by buying securities in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the securities in
the open market after pricing that could adversely affect investors who
purchase in this offering.
|
63
|
·
|
Penalty bids permit the
underwriters to reclaim a selling concession from a selected dealer when
the shares of common stock originally sold by the selected dealer are
purchased in a stabilizing or syndicate covering
transaction.
|
These
stabilizing transactions, covering transactions and penalty bids may have the
effect of raising or maintaining the market price of our common stock or
preventing or retarding a decline in the market price of our common
stock. As a result, the price of our common stock may be higher
than the price that might otherwise exist in the open market.
Neither
we nor the underwriters make any representation or prediction as to the effect
that the transactions described above may have on the prices of our common
stock. These transactions may occur on the NYSE AMEX Stock Exchange
or on any other trading market. If any of these transactions are
commenced, they may be discontinued without notice at any time.
Foreign
Regulatory Restrictions on Purchase of Shares
We have
not taken any action to permit a public offering of the shares outside the
United States or to permit the possession or distribution of this prospectus
outside the United States. Persons outside the United States who come
into possession of this prospectus must inform themselves about and observe any
restrictions relating to this offering of ordinary shares and the distribution
of the prospectus outside the United States.
TRANSFER
AGENT AND REGISTRAR
The
Transfer Agent and Registrar for shares of our common stock and preferred stock
is Continental Stock Transfer & Trust Company. Our Transfer Agent and
Registrar’s telephone number is (212) 845-3200.
LEGAL
MATTERS
The
validity of the securities offered hereby has been passed upon for us by
Ellenoff Grossman & Schole LLP, New York, New York. In addition, legal
matters relating to the PRC in connection with this offering will be passed upon
for us by Global Law Offices, Beijing, PRC. Loeb & Loeb, LLP, New
York, New York is acting as counsel to the underwriters in this
offering.
PLAN
OF DISTRIBUTION
The
Selling Stockholders and any of their pledgees, donees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock being offered under this prospectus on any stock exchange,
market or trading facility on which shares of our common stock are traded or in
private transactions. These sales may be at fixed or negotiated prices. The
Selling Stockholders may use any one or more of the following methods when
disposing of shares:
|
•
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
|
•
|
block trades in which the
broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
|
•
|
purchases by a broker-dealer as
principal and resales by the broker-dealer for its
account;
|
|
•
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
•
|
privately negotiated
transactions;
|
|
•
|
to cover short sales made after
the date that the registration statement of which this prospectus is a
part is declared effective by the
SEC;
|
|
•
|
broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares at a stipulated price per
|
|
share;
|
64
|
•
|
a combination of any of these
methods of sale; and
|
|
•
|
any other method permitted
pursuant to applicable law.
|
The
shares may also be sold under Rule 144 under the Securities Act of 1933, as
amended, if available for a Selling Stockholder, rather than under this
prospectus. The Selling Stockholders have the sole and absolute discretion not
to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time.
The
Selling Stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares.
Broker-dealers
engaged by the Selling Stockholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, which
commissions as to a particular broker or dealer may be in excess of customary
commissions to the extent permitted by applicable law.
If sales
of shares offered under this prospectus are made to broker-dealers as
principals, we would be required to file a post-effective amendment to the
registration statement of which this prospectus is a part. In the
post-effective amendment, we would be required to disclose the names of any
participating broker-dealers and the compensation arrangements relating to such
sales.
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares offered under this prospectus may be deemed to be
“underwriters” within the meaning of the Securities Act in connection with these
sales. Commissions received by these broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. Any
broker-dealers or agents deemed to be underwriters may not sell shares offered
under this prospectus unless and until we set forth the names of the
underwriters and the material details of their underwriting arrangements in a
supplement to this prospectus or, if required, in a replacement prospectus
included in a post-effective amendment to the registration statement of which
this prospectus is a part.
The
Selling Stockholders and any other persons participating in the sale or
distribution of the shares offered under this prospectus will be subject to
applicable provisions of the Exchange Act, and the rules and regulations under
that act, including Regulation M. These provisions may restrict activities of,
and limit the timing of purchases and sales of any of the shares by, the Selling
Stockholders or any other person. Furthermore, under Regulation M, persons
engaged in a distribution of securities are prohibited from simultaneously
engaging in market making and other activities with respect to those securities
for a specified period of time prior to the commencement of such distributions,
subject to specified exceptions or exemptions. All of these limitations may
affect the marketability of the shares.
If any of
the shares of common stock offered for sale pursuant to this prospectus are
transferred other than pursuant to a sale under this prospectus, then subsequent
holders could not use this prospectus until a post-effective amendment or
prospectus supplement is filed, naming such holders. We offer no assurance as to
whether any of the Selling Stockholders will sell all or any portion of the
shares offered under this prospectus.
We have
agreed to pay all fees and expenses we incur incident to the registration of the
shares being offered under this prospectus. However, each Selling
Stockholder and purchaser is responsible for paying any discounts, commissions
and similar selling expenses they incur.
We and
the Selling Stockholders have agreed to indemnify one another against certain
losses, damages and liabilities arising in connection with this prospectus,
including liabilities under the Securities Act.
EXPERTS
Our
financial statements for the years ended December 31, 2008 and December 31, 2009
have been included in this prospectus and in the registration statement in
reliance upon the report of Paritz & Company, independent registered public
accounting firm, appearing elsewhere in this prospectus and upon the authority
of that firm as experts in auditing and accounting.
65
INTERESTS
OF NAMED EXPERTS AND COUNSEL
No
“expert” or “counsel” as defined by Item 509 of Regulation S-K promulgated under
the Securities Act, whose services were used in the preparation of this Form
S-1, was hired on a contingent basis or will receive a direct or indirect
interest in us or our parents or subsidiaries, nor was any of them a promoter,
underwriter, voting trustee, director, officer or employee of the
Company.
SERVICE
OF PROCESS AND ENFORCEMENT OF JUDGMENTS
Some of
our directors and officers reside in the PRC and substantially all of our assets
are located in the PRC. In addition, certain “experts” named in this
prospectus are located in the PRC. As a result, it may be difficult or
impossible for you to effect service of process on our officers and directors or
those experts within the United States.
Global
Law Offices, our counsel as to PRC law, has advised us there is uncertainty as
to whether the courts of the PRC would (1) recognize or enforce judgments
of United States courts obtained against our officers or directors or the
experts named in this prospectus based on the civil liability provisions of the
securities laws of the United States or any state in the United States, or
(2) entertain original actions brought in the PRC against our officers or
directors or the experts named in this prospectus based on the securities laws
of the United States or any state in the United States.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the United States Securities and Exchange Commission, 100 F.
Street, N.E., Washington, D.C. 20549, a registration statement on Form S-1 under
the Securities Act for the common stock offered by this prospectus. We have not
included in this prospectus all the information contained in the registration
statement and you should refer to the registration statement and its exhibits
for further information.
The
registration statement and other information may be read and copied at the SEC's
Public Reference Room at 100 F. Street N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains a web site
(http://www.sec.gov) that contains the registration statements, reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC such as us.
You may
also read and copy any reports, statements or other information that we have
filed with the SEC at the addresses indicated above and you may also access them
electronically at the web site set forth above. These SEC filings are also
available to the public from commercial document
retrieval services.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our
bylaws provide that we will indemnify our directors and officers to the extent
required by the Delaware General Corporation Law and shall indemnify such
individuals to the extent permitted by Delaware law.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons, we have been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
66
INDEX
TO FINANCIAL STATEMENTS
INDEX
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Financial
Statements (audited):
|
||
Consolidated
Balance Sheets for the Fiscal Years Ended December 31, 2009 and
2008
|
F-3
|
|
|
||
Consolidated
Statements of Income and Comprehensive Income for the Fiscal Years Ended
December 31, 2009 and 2008
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Fiscal Years Ended December 31, 2009 and
2008
|
F-5
|
|
Consolidated
Statements of Changes in Stockholders' Equity
|
F-6
|
|
Notes
to Financial Statements for the Fiscal Year Ended December 31,
2009
|
F-7
|
|
Financial
Statements (unaudited):
|
||
Consolidated
Balance Sheets for the Three Months Ended March 31, 2010 and the Fiscal
Year Ended December 31, 2009
|
F-13
|
|
Consolidated
Statements of Income and Comprehensive Income for the Three Months Ended
March 31, 2010 and 2009
|
F-14
|
|
Consolidated
Statements of Cash Flows for the Three Months Ended March 31, 2010 and
2009
|
F-15
|
|
Consolidated
Statements of Changes in Stockholders' Equity
|
F-16
|
|
Notes
to Financial Statements for the Three Months Ended March 31,
2010
|
|
F-17
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
China
For-Gen Corp.
We have
audited the accompanying consolidated balance sheets of China For-Gen Corp. and
Subsidiary as of December 31, 2009 and 2008 and the related consolidated
statements of income and comprehensive income, changes in stockholders’ equity
and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of is
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our 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 For-Gen Corp. and
Subsidiary as of December 31, 2009 and 2008, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/S/
Paritz & Company, P.A.
