Attached files
| file | filename |
|---|---|
| EX-21 - iDcentrix, Inc. | v190010_ex21.htm |
| EX-2.1 - iDcentrix, Inc. | v190010_ex2-1.htm |
| EX-10.5 - iDcentrix, Inc. | v190010_ex10-5.htm |
| EX-10.1 - iDcentrix, Inc. | v190010_ex10-1.htm |
| EX-10.4 - iDcentrix, Inc. | v190010_ex10-4.htm |
| EX-10.3 - iDcentrix, Inc. | v190010_ex10-3.htm |
| EX-10.2 - iDcentrix, Inc. | v190010_ex10-2.htm |
| EX-10.6 - iDcentrix, Inc. | v190010_ex10-6.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
Report (Date of Earliest event Reported): July 16, 2010
iDcentrix,
Inc.
(Exact
name of registrant as specified in its charter)
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Nevada
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000-51263
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20-4650531
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(State or other jurisdiction of
incorporation or organization)
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(Commission File Number)
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(IRS Employer Identification No.)
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LongSheng Village, Tangshan Town,
Zhengan District
Dandong City, Liaoning,
P.R.China
(Address
of principal executive offices)
Telephone
– 86-0415-8176321
Rm 1903, 19/F, Hing Yip COMM
Centre,
No. 272 Des Voeux Rd,
Central, Hong Kong
(Former
Address)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General Instruction A.2. below):
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a -12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d -2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e -4(c))
This
report contains forward-looking statements. The forward-looking statements are
contained principally in the sections entitled “Description of Business,” “Risk
Factors,” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. In some
cases, you can identify forward-looking statements by terms such as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar
expressions intended to identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. These forward-looking statements include, among other things,
statements relating to:
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Continued
growth of the Chinese economy;
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Chinese
consumers’ continued movement up the value chain to consume higher-end
agricultural products, namely
blueberries;
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Our
ability to obtain additional capital in future years to fund our planned
expansion;
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Negative
changes in the industries in which our products are
sold;
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Decrease
in the availability, or increase in the cost, of raw materials and
energy;
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Economic,
political, regulatory, legal and foreign exchange risks associated with
our operations; or
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The
loss of key members of our senior management and our qualified sales
personnel.
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Also,
forward-looking statements represent our estimates and assumptions only as of
the date of this report. You should read this report and the documents that we
reference and filed as exhibits to the report completely and with the
understanding that our actual future results may be materially different from
what we expect. Except as required by law, we assume no obligation to update any
forward-looking statements publicly, or to update the reasons actual results
could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the
future.
Use
of Certain Defined Terms
Except
where the context otherwise requires and for the purposes of this report
only:
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the
“Company,” “we,” “us,” and “our” refer to the combined business of (i)
iDcentrix, Inc. or “iDcentrix,” a Nevada corporation, (ii) Honour Bond
Limited, or “Honour Bond,” a Hong Kong limited company and wholly-owned
subsidiary of iDcentrix, (iii) Shengzheng Zhihao Dongbo
Technology Ltd., or “Dongbo Consulting,” a Chinese limited company and
wholly-owned subsidiary of Honour Bond, and (iv) Dandong LongSheng
Horticulture Technology Co., Ltd., or “Dandong LongSheng,” a Chinese
limited company which is effectively and substantially controlled by
Dongbo Consulting through a series of captive agreements, as the case may
be;
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“BVI”
refers to the British Virgin
Islands;
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“Exchange
Act” refers to the Securities Exchange Act of 1934, as
amended;
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“Hong
Kong” refers to the Hong Kong Special Administrative Region of the
People’s Republic of China;
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2
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“PRC,”
“China,” and “Chinese,” refer to the People’s Republic of China (excluding
Hong Kong and Taiwan);
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“Renminbi”
and “RMB” refer to the legal currency of
China;
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“Securities
Act” refers to the Securities Act of 1933, as amended;
and
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“U.S.
dollars,” “dollars” and “$” refer to the legal currency of the United
States.
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ITEM
1.01
ENTRY
INTO A MATERIAL DEFINITIVE AGREEMENT
On July
16, 2010, we entered into and closed a share exchange agreement, or the Share
Exchange Agreement, with Honour Bond Limited, or “Honour Bond,” the shareholders
of Honour Bond, Tsoi Tik Man and Dandong LongSheng Horticulture Technology Co.,
Ltd., or “Dandong LongSheng,” pursuant to which we acquired 100% of the issued
and outstanding capital stock of Honour Bond in exchange for 49,870,814 shares
of our Common Stock, which constituted 99.74% of our issued and outstanding
capital stock as of and immediately after the consummation of the transactions
contemplated by the Share Exchange Agreement. Immediately following
the closing of the reverse acquisition of Honour Bond, Joseph Meuse, a former
shareholder of Honour Bond, cancelled 110,944 of the shares issued to him in
connection with the transaction. Diamond Award Limited, one of the
former shareholders of Honour Bond, is owned and controlled by Tsoi Tik Man, our
current director and former controlling shareholder and sole
officer. Diamond Award Limited received 2,446,116 shares of our
Common Stock in connection with the share exchange.
The
foregoing description of the terms of the Share Exchange Agreement is qualified
in its entirety by reference to the provisions of the agreement filed as Exhibit
2.1 to this report, which are incorporated by reference herein.
ITEM
2.01
COMPLETION
OF ACQUISITION OR DISPOSITION OF ASSETS
On July
16, 2010, we completed an acquisition of Honour Bond pursuant to the Share
Exchange Agreement. The acquisition was accounted for as a recapitalization
effected by a share exchange, wherein Honour Bond is considered the acquirer for
accounting and financial reporting purposes. The assets and liabilities of the
acquired entity have been brought forward at their book value and no goodwill
has been recognized.
As a
result of the acquisition, our consolidated subsidiaries include Honour Bond,
our wholly-owned subsidiary which is incorporated under the laws of Hong Kong,
Shengzheng Zhihao Dongbo Technology Ltd., or “Dongbo Consulting,” a wholly-owned
subsidiary of Honour Bond which is incorporated under the laws of the PRC, and
Dandong LongSheng, a limited liability company incorporated under the laws of
the PRC which is effectively and substantially controlled by Dongbo Consulting
through a series of captive agreements.
FORM
10 DISCLOSURE
As
disclosed elsewhere in this report, on July 16, 2010, we acquired Honour Bond in
a reverse acquisition transaction. Item 2.01(f) of Form 8-K states
that if the registrant was a shell company like we were immediately before the
reverse acquisition transaction disclosed under Item 2.01, then the registrant
must disclose the information that would be required if the registrant were
filing a general form for registration of securities on Form
10.
3
Accordingly,
we are providing below the information that would be included in a Form 10 if we
were to file a Form 10. Please note that the information provided
below relates to the combined enterprises after the acquisition of Honour Bond,
except that information relating to periods prior to the date of the reverse
acquisition only relate to Honour Bond and its consolidated subsidiaries unless
otherwise specifically indicated.
4
DESCRIPTION
OF BUSINESS
Business
Overview
Dandong
LongSheng Horticulture Technology Co., Ltd. (the "Company" or "Dandong
LongSheng") was founded in March of 2008 in the People’s Republic of
China. Our Company was organized to meet the strict supply chain
demands of the food and beverage industry for quality high-end agricultural
products. Our offices and growing facilities are located in and
around the city of Dandong in Liaoning Province. Our products consist
of a number of blueberry seedling varietals. Currently, we have the
capacity to grow seven million seedlings per year in our 34 greenhouses on five
acres of growing facilities. We sell our seedlings to a number of
agricultural enterprises throughout northern China, who then replant them and
cultivate them to maturity in blueberry farms.
Our
unique cultivation techniques allow us to produce multiple semi-mature blueberry
plants from seedlings at far higher efficiencies, survival rates and in shorter
periods of time than many of our competitors, contributing to our strong gross
margins. We currently employ approximately 155
individuals.
iDcentrix,
Inc. (formerly known as Sterling Gold Corp.) was incorporated in the State of
Nevada on January 26, 2004. The original intended business of
iDcentrix was the acquisition and exploration of mineral
properties. This business was in the early exploration stage and was
focused on the mineral exploration of a certain mining claim which was
subsequently abandoned.
On
January 31, 2008, iDcentrix consummated a share exchange (the “IDCX Share
Exchange”) with all of the shareholders of iDcentrix, Inc., a Delaware
corporation (“IDCX”), pursuant to a Share Exchange Agreement, dated January 16,
2008. Pursuant to the IDCX Share Exchange Agreement, the issued and outstanding
common shares of IDCX were exchanged on a one-for-one basis for common shares of
iDcentrix. iDcentrix issued 18,762,000 shares of its Common Stock to
the former shareholders of IDCX upon consummation of the IDCX Share
Exchange. As a result of the IDCX Share Exchange, IDCX became a
wholly-owned subsidiary of iDcentrix, and iDcentrix continued its existence as
the surviving corporation. Further, under the terms of the IDCX Share
Exchange Agreement, the Company’s current director and management prior to the
IDCX Share Exchange resigned and were replaced with IDCX’s directors and new
management. The acquisition was accounted for as a reverse merger
(recapitalization) with IDCX deemed to be the accounting acquirer and iDcentrix
deemed to be the legal acquirer. Following the IDCX Share Exchange,
iDcentrix’s new Board of Directors and management adopted the plan of operation
of IDCX and abandoned its previous plan of operation regarding the acquisition
and exploration of mineral properties. Following the IDCX Share
Exchange, the Company changed its name from “Sterling Gold Corp.” to “iDcentrix,
Inc.” and IDCX changed its name to “IDCX Co.”
On
October 23, 2009, iDcentrix entered into a stock purchase agreement (the
“Belmont Stock Purchase Agreement”) with Belmont Partners, LLC (“Belmont”),
whereby Belmont purchased a controlling interest of the Company’s common stock
(the “Belmont Purchase Transaction”). Pursuant to the Belmont Stock
Purchase Agreement, Joseph Meuse, a managing member of Belmont, was appointed as
a member of the Company’s Board of Directors and to the offices of President and
Secretary and all other Directors and officers of the Company
resigned. As of October 28, 2009, the Company changed its plan of
business from the development and marketing of high-end security identification
cards to seeking to acquire or merge with a revenue-producing company or a
company with technology assets.
On April
5, 2010, the Company entered into a Common Stock Purchase Agreement (the “Tsoi
Stock Purchase Agreement”) by and among Tsoi Tik Man, Belmont and the
Company. Pursuant to the terms of the Tsoi Stock Purchase Agreement,
on April 5, 2010, Tsoi Tik Man acquired from Belmont a controlling interest in
the Company’s Common Stock. Pursuant to the terms of the Tsoi Stock
Purchase Agreement, Joseph J. Meuse resigned and Tsoi Tik Man was named as the
sole officer and director of the Company. Concurrent with this change
of control, the Company moved its principal executive offices to Rm 1903, 19/F,
Hing Yip COMM Centre, No. 272 Des Voeux Rd, Central, Hong Kong.
5
From its
inception until its reverse acquisition of Honour Bond, iDcentrix did not
generate any revenue and was a development stage business with limited
operations. As a result of our reverse acquisition of Honour Bond, we
are no longer a shell company and active business operations were
revived. We plan to amend our Articles of Incorporation to change our
name to “North China Horticulture, Inc.” to reflect the current business of our
company.
Acquisition
of Honour Bond Limited
On July
16, 2010, we completed a reverse acquisition transaction through a share
exchange with Honour Bond and its shareholders, or the Shareholders, whereby we
acquired 100% of the issued and outstanding capital stock of Honour Bond in
exchange for 49,870,814 shares of our Common Stock which constituted 99.74% of
our issued and outstanding capital stock as of and immediately after the
consummation of the reverse acquisition. As a result of the reverse
acquisition, Honour Bond became our wholly-owned subsidiary and the former
shareholders of Honour Bond became our controlling stockholders. The
amount of consideration received by the shareholders of Honour Bond was
determined on the basis of arm’s-length negotiations between Honour Bond and
iDcentrix. The share exchange transaction with Honour Bond and the
Shareholders was treated as a reverse acquisition, with Honour Bond as the
acquirer and iDcentrix as the acquired party. Unless the context
suggests otherwise, when we refer in this report to business and financial
information for periods prior to the consummation of the reverse acquisition, we
are referring to the business and financial information of Honour Bond and its
consolidated subsidiaries.
Immediately
prior to the Share Exchange, the common stock of Honour Bond was owned by the
following persons in the indicated percentages: China Blueberry Holdings Limited
(58.06%); Advanced Dragon Investments Limited (20.02%); Glory Come Holdings
Limited (10.01%); Diwen Wu (2.00%); Diamond Award Limited (4.90%); and Joseph J.
Meuse (5.01%). Guang Zhao, our Chief Executive Officer, Chief
Financial Officer and Chairman nominee and the sole shareholder and chairman of
Dandong LongSheng, owns 100% of the capital stock of China Blueberry Holdings
Limited. Diamond Award Limited is owned and controlled by Tsoi Tik
Man, our current director and former controlling shareholder and sole
officer.
As a
result of his control of China Blueberry Holdings Limited, Guang Zhao, our Chief
Executive Officer, Chief Financial Officer and Chairman nominee, may be
considered the beneficial owner of a majority of the capital stock and voting
power of iDcentrix, as well as Dandong LongSheng. Mr. Zhao is also
the sole director and officer of Dongbo Consulting and Chairman and President of
Honour Bond.
Immediately
following the closing of the reverse acquisition of Honour Bond, Joseph Meuse, a
former shareholder of Honour Bond, cancelled 110,944 of the shares issued to him
in connection with the transaction.
Upon the
closing of the reverse acquisition, Tsoi Tik Man, our former President,
Secretary and a director, submitted a resignation letter pursuant to which he
resigned from all offices that he held effective immediately and from his
position as our director that will become effective on the tenth day following
the mailing by us of an information statement, or the Information Statement, to
our stockholders that complies with the requirements of Section 14f-1 of the
Exchange Act. In addition, our board of directors on July 16, 2010,
appointed Guang Zhao to fill the director vacancy created by such resignation,
which appointment will become effective upon the effectiveness of the
resignation of Tsoi Tik Man on the tenth day following the mailing by us of the
Information Statement to our stockholders. In addition, our executive
officer was replaced by Guang Zhao upon the closing of the reverse acquisition
as indicated in more detail below.
As a
result of our acquisition of Honour Bond, we now own all of the issued and
outstanding capital stock of Honour Bond, which in turn owns all of the issued
and outstanding capital stock of Dongbo Consulting. In addition, we
effectively and substantially control Dandong LongSheng through a series of
captive agreements with Dongbo Consulting. Dandong LongSheng is
principally engaged in the production of blueberry seedlings in the
PRC.
6
Contractual
Arrangements with our Controlled Affiliate and its Shareholder
On March
10, 2010, prior to the reverse acquisition transaction, Dongbo Consulting and
Dandong LongSheng and its sole shareholder Guang Zhao entered into a series of
agreements known as variable interest agreements (the “VIE Agreements”) pursuant
to which Dandong LongSheng became Dongbo Consulting’s contractually controlled
affiliate. The use of VIE agreements is a common structure used to
acquire PRC corporations, particularly in certain industries in which foreign
investment is restricted or forbidden by the PRC government. The VIE
Agreements included:
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(1)
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an
Exclusive Technical Consulting and Service Agreement between Dongbo
Consulting and Dandong LongSheng pursuant to which Dongbo Consulting is to
provide technical support and consulting services to Dandong LongSheng in
exchange for all of the net income after taxes of Dandong
LongSheng.
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(2)
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a
Call Option and Cooperation Agreement among Guang Zhao, Dandong LongSheng
and Dongbo Consulting under which the sole shareholder of Dandong
LongSheng has granted to Dongbo Consulting the irrevocable right and
option to acquire all of his equity interests in Dandong LongSheng to the
extent permitted by PRC law. If PRC law limits the percentage
of Dandong LongSheng that Dongbo Consulting may purchase at any time, then
Dongbo Consulting may repeatedly exercise its option in such increments as
may be allowed by PRC law. The exercise price of the option is
the net asset value of Dandong LongSheng at the time of exercise, or the
percentage of such net asset value which corresponds to any incremental
exercise of the option, or any higher price required by PRC
law. Any such difference between such net asset value and such
higher price required by PRC law is, subject to all applicable laws and
regulations, to be paid over to Dandong LongSheng. Dandong
LongSheng and its owner agree to refrain from taking certain actions which
might harm the value of Dandong LongSheng or Dongbo Consulting’s option,
and Dongbo Consulting undertakes to offer necessary financial support to
Dandong LongSheng with respect to any losses or capital requirements to
the extent permitted by law;
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(3)
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a
Power of Attorney by Guang Zhao pursuant to which Mr. Zhao authorizes
Dongbo Consulting to designate someone to exercise all of his shareholder
decision rights with respect to Dandong LongSheng, provided that Dandong
LongSheng consents to such authorization;
and
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(4)
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an
Equity Pledge Agreement between Guang Zhao and Dongbo Consulting under
which the sole shareholder of Dandong LongSheng has pledged all of his
equity in Dandong LongSheng to Dongbo Consulting to guarantee Dandong
LongSheng’s and Guang Zhao’s performance of their obligations under the
Exclusive Technical Consulting and Service Agreement, the Call Option and
Cooperation Agreement and the Equity Pledge
Agreement.
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The VIE
Agreements with our Chinese affiliate and its shareholder, which relate to
critical aspects of our operations, may not be as effective in providing
operational control as direct ownership. In addition, these
arrangements may be difficult and costly to enforce under PRC
law. Furthermore, our failure to perform our obligations under the
VIE Agreements could give Dandong LongSheng the right to cease performance under
or terminate the VIE Agreements and thereby deprive us of the economic benefit
of the VIE Agreements from which we derive all of our revenues. See
“Risk Factors - Risks Relating to the VIE Agreements.”
The
foregoing description of the terms of the Exclusive Technical Consulting and
Service Agreement, the Call Option and Cooperation Agreement, the Power of
Attorney and the Equity Pledge Agreement is qualified in its entirety by
reference to the provisions of the agreements filed as Exhibits 10.1, 10.2, 10.3
and 10.4 to this report, respectively, which are incorporated by reference
herein.
See
“Related Party Transactions” for further information on our contractual
arrangements with these parties.
7
Because
of the common control between Honour Bond, Dongbo Consulting and Dandong
LongSheng, for accounting purposes, the acquisition of these entities has been
treated as a recapitalization with no adjustment to the historical basis of
their assets and liabilities. The restructuring has been accounted
for using the “as if” pooling method of accounting and the operations were
consolidated as if the restructuring had occurred as of the beginning of the
earliest period presented in our consolidated financial statements and the
current corporate structure had been in existence throughout the periods covered
by our consolidated financial statements.
Our
Corporate Structure
All of
our business operations are conducted through our Hong Kong and Chinese
subsidiaries and controlled affiliate. The chart below presents our
corporate structure:
Our
Industry:
The
following industry information has been obtained from various market research
reports and publicly available sources. We believe this information to be
current and reliable. However, we have not independently verified such
information, and you should not unduly rely upon it.
Blueberries
are flowering plants of the genus Vaccinium. Blueberries are either
consumed fresh, frozen or processed into food products. China has
historically not been a major producer or consumer of blueberries. In
recent years, Chinese farmers have begun to cultivate blueberries in earnest due
to the high price that can be commanded in the market. Research
demonstrating the health benefits associated with blueberry consumption has been
followed by increasing global demand and production.
In the
U.S. market, the two largest uses for blueberries are baked goods and
non-alcoholic beverages. The following table provides a breakdown of
U.S. blueberry processing usage:
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There are
more than 400 varieties of blueberries in the world with over 200 in
China. Concurrent with increased awareness of health benefits of
blueberry consumption, global production has recently increased rapidly driven
by robust demand. In 2008, global production reached roughly 330,000
MMT. Worldwide blueberry acreage has more than doubled in the past
twelve years, from 62,800 acres in 1997 to approximately 145,000 acres in 2009.
The majority of that growth came from the western hemisphere, with 50,200
additional acres in South America and 32,000 more acres in North America,
primarily in the U.S. and British Columbia.
Total
Global Production:
Increased
planted acreage has resulted in increased output. It is anticipated
that global blueberry production will nearly quadruple from 2005 levels to over
1.2B lbs by 2012. North and South America will be major drivers, and
production in China is also anticipated to see explosive
growth.
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Demand:
Blueberry
consumption has been increasing over the past 10 years. In the United
States market, consumption has increased 47% from 13 ounces per capita in 1995,
to 19 ounces in 2008. It is estimated that that the global
demand for blueberries in 2010 may be as high as 450,000 MMT. Japan
is Asia’s largest importer of blueberries, and currently only produces 7% of its
yearly consumption. Japan currently imports 10 to 14 million tons of
U.S.-grown blueberries annually and is expected to become the largest importer
of Chinese blueberries in the near future.
The China
Blueberry Market:
China’s
domestic blueberry industry is in an early stage of
development. There were an estimated 400 to 600 hectares of blueberry
fields under cultivation in 2007, located primarily in Jilin, Liaoning and
Shandong Provinces. Due to foreign and domestic investment in
blueberry production and government promotion of the industry, the area under
cultivation is expected to reach 17,200 hectares by the end of
2010.
Prior to
2004, the Chinese blueberry export market was almost nonexistent. In
2003, the U.S. imported no blueberries from China. By 2008, the U.S.
was importing 265,000 pounds of Chinese-grown blueberries. This
figure is expected to increase as China continues to increase production of
processed blueberries.
The
following table provides a breakdown of the blueberry varieties currently
produced in China:
10
Currently
the vast majority of China’s blueberries are exported in either frozen or fresh
form. In 2007, domestic consumption accounted for 10% of China’s
blueberry production. As production costs are reduced and supply
increases, China can be expected to dramatically increase its domestic
consumption of blueberries.
PRC
Macroeconomic Drivers:
China’s
economic development has been rapid over the past decade:
Along
with GDP growth, both urban and rural disposable income per capita have also
increased:
11
As
Chinese citizens grow wealthier, we believe they will be more likely to increase
their purchases of healthy foods such as blueberries and blueberry
products. With approximately a quarter of the world’s population,
China represents a key growth driver for the global fruit food
market. Although China is the largest producer of apples, third
largest producer of oranges, and one of the top producers of pears and peaches
in the world, per capita fruit juice consumption in China is currently well
below that of major developed countries. We believe that improved living
standards and growing household disposable income have led to greater health
awareness among the population.
Our
Competitive Advantages
We
believe that our success to date and potential for future growth can be
attributed to the following factors:
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High-Value
Plants and Superior Varietals - We
produce premium specialty seedlings that yield fruit with high nutrient
concentration, potential health benefits and a delicious flavor. Our
blueberries are positioned in the high-end market as a premium healthy
food. We specialize in several varietals bred in particular for
their high yields, hardiness and quality
fruit.
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Modern
Horticulture Techniques –
Our technical know-how allows us to produce blueberry seedlings at greater
efficiencies than most of our competitors. Our seedling
survival to maturity rate is higher than that of most of our
competitors and we are able to cultivate seedlings to saleable maturity in
four months, more than a year and a half faster than local
farmers. Our cooperation with the Agriculture Department of
Dalian University allows us excellent access to the latest and best
growing technology.
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Geographic
Advantage – We
are located in Northern China, where the colder climate and soil
conditions are well-suited to the high-end varietals of blueberries we
cultivate.
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Experienced
Management – Our
management team has significant experience in the agriculture, food and
beverage industries.
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12
As a
premium specialty agricultural products company in China, we believe we are
well positioned to capitalize on future industry growth in China. We are
dedicated to providing seedlings that produce healthy and nutritional premium
blueberries. We will implement the following strategies to take advantage of
growth opportunities:
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Increase
production capacity: Production of
seedlings is a scalable business. We intend to increase
production capacity of seedlings to meet the increasing global and local
demand for blueberries.
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Produce
downstream
products: We
believe there is ample opportunity for us to cultivate blueberry plants to
fruition. We plan on expanding into the fresh and frozen
blueberry business. Our management has experience in the
processed food and beverage industries and plans to leverage that
experience in the future to produce lines of blueberry beverages and food
products.
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Further
expand our distribution network to increase the presence
of our
products throughout
the PRC.
Our current sales depend heavily on our regional distribution. To
support our rapid growth in sales, we plan to further expand our
distribution network.
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Our
Products:
Our
products consist of blueberry seedlings of sizes ranging from 2 inches to 8
inches tall. We sell a variety of blueberry seedlings, including the
following varietals: Vaccinium, V. ugilinosum and V.
vitis-idaea. The images below show the cultivation of
blueberry seedlings in our greenhouse facilities.
The
principal raw material used in our production is the blueberry seedlings, but
our raw materials also include the supplementary materials applied to facilitate
seedling growth such as fertilizer. The majority of our raw materials are
purchased in our local area. The table below details our major raw
material suppliers in 2009:
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Top 5 Suppliers
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Amount ($)
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Percentage
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Dandong
Shengyuan Agricultural Co. Ltd
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209,847 | 28 | % | |||||
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Fusong
Agricultural Nursery
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188,572 | 25 | % | |||||
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Dalian
Modern Agricultural Co. Ltd
|
104,153 | 14 | % | |||||
|
Changchun
Fertilizer Co. Ltd
|
72,900 | 10 | % | |||||
|
Dandong Huatian Agricultural Co.
Ltd
|
56,112 | 7 | % | |||||
|
Total
|
631,584 | 84 | % | |||||
13
We have a
sales staff dedicated to generating sales as well as attending sales fairs and
trade shows. Our sales staff is compensated on a salary plus
commission basis. Our customers often seek us out directly as we are
well known in the industry as a high quality provider of blueberry
seedlings. Customers are responsible for all costs associated with
product pickup and transport arrangements. In 2008, we sold all of our
products to a related party, Yichun Lindu Shanyeguo Development Company, but we
have since made efforts to diversify our sales channels. In 2009, our
top four customers accounted for 96% of our total sales. The table
below details our top customers in 2009:
|
Customer
|
Amount
($)
|
Percentage
|
||||||
|
Qingan
County Committee
|
1,874,686 | 37 | % | |||||
|
Changchun
Agricultural Development Co., Ltd
|
1,168,855 | 23 | % | |||||
|
Kaiyuan
Forestry Center
|
1,061,925 | 21 | % | |||||
|
Dalian
Berry Development Co., Ltd
|
719,060 | 14 | % | |||||
| 4,824,526 | 96 | % | ||||||
Employees
We
currently employ a staff of approximately 155 employees. We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Unemployment Insurance Law, the PRC Provisional Insurance Measures for Maternity
of Employees, PRC Interim Provisions on Registration of Social Insurance, PRC
Interim Regulation on the Collection and Payment of Social Insurance Premiums
and other related regulations, rules and provisions issued by the relevant
governmental authorities for our operations in the
PRC. According to the PRC Labor Contract Law, we are required to
enter into labor contracts with our employees and to pay them no less than the
local minimum wage.
|
Department
|
Staff
|
|||
|
Management
|
2 | |||
|
Administration
|
2 | |||
|
Accounting
|
2 | |||
|
Sales
|
2 | |||
|
Greenhouse Farmers
|
147 | |||
|
Total
|
155 | |||
Intellectual
Property Rights
We
protect our intellectual property primarily by maintaining strict control over
our production processes. In addition, for each project, only the
personnel associated with the project have access to the related intellectual
property. Access to proprietary data is limited to authorized
personnel to prevent unintended disclosure or otherwise using our intellectual
property without proper authorization. We will continue to take steps
to protect our intellectual property rights.
Our
facilities are located in Dandong city, Liaoning Province. We lease a total of
34 greenhouses from local farmers. In total, the area covered by the greenhouses
is more than 22,000 square meters. The greenhouses are equipped with heaters to
maintain optimal growing temperatures in the winter. Each greenhouse has a
capacity to plant 500,000 blueberry seedlings. The greenhouses are
leased under state laws, and under a cooperative agreement both parties have
agreed on a contract for five years, payable annually. The lease does not
include any necessary equipment for growing seedlings. Water and electricity are
also to be paid for by the leasing party. The greenhouse must be structurally
sound and be able to facilitate a proper growing environment. The tenant is
responsible for maintenance of the greenhouse and compensation payments for any
damages that may occur, barring any unusual damages. The leasing party has
proprietary rights to the equipment during and after the lease
period. Both firms will face monetary penalty for any cancellation of
contracts. After the expiration of the contract, the currently leasing party has
priority in further contracting. The leases are made under the name
of Guang Zhao, the company’s CEO and Chairman.
14
Our Facilities:
Competition
Regulation
Because
our principal operating affiliate, Dandong LongSheng, is located in the PRC, our
business is regulated by the national and local laws of the PRC. We believe our
conduct of business complies with existing PRC laws, rules and
regulations.
The PRC
government has decreed that agricultural entities in China are not required to
pay income tax. While Dandong LongSheng should not be subject to
enterprise income tax because of the nature of its business operations, Dongbo
Consulting will be required to pay enterprise income tax with respect to its
consulting fees received from Dandong LongSheng.
General
Regulation of Businesses
We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Production Safety Law, the PRC Regulation for Insurance for Labor Injury, the
PRC Unemployment Insurance Law, the PRC Provisional Insurance Measures for
Maternity of Employees, PRC Interim Provisions on Registration of Social
Insurance, PRC Interim Regulation on the Collection and Payment of Social
Insurance Premiums and other related regulations, rules and provisions issued by
the relevant governmental authorities from time to time, for our operations in
the PRC.
According
to the PRC Labor Contract Law, we are required to enter into labor contracts
with our employees. We are required to pay no less than local minimum wages to
our employees. We are also required to provide employees with labor safety and
sanitation conditions meeting PRC government laws and regulations and carry out
regular health examinations of our employees engaged in hazardous
occupations.
15
Foreign
Currency Exchange
The
principal regulation governing foreign currency exchange in China is the Foreign
Currency Administration Rules (1996), as amended (2008). Under these Rules, RMB
is freely convertible for current account items, such as trade and
service-related foreign exchange transactions, but not for capital account
items, such as direct investment, loan or investment in securities outside China
unless the prior approval of, and/or registration with, the State Administration
of Foreign Exchange of the People’s Republic of China, or SAFE, or its local
counterparts (as the case may be) is obtained.
Regulation
of Income Taxes
On April
16, 2007, the National People’s Congress of China passed a new Enterprise Income
Tax Law, or the New EIT Law, and its implementing rules, both of which became
effective on January 1, 2008. Before the implementation of the New EIT Law, FIEs
established in the PRC, unless granted preferential tax treatments by the PRC
government, were generally subject to an earned income tax, or EIT, rate of
33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The
New EIT Law and its implementing rules impose a unified EIT rate of 25.0% on all
domestic-invested enterprises and FIEs, unless they qualify under certain
limited exceptions.
In
addition to the changes to the current tax structure, under the New EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25% on its global income. The implementing rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of 25%. For
detailed discussion of PRC tax issues related to resident enterprise status, see
“Risk Factors – Risks Related to Doing Business in China – Under the New EIT
Law, we may be classified as a ‘resident enterprise’ of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC stockholders.”
Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will timely adjust our effective income tax rate when
necessary.
Dividend
Distribution
Under
applicable PRC regulations, FIEs in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a FIE in China is required to set aside
at least 10.0% of its after-tax profit based on PRC accounting standards each
year to its general reserves until the accumulative amount of such reserves
reach 50.0% of its registered capital. These reserves are not distributable as
cash dividends. The board of directors of a FIE has the discretion to allocate a
portion of its after-tax profits to staff welfare and bonus funds, which may not
be distributed to equity owners except in the event of
liquidation.
16
The New
EIT Law and its implementing rules generally provide that a 10% withholding tax
applies to China-sourced income derived by non-resident enterprises for PRC
enterprise income tax purposes unless the jurisdiction of incorporation of such
enterprises’ shareholder has a tax treaty with China that provides for a
different withholding arrangement. Dongbo Consulting is considered a FIE and is
directly held by our subsidiary Honour Bond in Hong Kong. According
to a 2006 tax treaty between the Mainland and Hong Kong, dividends payable by a
FIE in China to the company in Hong Kong who directly holds at least 25% of the
equity interests in the FIE will be subject to a no more than 5% withholding
tax. We expect that such 5% withholding tax will apply to dividends
paid to Honour Bond by Dongbo Consulting, but this treatment will depend on our
status as a non-resident enterprise.
Our
greenhouse facilities are subject to various pollution control regulations
with respect to noise, water and air pollution and the disposal of waste and
hazardous materials. We are also subject to periodic inspections by local
environmental protection authorities. We are not currently subject to any
pending actions alleging any violations of applicable PRC environmental
laws.
Insurance
Insurance
companies in China offer limited business insurance products. While business
interruption insurance is available to a limited extent in China, we have
determined that the risks of interruption, cost of such insurance and the
difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. As a result, we could
face liability from the interruption of our business as summarized under “Risk
Factors – Risks Related to Our Business – We do not carry business interruption
or other insurance, so we have to bear losses ourselves.”
17
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below, together with all of the other
information included in this report, before making an investment decision. If
any of the following risks actually occurs, our business, financial condition or
results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment. You
should read the section entitled “Special Notes Regarding Forward-Looking
Statements” above for a discussion of what types of statements are
forward-looking statements, as well as the significance of such statements in
the context of this report.
We
have a short operating history.
We were
founded in March 2008. We may not succeed in implementing our
business plan successfully because of competition from domestic and foreign
market entrants, failure of the market to accept our products, or other reasons.
Therefore, you should not place undue reliance on our past performance as it may
not be indicative of our future results.
We face risks
related to general domestic and global economic conditions and to the current
credit crisis.
Our
current operating cash flows provide us with stable funding capacity. However,
the current uncertainty arising out of domestic and global economic conditions,
including the recent disruption in credit markets, poses a risk to the PRC
economy, and may impact our ability to manage normal relationships with our
customers, suppliers and creditors. If the current situation deteriorates
significantly, our business could be materially negatively impacted, as demand
for our products and services may decrease from a slow-down in the general
economy, or supplier or customer disruptions may result from tighter credit
markets.
Our
business is subject to the health of the PRC economy and our growth may be
inhibited by the inability of potential customers to fund purchases of our
products.
Our
products are dependent on the continued growth of agriculture in the
PRC. There is no guarantee that the PRC will continue to invest in
agriculture.
In order to grow
at the pace expected by management, we will require additional capital to
support our long-term growth strategies. If we are unable to obtain additional
capital in future years, we may be unable to proceed with our plans and we may
be forced to curtail our operations.
We will
require additional working capital to support our long-term growth strategies,
which includes identifying suitable points of market entry for expansion growing
the number of points of sale for our products, so as to enhance our product
offerings and benefit from economies of scale. Our working capital requirements
and the cash flow provided by future operating activities, if any, may vary
greatly from quarter to quarter, depending on the volume of business during the
period. We may not be able to obtain adequate levels of additional financing,
whether through equity financing, debt financing or other sources. Additional
financings could result in significant dilution to our earnings per share or the
issuance of securities with rights superior to our current outstanding
securities. In addition, we may grant registration rights to investors
purchasing our equity or debt securities in the future. If we are unable to
raise additional financing, we may be unable to implement our long-term growth
strategies, develop or enhance our products and services, take advantage of
future opportunities or respond to competitive pressures on a timely
basis.
18
We sometimes extend credit to our
customers. Failure to collect the trade receivables or untimely
collection could affect our liquidity.
We extend
credit to some of our customers while generally requiring no collateral.
Generally, our customers pay in installments, with a portion of the payment
upfront and a portion of the payment after delivery of our products and upon
satisfaction of our customer. Sometimes, a small portion of the payment will not
be paid until after a certain period following the delivery of such products. We
perform ongoing credit evaluations of our customers’ financial condition and
generally have no difficulties in collecting our payments. However, if we
encounter future problems collecting amounts due from our clients or if we
experience delays in the collection of amounts due from our clients, our
liquidity could be negatively affected. We believe that we will be able to
collect current amounts due from our customers.
If
the suppliers from whom we source our raw materials fail to perform their
contractual obligations, our ability to provide products to our customers, as
well as our ability to obtain future business, may be harmed.
We
have concentration risk in our supply chain as we have recently sourced 74% of
our raw materials from one supplier in the first quarter of
2010. Should we encounter problems with the quality of products or
their availability we may be forced to source seedlings and other raw materials
from other suppliers, which could adversely affect our profit
margins.
Our
future success depends in part on the contributions of our management team and
key technical and sales personnel and our ability to attract and retain
qualified new personnel. In particular, our success depends on the
continuing employment of our Chief Executive Officer, Mr. Guang
Zhao. There is significant competition in our industry for qualified
managerial, technical and sales personnel and we cannot assure you that we will
be able to retain our key senior managerial, technical and sales personnel or
that we will be able to attract, integrate and retain other such personnel that
we may require in the future. If we are unable to attract and retain key
personnel in the future, our business, operations, financial condition, results
of operations and prospects could be materially adversely affected.
We are
subject to risk inherent to our business, including equipment failure, theft,
natural disasters, industrial accidents, labor disturbances, business
interruptions, property damage, product liability, personal injury and death. We
do not carry any business interruption insurance or third-party liability
insurance or other insurance to cover risks associated with our business. As a
result, if we suffer losses, damages or liabilities, including those caused by
natural disasters or other events beyond our control and we are unable to make a
claim again a third party, we will be required to bear all such losses from our
own funds, which could have a material adverse effect on our business, financial
condition and results of operations.
Our
quarterly operating results are likely to fluctuate, which may affect our stock
price.
Our
quarterly revenues, expenses, operating results and gross profit margins vary
from quarter to quarter. As a result, our operating results may fall below the
expectations of securities analysts and investors in some quarters, which could
result in a decrease in the market price of our common stock. The reasons our
quarterly results may fluctuate include:
|
|
·
|
variations
in the price of blueberry
seedlings;
|
|
|
·
|
changes
in the general competitive and economic conditions;
and
|
19
|
|
·
|
delays
in, or uneven timing in the delivery of, customer
orders.
|
Period to
period comparisons of our results should not be relied on as indications of
future performance.
Our
limited ability to protect our intellectual property, and the possibility that
our technology could inadvertently infringe technology owned by others, may
adversely affect our ability to compete.
We rely
on a combination of trade secret laws and confidentiality procedures to protect
the technological know-how that comprise much of our intellectual property. We
protect our technological know-how pursuant to non-disclosure and
non-competition provisions contained in our employment agreements, and
agreements with them to keep confidential all information relating to our
customers, methods, business and trade secrets during and after their employment
with us. Our employees are also required to acknowledge and recognize
that all inventions, trade secrets, works of authorship, developments and other
processes made by them during their employment are our property.
A
successful challenge to the ownership of our intellectual property could
materially damage our business prospects. Our competitors may assert that our
technologies or products infringe on their patents or proprietary rights. We may
be required to obtain from others licenses that may not be available on
commercially reasonable terms, if at all. Problems with intellectual property
rights could increase the cost of our products or delay or preclude our new
product development and commercialization. If infringement claims
against us are deemed valid, we may not be able to obtain appropriate licenses
on acceptable terms or at all. Litigation could be costly and
time-consuming but may be necessary to defend against infringement
claims.
Our
business may be subject to seasonal and cyclical fluctuations in
sales.
We may
experience seasonal fluctuations in our revenue in the PRC. Moreover,
our revenues are usually higher in the second and third fiscal quarters due to
seasonal purchases.
RISKS
RELATING TO THE VIE AGREEMENTS
The
PRC government may determine that the VIE Agreements are not in compliance with
applicable PRC laws, rules and regulations.