Hackensack,
New Jersey
May 6,
2010
F-2
CONSOLIDATED
BALANCE SHEETS
December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 843,358 | $ | 612,971 | ||||
Accounts
receivable
|
10,895,902 | 7,403,788 | ||||||
Deposits
|
7,581,584 | 6,703,051 | ||||||
Income
tax receivables
|
2,962,539 | 823,779 | ||||||
Inventories
|
5,963,585 | 5,984,432 | ||||||
Other
receivables
|
11,118 | 24,423 | ||||||
Total
current assets
|
28,258,086 | 21,552,444 | ||||||
Property,
plant and equipment
|
2,723,201 | 2,977,488 | ||||||
Total
assets
|
$ | 30,981,287 | $ | 24,529,932 | ||||
Liabilities
and stockholders' equity
|
||||||||
Current
liabilities
|
||||||||
Trade
accounts payable
|
$ | 309 | $ | 1,157,621 | ||||
Loan
payable - stockholder
|
- | 71,933 | ||||||
Accrued
expenses and other payables
|
409,984 | 459,703 | ||||||
Advance
from customer
|
1,039,398 | - | ||||||
Total
current liabilities
|
1,449,691 | 1,689,257 | ||||||
Warrant
liabilities
|
106,925 | 106,925 | ||||||
Stockholders'
equity
|
||||||||
Preferred
stock: par value $0.001; 500,000 shares authorized, 500,000 shares issued
and authorized
|
500 | 500 | ||||||
Common
stock: par value $0.001; 21,500,000 shares authorized, 13,854,281 and
13,854,281 shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
13,854 | 13,854 | ||||||
Additional
paid in capital
|
5,435,232 | 5,435,232 | ||||||
Retained
earnings
|
21,379,363 | 14,722,854 | ||||||
Accumulated
other comprehensive income
|
2,595,722 | 2,561,310 | ||||||
Total
stockholders' equity
|
29,424,671 | 22,733,750 | ||||||
Total
Liabilities and stockholders' equity
|
$ | 30,981,287 | $ | 24,529,932 |
F-3
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Sales
|
$ | 23,615,957 | $ | 22,146,254 | ||||
Cost
of goods sold
|
$ | 6,351,073 | $ | 10,428,042 | ||||
Gross
profit
|
$ | 17,264,884 | $ | 11,718,212 | ||||
Operating
expenses
|
||||||||
Selling
expense
|
$ | 3,561,550 | $ | 4,206,849 | ||||
General
and administrative expenses
|
$ | 912,870 | $ | 830,813 | ||||
Total
operating expenses
|
$ | 4,474,420 | $ | 5,037,662 | ||||
Operating
income
|
$ | 12,790,464 | $ | 6,680,550 | ||||
Other
income
|
||||||||
Interest
income
|
$ | 5,211 | $ | 8,221 | ||||
Total
other income
|
$ | 5,211 | $ | 8,221 | ||||
Net
income
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Foreign
Currency Translation Adjustment
|
$ | 34,412 | $ | 1,138,567 | ||||
Comprehensive
Income
|
$ | 12,830,087 | $ | 7,827,338 | ||||
Net
income from common share
|
||||||||
Earnings
per share – Basic
|
$ | 0.92 | 0.48 | |||||
Earnings
per share - Diluted
|
0.92 | 0.48 | ||||||
Weighted
average common share outstanding
|
||||||||
Basic
|
13,854,281 | 13,854,281 | ||||||
Diluted
|
13,854,281 | 13,854,281 |
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||
Depreciation
and amortization
|
259,509 | 391,905 | ||||||
Changes
in operating liabilities and assets:
|
||||||||
Trade
accounts receivable
|
(3,430,109 | ) | 389,119 | |||||
Advance
to suppliers
|
(1,002,110 | ) | (1,366,031 | ) | ||||
Inventories
|
26,406 | (4,728,944 | ) | |||||
Other
receivables
|
13,305 | |||||||
Trade
accounts payable
|
(1,157,311 | ) | 1,136,396 | |||||
Advance
from customer
|
1,039,398 | |||||||
Accrued
expenses
|
(49,720 | ) | 203,422 | |||||
Income
tax receivable
|
(2,078,882 | ) | (2,065,650 | ) | ||||
Net
cash provided by operating activities
|
6,419,755 | 648,988 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of plant and equipment
|
(2,923 | ) | (8,476 | ) | ||||
Prepaid
leased land
|
- | (97,670 | ) | |||||
Net
cash used in investing activities
|
(2,923 | ) | (106,146 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issued shares
|
- | 455,000 | ||||||
Related
party payable
|
(48,391 | ) | (1,204,506 | ) | ||||
Dividend
paid
|
(6,139,166 | ) | - | |||||
Net
cash used in financing activities
|
(6,187,557 | ) | (749,506 | ) | ||||
Effect
of rate changes on cash
|
1,112 | 46,437 | ||||||
Increase
(decrease) in cash and cash equivalents
|
230,387 | (160,227 | ) | |||||
Cash
and cash equivalents, beginning of period
|
612,971 | 773,198 | ||||||
Cash
and cash equivalents, end of period
|
$ | 843,358 | 612,972 | |||||
Supplemental
disclosures of cash flow information:
|
||||||||
Income
taxes paid in cash
|
$ | 2,137,989 | $ | 2,091,470 |
F-5
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Series A
Preferred Stock
|
Common Stock
|
Registered
|
Additional
Paid in
|
Retained
|
Other
Comprehensive
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Capital
|
Earnings
|
Income
|
Totals
|
||||||||||||||||||||||||||||
Balance:
December 31, 2007
|
- | $ | - | - | $ | - | $ | 4,228,841 | $ | 872,671 | $ | 8,034,083 | $ | 1,422,743 | $ | 14,558,338 | ||||||||||||||||||||
Sale
of 500,000 preferred shares
|
500,000 | $ | 500 | 347,575 | 348,075 | |||||||||||||||||||||||||||||||
Reverse
acquisition
|
13,854,281 | 13,854 | (4,576,415 | ) | 4,562,561 | - | ||||||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
1,138,567 | 1,138,567 | ||||||||||||||||||||||||||||||||||
Net
income
|
6,688,771 | 6,688,771 | ||||||||||||||||||||||||||||||||||
Balance:
December 31, 2008
|
500,000 | $ | 500 | 13,854,281 | $ | 13,854 | 0 | 5,435,232 | 14,722,854 | 2,561,310 | $ | 22,733,750 | ||||||||||||||||||||||||
Dividend
paid
|
(6,139,166 | ) | (6,139,166 | ) | ||||||||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
34,412 | 34,412 | ||||||||||||||||||||||||||||||||||
Net
income
|
12,795,675 | 12,795,675 | ||||||||||||||||||||||||||||||||||
Balance:
December 31, 2009
|
500,000 | $ | 500 | 13,854,281 | $ | 13,854 | 0 | 5,435,232 | 21,379,363 | 2,595,722 | $ | 29,424,671 |
F-6
NOTES
TO FINANCIAL STATEMENTS
1. Nature
of operations
China
For-Gen Corporation (“the Company”) was incorporated in the State of Delaware on
February 26th, 2008. The Company acquired all of the equity interests of
Liaoning Shengsheng Biotechnological Co., Ltd. (“Liaoning Shengsheng”), a
company incorporated in the People’s Republic of China (the “PRC”) on November
24, 2000. Since its inception, Liaoning Shengsheng has been an
agricultural and forestry company engaged in the breeding, cloning and sale of
plant seedlings and specialized transgenic plant seedlings, and the research and
development of seedling breeding technologies.
2. Acquisition
Pursuant
to the Share Transfer Agreement entered into on April 28, 2009 (the “Share
Transfer”) between the shareholders of Liaoning Shengsheng and the Company, we
acquired Liaoning Shengsheng and its wholly-owned subsidiary,
Pusheng. The closing of the Share Transfer (the “Closing”) took place
on May 6, 2009 whereby we acquired all RMB 35,000,000 of the registered capital
of Liaoning Shengsheng (the “Shengsheng Shares”) from all of its shareholders in
consideration for $5.12 million. At the Closing we paid $1.28 million
to the Shengsheng Shareholders, who are included among the selling stockholders
hereunder. Immediately following the Closing, Liaoning Shengsheng
became a wholly foreign-owned subsidiary (“WFOE”) of China For-Gen.
As part
of the Share Transfer, on June 8, 2009, certain officers and directors of the
Company (the “Grantees”) entered into a call option agreement (the “Call Option
Agreement”) with Ms. Sherry Li (“Ms. Li”), then the sole shareholder officer,
director and shareholder of China For-Gen, wherein she agreed to transfer a
number of shares of the Company equal to 60% (or approximately 55% in the event
the additional investment right is exercised by those investors who participated
in the February 2010 private placement) of the issued and outstanding shares of
common stock after an initial public offering. The Call Option
Agreement became effective upon the closing of the Share
Transfer. The option may be exercised by the Grantees for nominal
consideration, which would give the Grantees indirect ownership of a significant
percentage of our common stock. The Call Option Agreement provides
that Ms. Li may not dispose of any of the shares owned by Ms. Li in China
For-Gen without the Grantee’s prior written consent.
The
transaction was accounted for as a reverse merger and, accordingly, the Company
is the legal surviving entity and Liaoning Shegsheng is the accounting
survivor.
3. Summary
of Significant Accounting Policies
Basis of
presentation
On May
11, 2010, the Company effected a 1:1.5 reverse split of the Company’s issued and
outstanding common stock, decreasing the number of outstanding shares from
20,781,421 to 13,854,281 as of December 31, 2009. These statements
have been adjusted to reflect this reverse split on a historical pro-forma
basis.
The
consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
Use of
estimates
The
preparation of financial statements in conformity with US generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates and such differences could be
material.
Cash and Cash
Equivalents
Cash and
cash equivalents includes cash on hand and demand deposits held by banks.
Deposits held in financial institutions in the PRC are not insured by any
government entity or agency.
F-7
NOTES
TO FINANCIAL STATEMENTS
Accounts
Receivable
The
Company extends unsecured credit to its customers in the ordinary course of
business. Trade accounts receivable are recognized and carried at original
invoice amount less an allowance for any uncollectible amounts. An allowance for
doubtful accounts is established and determined based on management’s assessment
of known requirements, aging of receivables, payment history, the customer’s
current credit worthiness and the economic environment. There was no allowance
for doubtful accounts as of December 31, 2009 and 2008.
Inventories
Inventories
consist of trees grown from seedlings developed by the Company and trees
purchased and grown for resale. The costs of growing trees are capitalized into
inventory until the time of harvest. Once a tree is harvested and sold, the
related inventoried costs are recognized as a cost of sale to provide an
appropriate matching of expenses with the related revenue earned. The Company
states its inventories at the lower of cost or net realizable
value.
Property, Plant and
Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the useful lives of
the assets. Land lease acquisition costs are amortized over the life the lease.
Major renewals are capitalized and depreciated; maintenance and repairs that do
not extend the life of the respective assets are charged to expense as incurred.
Upon disposal of assets, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in
income.
Revenue
Recognition
Our revenues consist of sales of genetically
modified saplings. Sales are recognized in accordance with SEC Staff
Accounting Bulletin (“SAB”) No. 104 included in the codification as ASC 605,
Revenue Recognition, when the following four revenue criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the selling
price is fixed or determinable and collectability is reasonably assured. No
return allowance is made as products are normally not returnable upon acceptance
by the customers.
The
price at which we sell fast-growing poplar seedlings is based on numerous
factors, including: market price changes of fast-growing poplar seedlings;
regional supply of fast-growing poplar seedlings; seasonal availability of
seedlings and demand for fast-growing poplar seedlings. Generally, it
takes 20 days for a single transaction to be consummated. This time
frame includes negotiation of terms, execution of contract, preparation,
delivery, transportation, planting of products and receipt of
payment. For larger transactions, it can take up to one year for the
last payment to be made.
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling business. Under the
program, the Company collects value added tax (VAT) from customers in an amount
equal to 3% of sales during the year ended December 31, 2009 and 6% of sales
during the year ended December 2008. This amount is not required to
be remitted to the government. VAT, which is included in revenue, was $682,735
and $1,251,786 for the years ended December 31, 2009 and 2008
respectively.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities 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 reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the
statement of operations in the period that includes the enactment
date. A valuation allowance is provided for deferred tax assets if it
is more likely than not that these items will either expire before the Company
is able to realize their benefits, or that future deductibility is
uncertain.
Impairment of Long-Lived
Assets
Long-term
assets of the Company are reviewed annually to assess whether the carrying value
has become impaired according to the guidelines established in Statement of
Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” No impairment of assets was
recorded in the periods reported.
Derivative Financial
Instruments
In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument liability.
Derivative financial instruments are recorded as liabilities in the consolidated
balance sheet, measured at fair value. When available, quoted market
prices are used in determining fair value. However, if quoted market
prices are not available, we estimate fair value using either quoted market
prices of financial instruments with similar characteristics or other valuation
techniques. The derivative instrument liabilities are re-valued at the end of
each reporting period, with changes in the fair value of the derivative
liability recorded as charges or credits to income, in the period in which the
changes occur.
F-8
NOTES
TO FINANCIAL STATEMENTS
Foreign Currency and
Comprehensive Income
The
accompanying financial statements are presented in US dollars. The functional
currency is the Renminbi (“RMB”) of the PRC. The financial statements are
translated into US dollars from RMB at year-end exchange rates for assets and
liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
Accumulated
other comprehensive income represents foreign currency translation
adjustments.
Net Income Per
Share
Basic net
income per share is computed on the basis of the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed on the basis of the weighted average number of common shares and common
share equivalents outstanding. Dilutive securities having an anti-dilutive
effect on diluted net income per share are excluded from the calculation.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
New accounting
pronouncement
On
September 30, 2009, the Company adopted changes issued by the FASB to the
authoritative hierarchy of generally accepted accounting principles
(“GAAP”). These changes establish the FASB Accounting Standards
Codification TM (“Codification”) as the source of authoritative accounting
principles recognized by the FASB to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
GAAP in the U.S. The Codification was effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The
adoption had no material impact on the Company’s consolidated results of
operations or financial condition.
In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition. We believe the adoption of this new guidance will
not have a material impact on our financial statements.