Dongbo
Consulting provides support and consulting service to Dandong LongSheng
pursuant to the VIE Agreements. Almost all economic benefits and risks
arising from Dandong LongSheng’s operations are transferred to Dongbo Consulting
under these agreements. Details of the VIE Agreements are set out in
“DESCRIPTION OF BUSINESS – Contractual Arrangements with our Controlled
Affiliate and its Shareholder” above.
There are
risks involved with the operation of our business in reliance on the VIE
Agreements, including the risk that the VIE Agreements may be determined by PRC
regulators or courts to be unenforceable. Our PRC counsel has provided a
legal opinion that the VIE Agreements are binding and enforceable under PRC law,
but has further advised that if the VIE Agreements were for any reason
determined to be in breach of any existing or future PRC laws or regulations,
the relevant regulatory authorities would have broad discretion in dealing with
such breach, including:
|
·
|
imposing
economic penalties;
|
|
·
|
discontinuing
or restricting the operations of Dandong LongSheng or Dongbo
Consulting;
|
|
|
·
|
imposing
conditions or requirements in respect of the VIE Agreements with which
Dandong LongSheng or Dongbo Consulting may not be able to
comply;
|
|
|
·
|
requiring
our company to restructure the relevant ownership structure or
operations;
|
|
|
·
|
taking
other regulatory or enforcement actions that could adversely affect our
company’s business; and
|
20
|
|
·
|
revoking
the business licenses and/or the licenses or certificates of Dongbo
Consulting, and/or voiding the VIE
Agreements.
|
Any of
these actions could adversely affect our ability to manage, operate and gain the
financial benefits of Dandong LongSheng, which would have a material adverse
impact on our business, financial condition and results of
operations.
Our
ability to control Dandong LongSheng under the VIE Agreements may not be as
effective as direct ownership.
We
conduct our blueberry horticulture business in the PRC and generate virtually
all of our revenues through the VIE Agreements. Our plans for future growth are
based substantially on growing the operations of Dandong LongSheng.
However, the VIE Agreements may not be as effective in providing us with
control over Dandong LongSheng as direct ownership. The VIE
Agreements do not provide us with day-to-day control over the operations of
Dandong LongSheng. Under the current VIE arrangements, as a legal
matter, if Dandong LongSheng fails to perform its obligations under these
contractual arrangements, we may have to (i) incur substantial costs and
resources to enforce such arrangements, and (ii) rely on legal remedies under
PRC law, which we cannot be sure would be effective. Therefore, if we are unable
to effectively control Dandong LongSheng, it may have an adverse effect on our
ability to achieve our business objectives and grow our revenues.
Our
failure to perform our obligations under the VIE Agreements could give Dandong
LongSheng the right to cease performance under or terminate the VIE Agreements
and thereby deprive us of the economic benefit of the VIE
Agreements.
Under the
terms of the VIE Agreements, our subsidiary Dongbo Consulting is required to
provide extensive technical support and consulting services to Dandong
LongSheng, and to offer necessary financial support to Dandong LongSheng with
respect to any losses or capital requirements to the extent permitted by
law. If we are unable to, or for any other reason fail to perform our
obligations as required under the VIE Agreements, Dandong LongSheng may have the
legal right to cease performance under or terminate the VIE
Agreements. In such case, we may no longer be entitled to payment of
Dandong LongSheng’s net income after taxes and we could lose the entire economic
benefit derived from our controlled affiliate Dandong LongSheng from which
we derive all of our revenues.
As
the VIE Agreements are governed by PRC law, we would be required to rely on PRC
law to enforce our rights and remedies under them; PRC law may not provide us
with the same rights and remedies as are available in contractual disputes
governed by the law of other jurisdictions.
The VIE
Agreements are governed by PRC law and provide for the resolution of disputes
through the jurisdiction of courts in the PRC. If Dandong LongSheng
or its shareholder fail to perform the obligations under the VIE Agreements, we
would be required to resort to legal remedies available under PRC law, including
seeking specific performance or injunctive relief, or claiming damages. We
cannot be sure that such remedies would provide us with effective means of
causing Dandong LongSheng or its shareholder to meet their obligations, or
recovering any losses or damages as a result of non-performance. Further, the
legal environment in China is not as developed as in other jurisdictions.
Uncertainties in the application of various laws, rules, regulations or policies
in PRC legal system could limit our liability to enforce the VIE Agreements and
protect our interests.
The
payment arrangement under the VIE Agreements may be challenged by the PRC tax
authorities.
We
generate our revenues through the payments we receive pursuant to the VIE
Agreements. We could face adverse tax consequences if the PRC tax authorities
determine that the VIE Agreements were not entered into based on arm’s length
negotiations. For example, PRC tax authorities may adjust our income and
expenses for PRC tax purposes which could result in our being subject to higher
tax liability, or cause other adverse financial consequences.
21
Our
Shareholders have potential conflicts of interest with our company which may
adversely affect our business.
Guang
Zhao is our Chief Executive Officer, Chief Financial Officer and Chairman
nominee, and is also the sole shareholder of Dandong LongSheng. There
could be conflicts that arise from time to time between our interests and the
interests of Mr. Zhao. There could also be conflicts that arise between us
and Dandong LongSheng that would require our shareholders and Dandong
LongSheng’s shareholder to vote on corporate actions necessary to resolve the
conflict. There can be no assurance in any such circumstances that Mr.
Zhao will vote his shares in our best interest or otherwise act in the best
interests of our company. If Mr. Zhao fails to act in our best
interests, our operating performance and future growth could be adversely
affected.
We
rely on the approval certificates and business license held by Dongbo Consulting
and any deterioration of the relationship between Dongbo Consulting and Dandong
LongSheng could materially and adversely affect our business
operations.
We
operate our blueberry horticulture business in China on the basis of the
approval certificates, business license and other requisite licenses held by
Dongbo Consulting and Dandong LongSheng. There is no assurance that Dongbo
Consulting and Dandong LongSheng will be able to renew their licenses or
certificates when their terms expire with substantially similar terms as the
ones they currently hold.
Further,
our relationship with Dandong LongSheng is governed by the VIE Agreements that
are intended to provide us with effective control over the business operations
of Dandong LongSheng. However, the VIE Agreements may not be effective in
providing control over the application for and maintenance of the licenses
required for our business operations. Dandong LongSheng could violate
the VIE Agreements, go bankrupt, suffer from difficulties in its business or
otherwise become unable to perform its obligations under the VIE Agreements and,
as a result, our operations, reputations and business could be severely
harmed.
If
Dongbo Consulting exercises the purchase option it holds over Dandong
LongSheng’s share capital pursuant to the VIE Agreements, the payment of the
purchase price could materially and adversely affect our financial
position.
Under the
VIE Agreements, Dandong LongSheng’s shareholder has granted Dongbo Consulting
an option for the maximum period of time permitted by law to purchase all
of the equity interest in Dandong LongSheng at a price equal to its net asset
value at the time of purchase, unless applicable PRC laws and regulations
require an appraisal of the equity interest or stipulate other restrictions
regarding the purchase price of the equity interest. Dandong
LongSheng’s shareholder also undertook under the VIE Agreements to confer on
Dandong LongSheng all the gains from the transfer price after deducting the net
asset value corresponding to such equity interest. As Dandong LongSheng is
already our contractually controlled affiliate, Dongbo Consulting’s exercising
of the option would not bring immediate benefits to our company, and payment of
the purchase prices could adversely affect our financial position.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Changes in
China's political or economic situation could harm us and our operating
results.
Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some of the things that
could have this effect are:
|
|
·
|
Level
of government involvement in the
economy;
|
|
|
·
|
Control
of foreign exchange;
|
|
|
·
|
Methods
of allocating resources;
|
|
|
·
|
Balance
of payments position;
|
|
|
·
|
International
trade restrictions; and
|
|
|
·
|
International
conflict.
|
22
The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways.
For example, state-owned enterprises still constitute a large portion of the
Chinese economy and weak corporate governance and a lack of flexible currency
exchange policy still prevail in China. As a result of these differences, we may
not develop in the same way or at the same rate as might be expected if the
Chinese economy was similar to those of the OECD member countries.
We
conduct substantially all of our business through our operating subsidiary and
affiliate in the PRC. Our principal operating subsidiary and
affiliate, Dongbo Consulting and Dandong LongSheng, respectively, are subject to
laws and regulations applicable to foreign investments in China and, in
particular, laws applicable to foreign-invested enterprises. The PRC legal
system is based on written statutes, and prior court decisions may be cited for
reference but have limited precedential value. Since 1979, a series of new PRC
laws and regulations have significantly enhanced the protections afforded to
various forms of foreign investments in China. However, since the PRC legal
system continues to evolve rapidly, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of these laws,
regulations and rules involves uncertainties, which may limit legal protections
available to you and us. In addition, any litigation in China may be protracted
and result in substantial costs and diversion of resources and management
attention. In addition, all of our executive officers and directors are
residents of China and not of the United States, and substantially all the
assets of these persons are located outside the United States. As a
result, it could be difficult for investors to effect service of process in the
United States or to enforce a judgment obtained in the United States against our
Chinese operations, subsidiary and affiliate.
You may have
difficulty enforcing judgments against us.
We are a
Nevada holding company, but Honour Bond is a Hong Kong company, and our
principal operating affiliate and subsidiary, Dandong LongSheng and Dongbo
Consulting, respectively, are located in the PRC. Most of our assets
are located outside the United States and most of our current operations are
conducted in the PRC. In addition, all of our directors and officers are
nationals and residents of countries other than the United States. A
substantial portion of the assets of these persons is located outside the United
States. As a result, it may be difficult for you to effect service of process
within the United States upon these persons. It may also be difficult for you to
enforce in U.S. courts judgments predicated on the civil liability provisions of
the U.S. federal securities laws against us and our officers and directors, most
of whom are not residents in the United States and the substantial majority of
whose assets are located outside the United States. In addition, there is
uncertainty as to whether the courts of the PRC would recognize or enforce
judgments of U.S. courts. The recognition and enforcement of foreign judgments
are provided for under the PRC Civil Procedures Law. Courts in China may
recognize and enforce foreign judgments in accordance with the requirements of
the PRC Civil Procedures Law based on treaties between China and the country
where the judgment is made or on reciprocity between jurisdictions. China does
not have any treaties or other arrangements that provide for the reciprocal
recognition and enforcement of foreign judgments with the United States. In
addition, according to the PRC Civil Procedures Law, courts in the PRC will not
enforce a foreign judgment against us or our directors and officers if they
decide that the judgment violates basic principles of PRC law or national
sovereignty, security or the public interest. So it is uncertain whether a PRC
court would enforce a judgment rendered by a court in the United
States.
The PRC
government exerts substantial influence over the manner in which we must conduct
our business activities.
The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.
23
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Future 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 highly
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%. 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 products and our company.
Restrictions on currency exchange may limit our ability to receive
and use our revenues effectively.
The
majority of our revenues will be settled in RMB and U.S. dollars, and any future
restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell
or remit foreign currencies after providing valid commercial documents, at those
banks in China authorized to conduct foreign exchange business. In addition,
conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in China, and companies are required
to open and maintain separate foreign exchange accounts for capital account
items. We cannot be certain that the Chinese regulatory authorities will not
impose more stringent restrictions on the convertibility of the
RMB.
Fluctuations in
exchange rates could adversely affect our business and the value of our
securities.
The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Appreciation or depreciation in the value
of the RMB relative to the U.S. dollar would affect our financial results
reported in U.S. dollar terms without giving effect to any underlying change in
our business or results of operations. Fluctuations in the exchange rate will
also affect the relative value of any dividend we issue that will be exchanged
into U.S. dollars as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.
Since
July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s
Bank of China regularly intervenes in the foreign exchange market to prevent
significant short-term fluctuations in the exchange rate, the RMB may appreciate
or depreciate significantly in value against the U.S. dollar in the medium to
long term. Moreover, it is possible that in the future PRC authorities may lift
restrictions on fluctuations in the RMB exchange rate and lessen intervention in
the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign
currencies.
24
Restrictions
under PRC law on our PRC subsidiary’s ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.
Substantially
all of our revenues are earned by Dongbo Consulting, our PRC
subsidiary. PRC regulations restrict the ability of our PRC
subsidiary to make dividends and other payments to its offshore parent
company. PRC legal restrictions permit payments of dividends by our
PRC subsidiary only out of its accumulated after-tax profits, if any, determined
in accordance with PRC accounting standards and regulations. Our PRC subsidiary
is also required under PRC laws and regulations to allocate at least 10% of our
annual after-tax profits determined in accordance with PRC GAAP to a statutory
general reserve fund until the amounts in said fund reaches 50% of our
registered capital. Allocations to these statutory reserve funds can
only be used for specific purposes and are not transferable to us in the form of
loans, advances or cash dividends. Any limitations on the ability of
our PRC subsidiary to transfer funds to us could materially and adversely limit
our ability to grow, make investments or acquisitions that could be beneficial
to our business, pay dividends and otherwise fund and conduct our
business.
In
October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire “control” over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC resident’s funds used to establish or acquire the offshore entity;
covering the use of existing offshore entities for offshore financings; (3)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (4) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under
Circular 75 are required in connection with any increase or decrease of capital,
transfer of shares, mergers and acquisitions, equity investment or creation of
any security interest in any assets located in China to guarantee offshore
obligations, and Notice 106 makes the offshore SPV jointly responsible for these
filings. In the case of an SPV which was established, and which acquired a
related domestic company or assets, before the implementation date of Circular
75, a retroactive SAFE registration was required to have been completed before
March 31, 2006; this date was subsequently extended indefinitely by Notice 106,
which also required that the registrant establish that all foreign exchange
transactions undertaken by the SPV and its affiliates were in compliance with
applicable laws and regulations. Failure to comply with the
requirements of Circular 75, as applied by SAFE in accordance with Notice 106,
may result in fines and other penalties under PRC laws for evasion of applicable
foreign exchange restrictions. Any such failure could also result in the SPV’s
affiliates being impeded or prevented from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
SPV, or from engaging in other transfers of funds into or out of
China.
We have
advised our shareholders who are PRC residents, as defined in Circular 75, to
register with the relevant branch of SAFE, as currently required, in connection
with their equity interests in us and our acquisitions of equity interests in
our PRC subsidiary and affiliate. However, we cannot provide any assurances that
their existing registrations have fully complied with, and they have made all
necessary amendments to their registration to fully comply with, all applicable
registrations or approvals required by Circular 75. Moreover, because of
uncertainty over how Circular 75 will be interpreted and implemented, and how or
whether SAFE will apply it to us, we cannot predict how it will affect our
business operations or future strategies. For example, our present and
prospective PRC subsidiary’s and affiliate’s ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with Circular 75 by our PRC resident
beneficial holders. In addition, such PRC residents may not always be able to
complete the necessary registration procedures required by Circular 75. We also
have little control over either our present or prospective direct or indirect
shareholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident shareholders to comply
with Circular 75, if SAFE requires it, could subject these PRC resident
beneficial holders to fines or legal sanctions, restrict our overseas or
cross-border investment activities, limit our subsidiary’s and affiliate’s
ability to make distributions or pay dividends or affect our ownership
structure, which could adversely affect our business and
prospects.
25
Under the
New EIT Law effective on January 1, 2008, an enterprise established outside
China with “de facto management bodies” within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese
enterprise for enterprise income tax purposes. The implementing rules of the New
EIT Law define de facto management as “substantial and overall management and
control over the production and operations, personnel, accounting, and
properties” of the enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a “non-domestically incorporated resident
enterprise” if (i) its senior management in charge of daily operations reside or
perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets
and properties, accounting books, corporate chops, board and shareholder minutes
are kept in China; and (iv) at least half of its directors with voting rights or
senior management often resident in China. A resident enterprise would be
subject to an enterprise income tax rate of 25% on its worldwide income and must
pay a withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural person. Nor are
detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
We may be exposed
to liabilities under the Foreign Corrupt Practices Act and Chinese
anti-corruption laws, and any determination that we violated these laws could
have a material adverse effect on our business.
We are
subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by
the statute, for the purpose of obtaining or retaining business. We have
operations, agreements with third parties and we make the majority of our sales
in China. PRC also strictly prohibits bribery of government officials. Our
activities in China create the risk of unauthorized payments or offers of
payments by the employees, consultants, sales agents or distributors of our
Company, even though they may not always be subject to our control. It is our
policy to implement safeguards to discourage these practices by our employees.
However, our existing safeguards and any future improvements may prove to be
less than effective, and the employees, consultants, sales agents or
distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA or Chinese anti-corruption laws may result
in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, operating results and
financial condition. In addition, the U.S. government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in
which we invest or that we acquire.
26
Because
our business is located in the PRC, we may have difficulty establishing adequate
management, legal and financial controls, which we are required to do in order
to comply with U.S. securities laws.
PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. Most of our middle and top management staff are not educated and
trained in the Western system, and we may have difficulty hiring new employees
in the PRC with such training. As a result of these factors, we may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet Western
standards. Therefore, we may, in turn, experience difficulties in implementing
and maintaining adequate internal controls as required under Section 404 of the
Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or
material weaknesses in our internal controls, which could impact the reliability
of our financial statements and prevent us from complying with Commission rules
and regulations and the requirements of the Sarbanes-Oxley Act of 2002.
Any such deficiencies, weaknesses or lack of compliance could have a
materially adverse effect on our business.
RISKS
RELATED TO THE MARKET FOR OUR STOCK GENERALLY
Our common stock
is quoted on the OTC Bulletin Board, which may have an unfavorable impact on our
stock price and liquidity.
Our
common stock is quoted on the OTC Bulletin Board. The OTC Bulletin
Board is a significantly more limited market than established trading markets
such as the New York Stock Exchange or NASDAQ. The quotation of our
shares on the OTC Bulletin Board may result in a less liquid market available
for existing and potential shareholders to trade shares of our common stock,
could depress the trading price of our common stock and could have a long-term
adverse impact on our ability to raise capital in the future. We plan to list
our common stock as soon as practicable. However, we cannot assure
you that we will be able to meet the initial listing standards of any stock
exchange, or that we will be able to maintain any such listing.
We may be subject
to penny stock regulations and restrictions and you may have difficulty selling
shares of our common stock.
The SEC
has adopted regulations which generally define so-called “penny stocks” to be an
equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exemptions. Our common
stock is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or
the Penny Stock Rule. This rule imposes additional sales practice requirements
on broker-dealers that sell such securities to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by Rule 15g-9, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale. As a
result, this rule may affect the ability of broker-dealers to sell our
securities and may affect the ability of purchasers to sell any of our
securities in the secondary market, thus possibly making it more difficult for
us to raise additional capital.
27
There can
be no assurance that our common stock will qualify for exemption from the Penny
Stock Rule. In any event, even if our common stock were exempt from the Penny
Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the SEC the authority to restrict any person from participating in a
distribution of penny stock, if the SEC finds that such a restriction would be
in the public interest.
Provisions
in our Articles of Incorporation and Bylaws or Nevada law might discourage,
delay or prevent a change of control of us or changes in our management and,
therefore depress the trading price of the common stock.
Nevada
corporate law and our Articles of Incorporation and Bylaws contain other
provisions that could discourage, delay or prevent a change in control of our
Company or changes in its management that our stockholders may deem
advantageous. These provisions:
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deny
holders of our common stock cumulative voting rights in the election of
directors, meaning that stockholders owning a majority of our outstanding
shares of common stock will be able to elect all of our
directors;
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require
any stockholder wishing to properly bring a matter before a meeting of
stockholders to comply with specified procedural and advance notice
requirements; and
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allow
any vacancy on the board of directors, however the vacancy occurs, to be
filled by the directors.
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We
do not intend to pay dividends for the foreseeable future.
For the
foreseeable future, we intend to retain any earnings to finance the development
and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Accordingly, investors must be prepared to rely
on sales of their common stock after price appreciation to earn an investment
return, which may never occur. Investors seeking cash dividends
should not purchase our common stock. Any determination to pay dividends in the
future will be made at the discretion of our board of directors and will depend
on our results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.
Our
controlling stockholder holds a significant percentage of our outstanding voting
securities, which could hinder our ability to engage in significant corporate
transactions without its approval.
Mr. Guang
Zhao, as the sole director and shareholder of China Blueberry Holdings Limited,
is the beneficial owner of approximately 57.9% of our outstanding voting
securities. As a result, he possesses significant influence, giving him the
ability, among other things, to elect a majority of our board of directors and
to authorize or prevent proposed significant corporate transactions. His
ownership and control may also have the effect of delaying or preventing a
future change in control, impeding a merger, consolidation, takeover or other
business combination or discourage a potential acquirer from making a tender
offer.
28
Overview
Dandong
LongSheng Horticulture Technology Co., Ltd. (the “Company” or “Dandong
LongSheng”) was founded in March of 2008 in the People’s Republic of
China. Our Company was organized to meet the strict supply chain
demands of the food and beverage industry for quality high-end agricultural
products. Our offices and growing facilities are located in and
around the city of Dandong in Liaoning Province. Our products consist
of a number of blueberry seedling varietals. Currently, we have the
capacity to grow seven million seedlings per year in our 34 greenhouses on five
acres of growing facilities. We sell our seedlings to a number of
agricultural enterprises throughout northern China, who then replant them and
cultivate them to maturity in blueberry farms.
Our
unique cultivation techniques allow us to produce multiple semi-mature blueberry
plants from seedlings at far higher efficiencies, survival rates and in shorter
periods of time than many of our competitors, contributing to our strong gross
margins. We currently employ approximately 155
individuals.
Recent
Developments
Acquisition
of Honour Bond Limited
On July
16, 2010, we completed a reverse acquisition transaction through a share
exchange with Honour Bond and its shareholders, or the Shareholders, whereby we
acquired 100% of the issued and outstanding capital stock of Honour Bond in
exchange for 49,870,814 shares of our Common Stock which constituted 99.74% of
our issued and outstanding capital stock as of and immediately after the
consummation of the reverse acquisition. As a result of the reverse
acquisition, Honour Bond became our wholly-owned subsidiary and the former
shareholders of Honour Bond became our controlling stockholders. The
amount of consideration received by the shareholders of Honour Bond was
determined on the basis of arm’s-length negotiations between Honour Bond and
iDcentrix. The share exchange transaction with Honour Bond and the
Shareholders was treated as a reverse acquisition, with Honour Bond as the
acquirer and iDcentrix as the acquired party. Unless the context
suggests otherwise, when we refer in this report to business and financial
information for periods prior to the consummation of the reverse acquisition, we
are referring to the business and financial information of Honour Bond and its
consolidated subsidiaries.
Immediately
prior to the Share Exchange, the common stock of Honour Bond was owned by the
following persons in the indicated percentages: China Blueberry Holdings Limited
(58.06%); Advanced Dragon Investments Limited (20.02%); Glory Come Holdings
Limited (10.01%); Diwen Wu (2.00%); Diamond Award Limited (4.90%); and Joseph J.
Meuse (5.01%). Guang Zhao, our Chief Executive Officer, Chief
Financial Officer and Chairman nominee and the sole shareholder and chairman of
Dandong LongSheng, owns 100% of the capital stock of China Blueberry Holdings
Limited. Diamond Award Limited is owned and controlled by Tsoi Tik
Man, our current director and former controlling shareholder and sole
officer.
As a
result of his control of China Blueberry Holdings Limited, Guang Zhao, our Chief
Executive Officer, Chief Financial Officer and Chairman nominee, may be
considered the beneficial owner of a majority of the capital stock and voting
power of iDcentrix, as well as Dandong LongSheng. Mr. Zhao is also
the sole director and officer of Dongbo Consulting and Chairman and President of
Honour Bond.
Immediately
following the closing of the reverse acquisition of Honour Bond, Joseph Meuse, a
former shareholder of Honour Bond, cancelled 110,944 of the shares issued to him
in connection with the transaction.
29
Upon the
closing of the reverse acquisition, Tsoi Tik Man, our former President,
Secretary and a director, submitted a resignation letter pursuant to which he
resigned from all offices that he held effective immediately and from his
position as our director that will become effective on the tenth day following
the mailing by us of an information statement, or the Information Statement, to
our stockholders that complies with the requirements of Section 14f-1 of the
Exchange Act. In addition, our board of directors on July 16, 2010,
appointed Guang Zhao to fill the vacancy created by such resignation, which
appointment will become effective upon the effectiveness of the resignation of
Tsoi Tik Man on the tenth day following the mailing by us of the Information
Statement to our stockholders. In addition, our executive officer was
replaced by Guang Zhao upon the closing of the reverse acquisition as indicated
in more detail below.
As a
result of our acquisition of Honour Bond, we now own all of the issued and
outstanding capital stock of Honour Bond, which in turn owns all of the issued
and outstanding capital stock of Dongbo Consulting. In addition, we
effectively and substantially control Dandong LongSheng through a series of
captive agreements with Dongbo Consulting. Dandong LongSheng is
principally engaged in the production of blueberry seedlings in the
PRC.
Honour
Bond was established in Hong Kong on January 5, 2010 to serve as an intermediate
holding company. Dongbo Consulting was established in the PRC on
March 4, 2010. Dandong LongSheng, our operating affiliate, was
established in the PRC on March 13, 2008. On March 2, 2010, the local
government of the PRC issued a certificate of approval regarding the foreign
ownership of Dongbo Consulting by Honour Bond, a Hong Kong entity.
Contractual
Arrangements with our Controlled Affiliate and its Shareholder
On March
10, 2010, prior to the reverse acquisition transaction, Dongbo Consulting and
Dandong LongSheng and its sole shareholder Guang Zhao entered into a series of
agreements known as variable interest agreements (the “VIE Agreements”) pursuant
to which Dandong LongSheng became Dongbo Consulting’s contractually controlled
affiliate. The use of VIE agreements is a common structure used to
acquire PRC corporations, particularly in certain industries in which foreign
investment is restricted or forbidden by the PRC government. The VIE
Agreements included:
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(1)
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an
Exclusive Technical Consulting and Service Agreement between Dongbo
Consulting and Dandong LongSheng pursuant to which Dongbo Consulting is to
provide technical support and consulting services to Dandong LongSheng in
exchange for all of the net income after taxes of Dandong
LongSheng.
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(2)
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a
Call Option and Cooperation Agreement among Guang Zhao, Dandong LongSheng
and Dongbo Consulting under which the sole shareholder of Dandong
LongSheng has granted to Dongbo Consulting the irrevocable right and
option to acquire all of his equity interests in Dandong LongSheng to the
extent permitted by PRC law. If PRC law limits the percentage
of Dandong LongSheng that Dongbo Consulting may purchase at any time, then
Dongbo Consulting may repeatedly exercise its option in such increments as
may be allowed by PRC law. The exercise price of the option is
the net asset value of Dandong LongSheng at the time of exercise, or the
percentage of such net asset value which corresponds to any incremental
exercise of the option, or any higher price required by PRC
law. Any such difference between such net asset value and such
higher price required by PRC law is, subject to all applicable laws and
regulations, to be paid over to Dandong LongSheng. Dandong
LongSheng and its owner agree to refrain from taking certain actions which
might harm the value of Dandong LongSheng or Dongbo Consulting’s option,
and Dongbo Consulting undertakes to offer necessary financial support to
Dandong LongSheng with respect to any losses or capital requirements to
the extent permitted by law;
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(3)
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a
Power of Attorney by Guang Zhao pursuant to which Mr. Zhao authorizes
Dongbo Consulting to designate someone to exercise all of his shareholder
decision rights with respect to Dandong LongSheng, provided that Dandong
LongSheng consents to such authorization;
and
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(4)
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an
Equity Pledge Agreement between Guang Zhao and Dongbo Consulting under
which the sole shareholder of Dandong LongSheng has pledged all of his
equity in Dandong LongSheng to Dongbo Consulting to guarantee Dandong
LongSheng’s and Guang Zhao’s performance of their obligations under the
Exclusive Technical Consulting and Service Agreement, the Call Option and
Cooperation Agreement and the Equity Pledge
Agreement.
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30
The VIE
Agreements with our Chinese affiliate and its shareholder, which relate to
critical aspects of our operations, may not be as effective in providing
operational control as direct ownership. In addition, these
arrangements may be difficult and costly to enforce under PRC
law. Furthermore, our failure to perform our obligations under the
VIE Agreements could give Dandong LongSheng the right to cease performance under
or terminate the VIE Agreements and thereby deprive us of the economic benefit
of the VIE Agreements from which we derive all of our revenues. See
“Risk Factors - Risks Relating to the VIE Agreements.”
The
foregoing description of the terms of the Exclusive Technical Consulting and
Service Agreement, the Call Option and Cooperation Agreement, the Power of
Attorney and the Equity Pledge Agreement is qualified in its entirety by
reference to the provisions of the agreements filed as Exhibits 10.1, 10.2, 10.3
and 10.4 to this report, respectively, which are incorporated by reference
herein.
See
“Related Party Transactions” for further information on our contractual
arrangements with these parties.
Because
of the common control between Honour Bond, Dongbo Consulting and Dandong
LongSheng, for accounting purposes, the acquisition of these entities has been
treated as a recapitalization with no adjustment to the historical basis of
their assets and liabilities. The restructuring has been accounted
for using the “as if” pooling method of accounting and the operations were
consolidated as if the restructuring had occurred as of the beginning of the
earliest period presented in our consolidated financial statements and the
current corporate structure had been in existence throughout the periods covered
by our consolidated financial statements.
Our
operating results are primarily affected by the following factors:
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Growth in
the Chinese Economy - We operate our agricultural facilities in
China and derive the majority of our revenues from sales to customers in
China. Economic conditions in China, therefore, affect virtually all
aspects of our operations, including the demand for our products, the
availability and prices of our raw materials and our other expenses. China
has experienced significant economic growth, achieving a compound annual
growth rate of over 10% in gross domestic product from 1996 through 2008.
Concurrent with this growth, domestic demand for our products has also
increased. China is expected to experience continued growth in all areas
of investment and consumption, even in the face of a global economic
recession.
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Growth of
Demand in the Agricultural Products Market – We believe that
China’s recent rise in consumption of fruit has been due to China’s
economic growth and increased health and wellness consciousness.
Management believes that along with increases in disposable income,
Chinese consumers will elect to purchase more health foods and fresh
fruits, which will benefit our
sales.
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Fluctuations
in Raw Material Supply, Prices and Demand for our Products - Our
Company’s production costs depend largely on readily available supply
price of necessary raw materials which include seedlings, fertilizer, and
other growing equipment. Increases in the price of oil directly impact
fertilizer prices. Blueberry demand impacts both our raw material costs as
well as our sales price. We set our prices according to local market
prices for seedlings, which is determined by supply and demand factors in
Northern China.
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PRC
Government Policy Promoting the Development of the Agricultural Industry
- As part of the PRC’s eleventh five-year plan, local and federal
authorities have offered assistance in the form of a variety of subsidies
and tax incentives to farmers and agricultural producers with the goal of
modernizing China’s agriculture industry and promoting rural
affluence.
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31
Comparison of Three Months
Ended March 31, 2010 and 2009 (Unaudited)
The
following table sets forth key components of our results of operations during
the three months periods ended March 31, 2010 and 2009, both in dollars and as a
percentage of our net sales. As Dandong LongSheng was the only entity in our
combined business that had operations, the results of operations below refer
only to that of Dandong LongSheng.
|
Three Months Ended
|
Three Months Ended
|
|||||||||||||||
|
March 31, 2010
|
March 31, 2009
|
|||||||||||||||
|
% of Net
|
% of Net
|
|||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
|||||||||||||
|
Net
Sales
|
$ | 827,249 | 100 | % | $ | - | - | |||||||||
|
Cost
of sales
|
116,890 | 14 | % | - | - | |||||||||||
|
Gross
profit
|
710,359 | 86 | % | - | - | |||||||||||
|
Selling,
General and Administrative Expenses
|
32,742 | 4 | % | 18,315 | - | |||||||||||
|
Operating
Income
|
677,617 | 82 | % | (18,315 | ) | - | ||||||||||
|
(Other
expense)
|
(113 | ) | 0 | % | (184 | ) | - | |||||||||
|
Income
Before Income Taxes
|
677,504 | 82 | % | (18,499 | ) | - | ||||||||||
|
Income
taxes
|
- | 0 | % | - | - | |||||||||||
|
Net
income
|
$ | 677,504 | 82 | % | $ | (18,499 | ) | - | ||||||||
Net
Sales and Cost of Sales
Our net
sales sharply increased to $827,249 in the three months ended March 31, 2010
from $Nil in the same period in 2009. Our cost of sales increased to
$116,890 in the three months ended March 31, 2010 from $Nil in the same period
in 2009. The cost of goods sold per sales ratio changed from 0% to
14%. These increases were mainly due to the rapid growth in our scale and
output. We were in an experimental stage in 2008 where each primal seedling was
only proliferated into two. However, each seedling could be proliferated into
four or five in 2009, as a result of the growth in our experience and
technology. Therefore the level of finished goods in the end of 2009
was higher than 2008.
Gross
Profit and Gross Margin
Our gross
profit increased to $710,359 in the three months ended March 31, 2010 from $Nil
in the same period in 2009. Gross profit as a percentage of net revenue was 86%
and Nil for the three months ended March 31, 2010 and 2009,
respectively.
Selling,
General and Administrative Expenses
Our
selling, general and administration expenses increased to $32,742 in the three
months ended March 31, 2010 from $18,315 in the same period in 2009. This
increase was mainly due to our rapid growth as these costs are proportional to
sales.
Other
Income (Expenses)
Other
expenses decreased to $113 in the three months ended March 31, 2010 from $184 in
the same period in 2009. This decrease was mainly due to decrease in our
non-operation expenses.
Income
before Income Taxes
Our
income before income taxes increased to $677,504 in the three months ended March
31, 2010 from a loss of $18,499 in the same period in 2009. This change was
mainly due to the increase in sales based on ample finished goods in the end of
2009.
32
Income
Taxes
As all of
Dandong LongSheng’s operations are conducted in China, according to the PRC’s
new Enterprise Income Tax, we are exempt from paying income taxes because we
operate our business in the agriculture industry, which the government
encourages and offers special incentives. We benefited from the tax exemption in
both 2010 and 2009.
Comparison of Twelve Months
Ended December 31, 2009 and December 31, 2008
The
following table sets forth key components of our results of operations during
the twelve months periods ended December 31, 2009 and 2008, both in dollars and
as a percentage of our net sales. As the reverse acquisition of Honour Bond was
entered into after December 31, 2009 and during the periods indicated Dandong
LongSheng was the only entity in our combined business that had operations, the
results of operations below refer only to that of Dandong
LongSheng.
|
Twelve Months Ended
|
Twelve Months Ended
|
|||||||||||||||
|
December 31, 2009
|
December 31, 2008
|
|||||||||||||||
|
% of Net
|
% of Net
|
|||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
|||||||||||||
|
Net
Sales
|
$ | 5,008,712 | 100 | % | $ | 5,697,871 | 100 | % | ||||||||
|
Cost
of sales
|
1,297,480 | 26 | % | 2,610,873 | 46 | % | ||||||||||
|
Gross
profit
|
3,711,232 | 74 | % | 3,086,998 | 54 | % | ||||||||||
|
Selling,
General and Administrative Expenses
|
581,443 | 12 | % | 87,250 | 2 | % | ||||||||||
|
Compensation
to officer
|
2,471,127 | 49.3 | % | 0 | 0 | % | ||||||||||
|
Operating
Income
|
658,662 | 13 | % | 2,999,748 | 53 | % | ||||||||||
|
Other
income
|
93 | 0 | % | 222 | 0 | % | ||||||||||
|
Income
Before Income Taxes
|
658,755 | 13 | % | 2,999,970 | 53 | % | ||||||||||
|
Income
taxes
|
0 | 0 | % | 0 | 0 | % | ||||||||||
|
Net
income
|
$ | 658,755 | 13 | % | $ | 2,999,970 | 53 | % | ||||||||
Net Sales.
Our net sales decreased to $5,008,712 in the twelve months ended December 31,
2009 from $5,697,871 in the same period in 2008, representing a 14% decrease
year-on-year. This decrease was mainly due to the drop in market
price based on greater competition. Our unit price was reduced from
approximately $1 per unit in 2008, to approximately $0.7 in 2009.
Cost of
Sales. Our
cost of sales decreased to $1,297,480 in the twelve months ended December 31,
2009 from $2,610,873 in the same period in 2008. The cost of goods
sold per sales ratio changed from 46% to 26%, mainly due to the improvement in
proliferation technology. We were in an experimental stage in 2008,
where each primal seedling was only proliferated into two. However, each
seedling could be proliferated into four or five in 2009, as a result of the
growth in our experience and technology, and the costs were reduced
accordingly.
Gross Profit and
Gross Margin.
Our gross profit increased to $3,711,232 in the twelve months ended
December 31, 2009 from $3,086,998 in the same period in 2008. Gross profit as a
percentage of net revenue was 74% and 54% for the twelve months ended December
31, 2009 and 2008, respectively. The slight increase in the gross margin was
primarily due greater efficiencies in cost control.
Selling, General
and Administrative Expenses. Our selling, general and administration grew
to $581,443 in the twelve months ended December 31, 2009 from $87,250 in the
same period in 2008. This increase was mainly due to our rapid growth as these
costs are proportional to sales.
Other
Income. Other income decreased to $93 in the twelve months ended December
31, 2009 from $222 in the same period in 2008. This decrease was mainly due to
decrease in our interest income.
33
Income Before
Income Taxes. Our income before income taxes decreased to $658,755 in the
twelve months ended December 31, 2009 from $2,999,970 in the same period in
2008. This decrease was mainly due to the additional compensation paid to an
officer which amounted to $2,471,127 in 2009.
Income
Taxes. According to the PRC’s new Enterprise Income Tax, we are exempt
from paying income taxes because we operate our business in the agriculture
industry, which the government encourages and offers special incentives. We
benefited from the tax holiday in both 2008 and 2009.
Liquidity and Capital
Resources
As of
March 31, 2010, we had cash and cash equivalents of $106,115, primarily
consisting of cash on hand and demand deposits. The following table provides
detailed information about our net cash flow for all financial statement periods
presented in this report. To date, we have financed our operations primarily
through cash flows from operations and equity contributions by our
shareholders.
The
following table sets forth a summary of our cash flows for the periods
indicated:
Cash
Flow
(all
amounts in U.S. dollars)
|
Three Months Ended
March 31,
|
Twelve Months Ended
December 31,
|
|||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
|||||||||||||
|
Net
cash provided by (used in) operating activities
|
$ | (102,670 | ) | $ | (917,658 | ) | $ | 577,818 | $ | (1,046,059 | ) | |||||
|
Net
cash provided by (used in) investing activities
|
(2,048 | ) | - | (1,566 | ) | (42,758 | ) | |||||||||
|
Net
cash provided by (used in) financing activities
|
199,891 | 528,252 | (1,045,797 | ) | 1,561,270 | |||||||||||
|
Effects
of Exchange Rate Change in Cash
|
(358 | ) | 599 | 943 | 7,449 | |||||||||||
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
94,815 | (388,807 | ) | (468,602 | ) | 479,902 | ||||||||||
|
Cash
and Cash Equivalent at Beginning of the Period
|
11,300 | 479,902 | 479,902 | |||||||||||||
|
Cash
and Cash Equivalent at End of the Period
|
106,115 | 91,095 | 11,300 | 479,902 | ||||||||||||
Operating
activities
Net cash
used in operating activities was $102,670 for the three months ended March 31,
2010, as compared to $917,658 for the same period in 2009. The change is
attributable to the increase in net income for the current period, the increase
of $307,575 in inventories, increases of $61,571 in prepaid expenses and other
assets, increases of $329,780 in accounts payable and $82,522 in accrued
expenses and other current liabilities, and was offset by decreases of $344,509
in accounts receivable and $285,894 in advances to suppliers.