4.
|
Deposits
|
Deposits
consist of the following:
December
31,
|
|||||||||
2009
|
2008
|
||||||||
Equipment
purchase
|
(a)
|
$ | 7,205,413 | $ | - | ||||
Business
acquisition
|
(b)
|
292,903 | - | ||||||
Property
with trees
|
(c)
|
- | 6,645,012 | ||||||
Supplies
|
83,268 | 58,039 | |||||||
- | - | ||||||||
7,581,584 | 6,703,051 |
|
a.
|
In
April 2009, Liaoning entered into an agreement to purchase equipment for
RMB61,500,000 (approximately $9,000,000). This equipment will
be used in a factory the Company intends to build in the city of Karamai
to produce wood panel. Payment made to this supplier under this
agreement totaled RMB49,200,000 (approximately $7,200,000) as of December
31, 2009. Under this Agreement, the equipment vendor will
design, manufacture, deliver, and set up all equipment required for
manufacturing artificial board, or Medium Density
Fiberboard.
|
|
b.
|
In
May 2009, Liaoning entered into an agreement to acquire 80% of the
outstanding shares of Daxinganling Tuqiangbeiji Wood Co. Ltd. for
RMB31,000,000. A deposit of RMB2,000,000 was paid as of
December 31, 2009.
|
F-9
NOTES
TO FINANCIAL STATEMENTS
|
c.
|
The
balance as of December 31, 2008 represents the prepayment to Karamai Pulin
Ecology and Technology Co., Ltd to purchase trees and
timber.
|
5.
|
Property,
Plant and Equipment
|
Property,
Plant and Equipment consists of the following:
December
31,
2009
|
2008
|
Estimated
Useful
Life
|
|||||||
Land
use rights
|
$ | 61,704 | $ | 132,927 |
Life
of lease
|
||||
Buildings
|
2,932,790 | 2,930,043 |
10-30
years
|
||||||
Machinery
and equipment
|
1,130,164 | 1,129,106 |
3-8
years
|
||||||
Vehicles
|
139,306 | 139,175 |
5-8
years
|
||||||
Computer
and office equipment
|
83,917 | 80,912 |
3-5
years
|
||||||
Office
equipment
|
9,710 | 9,701 |
3-5
years
|
||||||
Total
property, plant and equipment
|
4,357,591 | 4,421,865 | |||||||
Accumulated
depreciation
|
(1,634,390 | ) | (1,444,377 | ) | |||||
2,723,201 | 2,977,488 |
6.
|
Advance
from customer
|
Advance
from customer consists of deposit from a customer. This amount is noninterest
bearing.
7.
|
Stockholders’
equity
|
In May
2008, the Company amended and restated Certificate of Incorporation to authorize
the issuance of 22,000,000 shares, consisting of 500,000 preferred shares and
21,500,000 are common shares, par value $.001 per share.
In May
2008, the Company sold 500,000 shares of Series A preferred shares (“Preferred
Stock”) and 1,000,000 warrants to purchase 0.66 (1.00 share pre-reverse split)
share of the Company’s common stock for an aggregate consideration of $455,000.
Each share of Preferred Stock is convertible into 0.66 (1.00 share pre-reverse
split) share of common stock. The Company has the right at any time to
repurchase the Series A Stock at a price of $1.71 ($1.14 per share pre-reverse
split) per share. In lieu of exercising such repurchase option, the
Company may make annual distributions to holders of Series A Stock in an amount
equal to two percent (2%) of the net income of the Company, if any.
The
Series A Stock shall be entitled to a dividend in the amount of 11% per annum,
payable monthly. No dividends are permitted to be paid on our common
stock while the Series A Stock is outstanding. The Company is further
prohibited from redeeming or repurchasing any common stock or any other class of
Company securities which is junior to or on parity with the Series A Stock while
the Series A Stock is outstanding.
The
Series A Stock has no voting rights, however, so long as any Series A Stock is
outstanding, the Company shall not, without the prior approval of the holders of
the Series A Stock then outstanding, (a) alter the powers, preferences or rights
of the Series A Stock, (b) authorize or create any class of securities ranking
senior to the Series A Stock as to dividends or distributions of assets, (c)
amend its certificate of incorporation or other charter documents in breach of
any of the provisions of the certificate of designation, (d) increase the
authorized number of shares of Series A Stock or (e) enter into any agreement
with respect to the foregoing.
The
Company shall not effect any conversion of the Series A Stock if after giving
effect to such conversion, such holder would beneficially own in excess of 4.9%
of the number of shares of our common stock outstanding immediately following
such conversion.
F-10
NOTES
TO FINANCIAL STATEMENTS
Holders
of Series A Stock may be entitled to an additional number of shares of our
common stock under certain circumstances in the event the Company issues common
stock, warrants, options or convertible debt or equity with an exercise or
conversion price that places a valuation of less than $42,500,000.
8. Earnings
Per Share
The
following table sets forth the computation of basic and diluted earnings per
share of common stock:
Years
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Basic
net income per share:
|
||||||||
Numerator:
|
||||||||
Net
income used in computing basic net income per share
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Net
income applicable to common shareholders
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Denominator:
|
||||||||
Weighted
average common shares outstanding
|
13,854,281 | 13,854,281 | ||||||
Basic
net income per share
|
$ | 0.92 | $ | 0.48 | ||||
Diluted
net income per share:
|
||||||||
Numerator:
|
||||||||
Net
income used in computing diluted net income per share
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Net
income applicable to common shareholders
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Denominator:
|
||||||||
Weighted
average common shares outstanding
|
13,854,281 | 13,854,281 | ||||||
Weighted
average effect of dilutive securities:
|
||||||||
Shares
used in computing diluted net income per share
|
13,854,281 | 13,854,281 | ||||||
Diluted
net income per share
|
$ | 0.92 | $ | 0.48 |
9.
|
Warrants
|
The
Warrants are entitled to a price adjustment provision that allows the exercise
price of the Warrants to be reduced in the event the Company issues any
additional shares of common stock at a price per share less than the
then-applicable warrant price. The Company determined that the Warrants meet the
definition of a derivative under ASC Topic 815, Derivatives and Hedging “ASC
Topic 815”. In determining whether the Warrants were eligible for a scope
exception from ASC Topic 815, the Company considered the provisions of ASC Topic
815-40 (Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock). The Company determined that the Warrants do not meet a
scope exception because they are not deemed indexed to the Company’s own stock.
Pursuant to ASC Topic 815, derivatives should be measured at fair value as of
the inception date and re-measured at fair value as of each subsequent balance
sheet date with changes in fair value recorded in earnings at each reporting
period.
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and using historical information that management deems most
relevant.
The
Company used the Black-Scholes option-pricing model with the following
assumptions:
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Estimated
dividends
|
11 | % | 11 | % | ||||
Expected
volatility
|
54 | % | 54 | % | ||||
Risk-free
interest rate
|
3 | % | 3 | % | ||||
Expected
term
|
3.3
years
|
4.3
years
|
10.
|
Income
tax
|
The
Company’s subsidiary, Liaoning Shengsheng, is exempted from income tax for its
sapling business effective January 1, 2008. During the years ended December 31,
2008 and 2009, Liaoning Shengsheng paid income tax of approximately RMB
20,000,000 (approximately $2,900,000) which will be refunded in 2010. The
Company recorded this amount as income tax receivable on its balance
sheet.
A
reconciliation of the Company’s effective income tax rate to the U.S. Federal
statutory rate is as follows:
F-11
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
Year Ended December
31,
|
||||||||
2009
|
2008
|
|||||||
Federal
statutory rate
|
35
|
%
|
35
|
%
|
||||
Tax
exempt income
|
-36
|
%
|
-37
|
%
|
||||
Valuation
allowance
|
1
|
%
|
2
|
%
|
||||
Effective
tax rate
|
0
|
%
|
0
|
%
|
Under the
income tax laws of the PRC, the Company’s subsidiaries operate in a nationally
investment-encouraged industry and are not subject to income tax.
The
Company has a deferred tax asset of approximately $100,000 and $190,000
resulting from net operating loss carryforwards from company’s U.S. operation
for the years ended December 31, 2008 and 2009 in the U.S. for which a 100%
valuation allowance has been provided.
The
Company has available approximately $300,000 and $260,000 of net operating loss
carryforwards in the United States which expire in 2028 and 2029.
11.
|
Concentration
of Credit Risks and Uncertainties
|
Concentration
of credit risk exists when changes in economic, industry or geographic factors
similarly affect groups of counter parties whose aggregate credit exposure is
material in relation to the Company’s total credit exposure. Two customers, each
independent distributors, accounted for more than 10% of accounts receivable at
December 31, 2009 and 2008, totaling 87% and 69%, respectively. Two customers
accounted for 81% and 94% of sales for the year ended December 31, 2009 and
2008.
12.
|
Subsequent
event
|
In
February, 2010, we entered into a Note Purchase Agreement with certain
accredited investors (the “Investors”) for the issuance and sale, relating to a
private placement by us of convertible Notes and 2,216,667 post reverse split
shares of Common Stock underlying Warrants. The consummation of the
private placement resulted in gross proceeds to us of $2,000,000. The
notes are convertible into an aggregate of 1,320,133 post reverse split shares
of common stock. Additionally, the Investors have the right to purchase up to an
additional $2,500,000 of notes and warrants on terms identical to those in the
February 2010 offering.
The
Company determined that the Warrants meet the definition of a derivative under
ASC Topic 815, Derivatives and
Hedging “ASC Topic 815”). In determining whether the Warrants were
eligible for a scope exception from ASC Topic 815, the Company considered the
provisions of ASC Topic 815-40 (Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock). The Company
determined that the Warrants do not meet a scope exception because they are not
deemed indexed to the Company’s own stock. Pursuant to ASC Topic
815, derivatives should be measured at fair value at the date of issuance and
recorded as a corresponding liability and re-measured at fair value with changes
in fair value recorded in earnings at each reporting period. Fair value is
generally based on independent sources such as quoted market prices or dealer
price quotations. Due to the fact that the Company’s securities are
non-marketable securities, they do not have readily determinable fair values.
The Company will estimate the fair value of the Warrants using various pricing
models and available information that management deems most relevant. Among the
factors to be considered in determining the fair value of financial instruments
are discounted anticipated cash flows, the cost, terms and liquidity of the
instrument, the financial condition, operating results and credit ratings of the
issuer, the quoted market price of similar traded securities, and other factors
generally pertinent to the valuation of financial instruments. Upon the earlier
of the warrant exercise or the expiration date, the warrant liability will be
reclassified into shareholders’ equity. Until that time, the warrant
liability will be recorded at fair value based on the methodology described
above.
F-12
CHINA
FOR-GEN CORP.