Net cash
provided by operating activities was $577,818 for the twelve months ended
December 31, 2009, as compared to net cash used in operating activities of
$1,046,059 for the same period in 2008. The change is attributable to the
increase of $32,786 in accounts receivable, increase of $264,508 in inventories,
increase of $3,191 in advances to suppliers, increase of $27,967 in accrued
expenses and other current liabilities, and increases of $86,622 in prepaid
expenses and other assets, and was offset by a decrease of $327,642 in accounts
payable.
Investing
activities
Net cash
used in investing activities for the three months ended March 31, 2010 was
$2,048, as compared to $Nil during the same period of 2009. The change is
attributable to the acquisition of property, plant & equipment.
Net cash
used in investing activities for the twelve months ended December 31, 2009 was
$1,566, as compared to $42,758 net cash used in investing activities during the
same period of 2008. The change is attributable to the decrease in acquisition
of property, plant and equipment.
34
Financing
activities
Net cash
provided by financing activities for the three months ended March 31, 2010 was
$199,891, as compared to net cash provided by financing activities of $528,252
in the same period of 2009. The change is attributable to the change in receipts
from related parties.
Net cash
used in financing activities for the twelve months ended December 31, 2009 was
$1,045,797, as compared to net cash provided by financing activities of
$1,561,270 in the same period of 2008. The change is attributable to the
increase of $116,944 in receipts from outside parties and $1,162,741 in
repayments to related parties.
We
believe that our cash on hand and cash flow from operations will meet part of
our present cash needs and we will require additional cash resources to meet our
expected capital expenditure and working capital for the next 12 months. We may,
however, in the future, require additional cash resources due to changed
business conditions, implementation of our strategy to ramp up our marketing
efforts and increase brand awareness, or acquisitions we may decide to pursue.
If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.
Inflation
Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor the price
change in travel industry and continually maintain effective cost control in
operations.
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 or capital
expenditures or capital resources that is material to an investor in our
securities.
Seasonality
We may
experience seasonal fluctuations in our in some regions in the PRC, based on the
seasonal changes in the weather and the tendency of customers to make purchases
relating to their apparel suitable for the time of year. Any
seasonality may cause significant pressure on us to monitor the development of
materials accurately and to anticipate and satisfy these
requirements. Our highest sales are during the second and third
calendar quarters due to the warmer temperatures which better suit the
production of blueberries.
Critical
Accounting Policies
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the amount of revenues and expenses during the reporting
periods. Management makes these estimates using the best information
available at the time the estimates are made. However, actual results
could differ from those results.
35
Risks
and uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Cash
and cash equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Accounts
receivable
Accounts
receivables are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible amounts, as needed.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debt
percentages determined by management based on historical experience as well as
current economic climate are applied to customers’ balances categorized by the
number of months the underlying invoices have remained outstanding. The
valuation allowance balance is adjusted to the amount computed as a result of
the aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. The allowances for uncollectible amounts for
the three months ended March 31, 2010 and the years ended December 31, 2009 and
2008 are nil.
Inventories
Inventories
are stated at the lower of cost (determined on a weighted average basis) or
market. The management compares the cost of inventories with the fair
market value and an allowance is made for writing down the inventories to fair
market value, if lower than the cost. As of March 31, 2010 and
December 31, 2010, the reserves for obsolete inventory are nil.
Revenue
recognition
The
Company recognizes sales in accordance with the United States Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition”. The Company recognizes revenue when the following
fundamental criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered, (iii) the price to
the customer is fixed or determinable and (iv) collection of the resulting
receivable is reasonably assured. Revenue is not recognized until
title and risk of loss is transferred to the customer, which occurs upon
delivery of goods, and objective evidence exists that customer acceptance
provisions have been met. Deposits or advance payments from customers
prior to delivery of goods and passage of title of goods are recorded as advance
from customers.
Property,
plant and equipment
Property,
plant and equipment are recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the year of disposal. The
cost of improvements that extend the life of plant, property, and equipment are
capitalized. These capitalized costs may include structural
improvements, equipment, and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of assets as follows:
|
Estimated Useful Life
|
Residual value
|
|||||
|
Machinery
and equipment
|
5-10
years
|
5%
|
||||
|
Vehicle
|
10
years
|
5%
|
36
Impairment
of long-lived assets
Long-lived
assets, which include property, plant and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of long-lived assets to be held
and used is measured by a comparison of the carrying amount of an asset to the
estimated undiscounted future cash flows expected to be generated by the
assets. If
the carrying amount of an asset exceeds its estimated undiscounted future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the assets. Fair
value is generally determined using the asset’s expected future discounted cash
flows or market value, if readily determinable. No impairment loss is recorded
for the three months ended March 31, 2010 and the years ended December 31, 2009
and 2008.
Concentration
of credit risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents and accounts and other
receivables. As of March 31, 2010, most of the Company's cash and cash
equivalents were held by major banks located in the PRC which the Company's
management believes are of high credit quality. With respect to accounts
receivable, the Company conducts periodic reviews of its customers' financial
condition and customer payment practices to minimize collection risk on accounts
receivable.
Foreign
currency translation
The
functional currency of the Company is the Chinese Renminbi (“RMB”). For
financial reporting purposes, RMB has been translated into United States dollars
("USD") as the reporting currency. Assets and liabilities are translated at the
exchange rate in effect at the balance sheet date. Income statement accounts are
translated at the average rate of exchange prevailing for the period. Capital
accounts are translated at their historical exchange rates when the capital
transaction occurred. Translation adjustments arising from the use of different
exchange rates from period to period are included as a component of
stockholders' equity as "Accumulated other comprehensive income." Gains and
losses resulting from foreign currency translation are included in accumulated
other comprehensive income.
Earnings
per share
Earnings
per share are calculated in accordance with the ASC 260, “Earnings per share.”
Basic net earnings per share are based upon the weighted average number of
common shares outstanding, but excluding shares issued as compensation that have
not yet vested. Diluted net earnings per share are based on the assumption that
all dilutive convertible shares and stock options were converted or exercised,
and that all unvested shares have vested. 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.
Income
taxes
The
Company accounts for income tax under the provisions of ASC 740, "Accounting for
Income Taxes", which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under
this method, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established,
whenever necessary, against net deferred tax assets when it is more likely than
not that some portion or all of the deferred tax asset will not be realized. The
Company did not have any deferred tax asset or liabilities in the PRC tax
jurisdiction for the three years ended March 31, 2010 and the years ended
December 31, 2009 and 2008.
Commencing
January 1, 2008, the PRC’s new Enterprise Income Tax ("EIT") law replaced the
laws for Domestic Enterprises ("DES") and Foreign Invested Enterprises
("FIEs"). The new standard EIT rate of 25% replaced the 33% rate
formerly applicable to both DES and FIEs.
37
According
to the PRC’s new Enterprise Income Tax, the Company is exempt from paying income
taxes because it operates its business in the agriculture industry, which the
government encourages and offers special incentives.
Fair
values of financial instruments
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, and other loans payable. Management has estimated that the carrying
amounts approximate their fair value due to the short-term nature.
Statements
of cash flows
In
accordance with ASC 230, "Statements of Cash Flows", cash flows from the
Company’s operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet.
Recent
Accounting Pronouncements
In
February 2010, FASB issued new standards in ASC 855, Subsequent Event. This
amendment removes the requirement for an SEC filer to disclose a date through
which subsequent events have been evaluated in both issued and revised financial
statements. Revised financial statements include financial statements revised as
a result of either correction of an error or retrospective application of GAAP.
All of the amendments are effective upon issuance of the final update, except
for the use of the issued date for conduit debt obligors. That amendment is
effective for interim or annual periods ending after June 15, 2010. The Company
does not expect the adoption of this amendment to have a material impact on its
consolidated financial statements.
In
January 2010, FASB amended ASC 820 Disclosures about Fair Value Measurements.
This update provides amendments to Subtopic 820-10 that requires new disclosure
as follows: 1) Transfers in and out of Levels 1 and 2. A reporting
entity should disclose separately the amounts of significant transfers in and
out of Level 1 and Level 2 fair value measurements and describe the reasons for
the transfers. 2) Activity in Level 3 fair value
measurements. In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should present
separately information about purchases, sales, issuances, and settlements (that
is, on a gross basis rather than as one net number). The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The Company has determined the adoption of this rule does
not have a material impact on its financial statements.
In
January 2010, FASB amended Accounting for Distributions to Shareholders with
Components of Stock and Cash. The amendments in this Update clarify that the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this rule to
have a material impact on its financial statements.
38
The
following table sets forth information regarding beneficial ownership of our
common stock as of July 16, 2010 by (i) any person or group with more than 5% of
any class of voting securities, (ii) each director, (iii) our chief executive
officer and each other executive officer whose cash compensation for the most
recent fiscal year exceeded $100,000 and (iv) all such executive officers and
directors as a group. Unless otherwise specified, the address of each
of the persons set forth below is in care of the Company, LongSheng Village,
Tangshan Town, Zhengan District, Dandong City, Liaoning, People’s Republic of
China. Except as indicated in the footnotes to this table and subject
to applicable community property laws, the persons named in the table to our
knowledge have sole voting and investment power with respect to all shares of
securities shown as beneficially owned by them. The information in this table is
as of July 16, 2010 based upon 50,000,000 shares of common stock
outstanding.
|
Name and Address of Beneficial Owner
|
Office, If Any
|
Amount and
Nature of
Beneficial
Ownership
|
Percent
Common Stock
|
||||||||
|
Guang
Zhao
|
Chief
Executive Officer, Chief Financial Officer and Chairman
nominee
|
28,954,026 |
(1)
|
57.9 | % | ||||||
|
Tsoi
Tik Man
Rm
1903, 19/F, Hing Yip COMM Centre,
No.
272 Des Voeux Rd, Central, Hong Kong
|
Director
and former President
|
2,575,302 |
(2)
|
5.2 | % | ||||||
|
Joseph
Meuse
360
Main Street
PO
Box 393
Washington,
Virginia 22747
|
Former
President
|
2,385,093 |
(3)
|
4.8 | % | ||||||
|
Francine
Dubois
|
Former
Chief Executive Officer
|
0 | 0 | % | |||||||
|
All
officers and directors as a group
(4
persons named above)
|
33,914,421 | 67.8 | % | ||||||||
|
China
Blueberry Holdings Limited
Akara
Bldg., 24 De Castro Street,
Wickhams
Cay 1, Road Town
Tortola,
British Virgin Islands
|
28,954,026 |
(1)
|
57.9 | % | |||||||
|
Advanced
Dragon Investments Limited
Quastisky
Building, P.O. Box 4389
Road
Town, Tortola
British
Virgin Islands
|
9,984,147 | 20.0 | % | ||||||||
|
Glory
Come Holdings Limited
Room
801-802, Lee Kar Building
4
Carnarvon Road, Tsimshatsui
Kowloon,
Hong Kong
|
4,992,073 | 10.0 | % | ||||||||
39
* Less
than 1%
-
N/A
(1) Mr.
Guang Zhao is the indirect owner of 28,954,026 shares of the Company’s Common
Stock by reason of his control of China Blueberry Holdings Limited, a company in
which he owns all of its outstanding capital stock.
(2) 2,446,116
of such shares are owned by Diamond Award Limited, a company owned and
controlled by Mr. Tsoi.
(3) Immediately
following the closing of the reverse acquisition of Honour Bond, Mr. Meuse, a
former shareholder of Honour Bond, cancelled 110,944 of the shares issued to him
in connection with the transaction.
Changes
in Control
The Company does not have
any change of control or retirement arrangements with its executive
officers.
DIRECTORS
AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors
and Executive Officers
The
following sets forth information about our directors and executive officers as
of the date of this report:
|
NAME
|
AGE
|
POSITION
|
||
|
Guang
Zhao
|
41
|
CEO,
CFO and Chairman nominee
|
||
|
Tsoi
Tik Man
|
54
|
Director
|
Guang Zhao Mr. Zhao has served
as Dandong LongSheng’s Chairman since March 2010 and our Chief Executive Officer
and Chief Financial Officer since July 16, 2010. Mr. Zhao graduated in 1988 from
Tianjin Nankai Cuisine College and holds a Brewing Engineering Certificate. Mr.
Zhao has extensive management experience as: Director of Qingan Xueyuan Beverage
Co., Ltd from 1990 to 1992, Director of Yichun City Wuyin Zone Beverage Co., Ltd
from 1992 to 1996, Chairman of the Board of Yichun City Xueyuan Beverage Co.,
Ltd since 1996, Chairman of the Board of Xingan Xueyuan Beverage Co., Ltd since
2004, and Chairman of the Board of Yichun Forest Wild Fruit Development Co., Ltd
since 2006.
Tsoi Tik Man Mr. Tsoi was the
President and Secretary of iDcentrix from April 2010 to July 16, 2010 and has
been a director of iDcentrix since April 2010. Mr. Tsoi graduated in 1980 from
the University of Scientific and Technology of China, Faculty of Physics, with a
bachelor’s degree. From 1981 to 1991, Mr. Tsoi served in Chinese government
agencies including the Ministry of Electronics Industry and the Ministry of
Labor and Human Resources. From 1991 to 2006, Mr. Tsoi established and acted as
President or other senior officer of several companies, including Kong Man
Investment Ltd., Dynasty Technology Inc., New Power (China) Investment Ltd.,
Ever Wealth Investment (Holding) Ltd. and Shenzhen KeTuoDa Development Ltd. In
2006, Mr. Tsoi established China Digital Communication Group Ltd. and has served
as its President since such time. In 2008, Mr. Tsoi established and became
President of ECO Ltd.
40
Family
Relationships
There is
no family relationship among any of our officers or directors.
To the
best of our knowledge, none of our directors or executive officers has been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past ten years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws. Except as set forth in our discussion below in
“Certain Relationships and Related Transactions, and Director Independence –
Transactions with Related Persons,” none of our directors, director nominees or
executive officers has been involved in any transactions with us or any of our
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.
41
EXECUTIVE
COMPENSATION
Summary
Compensation Table — Fiscal Years Ended December 31, 2009 and 2008
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the named persons for services
rendered in all capacities during the noted periods. No other executive officer
received total annual salary and bonus compensation in excess of
$100,000.
|
Name and Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Option
Awards
($)
|
Other ($)
|
Total ($)
|
||||||||||||||||
|
Guang
Zhao, Chief Executive
|
2008(2)
|
0 | 0 | 0 | 51,240 |
(3)
|
51,240 |
(3)
|
||||||||||||||
| Officer and Chief Financial Officer |
2009(2)
|
0 | 0 | 0 | 73,200 |
(3)
|
73,200 |
(3)
|
||||||||||||||
|
Yunhe
Wang, former Chief
|
2008(2)
|
0 | 0 | 0 | 0 | 0 | ||||||||||||||||
| Executive Officer of Dandong LongSheng |
2009(2)
|
0 | 2,900,000 |
(4)
|
0 | 0 | 2,900,000 |
(4)
|
||||||||||||||
|
Joseph
Meuse, former President
|
2008(5)
|
0 | 0 | 0 | 0 | 0 | ||||||||||||||||
|
2009(5)
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||||
|
Francine
Dubois, former Chief
|
2009(5)
|
137,697 | 30,625 | 74,688 | 0 | 243,010 | ||||||||||||||||
| Executive Officer |
2010(5)
|
20,625 | 28,398 | 0 | 0 | 49,023 | ||||||||||||||||
|
(1)
|
On
July 16, 2010, we acquired Honour Bond in a reverse acquisition
transaction that was structured as a share exchange and in connection with
that transaction, Mr. Guang Zhao became our Chief Executive Officer and
Chief Financial Officer. Prior to the effective date of the
reverse acquisition, Tik Man Tsoi, Joseph Meuse and Francine Dubois served
as former Presidents or CEOs of
iDcentrix.
|
|
(2)
|
Represents
compensation paid for the years ended December 31, 2008 and
2009.
|
|
(3)
|
Represents
the amounts Mr. Zhao received from Dandong LongSheng as dividend payments
prior to the consummation of the reverse
acquisition.
|
|
(4)
|
Mr.
Wang served as the Chief Executive Officer of Dandong LongSheng from March
2008 until March 2010. Represents the amounts Mr. Wang received
from Dandong LongSheng as a bonus payment prior to the consummation of the
reverse acquisition.
|
|
(5)
|
Represents
compensation paid for the years ended January 31, 2009 and
2010.
|
Summary of Employment Agreements and
Material Terms
Prior to
our reverse acquisition of Honour Bond, Dandong LongSheng, our operating
affiliate was a private limited company organized under the laws of the PRC, and
in accordance with PRC regulations, the salary of our executives was determined
by our shareholders.
Other
than the salary and necessary social benefits required by the government, we
currently do not provide other benefits to the officers at this time. Our
executive officers are not entitled to severance payments upon the termination
of their employment agreements or following a change in control.
We have
not provided retirement benefits (other than a state pension scheme in which all
of our employees in China participate) or severance or change of control
benefits to our named executive officers.
42
Outstanding Equity Awards at Fiscal
Year End
For the
year ended January 31, 2010, no director or executive officer has received
compensation from us pursuant to any compensatory or benefit plan. There is no
plan or understanding, express or implied, to pay any compensation to any
director or executive officer pursuant to any compensatory or benefit plan,
although we anticipate that we may compensate our officers and directors for
services to us with stock or options to purchase stock, in lieu of
cash.
Compensation of
Directors
No member
of our board of directors received any compensation for his services as a
director during the year ended January 31, 2010 and currently no compensation
arrangements are in place for the compensation of directors.
Transactions
with Related Persons
The
following includes a summary of transactions since the beginning of the 2008
year, or any currently proposed transaction, in which we were or are to be a
participant and the amount involved exceeded or exceeds the lesser of $120,000
or one percent of the average of our total assets at year end for the last two
completed fiscal years, and in which any related person had or will have a
direct or indirect material interest (other than compensation described under
“Executive Compensation”). We believe the terms obtained or consideration that
we paid or received, as applicable, in connection with the transactions
described below were comparable to terms available or the amounts that would be
paid or received, as applicable, in arm’s-length transactions.
On April
5, 2010, the Company entered into a Common Stock Purchase Agreement (the “Tsoi
Stock Purchase Agreement”) by and among Tsoi Tik Man, Belmont Partners, LLC and
the Company. Pursuant to the terms of the Tsoi Stock Purchase
Agreement, on April 5, 2010, Tsoi Tik Man acquired from Belmont approximately
53.8% of the Company’s outstanding Common Stock. In consideration for
the sale of the Purchased Stock, Tsoi Tik man paid Belmont $300,000 and the
Company agreed to issue to Belmont shares of its common stock such that Belmont
would own 10% of the issued and outstanding capital stock of the Company after
the closing of a merger transaction with an as of then unidentified target
corporation contemplated by the Tsoi Stock Purchase Agreement. Pursuant to the
terms of the Tsoi Stock Purchase Agreement, Joseph J. Meuse resigned and Tsoi
Tik Man was named as the sole officer and director of the
Company. Joseph J. Meuse, the former President and Secretary and
director of the Company, is a managing member of Belmont.
On July
16, 2010, we completed a reverse acquisition transaction through a share
exchange with Honour Bond and its shareholders, or the Shareholders, whereby we
acquired 100% of the issued and outstanding capital stock of Honour Bond in
exchange for 49,870,814 shares of our Common Stock which constituted 99.74% of
our issued and outstanding capital stock as of and immediately after the
consummation of the reverse acquisition. As a result of the reverse
acquisition, Honour Bond became our wholly-owned subsidiary and the former
shareholders of Honour Bond became our controlling stockholders. The
amount of consideration received by the shareholders of Honour Bond was
determined on the basis of arm’s-length negotiations between Honour Bond and
iDcentrix.
Immediately
prior to the Share Exchange, the common stock of Honour Bond was owned by the
following persons in the indicated percentages: China Blueberry Holdings Limited
(58.06%); Advanced Dragon Investments Limited (20.02%); Glory Come Holdings
Limited (10.01%); Diwen Wu (2.00%); Diamond Award Limited (4.90%); and Joseph J.