CONSOLIDATED
BALANCE SHEETS
March 31, 2010
|
December 31, 2009
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 2,156,681 | $ | 843,358 | ||||
Accounts
receivable
|
10,326,559 | 10,895,902 | ||||||
Deposits
|
8,213,275 | 7,581,584 | ||||||
Prepaid
expenses
|
73,376 | - | ||||||
Income
tax receivables
|
2,953,696 | 2,962,539 | ||||||
Inventories
|
6,049,194 | 5,963,585 | ||||||
Other
receivables
|
11,105 | 11,118 | ||||||
Total
current assets
|
29,783,886 | 28,258,086 | ||||||
Property,
plant and equipment
|
2,715,827 | 2,723,201 | ||||||
Deferred
financing costs
|
128,250 | - | ||||||
Total
assets
|
$ | 32,627,963 | $ | 30,981,287 | ||||
Liabilities
and stockholders' equity
|
||||||||
Current
liabilities
|
||||||||
Trade
accounts payable
|
$ | 16,985 | $ | 309 | ||||
Accrued
expenses and other payables
|
394,948 | 409,984 | ||||||
Advance
from customer
|
1,094,762 | 1,039,398 | ||||||
Due
to shareholder
|
63,400 | - | ||||||
Dividend
payable
|
8,102,036 | - | ||||||
Total
current liabilities
|
9,672,131 | 1,449,691 | ||||||
Warrant
liabilities
|
1,040,607 | 106,925 | ||||||
Convertible
notes, net of debt discount of 1,060.853
|
966,468 | - | ||||||
Convertible
notes-accrued interest
|
23,528 | - | ||||||
Total
liabilities
|
11,702,734 | 1,556,616 | ||||||
Stockholders'
equity
|
||||||||
Preferred
stock: par value $0.001; 500,000 shares authorized, 500,000 shares issued
and authorized
|
500 | 500 | ||||||
Common
stock: par value $0.001; 21,500,000 shares authorized, 14,270,948 and
13,854,281 shares issued and outstanding at March 31, 2010 and December
31, 2009, respectively
|
14,271 | 13,854 | ||||||
Additional
paid in capital
|
5,541,740 | 5,435,232 | ||||||
Retained
earnings
|
12,812,574 | 21,379,363 | ||||||
Other
comprehensive income
|
2,556,144 | 2,595,722 | ||||||
Total
stockholders' equity
|
20,925,229 | 29,424,671 | ||||||
Total
liabilities and stockholders' equity
|
$ | 32,627,963 | $ | 30,981,287 |
F-13
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Sales
revenues
|
$ | 5,575 | $ | 6,992 | ||||
Cost
of goods sold
|
2,134 | 1,993 | ||||||
Gross
profit
|
3,441 | 4,999 | ||||||
Operating
expenses
|
||||||||
Selling
expense
|
2,853 | 2,498 | ||||||
General
and administrative expenses
|
428,516 | 164,856 | ||||||
Total
operating expenses
|
431,369 | 167,354 | ||||||
Operating
loss
|
(427,928 | ) | (162,355 | ) | ||||
Other
income (expense)
|
||||||||
Interest
income
|
646 | 781 | ||||||
Gain
on change of fair value of derivative liabilities
|
20,246 | - | ||||||
Interest
expense
|
(57,599 | ) | - | |||||
Total
other income (expenses)
|
(36,707 | ) | 781 | |||||
Net
income
|
(464,635 | ) | (161,574 | ) | ||||
Foreign
Currency Translation Adjustment
|
(39,578 | ) | 38,281 | |||||
Comprehensive
Income
|
$ | (504,213 | ) | $ | (123,293 | ) | ||
Net
loss for common share
|
||||||||
Loss
per share-Basic
|
$ | (0.03 | ) | $ | (0.01 | ) | ||
Loss
per share-Diluted
|
$ | (0.03 | ) | $ | (0.01 | ) | ||
Weighted
average common stock outstanding
|
||||||||
Basic
|
14,270,948 | 13,854,281 | ||||||
Diluted
|
14,270,948 | 13,854,281 |
F-14
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Three months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (464,635 | ) | $ | (161,574 | ) | ||
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||
Depreciation
and amortization
|
49,856 | 49,603 | ||||||
Gain
on the change of fair value of derivative liabilites
|
(20,246 | ) | - | |||||
Amortization
of discount debt
|
27,321 | |||||||
Changes
in operating liabilities and assets:
|
||||||||
Trade
accounts receivable
|
556,760 | 131,946 | ||||||
Advance
to suppliers
|
(56,565 | ) | (66,237 | ) | ||||
Inventories
|
(92,502 | ) | 1,050,503 | |||||
Prepaid
expense
|
(72,137 | ) | 13,379 | |||||
Deposit
|
(585,129 | ) | ||||||
Trade
accounts payable
|
16,676 | (1,155,284 | ) | |||||
Advance
from customer
|
56,565 | 183,676 | ||||||
Accrued
expenses
|
66,622 | (15,069 | ) | |||||
Other
payable
|
(57,839 | ) | (34,151 | ) | ||||
Net
cash provided by (used in) operating activities
|
(575,253 | ) | (3,208 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Construction
in progress
|
(5,823 | ) | ||||||
Purchases
of plant and equipment
|
(45,630 | ) | - | |||||
Net
cash used in investing activities
|
(45,630 | ) | (5,823 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of convertiable notes
|
2,000,000 | - | ||||||
Deferred
financing costs
|
(128,250 | ) | - | |||||
Due
to shareholder
|
63,400 | 968,131 | ||||||
Net
cash provided by financing activities
|
1,935,150 | 968,131 | ||||||
Effect
of rate changes on cash
|
(944 | ) | (591 | ) | ||||
Increase
in cash and cash equivalents
|
1,313,323 | 958,509 | ||||||
Cash
and cash equivalents, beginning of period
|
843,358 | 612,971 | ||||||
Cash
and cash equivalents, end of period
|
$ | 2,156,681 | 1,571,480 | |||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid in cash
|
- | - | ||||||
Non-cash
financing activities:
|
||||||||
Debt
discount on convertible notes
|
939,147 | - |
F-15
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Series A Preferred Stock
|
Common Stock
|
Additional Paid in
|
Retained
|
Comprehensive
|
||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
|
Totals
|
|||||||||||||||||||||||||
Balance:
December 31, 2008
|
500,000 | $ | 500 | 13,854,281 | $ | 13,854 | $ | 5,435,232 | $ | 14,722,854 | $ | 2,561,310 | $ | 22,733,750 | ||||||||||||||||||
Dividend
paid
|
(6,139,166 | ) | (6,139,166 | ) | ||||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
34,412 | 34,412 | ||||||||||||||||||||||||||||||
Net
income
|
12,795,675 | 12,795,675 | ||||||||||||||||||||||||||||||
Balance:
December 31, 2009
|
500,000 | $ | 500 | 13,854,281 | $ | 13,854 | $ | 5,435,232 | $ | 21,379,363 | $ | 2,595,722 | $ | 29,424,671 | ||||||||||||||||||
Issuance
of shares for cancellation of warrants
|
416,667 | 417 | 106,508 | 106,925 | ||||||||||||||||||||||||||||
Dividend
declared or paid
|
(8,102,154 | ) | (8,102,154 | ) | ||||||||||||||||||||||||||||
- | ||||||||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
(39,578 | ) | (39,578 | ) | ||||||||||||||||||||||||||||
Net
loss
|
(464,635 | ) | (464,635 | ) | ||||||||||||||||||||||||||||
- | ||||||||||||||||||||||||||||||||
Balance:
March 31, 2010
|
500,000 | $ | 500 | 14,270,948 | $ | 14,271 | $ | 5,541,740 | $ | 12,812,574 | $ | 2,556,144 | $ | 20,925,229 |
F-16
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
1. Nature of
operations
China
For-Gen Corporation (“the Company”) was incorporated in the State of Delaware on
February 26th, 2008. The Company acquired all of the equity interests of
Liaoning Shengsheng Biotechnological Co., Ltd. (“Liaoning Shengsheng”), a
company incorporated in the People’s Republic of China (the “PRC”) on November
24, 2000. Since its inception, Liaoning Shengsheng has been an
agricultural and forestry company engaged in the breeding, cloning and sale of
plant seedlings and specialized transgenic plant seedlings, and the research and
development of seedling breeding technologies.
The
Company experiences strong seasonality in the sales of popular saplings, its
main product. The majority of sales are executed in April, May,
October and November each year. Accordingly, the Company has extreme seasonal
fluctuations in its revenue, operating income and cash flows. Result of
operation for three months ended March 31, 2010 and 2009 are not necessarily
indicative of the results to be obtained a full year.
2. Acquisition
Pursuant
to the Share Transfer Agreement entered into on April 28, 2009 (the “Share
Transfer”) between the shareholders of Liaoning Shengsheng and the Company, we
acquired Liaoning Shengsheng and its wholly-owned subsidiary,
Pusheng. The closing of the Share Transfer (the “Closing”) took place
on May 6, 2009 whereby we acquired all RMB 35,000,000 of the registered capital
of Liaoning Shengsheng (the “Shengsheng Shares”) from all of its shareholders in
consideration for $5.12 million. At the Closing we paid $1.28 million
to the Shengsheng Shareholders, who are included among the selling stockholders
hereunder. Immediately following the Closing, Liaoning Shengsheng
became a wholly foreign-owned subsidiary (“WFOE”) of China For-Gen.
As part
of the Share Transfer, on June 8, 2009, the shareholders of Liaoning Shengsheng
(the “Grantees”) entered into a call option agreement (the “Call Option
Agreement”) with Ms. Sherry Li (“Ms. Li”), then the sole shareholder officer,
director and shareholder of China For-Gen, wherein she agreed to transfer a
number of shares of the Company equal to 60% of the issued and outstanding
shares of common stock after an initial public offering. The Call
Option Agreement became effective upon the closing of the Share
Transfer. The option may be exercised by the Grantees for nominal
consideration, which would give the Grantees indirect ownership of a significant
percentage of our common stock. The Call Option Agreement provides
that Ms. Li may not dispose of any of the shares owned by Ms. Li in China
For-Gen without the Grantee’s prior written consent.
The
transaction was accounted for as a reverse merger and, accordingly, the Company
is the legal surviving entity and Liaoning Shengsheng is the accounting
survivor.
3. Summary
of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America.
The
Company's functional currency is the Chinese Renminbi, however the accompanying
consolidated financial statements have been translated and presented in United
States Dollars.
On May
12, 2010, the Company effected a 1:1.5 reverse split of the Company’s issued and
outstanding shares of common stock, decreasing the number of outstanding shares
from 20,781,421 to 13,854,281 as of December 31, 2009 and from 21,406,422 to
14,270,948 as of March 31, 2010. These statements have been adjusted to reflect
this reverse split.
Principles of
consolidation
The
consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in
consolidation.
Use of
estimates
The
preparation of financial statements in conformity with US generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates and such differences could be
material.
F-17
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies (continued)
Cash and Cash
Equivalents
Cash
and cash equivalents includes cash on hand and demand deposits held by banks.
Deposits held in financial institutions in the PRC are not insured by any
government entity or agency.
Accounts
Receivable
The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. Trade accounts receivable are recognized
and carried at original invoice amount less an allowance for any uncollectible
amounts. An allowance for doubtful accounts is established and determined based
on management’s assessment of known requirements, aging of receivables, payment
history, the customer’s current credit worthiness and the economic environment.
There is no allowance for doubtful account as of March 31, 2010 and December 31,
2009.
Inventories
Inventories
consist of trees grown from seedlings developed by the Company and trees
purchased and grown for resale. The costs of growing trees are capitalized into
inventory until the time of harvest. Once a tree is harvested and sold, the
related inventoried costs are recognized as a cost of sale to provide an
appropriate matching of expenses with the related revenue earned. The Company
states its inventories at the lower of cost or net realizable
value.
Property, Plant and
Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the useful lives of
the assets. Land lease acquisition costs are amortized over the life the lease.
Major renewals are capitalized and depreciated; maintenance and repairs that do
not extend the life of the respective assets are charged to expense as incurred.
Upon disposal of assets, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in
income.
Revenue
Recognition
Our revenues consist of sales of genetically
modified saplings. Sales are recognized in accordance with SEC Staff
Accounting Bulletin (“SAB”) No. 104 included in the codification as ASC 605,
Revenue Recognition, when the following four revenue criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the selling
price is fixed or determinable and collectability is reasonably assured. No
return allowance is made as products are normally not returnable upon acceptance
by the customers.
The
price at which we sell fast-growing poplar seedlings is based on numerous
factors, including: market price changes of fast-growing poplar seedlings;
regional supply of fast-growing poplar seedlings; seasonal availability of
seedlings and demand for fast-growing poplar seedlings. Generally, it
takes 20 days for a single transaction to be consummated. This time
frame includes negotiation of terms, execution of contract, preparation,
delivery, transportation, planting of products and receipt of
payment. For larger transactions, it can take up to one year for the
last payment to be made.
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling and farming
business. Under the program, the Company collects value added tax (VAT) from
customers at 3% of sales. This amount is not required to be remitted to the
government. VAT. which is included in revenue, was $162 and $396 for the three
months ended March 31, 2010 and 2009 respectively.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities 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 reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the
statement of operations in the period that includes the enactment
date. A valuation allowance is provided for deferred tax assets if it
is more likely than not that these items will either expire before the Company
is able to realize their benefits, or that future deductibility is
uncertain.
Impairment of Long-Lived
Assets
Long-term
assets of the Company are reviewed annually to assess whether the carrying value
has become impaired according to the guidelines established in Statement of
Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” No impairment of assets was
recorded in the periods reported.
F-18
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies (continued)
Foreign Currency and
Comprehensive Income
The
accompanying financial statements are presented in US dollars. The functional
currency is the Renminbi (“RMB”) of the PRC. The financial statements are
translated into US dollars from RMB at year-end exchange rates for assets and
liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
Accumulated
other comprehensive income represents foreign currency translation
adjustments.
Earnings Per
Share
Basic net
income per share is computed on the basis of the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed on the basis of the weighted average number of common shares and common
share equivalents outstanding. Dilutive securities having an anti-dilutive
effect on diluted net income per share are excluded from the calculation.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
Derivative Financial
Instruments
In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument liability.
Derivative financial instruments are recorded as liabilities in the consolidated
balance sheet, measured at fair value. When available, quoted market
prices are used in determining fair value. However, if quoted market
prices are not available, we estimate fair value using either quoted market
prices of financial instruments with similar characteristics or other valuation
techniques. The derivative instrument liabilities are re-valued at the end of
each reporting period, with changes in the fair value of the derivative
liability recorded as charges or credits to income, in the period in which the
changes occur.
New accounting
pronouncement
On
September 30, 2009, the Company adopted changes issued by the FASB to the
authoritative hierarchy of generally accepted accounting principles
(“GAAP”). These changes establish the FASB Accounting Standards
CodificationTM (“Codification”) as the source of authoritative accounting
principles recognized by the FASB to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
GAAP in the U.S. The Codification was effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The
adoption had no material impact on the Company’s consolidated results of
operations or financial condition.
In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition. We believe the adoption of this new guidance will
not have a material impact on our financial statements.
F-19
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
4. Deposits
Deposits
consist of the following:
3/31/2010
|
12/31/2009
|
|||||||||
Equipment
purchase
|
(a)
|
$
|
7,197,086
|
$
|
7,205,413
|
|||||
Business
acquisition
|
(b)
|
877,693
|
292,903
|
|||||||
Supplies
|
138,496
|
83,268
|
||||||||
Total
|
$
|
8,213,275
|
$
|
7,581,584
|
a.
|
In
April 2009, Liaoning entered into an agreement to purchase equipment for
RMB61,500,000 (approximately $9,000,000). Those equipment will
be used in a factory the Company intends to build in the city of Karamai
to manufacture artificial board or Medimum Density Fiberboard (“MDF”).
Payment made to this supplier under this agreement totaled RMB 49,200,000
(approximately $7,197,086) as of March 31, 2010. Under the agreement, the
equipment vendor will design, manufacture, deliver and setup all equipment
required for manufacturing artificial board or
MDF.
|
b.
|
In
May 2009, Liaoning entered into an agreement to acquire 80% outstanding
shares of Daxinganling Tuqiangbeiji Wood Co. Ltd. for
$4,534,749.
|
5. Property,
Plant and Equipment
Property,
Plant and Equipment consists of the following:
3/31/2010
|
12/31/2009
|
Estimated
Useful
Life
|
|||||||
Land
use rights
|
$
|
59,108
|
$
|
61,704
|
Life of lease
|
||||
Buildings
|
2,929,400
|
2,932,790
|
10-30
years
|
||||||
Machinery
and equipment
|
1,128,858
|
1,130,164
|
3-8
years
|
||||||
Vehicles
|
183,257
|
139,306
|
5-8
years
|
||||||
Computer
and office equipment
|
85,307
|
83,917
|
3-5
years
|
||||||
Office
equipment
|
9,699
|
9,710
|
3-5
years
|
||||||
Total
property, plant and equipment
|
4,395,660
|
4,357,591
|
|||||||
Accumulated
depreciation
|
(1,679,833
|
)
|
(1,634,390
|
)
|
|||||
$
|
2,715,827
|
$
|
2,723,201
|
6. Advance
from customer
Advance
from customer consists of deposit from one of our customer. This amount is
noninterest bearing.
7. Convertible
Notes
On
February 12, 2010, pursuant to a convertible note purchase agreement, the
Company received gross proceeds of $2,000,000 from the sale of five year
Convertible Promissory Notes, bearing interest at ten percent (10%) per annum
(the “Notes”) and maturing on February 11, 2015 and common stock Purchase
Warrants A and B (each, the “A Warrants” and “B Warrants” and collectively, the
“Warrants”) to various accredited and institutional
investors. Following the Reverse Split (see note 3), the Notes are
convertible into an aggregate of 1,320,133 shares of common
stock. The Notes are convertible at any time at a conversion price of
$1.515 post split ($1.01 per share before split). In addition, those investors
who purchased convertible promissory notes and warrants have the right to
purchase up to an additional $2,500,000 of notes and warrants on terms identical
to those in the February 2010 offering.
The
convertible note agreement the Company entered into with its investors contain
various covenants that may limit the company’s discretion in operating its
business. In particular, the Company agrees for two years after the second
payment not to enter into any borrowing of more than three times as much as of
the EBITDA (defined as earnings before interest, tax, depreciation and
amortization) from recurring operations over the past four quarters. The Company
also agrees not to issue any convertible debt for a period of three years from
the closing date.
The notes
bears interest at a rate of 10% per annum accrued monthly in kind for the first
12 months and shall be payable in cash by the 10th day of each month, post the
initial 12 months at the election of the note holder. Approximately $135,000 of
due diligence fees and other costs
F-20
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
7. Convertible
Notes (continued)
directly
associated with the issuance of the Notes is recorded as deferred financing
costs in the balance sheet at March 31, 2010. The Company is amortizing these
financing costs over the life of the Notes. The amortization for the period
ended March 31, 2010 was $6,750.
8. Stockholders’
equity
On
March 21, 2010, the Company’s subsidiary, Liaoning Shengsheng declared a
dividend to the original Liaoning Shengsheng shareholders in the amount of
RMB55,300,000 (approximately $8,000,000). This dividend will be paid when
Liaoning Shengsheng has sufficient cash flow.
9.
Warrants
In
connection with the convertible notes purchase agreements, the Company issued A
warrants and B warrants to purchase shares of the Company’s common
stock.
The A
Warrants were initially exercisable for five years at an exercise price of $1.35
per share, for up to an aggregate of 1,662,500 shares of our common
stock. The B Warrants were initially exercisable for five years at an
exercise price of $1.70 per share, for up to an aggregate of an additional
1,662,500 shares of our common stock. Following the Reverse Split,
the A Warrants are exercisable for 1,108,334 shares of common stock at an
exercise price of $2.03 per share and the B Warrants are exercisable for
1,108,333 shares of common stock at an exercise price of $2.55 per
share.
In the
event the Company’s net income for the year ending December 31, 2010 is less
than $.6163 per share on a fully-diluted basis, then the exercise price shall be
reduced by the percentage shortfall as reported for the fiscal year ended
December 31, 2010. The A Warrant exercise price shall be reduced proportionately
by 0% if the earnings are $.6163 per share and by 75% if the earnings are $.1541
per share.
In the
event the Company’s net income for the year ended December 31, 2010 is less than
$.6163 per share on a fully-diluted basis, then the B Warrant exercise price
shall be reduced by the percentage shortfall as reported for the fiscal year
ended December 31, 2010. The warrant exercise price shall be reduced
proportionately by 0% if the earnings are $.6163 per share and by 75% if the
earnings are $.1541 per share.
The
Warrants are entitled to a price adjustment provision that allows the price of
the Warrants to be reduced in the event the Company issues any additional shares
of common stock at a price per share less than the then-applicable warrant
price. The Company determined that the Warrants meet the definition of a
derivative under ASC Topic 815, Derivatives and Hedging “ASC Topic 815”. In
determining whether the Warrants were eligible for a scope exception from ASC
Topic 815, the Company considered the provisions of ASC Topic 815-40
(Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock). The Company determined that the Warrants do not meet a
scope exception because they are not deemed indexed to the Company’s own stock.
Pursuant to ASC Topic 815, derivatives should be measured at fair value as of
the inception date and re-measured at fair value as of each subsequent balance
sheet date with changes in fair value recorded in earnings at each reporting
period. These warrants were measured at fair value of $1,060,853 on
the grant date. The Company recorded a gain on change in fair value of warrants
liability of $20,246 through ended March 31, 2010.
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and using historical information that management deems most
relevant.
The
Company used the Black-Scholes option-pricing model with the following
assumptions:
Warrants A
|
Warrants B
|
|||||||
Expected
Term (Years)
|
5.00 | 5.00 | ||||||
Dividend
Rate (%)
|
0 | 0 | ||||||
Volatility
(%)
|
53.9 | 53.9 | ||||||
Risk
Free Rate (%)
|
2.6 | 2.6 |
On
January 1, 2010, the Company entered into an agreement to cancel 1,000,000
outstanding warrants in exchange for 416,667 shares of common
stock.
F-21
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
10. The
following table sets forth the computation of basic and diluted earnings per
share of common stock:
For Three Months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Basic
net loss per share:
|
||||||||
Numerator:
|
||||||||
Net
loss used in computing basic net loss per share
|
$ | ( 464,635 | ) | $ | (161,574 | ) | ||
Net
loss applicable to common shareholders
|
$ | (464,635 | ) | $ | 161,574 | ) | ||
Denominator:
|
||||||||
Weighted
average common shares outstanding
|
14,270,948 | 13,854,281 | ||||||
Basic
loss per share
|
$ | (0.03 | ) | $ | (0.01 | ) | ||
Diluted
net loss per share:
|
||||||||
Numerator:
|
||||||||
Net
loss used in computing diluted net loss per share
|
$ | (464,635 | ) | $ | (161,574 | ) | ||
Net
loss applicable to common shareholders
|
$ | (464,635 | ) | $ | (161,574 | ) | ||
Denominator:
|
||||||||
Weighted
average common shares outstanding
|
14,270,948 | 13,854,281 | ||||||
Weighted
average effect of dilutive securities:
|
- | - | ||||||
Shares
used in computing diluted net loss per share
|
14,270,948 | 13,854,281 | ||||||
Diluted
net loss per share
|
$ | (0.03 | ) | $ | (0.01 | ) |
11. Income
Tax
A
reconciliation of the Company’s effective income tax rate to the U.S. Federal
statutory rate is as follows:
For the period ended March 31
|
||||||||
2010
|
2009
|
|||||||
Federal
statutory rate
|
35 | % | 35 | % | ||||
-36 | % | -37 | % | |||||
Valuation
allowance
|
1 | % | 2 | % | ||||
Effective tax
rate
|
0 | % | 0 | % |
Under the
income tax laws of the PRC, the Company’s subsidiaries operate in a nationally
investment- encouraged industry and are not subject to income tax.
The
Company has deferred tax assets of approximately $117,000 and $17,093 from net
operating loss in the U.S. for the three months ended March 31, 2010 and 2009
for which a 100% valuation allowance has been provided.
12. Concentration of Credit Risks and
Uncertainties
One
customer accounted for 100% of sales for the period ended March 31, 2010, and
2009, respectively.
13.
Subsequent event
On May
12, 2010, the Company filed Second Amended and Restated Certificate of
Incorporation. Pursuant to which, the Company shall have authority to issue
52,000,000 of all classes of capital stock, of which (1) 2,000,000 shares shall
be shares of preferred stock of the Par value of $ .001 per share, o f which
500,000 shares of preferred stock shall be designated as Series A convertible
preferred stock; and (2) 50,000,000 shares shall be shares of common stock of
the par value of $.001 per share.
F-22
[Alternate
Page for Selling Securityholder Prospectus]
6,318,532
Shares
China
For-Gen Corp.
common
stock
Until
, 2010 all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in
addition to the dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS
Maxim
Group LLC
,
2010
[Alternate
Page for Selling Securityholder Prospectus]
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in
any state or other jurisdiction where the offer or sale is not
permitted.
Preliminary
Prospectus
Subject
to Completion, Dated
[ ],
2010
CHINA
FOR-GEN CORP.
6,318,532
shares of common stock
This
prospectus relates to the resale of up to 6,318,532 shares (the “Shares”) of
common stock, par value $.001 per share of China For-Gen Corp., a Delaware
corporation, that may be sold from time to time by the selling stockholders
named in this prospectus on page SS-2 (“Selling Stockholders”). The
shares of common stock offered under this prospectus includes (i) 2,950,001
shares of common stock issuable upon exercise of warrants and (ii) 7,968,531
shares of common stock currently issued and outstanding.
The
Shares were issued to the Selling Stockholders in private placement transactions
which were exempt from the registration and prospectus delivery requirements of
the Securities Act of 1933, as amended.
The
distribution of securities offered hereby may be effected in one or more
transactions that may take place on the NYSE AMEX Stock Exchange, including
ordinary brokers’ transactions, privately negotiated transactions or through
sales to one or more dealers for resale of such securities as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the selling
securityholders. No sales of the shares covered by this prospectus shall occur
until the shares of common stock sold in our initial public offering begin
trading on the NYSE Amex Stock Exchange.