Meuse (5.01%). Guang Zhao, our Chief Executive Officer, Chief
Financial Officer and Chairman nominee and the sole shareholder and chairman of
Dandong LongSheng, owns 100% of the capital stock of China Blueberry Holdings
Limited. Diamond Award Limited is owned and controlled by Tsoi Tik
Man, our current director and former controlling shareholder and sole
officer.
43
On March
10, 2010, prior to the reverse acquisition transaction, Dongbo Consulting and
Dandong LongSheng and its sole shareholder Guang Zhao entered into a series of
agreements known as variable interest agreements (the “VIE Agreements”) pursuant
to which Dandong LongSheng became Dongbo Consulting’s contractually controlled
affiliate. The use of VIE agreements is a common structure used to
acquire PRC corporations, particularly in certain industries in which foreign
investment is restricted or forbidden by the PRC government. The VIE
Agreements included:
|
|
(1)
|
an
Exclusive Technical Consulting and Service Agreement between Dongbo
Consulting and Dandong LongSheng pursuant to which Dongbo Consulting is to
provide technical support and consulting services to Dandong LongSheng in
exchange for all of the net income after taxes of Dandong
LongSheng.
|
|
|
(2)
|
a
Call Option and Cooperation Agreement among Guang Zhao, Dandong LongSheng
and Dongbo Consulting under which the sole shareholder of Dandong
LongSheng has granted to Dongbo Consulting the irrevocable right and
option to acquire all of his equity interests in Dandong LongSheng to the
extent permitted by PRC law. If PRC law limits the percentage
of Dandong LongSheng that Dongbo Consulting may purchase at any time, then
Dongbo Consulting may repeatedly exercise its option in such increments as
may be allowed by PRC law. The exercise price of the option is
the net asset value of Dandong LongSheng at the time of exercise, or the
percentage of such net asset value which corresponds to any incremental
exercise of the option, or any higher price required by PRC
law. Any such difference between such net asset value and such
higher price required by PRC law is, subject to all applicable laws and
regulations, to be paid over to Dandong LongSheng. Dandong
LongSheng and its owner agree to refrain from taking certain actions which
might harm the value of Dandong LongSheng or Dongbo Consulting’s option,
and Dongbo Consulting undertakes to offer necessary financial support to
Dandong LongSheng with respect to any losses or capital requirements to
the extent permitted by law;
|
|
|
(3)
|
a
Power of Attorney by Guang Zhao pursuant to which Mr. Zhao authorizes
Dongbo Consulting to designate someone to exercise all of his shareholder
decision rights with respect to Dandong LongSheng, provided that Dandong
LongSheng consents to such authorization;
and
|
|
|
(4)
|
an
Equity Pledge Agreement between Guang Zhao and Dongbo Consulting under
which the sole shareholder of Dandong LongSheng has pledged all of his
equity in Dandong LongSheng to Dongbo Consulting to guarantee Dandong
LongSheng’s and Guang Zhao’s performance of their obligations under the
Exclusive Technical Consulting and Service Agreement, the Call Option and
Cooperation Agreement and the Equity Pledge
Agreement.
|
Mr. Guang
Zhao, the Chief Executive Officer, Chief Financial Officer, Chairman nominee and
indirect controlling stockholder of iDcentrix, is the controlling stockholder
and Chairman of Dandong LongSheng, our operating affiliate. Mr. Zhao
is also the sole director and officer of Dongbo Consulting and Chairman and
President of Honour Bond.
As of
June 30, 2010, March 31, 2010, December 31, 2009 and December 31, 2008, Dandong
LongSheng had payable balances of $612,954, $610,501, $411,833 and $1,571,292,
respectively, due to Dandong LongSheng’s sole owner and Chairman, Mr. Guang
Zhao. These amounts due are generally unsecured, non-interest bearing and
due upon demand.
During
the year 2008, 100% of Dandong LongSheng’s sales were made to an affiliated
Company Yichun Lindu Shanyeguo Development Company, which is owned by Mr. Guang
Zhao, the Company’s Chief Executive Officer, Chief Financial Officer, Chairman
nominee and controlling stockholder. The amount of such sales to the
related party in 2008 was $5,697,871. As a result of such sales,
Dandong LongSheng had an account receivable outstanding from such related party
of $3,701,397 on December 31, 2008, $3,670,409 on December 31, 2009, and
$3,670,999 on March 31, 2010. On June 28, 2010, the related party paid off
such account receivable in full. These accounts receivable did not
accrue interest and were payable upon demand.
44
Insider
Transactions Policies and Procedures
The
Company does not currently have an insider transaction policy.
Director
Independence
We
currently do not have any independent directors as the term “independent” is
defined by the rules of the Nasdaq Stock Market.
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties and an adverse result in these or other matters may arise
from time to time that may harm our business. We are currently not aware of any
such legal proceedings or claims that we believe will have a material adverse
affect on our business, financial condition or operating results.
MARKET
PRICE AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market
Information
Our
common stock is traded on the OTC Bulletin Board under the ticker symbol
“IDCX.” The following table sets forth the range of high and low bid
information for our common stock for each full quarterly period during each of
the past two fiscal years. Effective upon the closing of the reverse acquisition
of Honour Bond, our year-end was changed to December 31.
|
High Bid
|
Low Bid
|
|||||||
|
For
the fiscal year ending on 1-31-11
|
||||||||
|
First
Quarter 2-1-10 to 4-30-10
|
$ | 0.1445 | $ | 0.001 | ||||
|
For
the fiscal year ending on 1-31-10
|
||||||||
|
Fourth
Quarter 11-1-09 to 1-31-10
|
$ | 0.0125 | $ | 0.0021 | ||||
|
Third
Quarter 8-1-09 to 10-31-09
|
$ | 0.035 | $ | 0.002 | ||||
|
Second
Quarter 5-1-09 to 7-31-09
|
$ | 0.0998 | $ | 0.02 | ||||
|
First
Quarter 2-1-09 to 4-30-09
|
$ | 0.12 | $ | 0.021 | ||||
|
For
the fiscal year ending on 1-31-09
|
||||||||
|
Fourth
Quarter 11-1-08 to 1-31-09
|
$ | 0.40 | $ | 0.11 | ||||
|
Third
Quarter
8-1-08 to 10-31-08
|
$ | 0.65 | $ | 0.12 | ||||
|
Second
Quarter 5-1-08 to 7-31-08
|
$ | 1.35 | $ | 0.30 | ||||
|
First
Quarter 2-1-08 to 4-30-08
|
$ | 1.55 | $ | 0.35 | ||||
These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions.
Holders
As of
July 16, 2010, immediately after to the Share Exchange, there were approximately
69 stockholders of record of the 50,000,000 shares of our common
stock.
Dividends
In the
past, we have not distributed earnings to shareholders. Any future
decisions regarding dividends will be made by our board of directors. We
currently intend to retain and use any future earnings for the development and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has complete discretion on
whether to pay dividends. Even if our board of directors decides to pay
dividends, the form, frequency and amount will depend upon our future operations
and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that the board of directors may deem
relevant.
45
Substantially
all of our revenues are earned by Dandong LongSheng or Dongbo Consulting, our
PRC affiliate and subsidiary, respectively. PRC regulations restrict the ability
of our PRC subsidiary to make dividends and other payments to its offshore
parent company. PRC legal restrictions permit payments of dividend by
our PRC subsidiary only out of its accumulated after-tax profits, if any,
determined in accordance with PRC accounting standards and
regulations. Our PRC subsidiary is also required under PRC laws and
regulations to allocate at least 10% of its annual after-tax profits determined
in accordance with PRC GAAP to a statutory general reserve fund until the
amounts in said fund reaches 50% of its registered capital. Allocations to this
statutory reserve fund can only be used for specific purposes and are not
transferable to us in the form of loans, advances or cash dividends. Any
limitations on the ability of our PRC subsidiary to transfer funds to us could
materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends and
otherwise fund and conduct our business.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
Company has two stock option plans providing for equity grants to certain
directors, employees and consultants of the Company and its
subsidiaries:
(i) The
2005 Nonqualified Stock Option Plan (the “2005 Plan”), pursuant to which
10,000,000 shares of common stock may be issued upon the exercise of options;
and
(ii) The
2007 Equity Participation Plan of iDcentrix, Inc. (the “2007 Plan”), which the
Company assumed as part of the Share Exchange with IDCX, pursuant to which up to
3,400,000 shares of common stock, in the aggregate, may be issued upon exercise
of stock options, as well as in the form of restricted stock, performance,
dividend equivalent or stock payment awards.
2005
Nonqualified Stock Option Plan
The 2005
Plan is registered on Form S-8, Registration No. 333-126739, and authorizes the
issuance of stock options to officers, directors, employees and consultants for
services rendered to the Company. The Board of Directors is vested with the
power to determine the terms and conditions of the options (e.g., the number of
options subject to a grant and the exercise price of the options granted). The
plan covers 10,000,000 shares of our common stock. As of the date hereof,
no options had been granted, and there are no options outstanding, under this
plan.
The
2007 Equity Participation Plan of IDCX
The 2007
Equity Participation Plan of iDcentrix, Inc., effective May 1, 2007, as amended
(the “2007 Plan”), provides for awards in respect of up to 3,400,000 shares of
common stock in the form of stock options, as well as restricted stock,
performance, dividend equivalent or stock payment awards. iDcentrix assumed the
2007 Plan and all agreements entered into thereunder in connection with the
Share Exchange with IDCX. Employees, independent directors and consultants
selected by the committee are eligible to receive awards under the 2007 Plan.
Incentive stock options, however, may only be granted to employees and no
more than 500,000 shares may be subject to incentive stock options. A
participant may not receive awards in respect of more than 2,000,000
shares, in the aggregate, in one year. As of July 16, 2009, 1,154,000 shares
remained available for grant under the 2007 Plan. As of the date
hereof, there are no stock options or other equity award compensation
outstanding under this plan.
46
RECENT
SALES OF UNREGISTERED SECURITIES
Reference
is made to the disclosure set forth under Item 3.02 of this report, which
disclosure is incorporated by reference into this section.
On
November 6, 2007, the Company granted (i) 500,000 shares of restricted stock to
Francine Dubois, (ii) 150,000 shares of restricted stock to Michael Harris,
(iii) 150,000 shares of restricted stock to Paul Gifford, and (iv) 120,000
shares of restricted stock to Bruce Morris, pursuant to The 2007 Equity
Participation Plan of the Company. Each of Ms. Dubois, Mr.
Harris, Mr. Gifford and Mr. Morris was an officer and/or director of IDCX at the
time of the grants. The restricted shares
were issued pursuant to exemptions under Section 4(2) of the Securities
Act of 1933. There
were no cash proceeds to IDCX as a result of these grants.
On
January 31, 2008, the Company issued an
additional 6,500,000 shares of common stock to Fortress Paper Ltd. as
consideration for an additional sub-license of certain patented technology to
the Company. The
shares were issued
pursuant to the exemption from registration contained in Section 4(2) of the Securities
Act of 1933. There
were no cash proceeds to the Company as a result of this issuance.
On
January 31, 2008 and February 1, 2008, the Company consummated a private
placement. The
Company issued
2,842,000 common shares for aggregate gross proceeds of $2,131,500. The shares were issued
to investors outside the United States pursuant to Regulation S promulgated
under the Securities Act and to accredited investors
within the United States pursuant to Regulation D promulgated under the
Securities Act and/or Section 4(2) of the Securities
Act. Proceeds from
this placement were used to cover general and administrative
expenses.
On
January 31, 2008, the Company consummated a Share Exchange with IDCX pursuant to
a Share Exchange Agreement, dated January 16, 2008, by and between the Company,
IDCX, all the shareholders of IDCX and Francine Dubois as the shareholder
representative. Pursuant to the Share
Exchange Agreement, the issued and outstanding common shares of IDCX were
exchanged on a one-for-one basis for common shares of the Company. The Company issued
18,762,000 common shares upon closing of the Share Exchange. The common shares were
issued to shareholders outside the United States pursuant to Regulation S
promulgated under the Securities Act of 1933, and to shareholders within the
United States pursuant to the exemption from registration contained in Rule 506
promulgated under the Securities Act of 1933 and/or Section 4(2) of the Securities
Act of 1933. No cash proceeds
were received by the Company with respect to the Share Exchange as a result of
this issuance.
On
October 28, 2009, the Company issued to Belmont Partners, LLC 36,688,800 shares
of the Company’s common stock for net proceeds after offering costs of
approximately $86,272. The shares were issued to an accredited
investor within the United States pursuant to Regulation D promulgated under the
Securities Act and/or Section 4(2) of the Securities
Act.
DESCRIPTION
OF SECURITIES
Common
Stock
We are
authorized to issue up to 100,000,000 shares of common stock, par value $0.00001
per share. Each outstanding share of common stock entitles the holder
thereof to one vote per share on all matters. Our bylaws provide that
any vacancy occurring in the board of directors may be filled by the affirmative
vote of a majority of the remaining directors though less than a quorum of the
board of directors. Shareholders do not have preemptive rights to
purchase shares in any future issuance of our common stock.
47
The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. Our
board of directors has never declared a dividend and does not anticipate
declaring a dividend in the foreseeable future. Should we decide in
the future to pay dividends, as a holding company, our ability to do so and meet
other obligations depends upon the receipt of dividends or other payments from
our operating subsidiary and other holdings and investments. In
addition, our operating subsidiary in the PRC, from time to time, may be subject
to restrictions on its ability to make distributions to us, including as a
result of restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions. In the event of our liquidation, dissolution
or winding up, holders of our common stock are entitled to receive, ratably, the
net assets available to shareholders after payment of all
creditors.
As
of July 16, 2010, we had a total of 50,000,000 shares of common stock
outstanding.
Anti-takeover Effects of Our Articles
of Incorporation and By-laws
Our
Articles of Incorporation and Bylaws contain certain provisions that may have
anti-takeover effects, making it more difficult for or preventing a third party
from acquiring control of the Company or changing its board of directors and
management. According to our Bylaws and Articles of Incorporation, the holders
of the Company’s common stock do not have cumulative voting rights in the
election of our directors. The combination of the present ownership by a few
stockholders of a significant portion of the Company’s issued and outstanding
common stock and lack of cumulative voting makes it more difficult for other
stockholders to replace the Company’s board of directors or for a third party to
obtain control of the Company by replacing its board of directors.
Anti-takeover
Effects of Nevada Law
Business
Combinations
The
“business combination” provisions of Sections 78.411 to 78.444, inclusive, of
the Nevada Revised Statutes, or NRS, prohibit a Nevada corporation with at least
200 stockholders from engaging in various “combination” transactions with any
interested stockholder:
|
|
•
|
for
a period of three years after the date of the transaction in which the
person became an interested stockholder, unless the transaction is
approved by the board of directors prior to the date the interested
stockholder obtained such status;
or
|
|
|
•
|
after
the expiration of the three-year period,
unless:
|
|
|
•
|
the
transaction is approved by the board of directors or a majority of the
voting power held by disinterested stockholders,
or
|
|
|
•
|
if
the consideration to be paid by the interested stockholder is at least
equal to the highest of: (a) the highest price per share paid by the
interested stockholder within the three years immediately preceding the
date of the announcement of the combination or in the transaction in which
it became an interested stockholder, whichever is higher, (b) the market
value per share of common stock on the date of announcement of the
combination and the date the interested stockholder acquired the shares,
whichever is higher, or (c) for holders of preferred stock, the highest
liquidation value of the preferred stock, if it is
higher.
|
48
A
“combination” is defined to include mergers or consolidations or any sale, lease
exchange, mortgage, pledge, transfer or other disposition, in one transaction or
a series of transactions, with an “interested stockholder” having: (a) an
aggregate market value equal to 5% or more of the aggregate market value of the
assets of the corporation, (b) an aggregate market value equal to 5% or more of
the aggregate market value of all outstanding shares of the corporation, or (c)
10% or more of the earning power or net income of the corporation.
In
general, an “interested stockholder” is a person who, together with affiliates
and associates, owns (or within three years, did own) 10% or more of a
corporation's voting stock. The
statute could prohibit or delay mergers or other takeover or change in control
attempts and, accordingly, may discourage attempts to acquire our company even
though such a transaction may offer our stockholders the opportunity to sell
their stock at a price above the prevailing market price.
The
“control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS,
which apply only to Nevada corporations with at least 200 stockholders,
including at least 100 stockholders of record who are Nevada residents, and
which conduct business directly or indirectly in Nevada, prohibit an acquiror,
under certain circumstances, from voting its shares of a target corporation's
stock after crossing certain ownership threshold percentages, unless the
acquiror obtains approval of the target corporation's disinterested
stockholders. The
statute specifies three thresholds: one-fifth or more but less than one-third,
one-third but less than a majority, and a majority or more, of the outstanding
voting power. Once
an acquiror crosses one of the above thresholds, those shares in an offer or
acquisition and acquired within 90 days thereof become “control shares” and such
control shares are deprived of the right to vote until disinterested
stockholders restore the right. These
provisions also provide that if control shares are accorded full voting rights
and the acquiring person has acquired a majority or more of all voting power,
all other stockholders who do not vote in favor of authorizing voting rights to
the control shares are entitled to demand payment for the fair value of their
shares in accordance with statutory procedures established for dissenters'
rights.
Although
we are not currently subject to these “control share” provisions since we do not
conduct business directly or indirectly in Nevada and have less than 100
stockholders of record who are Nevada residents, there can be no assurance that
in the future such provisions will not apply to us.
Our
independent stock transfer agent is Pacific Stock Transfer
Company. Their mailing address is 4045 South Spencer Street, Suite
403, Las Vegas, NV 89119, and their phone number is (702) 361-3033.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The
Company is permitted by the Bylaws to purchase and maintain insurance on behalf
of its officers and directors against any liability and expense incurred in such
capacity, whether or not the Company would have the power to indemnify such
person against such liability, to the fullest extent permitted under Nevada
law.
The
Company is incorporated under the laws of the State of
Nevada. Section 78.7502 of the Nevada Revised Statutes provides that
a Nevada corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys’ fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its
equivalent, does not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and that, with respect to any
criminal action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
49
Section
78.7502 further provides a Nevada corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually and
reasonably incurred by him in connection with the defense or settlement of the
action or suit if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to which such
a person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation or for
amounts paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines upon application that in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
Section
78.751 of the Nevada Revised Statutes provides that discretionary
indemnification under Section 78.7502 unless ordered by a court or advanced
pursuant to subsection 2 of section 78.751, may be made by the corporation only
as authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances. The
determination must be made by:
|
¨
|
By
the stockholders;
|
|
|
¨
|
By
the board of directors by majority vote of a quorum consisting of
directors - who were not parties to the action, suit or
proceeding;
|
|
|
¨
|
If
a majority vote of a quorum consisting of directors who were not parties
to the action, suit or proceeding so orders, by independent legal counsel
in a written opinion; or
|
|
|
¨
|
If
a quorum consisting of directors who were not parties to the action, suit
or proceeding cannot be obtained, by independent legal counsel in a
written opinion.
|
The
Articles of Incorporation, the Bylaws or an agreement made by the corporation
may provide that the expenses of officers and directors incurred in defending a
civil or criminal action, suit or proceeding must be paid by the corporation as
they are incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he is not entitled to be indemnified by the
corporation. The provisions of this subsection do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
The
indemnification and advancement of expenses authorized in or ordered by a court
pursuant to NRS Section 78.751:
|
|
¨
|
does
not exclude any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under the articles of
incorporation or any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his office, except
that indemnification, unless ordered by a court pursuant to section
78.7502 or for the advancement of expenses made pursuant to subsection 2
of section 78.751, may not be made to or on behalf of any director or
officer if a final adjudication establishes that his acts or omissions
involved intentional misconduct, fraud or a knowing violation of the law
and was material to the cause of action;
and
|
50
|
|
¨
|
continues
for a person who has ceased to be a director, officer, employee or agent
and inures to the benefit of the heirs, executors and administrators of
such a person.
|
Insofar
as indemnification by us for liabilities arising under the Securities Act may be
permitted to our directors, officers or persons controlling the company pursuant
to provisions of our articles of incorporation and bylaws, or otherwise, we have
been advised 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 by such director, officer or
controlling person of us 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 offered, 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.