We will
not receive any proceeds from the sale of the Shares by the Selling
Stockholders. To the extent the Warrants are exercised for cash, if at all, we
will receive the exercise price for those Warrants.
Our
common stock is not currently quoted or traded on any public
market. We intend to apply to have our shares listed on the NYSE AMEX
Stock Exchange under the symbol CFG.
On
[ ], 2010, a
registration statement under the Securities Act with respect to our initial
public offering underwritten by Maxim Group LLC, as the representative of the
underwriters, of $[]of 4,000,000 shares of Common Stock assuming a $[ ] per
share initial public offering price was declared effective by the Securities and
Exchange Commission. We received approximately $[] in net proceeds from the
offering (assuming no exercise of the underwriters’ over-allotment option) after
payment of underwriting discounts and commissions and estimated expenses of the
offering.
THIS
INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY IF
YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE “RISK FACTORS” BEGINNING
ON PAGE [ ] FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN
INVESTMENT IN OUR COMMON STOCK.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date
of this prospectus
is ,
2010
TABLE OF
CONTENTS
Prospectus
Summary
|
1
|
|
The
Offering
|
3
|
|
Summary
Consolidated Financial and Operating Data
|
5
|
|
Risk
Factors
|
6
|
|
Cautionary
Note Regarding Forward-Looking Statements and Other Information
Contained in this Prospectus
|
20
|
|
Use
of Proceeds
|
20
|
|
Dividend
Policy
|
21
|
|
Capitalization
|
22
|
|
Market
Price of and Dividends of Common Equity and Related Stockholder
Matters
|
22
|
|
Determination
of Offering Price
|
22
|
|
Dilution
|
24
|
|
Exchange
Rate Information
|
24
|
|
Selected
Consolidated Financial and Operating Data
|
25
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
26
|
|
Industry
Overview
|
33
|
|
Business
|
39
|
|
Facilities
|
41
|
|
Legal
Proceedings
|
45
|
|
Our
History and Corporate Structure
|
48
|
|
Directors
and Executive Officers
|
50
|
|
Executive
Compensation
|
52
|
|
Security
Ownership of Certain Beneficial Owners and Management
|
54
|
|
Certain
Relationships and Related Transactions
|
55
|
|
Description
of Our Securities
|
55
|
|
Shares
Eligible for Future Sale
|
58
|
|
Material
PRC Income Tax Considerations
|
59
|
|
Transfer
Agent and Registrar
|
65
|
|
Legal
Matters
|
65
|
|
Plan
of Distribution
|
65
|
|
Experts
|
66
|
|
Interests
of Named Experts and Counsel
|
67
|
|
Service
of Process and Enforcement of Judgments
|
67
|
|
Where
You Can Find More Information
|
67
|
|
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
|
67
|
|
Index
to Financial Statements
|
F-1
|
[Alternate
Page for Selling Securityholder Prospectus]
6,318,532 Shares
of
common
stock
CHINA
FOR-GEN CORP.
▪
PROSPECTUS
▪
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus or any prospectus supplement. This prospectus is not an offer
of these securities in any jurisdiction where an offer and sale is not
permitted
[Alternate
Page for Selling Securityholder Prospectus]
THE
OFFERING
This
prospectus relates to the sale by the Selling Stockholders of up to 6,318,532
shares of our Common Stock, which includes (i) 1,854,280 shares of Common Stock;
and (ii) 1,320,132 shares of Common Stock issuable upon conversion of 2010
PIPE Convertible Notes; (iii) 3,325,000 shares of Common Stock issuable
upon exercise of the 2010 Warrants; (iii) 444,119 shares issuable upon
conversion of 2008 Series A Preferred Stock; and (iv) 416,667 shares of common
stock issuable upon cashless exercise by the selling stockholder of its 2008
stock purchase warrants.
Common
stock outstanding prior to the offering
|
13,854,280
shares
|
|
Common
stock offered by Selling Stockholders
|
6,318,532
shares
|
|
Common
stock outstanding after the offering (assuming cashless exercise of the
2008 Warrants)
|
18,870,948
shares
|
|
Risk
Factors
|
See
“Risk Factors” beginning on page 6 and other information included in this
prospectus for a discussion of factors you should consider before deciding
to invest in shares of our common
stock.
|
SS-1
[Alternate
Page for Selling Securityholder Prospectus]
USE
OF PROCEEDS
We will
not receive any of the proceeds from the sale of the shares of Common Stock by
the Selling Stockholders. However, to the extent that the warrants are exercised
for cash, we will receive proceeds from the exercise of such warrants. We intend
to use any proceeds received from the exercise of the warrants for working
capital and other general corporate purposes.
SELLING
STOCKHOLDERS
We are
registering for resale shares of our common stock that are currently issued and
outstanding. We are registering the shares to permit the Selling Stockholders
and their pledgees, donees, transferees and other successors-in-interest that
receive their shares from a Selling Stockholder as a gift, partnership
distribution or other non-sale related transfer after the date of this
prospectus to resell the shares when and as they deem appropriate in the manner
described in the “Plan of Distribution”. None of the selling shareholders are
broker-dealers or affiliates of broker-dealers.
The
following table sets forth:
|
•
|
the name of the Selling
Stockholders,
|
|
•
|
the number of shares of our
common stock that the Selling Stockholders beneficially owned prior to the
offering for resale of the shares under this
prospectus,
|
|
•
|
the maximum number of shares of
our common stock that may be offered for resale for the account of the
Selling Stockholders under this prospectus,
and
|
|
•
|
the number and percentage of
shares of our common stock to be beneficially owned by the Selling
Stockholders after the offering of the shares (assuming all of the offered
shares are sold by the Selling
Stockholders).
|
Name of Selling Stockholder
|
Shares of
common stock
Beneficially
Owned Prior
to Offering(1)
|
Percentage of
Shares Before
Offering(1)
|
Maximum
Number of
Shares to
be Sold
|
Shares of
common stock
Beneficially
Owned After
Offering(2)
|
Percentage
Ownership
After
Offering
|
|||||||||||||||
T
Squared Investments LLC
|
1,914,901 | (3) | 12.14 | 1,914,901 | 0 | 0 | ||||||||||||||
T
Squared China Fund LLC
|
176,840 | (4) | 1.26 | 176,840 | 0 | 0 | ||||||||||||||
Silver
Rock II, Ltd.
|
884,200 | (5) | 6.00 | 884,200 | 0 | 0 | ||||||||||||||
Ross
Pirasteh
|
88,420 | (6) | * | 88,420 | 0 | 0 | ||||||||||||||
Special
Situations Private Equity Fund, L.P.
|
397,890 | (7) | 2.79 | 397,890 | 0 | 0 | ||||||||||||||
G.
Tyler Runnels and Jasmine N. Runnels TTEES
|
294,716 | (8) | 4.66 | 29294,716 | 0 | 0 | ||||||||||||||
Steven
B. Dunn
|
294,716 | (8) | 2.08 | 294,716 | 0 | 0 | ||||||||||||||
Swing
Rock Trading, LLC
|
860,786 | (9) | 5.85 | 860,866 | 0 | 0 | ||||||||||||||
Jin
Hai Fu, Inc.
|
483,040 | (10) | 3.49 | 483,040 | 0 | 0 | ||||||||||||||
Wan
Xuesheng, Inc.
|
483,040 | (11) | 3.49 | 483,040 | 0 | 0 | ||||||||||||||
Maxsun
Investments
|
25,000 | (12) | * | 25,000 | 0 | 0 | ||||||||||||||
Steven
Fox
|
80,000 | * | 80,000 | 0 | 0 | |||||||||||||||
China
Financial Services
|
334,984 | (13) | 2.04 | 334,984 | 0 | 0 | ||||||||||||||
Minmin
Zhang
|
100,000 | * | 100,000 | 0 | 0 |
* Represents
less than 1% of total outstanding common stock.
SS-2
(1) Beneficial
ownership is determined in accordance with Rule 13d-3 of the Exchange Act. In
computing the number of shares beneficially owned by a person and the percentage
ownership of that person, securities that are currently convertible or
exercisable into shares of our common stock, or convertible or exercisable into
shares of our common stock within 60 days of the date hereof are deemed
outstanding. Such shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other person. Except as indicated in
the footnotes to the following table, each stockholder named in the table has
sole voting and investment power with respect to the shares set forth opposite
such stockholder’s name. The percentage of beneficial ownership is based on
13,854,281shares of common stock outstanding as of July 12, 2010.
(2) Assumes
that all securities registered will be sold.
(3) The
1,914, 901 shares of common stock include: (i) 283,200 shares of common stock
issued and outstanding as of the date hereof; (ii) 584,159 shares of common
stock issuable upon conversion of such holder’s 2010 Notes; (iii) 980,875 shares
of common stock issuable upon conversion of such holder’s 2010 Warrants; and
(iv) 66,667 shares of common stock issuable upon conversion of such holder’s
2008 Warrants. have voting and investment control over such
securities. Mark Jensen and Thomas Suave have voting and investment
control over such securities.
(4) The
176,840 shares of common stock include: (i) 66,007 shares of common stock
issuable upon conversion of the 2010 Notes; and (ii) 110,833 shares of common
stock issuable upon conversion of the 2010 Warrants. Mark Jensen and
Thomas Suave have voting and investment control over such
securities.
(5) The
884,200 shares of common stock include: (i) 330,033 shares of common stock
issuable upon conversion of the 2010 Notes; and (ii) 554,167 shares of common
stock issuable upon conversion of the 2010 Warrants. Ezzat Jillad has
voting and investment control over such securities.
(6) The
88,420 shares of common stock include: (i) 33,003 shares of common stock
issuable upon conversion of the 2010 Notes; and (ii) 55,417 shares of common
stock issuable upon conversion of the 2010 Warrants.
(7) The
397,890 shares of common stock include: (i) 148,515 shares of common stock
issuable upon conversion of the 2010 Notes; and (ii) 249,375 shares of common
stock issuable upon conversion of the 2010 Warrants. Benjamin Burditt
has voting and investment control over such securities.
(8) The
294,716 shares of common stock include: (i) 82,508 shares of common stock issued
and outstanding as of the date hereof; (ii) 79,208 shares of common stock
issuable upon conversion by such selling stockholder of convertible promissory
notes issued on February 12, 2010 in connection with the private placement,
which we refer to herein as the 2010 Notes; and (iii) 133,000 shares of common
stock issuable upon conversion by such selling stockholder of convertible
warrants issued on February 12, 2010 in connection with the private placement,
which we refer to herein as the 2010 Warrants.
(9) The
860,786 shares of common stock include: (i) 444,119 shares issuable upon
conversion of Series A Preferred Stock; and (ii) 416,667 shares of common stock
issuable upon cashless exercise by the selling stockholder of its common stock
purchase warrants, which we refer to herein as the 2008
Warrants. Greg Goldberg has voting and investment control over such
securities.
(10) Huafu
Wang has voting and investment control over such securities.
(11) Li
Liao has voting and investment control over such securities.
(12) Johnny
Song Lin has voting and investment control over such securities.
(13) Sherry
Li has voting and investment control over such securities.
SS-3
May
2008 Private Placement
On May
30, 2008, we conducted a private placement of 500,000 shares of our newly
created Series A Convertible Preferred Stock, convertible into 500,000 shares of
our common stock, and a five-year common stock purchase warrant to purchase up
to 1,000,000 shares of common stock at a price of $1.25 per warrant share (the
“2008 Warrant”). We received gross proceeds of $455,000 from the private
placement. The 2008 Warrant is exercisable through May 20, 2013 at an
exercise price of $1.25 per share. As a result of the Reverse Split,
the Series A Convertible Preferred Stock is convertible into an aggregate of
444,119 shares of common stock at a conversion price of $0.91 per share and the
2008 Warrants are currently exercisable for an aggregate of 666,667 shares of
common stock at an exercise price of $1.88 per share. The 2008
Warrants are also exercisable on a cashless basis.