At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding, which may result in a claim for such indemnification.
ITEM
3.02
UNREGISTERED
SALES OF EQUITY SECURITIES
On July
16, 2010, we issued 49,870,814 shares of our Common Stock to the shareholders of
Honour Bond. The total consideration for the 49,870,814 shares of our
Common Stock was 999 shares of Honour Bond, which is all the issued and
outstanding capital stock of Honour Bond. The number of our shares
issued to the shareholders of Honour Bond was determined based on an arms-length
negotiation. The issuance of our shares to the shareholders of Honour
Bond was made pursuant to Regulation S under the Securities Act and/or in
reliance on the exemption provided by Section 4(2) of the Securities Act for the
offer and sale of securities not involving a public offering and Regulation D
promulgated thereunder.
We issued
securities in reliance upon Regulation S under the Securities
Act. Each shareholder who received the securities in such instances
was not a United States person as defined in Regulation S. In
addition, the Company did not conduct any selling efforts directed at the United
States in connection with the offering. All shares of common stock
issued pursuant to Regulation S included a restrictive legend indicating that
the shares are being issued pursuant to Regulation S under the Securities Act
and are deemed to be “restricted securities.” As a result, such
recipients of the shares will not be able to resell the shares unless in
accordance with Regulation S, pursuant to a registration statement, or upon
reliance of an applicable exemption from registration under the Securities
Act.
We issued
securities in reliance upon Rule 506 of Regulation D of the Securities Act.
These shareholders who received the securities in such instances made
representations that (a) the shareholder is acquiring the securities for his,
her or its own account for investment and not for the account of any other
person and not with a view to or for distribution, assignment or resale in
connection with any distribution within the meaning of the Securities Act, (b)
the shareholder agrees not to sell or otherwise transfer the purchased shares
unless they are registered under the Securities Act and any applicable state
securities laws, or an exemption or exemptions from such registration are
available, (c) the shareholder has knowledge and experience in financial and
business matters such that he, she or it is capable of evaluating the merits and
risks of an investment in us, (d) the shareholder had access to all of our
documents, records, and books pertaining to the investment and was provided the
opportunity ask questions and receive answers regarding the terms and conditions
of the offering and to obtain any additional information which we possessed or
were able to acquire without unreasonable effort and expense, and (e) the
shareholder has no need for the liquidity in its investment in us and could
afford the complete loss of such investment. Management made the determination
that the investors in instances where we relied on Regulation D are accredited
investors (as defined in Regulation D) based upon management’s inquiry into
their sophistication and net worth. In addition, there was no general
solicitation or advertising for securities issued in reliance upon Regulation
D.
51
ITEM
5.01
CHANGES
IN CONTROL OF REGISTRANT
Reference
is made to the disclosure set forth under Item 2.01 of this report, which
disclosure is incorporated herein by reference.
As a
result of the closing of the reverse acquisition with Honour Bond, the former
shareholders of Honour Bond now own 99.5% of the total outstanding shares of our
common stock.
ITEM
5.02
DEPARTURE
OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN
OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS
Upon the
closing of the reverse acquisition, Tsoi Tik Man, our President, Secretary and a
director, submitted a resignation letter pursuant to which he resigned from all
offices that he held effective immediately and from his position as our director
that will become effective on the tenth day following the mailing by us of an
information statement, or the Information Statement, to our stockholders that
complies with the requirements of Section 14f-1 of the Exchange
Act. In addition, our board of directors on July 16, 2010, appointed
Guang Zhao (Chairman) to fill the vacancy created by such resignation, which
appointment will become effective upon the effectiveness of the resignations of
Tsoi Tik Man on the tenth day following the mailing by us of the Information
Statement to our stockholders. In addition, our executive officer was
replaced by the executive officer of Dandong LongSheng upon the closing of the
reverse acquisition as indicated in more detail above.
ITEM
5.03
AMENDMENT
TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL YEAR
The
year-end for Honour Bond is December 31. On July 16, 2010, the Board
of Directors of iDcentrix approved changing the fiscal year-end of iDcentrix
from January 31 to December 31 as a result of the reverse acquisition of Honour
Bond.
ITEM
5.06
CHANGE
IN SHELL COMPANY STATUS
Prior to
the closing of the reverse acquisition, iDcentrix was a “shell company” as
defined in Rule 12b-2 of the Exchange Act. As described in Item 2.01
above, which is incorporated by reference into this Item 5.06, iDcentrix ceased
being a shell company upon completion of the reverse acquisition on July 16,
2010.
52
ITEM
9.01
FINANCIAL
STATEMENTS AND EXHIBITS
(a)
Financial
Statements of Business Acquired
Filed
herewith are audited financial statements of Dandong Longsheng Horticulture
Technology Co., Ltd. for the fiscal years ended December 31, 2009 and 2008 and
consolidated financial statements of Honour Bond Limited for the three months
ended March 31, 2010 and 2009 (unaudited).
(b)
Pro
Forma Financial Information
Filed
herewith is the unaudited pro forma condensed consolidated financial information
of iDcentrix, Inc. and its subsidiaries for the requisite periods.
(d)
Exhibits
53
|
Exhibit No.
|
Description
|
|
|
2.2.1*
|
Share
Exchange Agreement, dated as of July 16, 2010, among iDcentrix, Inc.,
Honour Bond Limited, the shareholders of Honour Bond Limited, Tsoi Tik
Man and Dandong LongSheng Horticulture Technology Co.,
Ltd.
|
|
|
3.3.1
|
Articles
of Incorporation (incorporated by reference to Exhibit 3.1 to the Form
SB-2 of the Company filed with the SEC on February 20,
2004)
|
|
|
3.3.2
|
Certificate
of Amendment to Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Form 8-K of the Company filed with the SEC on March 10,
2008)
|
|
|
4.3.3
|
Certificate
of Amendment to the Articles of Incorporation (incorporated by reference
to Exhibit 3.1 to the Form 10-Q of the Company filed with the SEC on June
14, 2010)
|
|
|
3.4
|
Amended
and Restated By-Laws (incorporated by reference to Exhibit 99.2 to the
Form 8-K of the Company filed with the SEC on February 6,
2008)
|
|
|
10.1*
|
Exclusive
Technical Consulting and Service Agreement, dated March 10, 2010, between
Shengzheng Zhihao Dongbo Technology Ltd. and LongSheng Horticulture
Technology Co., Ltd. (English translation)
|
|
|
10.2*
|
Call
Option and Cooperation Agreement, dated March 10, 2010, among Guang Zhao,
Shengzheng Zhihao Dongbo Technology Ltd. and LongSheng Horticulture
Technology Co., Ltd. (English translation)
|
|
|
10.3*
|
Power
of Attorney by Guang Zhao in favor of Shengzheng Zhihao Dongbo Technology
Ltd. (English translation)
|
|
|
10.4*
|
Equity
Pledge Agreement, dated March 10, 2010, between Guang Zhao and Shengzheng
Zhihao Dongbo Technology Ltd. (English translation)
|
|
|
10.5*
|
Greenhouse
Leasing Agreement (English translation)
|
|
|
10.6*
|
Land
Transfer Contract (English translation)
|
|
|
10.7
|
2007
Equity Participation Plan of iDcentrix, Inc. (incorporated by reference to
Exhibit 99.16 to the Form 8-K of the Company filed with the SEC on
February 6, 2008)
|
|
|
10.8
|
Amendment
No. 1 to 2007 Equity Participation Plan of iDcentrix, Inc. (incorporated
by reference to Exhibit 10.6 to the Form 10-K of the Company filed with
the SEC on May 15, 2008)
|
|
|
10.9
|
Amendment
No. 2 to 2007 Equity Participation Plan of iDcentrix, Inc. (incorporated
by reference to Exhibit 10.7 to the Form 10-K of the Company filed with
the SEC on May 15, 2008)
|
|
|
10.10
|
2005
Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Form S-8 of the Company filed with the SEC on July 20,
2005)
|
|
|
10.11
|
Common
Stock Purchase Agreement dated April 5, 2010, by and among Tsoi Tik Man,
Belmont Partners, LLC and iDcentrix, Inc. (incorporated by reference to
Exhibit 10.1 to the Form 8-K of the Company filed with the SEC on April 9,
2010)
|
|
|
21*
|
Subsidiaries
of the Company
|
|
|
*
|
Filed
herewith.
|
54
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Date: July
16, 2010
|
iDcentrix, Inc.
|
|
|
(Registrant)
|
|
|
/s/ Guang Zhao
|
|
|
*Signature
|
|
|
Chief Executive Officer and Chief Financial
Officer
|
|
|
Title
|
55
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
FINANCIAL
STATEMENTS
DECEMBER
31, 2009 AND 2008
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
FINANCIAL
STATEMENTS
DECEMBER
31, 2009 AND 2008
TABLE OF
CONTENTS
|
Report
of Independent Registered Public Accounting Firm
|
1
|
|
Balance
Sheets as of December 31, 2009 and 2008
|
2
|
|
Statements
of Income and Other Comprehensive Income
|
|
|
For
the years ended December 31, 2009 and 2008
|
3
|
|
Statements
of Changes in Shareholders' Equity
|
|
|
For
the years ended December 31, 2009 and 2008
|
4
|
|
Statements
of Cash Flows
|
|
|
For
the years ended December 31, 2009 and 2008
|
5
|
|
Notes
to Financial Statements
|
6
-13
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Dandong
Longsheng Horticulture Technology Co., Ltd.
We have
audited the accompanying balance sheets of Dandong Longsheng Horticulture
Technology Co., Ltd. as of December 31, 2009 and 2008, and the related
statements of income and other comprehensive income, changes in shareholders’
equity, and cash flows for each of the years in the two-year period ended
December 31, 2009. Dandong Longsheng Horticulture Technology Co., Ltd.’s
management is responsible for these financial statements. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Dandong Longsheng Horticulture
Technology Co., Ltd. as of December 31, 2009 and 2008 and the results of its
operations, changes in shareholders’ equity, and cash flows for each of the
years in the two-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America.
FRIEDMAN
LLP
FRIEDMAN
LLP
Marlton,
New Jersey
March 12,
2010
1
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
BALANCE
SHEETS
|
December 31,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 11,300 | $ | 479,902 | ||||
|
Accounts
receivable, net
|
||||||||
|
-
affiliated company
|
3,670,409 | 3,701,397 | ||||||
|
-
non-affiliated company
|
7,388 | - | ||||||
|
Other
receivables, net
|
100,746 | - | ||||||
|
Advance
to suppliers
|
3,861 | 7,037 | ||||||
|
Inventories,
net
|
616,134 | 878,600 | ||||||
|
Prepaid
expenses
|
19,452 | 33,447 | ||||||
|
Total
current assets
|
4,429,290 | 5,100,383 | ||||||
|
Property,
plant and equipment, net
|
36,882 | 40,094 | ||||||
|
TOTAL
ASSETS
|
$ | 4,466,172 | $ | 5,140,477 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 158,541 | $ | 485,153 | ||||
|
Accrued
expenses and other payables
|
50,217 | 22,180 | ||||||
|
Due
to outside parties
|
117,007 | - | ||||||
|
Due
to related parties
|
411,833 | 1,571,292 | ||||||
|
Total
current liabilities
|
737,598 | 2,078,625 | ||||||
|
TOTAL
LIABILITIES
|
737,598 | 2,078,625 | ||||||
|
SHAREHOLDERS’
EQUITY
|
||||||||
|
Registered
capital
|
14,059 | 14,059 | ||||||
|
Accumulated
other comprehensive income
|
55,790 | 47,823 | ||||||
|
Retained
earnings
|
3,658,725 | 2,999,970 | ||||||
|
TOTAL
SHAREHOLDERS’ EQUITY
|
3,728,574 | 3,061,852 | ||||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 4,466,172 | $ | 5,140,477 | ||||
The
accompany notes are an integral part of these consolidated financial
statements
2
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
STATEMENTS
OF INCOME AND OTHER COMPREHENSIVE INCOME
|
For the years ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
revenues
|
$ | 5,008,712 | $ | 5,697,871 | ||||
|
Cost
of goods sold
|
-1,297,480 | -2,610,873 | ||||||
|
Gross
profit
|
3,711,232 | 3,086,998 | ||||||
|
Operating
expenses:
|
||||||||
|
General
and administrative expenses
|
-581,443 | -87,250 | ||||||
|
Compensation
to officer
|
-2,471,127 | - | ||||||
| -3,052,570 | -87,250 | |||||||
|
Income
from operations
|
658,662 | 2,999,748 | ||||||
|
Other
income (expenses)
|
||||||||
|
Interest
income
|
108 | 222 | ||||||
|
Other
expenses
|
-15 | - | ||||||
|
Total
Other income (expenses)
|
93 | 222 | ||||||
|
Income
before income taxes
|
658,755 | 2,999,970 | ||||||
|
Income
tax expense
|
- | - | ||||||
|
Income
from operations
|
658,755 | 2,999,970 | ||||||
|
Other
comprehensive income
|
7,967 | 47,823 | ||||||
|
Comprehensive
income
|
$ | 666,722 | $ | 3,047,793 | ||||
|
Basic
and diluted earnings per share
|
$ | 7 | $ | 30 | ||||
|
Weighted
average number of shares
|
100,000 | 100,000 | ||||||
The
accompany notes are an integral part of these consolidated financial
statements
3
DANDONG LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 & 2008
|
Registered
capital
|
Accumulated
other
comprehensive
income (loss)
|
Retained
earnings
(Accumulated
deficits)
|
Total
|
|||||||||||||
|
Balance March
13, 2008
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Capital
contribution
|
14,059 | - | - | 14,059 | ||||||||||||
|
Foreign
currency translation
|
- | 47,823 | - | 47,823 | ||||||||||||
|
Net
income
|
- | - | 2,999,970 | 2,999,970 | ||||||||||||
|
Balance
December 31, 2008
|
$ | 14,059 | $ | 47,823 | $ | 2,999,970 | $ | 3,061,852 | ||||||||
|
Foreign
currency translation gain
|
- | 7,967 | - | 7,967 | ||||||||||||
|
Net
income
|
- | - | 658,755 | 658,755 | ||||||||||||
|
Balance
December 31, 2009
|
$ | 14,059 | $ | 55,790 | $ | 3,658,725 | $ | 3,728,574 | ||||||||
The
accompany notes are an integral part of these consolidated financial
statements
4
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
STATEMENTS
OF CASH FLOWS
|
For the years ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$ | 658,755 | $ | 2,999,970 | ||||
|
Adjustments
to reconcile net income to cash provided by (used in) operating
activities:
|
||||||||
|
Depreciation
|
4,875 | 3,286 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
32,786 | (3,643,954 | ) | |||||
|
Inventories
|
264,508 | (864,964 | ) | |||||
|
Advance
to suppliers
|
3,191 | (6,928 | ) | |||||
|
Prepaid
expenses and other assets
|
(86,622 | ) | (32,928 | ) | ||||
|
Accounts
payable
|
(327,642 | ) | 477,623 | |||||
|
Accrued
expenses and other current liabilities
|
27,967 | 21,836 | ||||||
|
Cash
provided by (used in) operating activities
|
577,818 | (1,046,059 | ) | |||||
|
Cash
flows from investing activities:
|
||||||||
|
Acquisition
of property, plant & equipment
|
(1,566 | ) | (42,758 | ) | ||||
|
Net
cash (used in) investing activities
|
(1,566 | ) | (42,758 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Capital
contribution
|
- | 14,363 | ||||||
|
Receipts
from outside parties
|
116,944 | - | ||||||
|
Repayments
to related parties
|
(1,162,741 | ) | - | |||||
|
Receipts
from related parties
|
- | 1,546,907 | ||||||
|
Net
cash provided by (used in) financing activities
|
(1,045,797 | ) | 1,561,270 | |||||
|
Effect
of exchange rate changes on cash
|
943 | 7,449 | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(468,602 | ) | 479,902 | |||||
|
Cash
and cash equivalents, beginning of the year
|
479,902 | - | ||||||
|
Cash
and cash equivalents, ending of the year
|
$ | 11,300 | $ | 479,902 | ||||
|
SUPPLEMENTARY DISCLOSURE:
|
||||||||
|
Interest
paid
|
$ | - | $ | - | ||||
|
Income
tax paid
|
$ | - | $ | - | ||||
The
accompany notes are an integral part of these consolidated financial
statements
5
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009 AND 2008
NOTE 1 - ORGANIZATION AND
BASIS OF PRESENTATION
Dandong
Longsheng Horticulture Technology Co., Ltd. (the "Company" or "Dandong
Longsheng") is a corporation organized under the laws of People’s Republic of
China (“PRC”) in March 2008 with registered capital of RMB 100,000
(approximately $14,059).
The
Company is principally engaged in the cultivation and sales of blueberry
seedlings.
The
Company’s financial statements have been prepared in accordance with generally
accepted accounting principles in the United States of America (“US
GAAP”).
NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the amount of revenues and expenses during the reporting
periods. Management makes these estimates using the best information
available at the time the estimates are made. However, actual results
could differ from those results.
Cash and cash
equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Accounts
receivable
Accounts
receivables are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible amounts, as needed.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debt
percentages determined by management based on historical experience as well as
current economic climate are applied to customers’ balances categorized by the
number of months the underlying invoices have remained outstanding. The
valuation allowance balance is adjusted to the amount computed as a result of
the aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. The allowances for uncollectible amounts for
the years ended December 31, 2009 and 2008 are nil.
Inventories
Inventories
are stated at the lower of cost (determined on a weighted average basis) or
market. The management compares the cost of inventories with the fair
market value and an allowance is made for writing down the inventories to fair
market value, if lower than the cost.
6
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009 AND 2008
NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
recognition
The
Company recognizes sales in accordance with the United States Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition”. The Company recognizes revenue when the following
fundamental criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered, (iii) the price to
the customer is fixed or determinable and (iv) collection of the resulting
receivable is reasonably assured. Revenue is not recognized until
title and risk of loss is transferred to the customer, which occurs upon
delivery of goods, and objective evidence exists that customer acceptance
provisions have been met. Deposits or advance payments from customers
prior to delivery of goods and passage of title of goods are recorded as advance
from customers.
Property, plant and
equipment
Property,
plant and equipment are recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the year of disposal. The
cost of improvements that extend the life of plant, property, and equipment are
capitalized. These capitalized costs may include structural
improvements, equipment, and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of assets as follows:
|
Estimated Useful Life
|
Residual
value
|
||||
|
Machinery
and equipment
|
5-10
years
|
5% | |||
|
Vehicle
|
10
years
|
5%
|
|
Impairment of long-lived
assets
Long-lived
assets, which include property, plant and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of long-lived assets to be held
and used is measured by a comparison of the carrying amount of an asset to the
estimated undiscounted future cash flows expected to be generated by the
assets. If the carrying amount of an asset exceeds its
estimated undiscounted future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily determinable.
No impairment loss is recorded for the years ended June 30, 2009 and
2008.
Concentration of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents and accounts and other
receivables. As of December 31, 2009, most of the Company's cash and cash
equivalents were held by major banks located in the PRC which the Company's
management believes are of high credit quality. With respect to accounts
receivable, the Company conducts periodic reviews of its customers' financial
condition and customer payment practices to minimize collection risk on accounts
receivable.
7
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009 AND 2008
NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign currency
translation
The
functional currency of the Company is the Chinese Renminbi (“RMB”). For
financial reporting purposes, RMB has been translated into United States dollars
("USD") as the reporting currency. Assets and liabilities are translated at the
exchange rate in effect at the balance sheet date. Income statement accounts are
translated at the average rate of exchange prevailing for the period. Capital
accounts are translated at their historical exchange rates when the capital
transaction occurred. Translation adjustments arising from the use of different
exchange rates from period to period are included as a component of
stockholders' equity as "Accumulated other comprehensive income." Gains and
losses resulting from foreign currency translation are included in accumulated
other comprehensive income.