Registration Rights
Agreement. In connection with the private placement, we
entered into the Registration Rights Agreement to have the shares of common
stock underlying the preferred stock and 2008 Warrants registered for public
resale. The filing of the registration statement of which this
prospectus is a part is intended to satisfy certain of our obligations under the
Registration Rights Agreement.
February
2010 Private Placement
On
February 12, 2010, we received gross proceeds of $2,000,000 from the sale of
five year Convertible Promissory Notes, bearing interest at ten percent (10%)
per annum (the “Notes”), and common stock purchase warrants A and B (each, the
“A Warrants” and “B Warrants” and collectively, the “Warrants”) to various
accredited and institutional investors. The Notes are convertible
into an aggregate of 1,980,198 shares of our common stock. The Notes
are convertible at any time at the option of the Note holder.
Holders
of the Notes and Warrants shall not be entitled to convert their Notes or any
Warrants into such number of shares of our common stock which, when added to the
number of shares of common stock beneficially owned by such holder and its
affiliates immediately prior to conversion of such Note or Warrant, would result
in beneficial ownership by such holder and its affiliates of more than 4.99% of
the outstanding shares of our common stock. For purposes of the
immediately preceding sentence, “beneficial ownership” is determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Rule 13d-3 thereunder. This restriction may be waived or
amended only with the consent of the applicable Note holder and the consent of
holders of a majority of the shares of our outstanding common stock who are not
affiliates of the Company.
The A
Warrants are exercisable for five years at an exercise price of $1.35 per share,
for up to an aggregate of 1,662,500 shares of our common stock. The B
Warrants are exercisable for five years at an exercise price of $1.70 per share,
for up to an aggregate of an additional 1,662,500 shares of our common
stock.
The
exercise price of the A Warrants is subject to adjustment in the event the
Company fails to meet certain earnings per share projections. In the
event the Company’s net income for the year ended December 31, 2009 is less than
$.4565 per share on a fully-diluted basis, then the exercise price shall be
reduced by a percentage equal to the percentage shortfall (where net income on a
fully diluted basis shall always be defined as earnings from continuing
operations before any non-cash items on a pre-tax fully diluted basis (including
dilution from any options, warrants and convertible securities) as reported for
the fiscal year ended December 31, 2009). The A Warrant exercise price shall be
reduced proportionately by 0% if the earnings are $.4565 per share and by 75% if
the earnings are $.1141 per share. For example, if the Company earns $.3652 per
share, or 20% below $.4565 per share, then the A Warrant exercise price shall be
reduced by 20%. Such reduction shall automatically be in effect at the time the
December 31, 2009 financial results are reported or at any other time that the
intial investor in the Note and the Company have a written and executed
agreement stating otherwise, and shall be made from the starting exercise price
of the warrants being the exercise price of the warrants at that time, and shall
be cumulative upon any other changes to the exercise price of the warrant that
may already have been made.
In the
event the Company’s net income for the year ended December 31, 2010 is less than
$.6163 per share on a fully-diluted basis, then the exercise price shall be
reduced by the percentage shortfall (where net income on a fully diluted basis
shall always be defined as earnings from continuing operations before any
non-cash items on a pre-taxed fully diluted basis (including dilution from any
options, warrants and convertible securities) as reported for the fiscal year
ended December 31, 2010). The A Warrant exercise price shall be reduced
proportionately by 0% if the earnings are $.6163 per share and by 75% if the
earnings are $.1541 per share. For example, if the Company earns $.4930
per share, or 20% below $.6163 per share, then the A Warrant exercise price
shall be reduced by 20%. Such reduction shall automatically be in effect
at the time the December 31, 2010 financial results are reported or at any other
time that the intial investor in the Note and the Company have a written and
executed agreement stating otherwise, and shall be made from the starting
exercise price of the warrants being the exercise price of the warrants at that
time, and shall be cumulative upon any other changes to the exercise price of
the warrant that may already have been made.
The
exercise price of the B Warrants is also subject to adjustment in the event the
Company fails to meet certain earnings per share projections. In the event
the Company’s net income for the year ended December 31, 2009 is less than
$.4529 per share on a fully-diluted basis, then the B Warrant exercise price
shall be reduced by a percentage equal to the percentage shortfall (where net
income on a fully diluted basis shall always be defined as earnings from
continuing operations before any non-cash items on a pre-tax fully diluted basis
(including dilution from any options, warrants and convertible securities) as
reported for the fiscal year ended December 31, 2009). The B Warrant exercise
price shall be reduced proportionately by 0% if the earnings are $.4565 per
share and by 75% if the earnings are $.1141 per share. For example, if the
Company earns $0.3652 per share, or 20% below $.4565 per share, then the warrant
exercise price shall be reduced by 20%. Such reduction shall automatically be in
effect at the time the December 31, 2009 financial results are reported or at
any other time that the initial investor in the Note and the Company have a
written and executed agreement stating otherwise, and shall be made from the
starting exercise price of the warrants being the exercise price of the warrants
at that time, and shall be cumulative upon any other changes to the exercise
price of the warrant that may already have been made.
SS-4
In the
event the Company’s net income for the year ended December 31, 2010 is less than
$.6163 per share on a fully-diluted basis, then the B Warrant exercise price
shall be reduced by the percentage shortfall (where net income on a fully
diluted basis shall always be defined as earnings from continuing operations
before any non-cash items on a pre-taxed fully diluted basis (including dilution
from any options, warrants and convertible securities) as reported for the
fiscal year ended December 31, 2010). The warrant exercise price shall be
reduced proportionately by 0% if the earnings are $.6163 per share and by 75% if
the earnings are $.1541 per share. For example, if the Company earns $0.4930 per
share, or 20% below $.6163 per share, then the B Warrant exercise price would be
reduced by 20%. Such reduction shall automatically be in effect at the
time the December 31, 2010 financial results are reported or at any other time
that the initial investor in the Note and the Company have a written and
executed agreement stating otherwise, and shall be made from the starting
exercise price of the warrants being the exercise price of the warrants at that
time, and shall be cumulative upon any other changes to the exercise price of
the warrant that may already have been made.
Each
Selling Stockholder may offer for sale all or part of the shares from time to
time. The selling stockholder table assumes the Selling Stockholders will sell
all of the shares offered for sale. A Selling Stockholder is under no
obligation, however, to sell any shares pursuant to this
prospectus.
SS-5
[Alternate
Page for Selling Securityholder Prospectus]
PLAN
OF DISTRIBUTION
The
selling securityholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling securityholder as a gift, pledge, partnership distribution or
other transfer, may, from time to time, sell, transfer or otherwise dispose of
any or all of their shares of common stock or interests in shares of common
stock on any stock exchange, market or trading facility on which the shares are
traded or in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.
The
selling securityholders may use any one or more of the following methods when
disposing of shares or interests therein:
|
•
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
|
•
|
block trades in which the
broker-dealer will attempt to sell the shares as agent, but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
|
•
|
purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
|
•
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
•
|
privately negotiated
transactions;
|
|
•
|
short
sales;
|
|
•
|
through the writing or settlement
of options or other hedging transactions, whether through an options
exchange or otherwise;
|
|
•
|
broker-dealers may agree with the
selling securityholders to sell a specified number of such shares at a
stipulated price per share;
|
|
•
|
a combination of any such methods
of sale; and
|
|
•
|
any other method permitted
pursuant to applicable law.
|
The
selling securityholders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock, from time to time, under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
securityholders to include the pledgee, transferee or other successors in
interest as selling securityholders under this prospectus. The selling
securityholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus;
provided, however, that prior
to any such transfer the following information (or such other information as may
be required by the federal securities laws from time to time) with respect to
each such selling beneficial owner must be added to the prospectus by way of a
prospectus supplement or post-effective amendment, as appropriate: (1) the
name of the selling beneficial owner; (2) any material relationship the
selling beneficial owner has had within the past three years with us or any of
our predecessors or affiliates; (3) the amount of securities of the class
owned by such security beneficial owner before the offering; (4) the amount
to be offered for the security beneficial owner’s account; and (5) the
amount and (if one percent or more) the percentage of the class to be owned by
such security beneficial owner after the offering is complete.
In
connection with the sale of our common stock or interests therein, the selling
securityholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
securityholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The
selling securityholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
SS-6
The
aggregate proceeds to the selling securityholders from the sale of the common
stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any. Each of the selling securityholders reserves
the right to accept and, together with their agents from time to time, to
reject, in whole or in part, any proposed purchase of common stock to be made
directly or through agents. We will not receive any of the proceeds from this
offering. Upon any exercise of the warrants by payment of cash, however, we will
receive the exercise price of the warrants.
The
selling securityholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
as amended, provided that they meet the criteria and conform to the requirements
of that rule.
The
selling securityholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
“underwriters” within the meaning of Section 2(11) of the Securities Act.
Any discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling securityholders who are “underwriters” within the meaning of
Section 2(11) of the Securities Act will be subject to the prospectus
delivery requirements of the Securities Act.
To the
extent required, the shares of our common stock to be sold, the names of the
selling securityholders, the respective purchase prices and public offering
prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
The
maximum amount of compensation to be received by any FINRA member or independent
broker-dealer for the sale of any securities registered under this prospectus
will not be greater than 8.0% of the gross proceeds from the sale of such
securities.
In order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the common stock may not be sold
unless it has been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied
with.
We have
advised the selling securityholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling securityholders and their affiliates. In
addition, we will make copies of this prospectus (as it may be supplemented or
amended from time to time) available to the selling securityholders for the
purpose of satisfying the prospectus delivery requirements of the Securities
Act. The selling securityholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities
Act.
We have
agreed to indemnify the selling securityholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating to the
registration of the shares offered by this prospectus.
We have
agreed with the selling securityholders to keep the registration statement of
which this prospectus constitutes a part effective until the earlier of
(1) such time as all of the shares covered by this prospectus have been
disposed of pursuant to and in accordance with the registration statement or
(2) the date on which the shares may be sold pursuant to Rule 144 of the
Securities Act.
To our
knowledge, no selling securityholder is a broker-dealer or an affiliate of a
broker-dealer.
LEGAL
MATTERS
The
validity of the securities offered hereby has been passed upon for us by
Ellenoff Grossman & Schole LLP, New York, New
York.
SS-7
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
Expenses
payable by us in connection with this offering are as follows:
SEC
Registration Fee
|
$
|
4,020.80
|
||
AMEX
Filing Fees
|
$
|
60,000
|
||
Professional
Fees and Expenses
|
$
|
300,000
|
||
Printing
and Engraving Expenses (1)
|
$
|
40,000
|
||
Miscellaneous
Expenses(1)
|
$
|
5,979.20
|
||
Total
(1)
|
$
|
410,000
|
(1)
Estimates
Item
14. Indemnification of Directors and Officers.
We are a
Delaware corporation, and accordingly, we are subject to the corporate laws
under the Delaware General Corporation Law. Article Sixth of our
second amended and restated certificate of incorporation contains the following
indemnification provision for our directors and officers:
“The
Corporation shall have the power to indemnify any director, officer, employee or
agent of the Corporation or any other person who is serving at the request of
the Corporation in any such capacity with another corporation, partnership,
joint venture, trust or other enterprise (including, without limitation, any
employee benefit plan) to the fullest extent permitted by the General
Corporation Law of the State of Delaware as it exists on the date hereof or as
it may hereafter be amended, and any such indemnification may continue as to any
person who has ceased to be director, officer, employee or agent and may inure
to the benefit of the heirs, executors and administrators of such a
person.”
None of
our directors will be personally liable to us or our stockholders for monetary
damages resulting from a breach of fiduciary duty as a director, except
liability for the following:
|
•
|
Any breach of their duty of
loyalty to us or our
stockholders;
|
|
•
|
Acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
law;
|
|
•
|
Unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in Section 174
of the Delaware General Corporation Law;
and
|
|
•
|
Any transaction from which the
director derived an improper personal
benefit.
|
Our
amended and restated certificate of incorporation also provides discretionary
indemnification for the benefit of our directors, officers, and employees, to
the fullest extent permitted by Delaware law, as it may be amended from time to
time. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, or the Securities Act, may be permitted to our
directors or officers, or persons controlling us, pursuant to the foregoing
provisions, we have been informed that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Pursuant
to our amended and restated bylaws, we are required to indemnify our directors,
officers, employees and agents, and we have the discretion to advance his or her
related expenses, to the fullest extent permitted by law.
The
limitation of liability and indemnification provisions in our amended and
restated certificate of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against our directors for breach of their fiduciary
duty. They may also reduce the likelihood of derivative litigation
against our directors and officers, even though an action, if successful, might
benefit us and our stockholders. Furthermore, a stockholder’s investment may be
adversely affected to the extent we pay the costs of settlement and damage
awards against directors and officers as required by these indemnification
provisions. At present, there is no pending litigation or proceeding involving
any of our directors, officers or employees regarding which indemnification is
sought, and we are not aware of any threatened litigation that may result in
claims for indemnification.
II-1
Item
15. Recent Sales of Unregistered Securities
The
following are all issuances of securities by the registrant during the past
three years which were not registered under the Securities Act of 1933, as
amended. In each of these issuances the recipient represented that he
or it was acquiring the shares for investment purposes only, and not with a view
towards distribution or resale except in compliance with applicable securities
laws. No general solicitation or advertising was used in connection with
any transaction, and the certificate evidencing the securities that were issued
contained a legend restricting their transferability absent registration under
the Securities Act or the availability of an applicable exemption therefrom.
Unless specifically set forth below, no underwriter participated in the
transaction and no commissions were paid in connection with the
transactions.
May
2008 Private Placement
On May
30, 2008, the Company conducted a private placement of 500,000 shares of its
newly created Series A Convertible Preferred Stock convertible into 500,000
shares of our common stock and the 2008 Warrant. The Company received
gross proceeds of $455,000 from the private placement. The 2008
Warrant is exercisable through May 20, 2013 at an exercise price of $1.25 per
share. The securities were offered pursuant to exemptions from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
Regulation D and Rule 506.
Registration Rights
Agreement. In connection with the private placement, we
entered into the Registration Rights Agreement to have the shares of common
stock underlying the preferred stock and 2008 Warrant registered for public
resale. The filing of the registration statement of which this
prospectus is a part is intended to satisfy certain of our obligations the
Registration Rights Agreement.
II-2
February
2010 Private Placement
On
February 12, 2010, the Company received gross proceeds of $2,000,000 from the
sale of five year Convertible Promissory Notes, bearing interest at ten percent
(10%) per annum (the “Notes”) and common stock Purchase Warrants A and B (each,
the “A Warrants” and “B Warrants” and collectively, the “Warrants”) to various
accredited and institutional investors. The Notes are convertible
into an aggregate of 1,980,198 shares of our common stock. The Notes
are convertible at any time at the option of the Note holder. The
securities were offered pursuant to exemptions from registration provided
by Section 4(2) of the Securities Act of 1933, as amended, Regulation D and
Rule 506.
Holders
of the Notes and Warrants shall not be entitled to convert their Notes or any
Warrants into such number of shares of our common stock which, when added to the
number of shares of common stock beneficially owned by such holder and its
affiliates immediately prior to conversion of such Note or Warrant, would result
in beneficial ownership by such holder and its affiliates of more than 4.99% of
the outstanding shares of our common stock. For the purposes of the
immediately preceding sentence, “beneficial ownership” shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Rule 13d-3 thereunder. This restriction may be waived or
amended only with the consent of the applicable Note holder and the consent of
holders of a majority of the shares of our outstanding common stock who are not
affiliates of the Company.
The A
Warrants are exercisable for five years at an exercise price of $1.35 per share,
for up to an aggregate of 1,662,500 shares of our common stock. The B
Warrants are exercisable for five years at an exercise price of $1.70 per share,
for up to an aggregate of an additional 1,662,500 shares of our common
stock.
Item
16. Exhibits and Financial Statement Schedules
(a)
Exhibits
Exhibit
Number
|
|
Document
|
1.1
|
|
Form
of Underwriting Agreement (3)
|
2.1
|
Share
Transfer Agreement, dated April 28, 2009, by and among the Company,
Liaoning Shengsheng and the shareholders of Liaoning Shengsheng
(1)
|
|
3.1
|
Certificate
of Incorporation of the Company (1)
|
|
3.2
|
|
Amended
and Restated Certificate of Incorporation of the Company
(1)
|
3.3
|
|
Second
Amended and Restated Certificate of Incorporation of the Company
(1)
|
3.4
|
|
By-Laws
of the Registrant (1)
|
4.1
|
Specimen
Share Certificate (3)
|
|
4.2
|
Form
of Certificate of Series A Convertible Preferred Stock issued to
investors, dated May 30, 2008 (1)
|
|
4.3
|
Form
of Convertible Warrant issued to investors, dated May 30, 2008
(1)
|
|
4.4
|
|
Form
of Convertible Warrant A issued to investors, dated February 12, 2010, as
amended (2)
|
4.5
|
Form
of Convertible Warrant B issued to investors, dated February 12, 2010, as
amended (2)
|
|
4.6
|
Form
of Convertible Note issued to investors, dated February 12, 2010
(1)
|
|
5.1
|
|
Opinion
of Ellenoff Grossman & Schole LLP (2)
|
10.1
|
Form
of Securities Purchase Agreement, dated May 30, 2008, between the Company
and Professional Offshore Opportunity Fund, Ltd. (1)
|
|
10.2
|
Form
of Registration Rights Agreement, dated May 30, 2008, between the Company
and Professional Offshore Opportunity Fund, Ltd. (1)
|
|
10.3
|
Form
of Note Purchase Agreement, dated February 12, 2010, between the Company
and private placement investors
(1)
|
II-3
10.4
|
Form
of Registration Rights Agreement, dated February 12, 2010, between the
Company and private placement investors (1)
|
|
10.5
|
|
Form
of Lock-up Agreement (2)
|
10.6
|
Form
of Make Good Escrow Agreement (3)
|
|
10.7
|
Amended
and Restated Call Option Agreement, dated May 12, 2010
(1)
|
|
21.1
|
|
Subsidiaries
of the Company (1)
|
23.1
|
|
Consent
of Paritz & Company (2)
|
23.2
|
|
Consent
of Ellenoff Grossman & Schole LLP (included in Exhibit 5.2)
(2)
|
99.1
|
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Mr. Wang Baoquan(2)
|
99.2
|
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Mr. Jun Fang (2)
|
99.3
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Mr. Gang Xu (2)
|
|
99.4
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Ms. Lanfang Wu (2)
|
|
99.5
|
Unofficial
English translation of Confirmation Letter issued by Shenyang Agriculture
University dated March 31, 2010 (2)
|
|
99.6
|
Unofficial
English translation of Confirmation Letter issued by Dalian Technology
University dated May 28, 2010 (2)
|
|
99.7
|
Unofficial
English translation of Beijisong Share Transfer Agreement dated May 10,
2009 and its Amendment dated May 13, 2009
(2)
|
(1)
|
Previously
filed
|
(2)
|
Filed
herewith
|
(3)
|
To
be filed by amendment
|
(b)
Financial Statement Schedules. None
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
ii. To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement(or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in the effective
Registration Statement;
iii. To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
II-4
(2) That,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
II-5
Each
prospectus filed by the Registrant pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to
such date of first use.
Insofar
as indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
(6) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the
securities:
The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424 (§230.424 of this
chapter).
II-6
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Haicheng City, Liaoning Province,
People’s Republic of China, on July 13, 2010.
CHINA
FOR-GEN CORP.
|
|
/s/ Wang Baoquan
|
|
By:
Wang Baoquan
|
|
President
and Chairman of the Board of Directors
|
|
(principal
executive officer)
|
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Wang Baoquan as his or her true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him or her and in his or her name, place, and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments,
exhibits thereto and other documents in connection therewith) to this
Registration Statement and any subsequent registration statement filed by the
registrant pursuant to Rule 462(b) of the Securities Act of 1933, as amended,
which relates to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on
the dates indicated.
Name and Title
|
|
Date
|
/s/ Wang Baoquan
|
July
13, 2010
|
|
Wang
Baoquan
|
||
President
and Chairman of the Board of Directors
|
||
(principal
executive and accounting officer)
|
||
/s/ Lanfeng Wu
|
July
13, 2010
|
|
Lanfeng
Wu
|
||
Treasurer
and Secretary
|
||
/s/ Yu Jia
|
July
13, 2010
|
|
Yu
Jia
|
||
Director
|
||
/s/ Zhang Daoxu
|
July
13, 2010
|
|
Zhang
Daoxu
|
||
Director
|
||
/s/ Wu Yuanhua
|
July
13, 2010
|
|
Wu
Yuanhua
|
||
Director
|
||
/s/ Xu Gang
|
July
13, 2010
|
|
Xu
Gang
|
||
Director
|
||
/s/ Scott Ogilvie |
July
13, 2010
|
|
Scott Ogilvie | ||
Director | ||
/s/ Ning Zhang |
July
13, 2010
|
|
Ning Zhang | ||
Director |
EXHIBIT
INDEX
Exhibit
Number
|
|
Document
|
1.1
|
|
Form
of Underwriting Agreement (3)
|
2.1
|
Share
Transfer Agreement, dated April 28, 2009, by and among the Company,
Liaoning Shengsheng and the shareholders of Liaoning Shengsheng
(1)
|
|
3.1
|
Certificate of
Incorporation of the Company (1)
|
|
3.2
|
|
Amended
and Restated Certificate of Incorporation of the Company
(1)
|
3.3
|
|
Second
Amended and Restated Certificate of Incorporation of the Company
(1)
|
3.4
|
|
By-Laws
of the Registrant (1)
|
4.1
|
Specimen
Share Certificate (3)
|
|
4.2
|
Form
of Certificate of Series A Convertible Preferred Stock issued to
investors, dated May 30, 2008 (1)
|
|
4.3
|
Form
of Convertible Warrant issued to investors, dated May 30, 2008
(1)
|
|
4.4
|
|
Form
of Convertible Warrant A issued to investors, dated February 12, 2010, as
amended (2)
|
4.5
|
Form
of Convertible Warrant B issued to investors, dated February 12, 2010, as
amended (2)
|
|
4.6
|
Form
of Convertible Note issued to investors, dated February 12, 2010
(1)
|
|
5.1
|
|
Opinion
of Ellenoff Grossman & Schole LLP (2)
|
10.1
|
Securities
Purchase Agreement, dated May 30, 2008, between the Company and
Professional Offshore Opportunity Fund, Ltd. (1)
|
|
10.2
|
Registration
Rights Agreement, dated May 30, 2008, between the Company and Professional
Offshore Opportunity Fund, Ltd. (1)
|
|
10.3
|
Note
Purchase Agreement, dated February 12, 2010, between the Company
and private placement investors (1)
|
|
10.4
|
Registration
Rights Agreement, dated February 12, 2010, between the Company and private
placement investors (1)
|
|
10.5
|
|
Form
of Lock-up Agreement (2)
|
10.6
|
Form
of Make Good Escrow Agreement (3)
|
|
10.7
|
Amended
and Restated Call Option Agreement, dated May 12, 2010
(1)
|
|
21.1
|
|
Subsidiaries
of the Company (1)
|
23.1
|
|
Consent
of Paritz & Company (2)
|
23.2
|
|
Consent
of Ellenoff Grossman & Schole LLP (included in Exhibit 5.1)
(2)
|
99.1
|
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Mr. Wang Baoquan(2)
|
99.2
|
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Mr. Jun Fang (2)
|
99.3
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Mr. Gang Xu (2)
|
|
99.4
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Ms. Lanfang Wu (2)
|
|
99.5
|
Unofficial
English translation of Confirmation Letter issued by Shenyang Agriculture
University dated March 31, 2010 (2)
|
|
99.6
|
Unofficial
English translation of Confirmation Letter issued by Dalian Technology
University dated May 28, 2010 (2)
|
|
99.7
|
Unofficial
English translation of Beijisong Share Transfer Agreement dated May 10,
2009 and its Amendment dated May 13, 2009
(2)
|
(1)
|
Previously
filed
|
(2)
|
Filed
herewith
|
(3)
|
To
be filed by amendment
|