Earnings per
share
Earnings
per share are calculated in accordance with the ASC 260, “Earnings per share.”
Basic net earnings per share are based upon the weighted average number of
common shares outstanding, but excluding shares issued as compensation that have
not yet vested. Diluted net earnings per share are based on the assumption that
all dilutive convertible shares and stock options were converted or exercised,
and that all unvested shares have vested. 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.
Income
taxes
The
Company accounts for income tax under the provisions of ASC 740,"Accounting for
Income Taxes", which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, whenever necessary,
against net deferred tax assets when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The Company did
not have any deferred tax asset or liabilities in the PRC tax jurisdiction for
the year ended December 31, 2009 and 2008.
Commencing
January 1, 2008, the PRC’s new Enterprise Income Tax ("EIT") law replaced the
laws for Domestic Enterprises ("DES") and Foreign Invested Enterprises
("FIEs"). The new standard EIT rate of 25% replaced the 33% rate
formerly applicable to both DES and FIEs.
According
to the PRC’s new Enterprise Income Tax, the Company is exempt from paying income
taxes because it operates its business in the agriculture industry, which the
government encourages and offers special incentives.
Fair values of financial
instruments
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, and other loans payable. Management has estimated that the carrying
amounts approximate their fair value due to the short-term
nature.
8
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009 AND 2008
NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statements of cash
flows
In
accordance with ASC 230, "Statements of Cash Flows", cash flows from the
Company’s operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet.
Recent accounting
pronouncements
In
October 2009, the FASB issued ASU 2009-13 (EITF No. 08-1) which amends
ASC 605-25 “Revenue Recognition—Multiple-Element Arrangements”. ASU 2009-13
amends ASC 605-25 to eliminate the requirement that all undelivered elements
have Vendor Specific Objective Evidence (VSOE) or Third Party Evidence (TPE)
before an entity can recognize the portion of an overall arrangement fee that is
attributable to items that already have been delivered. In the absence of VSOE
or TPE of the standalone selling price for one or more delivered or undelivered
elements in a multiple-element arrangement, the overall arrangement fee will be
allocated to each element (both delivered and undelivered items) based on their
relative estimated selling prices. Application of the “residual method” of
allocating an overall arrangement fee between delivered and undelivered elements
will no longer be permitted upon adoption of ASU 2009-13. The provisions of ASU
2009-13 will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
Early adoption will be permitted. The Company is currently evaluating the effect
of adoption of the provisions of the ASU 2009-13 on the Company’s financial
Statements.
In
August 2009, the FASB issued ASU 2009-05 which amends Subtopic 820-10 “Fair
Value Measurements and Disclosures” for the fair value measurement of
liabilities. ASU 2009-05 provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available,
an entity is required to measure fair value utilizing one or more of the
following techniques (1) a valuation technique that uses the quoted market
price of an identical liability or similar liabilities when traded as assets; or
(2) another valuation technique that is consistent with the principles of
Topic 820, such as a present value technique or a market approach. The
provisions of ASU No. 2009-05 are effective for the first reporting period
(including the interim periods) beginning after issuance. The provisions of ASU
No. 2009-05 will be effective for interim and annual periods beginning
after August 27, 2009. Adoption of ASC 820 is not expected to have a
material impact on the Company’s results of operations or financial
position.
In
June 2009, the FASB issued ASC 105, the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162. The FASB Accounting Standards
Codification TM (“Codification”) will become the source of authoritative U.S.
generally accepted accounting principles (“GAAP”) recognized by FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date of ASC 105, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. ASC 105 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. Adoption of ASC 105 is not expected to have a material impact on the
Company’s results of operations or financial position.
9
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009 AND 2008
NOTE 3 - CONCENTRATION AND
RISKS
(a) Concentration
risk
A summary
of the major clients who accounted for 10% or more of the Company’s
sales are as follows:
|
For the years ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Major
Clients' sales
|
||||||||
|
Affiliated
Company
|
$ | - | $ | 5,697,871 | ||||
|
Client
A
|
1,874,686 | - | ||||||
|
Client
B
|
1,168,855 | - | ||||||
|
Client
C
|
1,061,925 | - | ||||||
|
Client
D
|
719,060 | - | ||||||
|
Other
clients
|
184,186 | - | ||||||
|
Total
Sales
|
$ | 5,008,712 | $ | 5,697,871 | ||||
A summary
of the major suppliers who provided 10% or more of the Company’s
purchases are as follows:
|
For the years ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Major
Suppliers
|
||||||||
|
Supplier
A
|
$ | - | $ | 1,816,223 | ||||
|
Supplier
B
|
209,846 | 348,996 | ||||||
|
Supplier
C
|
188,572 | 258,537 | ||||||
|
Supplier
D
|
104,153 | 193,903 | ||||||
|
Other
suppliers
|
247,638 | 501,319 | ||||||
|
Total
Purchase
|
$ | 750,209 | $ | 3,118,978 | ||||
(b)
Credit risk
Financial
instruments that potentially expose the Company to concentrations of credit risk
consist primarily of cash, cash equivalents and accounts receivable. The Company
places its cash, cash equivalents with financial institutions that management
believes are of high-credit ratings and quality.
The
Company has not experienced significant losses from uncollectible accounts. The
Company will continue to evaluate its collection experience and will provide for
an allowance for doubtful accounts as appropriate.
(c)
Foreign currency risk
A
majority of the Company’s sales and expenses transactions and a significant
portion of the Company’s assets and liabilities are denominated in RMB. RMB is
not freely convertible into foreign currencies. In the PRC, certain foreign
exchange transactions are required by law to be transacted only by authorized
financial institutions at exchange rates set by the People’s Bank of China
(“PBOC”). Remittances in currencies other than RMB by the Company in China must
be processed through the PBOC or other China foreign exchange regulatory bodies
which require certain supporting documentation in order to affect the
remittance.
10
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009 AND 2008
NOTE 3 - CONCENTRATION AND
RISKS (Continued)
(d)
Country and Political risk
The
Company’s operations are all carried out in the PRC. Accordingly, The
Company’s business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC's economy.
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign currency
exchange. The Company’s results of operations may be adversely
affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
NOTE 4 – ACCOUNTS
RECEIVABLE
Accounts
receivable consists of trade receivables resulting from sales of products during
the normal course of business. Accounts receivable as of December 31, 2009 and
2008 amounted to $3,677,797 and $3,701,397, net of allowance, respectively. The
Company has sales to affiliated Company Yichun Lindu Shanyeguo Development
Company in 2008 only. The major account receivable is from affiliated Company.
The management considered all accounts receivable collectible and no allowance
was made for the years ended December 31, 2009 and 2008.
The
Accounts receivable has the following breakdown between affiliated Company and
non-affiliated Company:
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accounts
Receivable
|
||||||||
|
From
Affiliated Company
|
$ | 3,670,409 | $ | 3,701,397 | ||||
|
From
Outside Company
|
7,388 | - | ||||||
|
Total
Accounts receivable
|
$ | 3,677,797 | $ | 3,701,397 | ||||
NOTE 5 – OTHER
RECEIVABLES
Other
receivables are mainly composed of advance to employees for the daily
operation of business. Other receivable as of December 31, 2009 and 2008
amounted to $100,746 and nil, respectively.
NOTE 6 -
INVENTORIES
Inventories
consist of the following as of December 31, 2009 and 2008:
|
2009
|
2008
|
|||||||
|
Raw
mateirals
|
$ | 8,732 | $ | 98,888 | ||||
|
Finished
goods
|
174,077 | 186,129 | ||||||
|
Work-in-process
|
433,325 | 593,583 | ||||||
|
Total
|
$ | 616,134 | $ | 878,600 | ||||
No
allowance for inventories was made for the years ended December 31, 2009 and
2008.
11
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009 AND 2008
NOTE 7 - PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment consist of the following as of December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Machinery
and equipment
|
$ | 13,611 | $ | 13,577 | ||||
|
Vehicle
|
24,571 | 24,510 | ||||||
|
Office
equipment
|
6,924 | 5,345 | ||||||
|
Total
costs
|
45,106 | 43,432 | ||||||
|
Less:
Accumulated Depreciation
|
(8,224 | ) | (3,338 | ) | ||||
|
Total
|
$ | 36,882 | $ | 40,094 | ||||
Depreciation
expense for the year ended December 31, 2009 and 2008 were $4,875 and $3,286,
respectively.
NOTE 8 - RELATED PARTY
TRANSACTIONS
As of
December 31, 2009 and 2008, the Company has a payable balance of $411,833 and
$1,571,292 due to the Company’s actual Chairman, Mr. Guang Zhao. These amounts
due are generally unsecured, non-interest bearing and due upon demand.
For the
year 2008, the company’s 100% sales were made to an affiliated Company Yichun
Lindu Shanyeguo Development Company, which is owned by Mr. Guang Zhao, the
Company’s Chairman and controlling shareholder.
NOTE 9 – INCOME
TAXES
The
Company is governed by the Income Tax Law of the People’s Republic of China
concerning the private-run enterprises, which are generally subject to income
tax at a statutory rate of 25% on net income reported after appropriated tax
adjustments.
However,
the Company is exempt from both income tax and value-added tax because it
operates its business in the agriculture industry. The Chinese
government has long been encouraging and promoting agriculture-related
businesses by offering tax exemption and many other incentives.
Reconciliation
of the difference between the actual income tax rate and the effective tax rate
computed by applying the related tax exemption for the operation of the periods
presented as follows:
|
For
the years ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Statutory
income tax rate
|
25 | % | 25 | % | ||||
|
Tax
exempt
|
(25 | )% | (25 | )% | ||||
|
Effective
tax rate
|
0 | % | 0 | % | ||||
12
DANDONG
LONGSHENG HORTICULTURE TECHNOLOGY CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2009 AND 2008
NOTE 10 - SHAREHOLDERS’
EQUITY
The
Company’s total registered capital is RMB100,000 as of March 13, 2008,
equivalent of $14,059. The industry practice in PRC does not require the
issuance of stock certificates to the shareholders, nor a third party transfer
agent to maintain the records. For the purpose of financial
reporting, the Company elected to designate one (1) common share for each RMB
contributed. Accordingly, there were total 100,000 shares issued and
outstanding for the years ended December 31, 2009 and 2008.
13
HONOUR
BOND LIMITED
CONSOLIDATED
FINANCIAL STATEMENTS
March
31, 2010 and 2009
HONOUR
BOND LIMITED
CONSOLIDATED
FINANCIAL STATEMENTS
CONTENTS
|
FINANCIAL
INFORMATION
|
Page
|
||
|
Item
1.
|
|||
|
Consolidated
Balance Sheets as of March 31, 2010(Unaudited) and December 31,
2009
|
2
|
||
|
Consolidated
Statements of Operations for the Three Months Ended March 31, 2010 and
2009 (Unaudited)
|
3
|
||
|
Consolidated
Statements of Cash Flows for the Three Months Ended March 31, 2010 and
2009 (Unaudited)
|
4
|
||
|
Consolidated
Statements of Stockholders' Equity (Deficit) for the Three Months Ended
March 31, 2010 and 2009 (Unaudited)
|
5
|
||
|
Notes
to Consolidated Financial Statements (Unaudited)
|
6-14
|
||
1
HONOUR
BOND LIMITED
CONSOLIDATED
BALANCE SHEETS
|
March 31,
|
December 31,
|
|||||||
|
2010
(Unaudited)
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 106,115 | $ | 11,300 | ||||
|
Accounts
receivable, net
|
||||||||
|
-
affiliated company
|
3,670,999 | 3,670,409 | ||||||
|
-
non-affiliated company
|
351,899 | 7,388 | ||||||
|
Other
receivables, net
|
57,842 | 100,746 | ||||||
|
Advance
to suppliers
|
289,756 | 3,861 | ||||||
|
Inventories,
net
|
890,389 | 616,134 | ||||||
|
Prepaid
expenses
|
805 | 19,452 | ||||||
|
Total
current assets
|
5,367,805 | 4,429,290 | ||||||
|
Property,
plant and equipment, net
|
37,592 | 36,882 | ||||||
|
TOTAL
ASSETS
|
$ | 5,405,397 | $ | 4,466,172 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 137,514 | $ | 158,541 | ||||
|
Accrued
expenses and other payables
|
132,747 | 50,217 | ||||||
|
Due
to outside parties
|
117,026 | 117,007 | ||||||
|
Due
to related parties
|
610,501 | 411,833 | ||||||
|
Total
current liabilities
|
997,788 | 737,598 | ||||||
|
TOTAL
LIABILITIES
|
997,788 | 737,598 | ||||||
|
STOCKHOLDERS’
EQUITY
|
||||||||
|
Common
stock, $0.1289 Par value; 10,000 shares authorized; 999 shares issued and
outstanding
|
129 | 129 | ||||||
|
Additional
Paid-in capital
|
15,221 | 13,930 | ||||||
|
Accumulated
other comprehensive income
|
56,030 | 55,790 | ||||||
|
Retained
earnings
|
4,336,229 | 3,658,725 | ||||||
|
TOTAL
STOCKHOLDERS’ EQUITY
|
4,407,609 | 3,728,574 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 5,405,397 | $ | 4,466,172 | ||||
The
accompany notes are an integral part of these consolidated financial
statements
2
HONOUR
BOND LIMITED
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
|
For the three months ended March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
revenues
|
$ | 827,249 | $ | - | ||||
|
Cost
of goods sold
|
(116,890 | ) | - | |||||
|
Gross
profit
|
710,359 | - | ||||||
|
Operating
expenses:
|
||||||||
|
General
and administrative expenses
|
(32,742 | ) | (18,315 | ) | ||||
|
Income
from operations
|
677,617 | (18,315 | ) | |||||
|
Other
income (expenses)
|
||||||||
|
Interest
income
|
12 | 31 | ||||||
|
Other
expenses
|
(125 | ) | (215 | ) | ||||
|
Total
other expenses
|
(113 | ) | (184 | ) | ||||
|
Income
(loss) before income taxes
|
677,504 | (18,499 | ) | |||||
|
Income
tax expense
|
- | - | ||||||
|
Income
(loss) from operations
|
677,504 | (18,499 | ) | |||||
|
Other
comprehensive income
|
240 | 3,842 | ||||||
|
Comprehensive
income (loss)
|
$ | 677,744 | $ | (14,657 | ) | |||
|
Basic
and diluted earnings (loss) per share
|
$ | 678 | $ | (18 | ) | |||
|
Weighted
average number of shares
|
999 | 999 | ||||||
The
accompany notes are an integral part of these consolidated financial
statements
3
HONOUR
BOND LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
|
For
the three months ended March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income (loss)
|
$ | 677,504 | $ | (18,499 | ) | |||
|
Adjustments
to reconcile net income (loss) to cash provided by (used in) operating
activities:
|
||||||||
|
Depreciation
|
1,345 | 1,204 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(344,509 | ) | 40,143 | |||||
|
Inventories
|
(274,156 | ) | (581,731 | ) | ||||
|
Advance
to suppliers
|
(285,894 | ) | 7,046 | |||||
|
Prepaid
expenses and other assets
|
61,571 | (18,552 | ) | |||||
|
Accounts
payable
|
(21,053 | ) | (350,833 | ) | ||||
|
Accrued
expenses and other current liabilities
|
82,522 | 3,564 | ||||||
|
Cash
(used in) operating activities
|
(102,670 | ) | (917,658 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Acquisition
of property, plant & equipment
|
(2,048 | ) | - | |||||
|
Net
cash (used in) investing activities
|
(2,048 | ) | - | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Capital
contribution
|
1,289 | - | ||||||
|
Receipts
from related parties
|
198,602 | 528,252 | ||||||
|
Net
cash provided by financing activities
|
199,891 | 528,252 | ||||||
|
Effect
of exchange rate changes on cash
|
(358 | ) | 599 | |||||
|
Net
increase (decrease) in cash and cash equivalents
|
94,815 | (388,807 | ) | |||||
|
Cash
and cash equivalents, beginning of the period
|
11,300 | 479,902 | ||||||
|
Cash
and cash equivalents, ending of the period
|
$ | 106,115 | $ | 91,095 | ||||
|
SUPPLEMENTARY DISCLOSURE:
|
||||||||
|
Interest
paid
|
$ | - | $ | - | ||||
|
Income
tax paid
|
$ | - | $ | - | ||||
The
accompany notes are an integral part of these consolidated financial
statements
4
HONOUR
BOND LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
|
Common Stock, Par
value $0.1289
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid-in
capital
|
Accumulated
other
comprehensive
income
|
Retained
earnings
|
Total
|
|||||||||||||||||||
|
Balance
at December 31, 2008
|
999 | $ | 129 | $ | 13,930 | 47,823 | 2,999,970 | $ | 3,061,852 | |||||||||||||||
|
Foreign
currency translation gain
|
- | 3,842 | - | 3,842 | ||||||||||||||||||||
|
Net
income (Loss)
|
- | - | (18,499 | ) | (18,499 | ) | ||||||||||||||||||
|
Balance
at March 31, 2009
|
999 | $ | 129 | $ | 13,930 | 51,665 | 2,981,471 | $ | 3,047,195 | |||||||||||||||
|
Balance
at December 31, 2009
|
999 | 129 | 13,930 | 55,790 | 3,658,725 | 3,728,574 | ||||||||||||||||||
|
Capital
contribution
|
1,291 | 1,291 | ||||||||||||||||||||||
|
Foreign
currency translation gain
|
- | - | 240 | - | 240 | |||||||||||||||||||
|
Net
income
|
- | - | - | 677,504 | 677,504 | |||||||||||||||||||
|
Balance
March 31, 2010
|
999 | $ | 129 | $ | 15,221 | 56,030 | 4,336,229 | $ | 4,407,609 | |||||||||||||||
The
accompany notes are an integral part of these consolidated financial
statements
5
HONOUR
BOND LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
NOTE
1 - ORGANIZATION AND BASIS OF PRESENTATION
Honour
Bond Limited (the "Company" or "Honour ") is a corporation organized under the
laws of Hong Kong Special Administrative Region (“HKSAR”) in January 2010
with registered capital of HKD 10,000 (approximately $1,289).
Honour is
a holding company whose only asset, held through a 100% wholly owned subsidiary
Shenzhen Zhihao Dongbo Technology Co., Ltd. (“Zhihao”), a limited liability
company organized under the laws of the People’s Republic of China (“PRC”) in
March 2010. The Company does not conduct any substantive operations
of its own, but conducts its primary business operations through Zhihao’s
variable interest entity (“VIE”), Dandong Longsheng Horticulture Technology Co.,
Ltd. (“Dandong Longsheng”) Dandong Longsheng was incorporated under
the laws of the PRC in March 2008.
The
Company, through Zhihao, has entered into certain exclusive agreements with
Dandong Longsheng, which obligate the Company to absorb a majority of the risk
of loss from Dandong LongSheng’s activities and entitle it to receive a majority
of its residual returns. In addition, Dandong Longsheng 's shareholders have
pledged their equity interest in Dandong Longsheng to Zhihao, irrevocably
granted Zhihao an exclusive option to purchase, to the extent permitted under
PRC law, all or part of the equity interests in Dandong Longsheng and agreed to
entrust all the rights to exercise their voting power to the person(s) appointed
by Zhihao. Through these contractual arrangements, the Company and Zhihao hold
all the variable interests of Dandong Longsheng, and the Company and Zhihao have
been determined to be the most closely associated with Dandong Longsheng.
Therefore, the Company is the primary beneficiary of Dandong
Longsheng.
Based on
these contractual arrangements, the Company believes that Dandong Longsheng
should be considered as a VIE under ASC 810, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No.51", because the equity
investors in Dandong Longsheng do not have the characteristics of a controlling
financial interest and the Company through Zhihao is the primary beneficiary of
Dandong Longsheng. Accordingly, the Company believes that Dandong Longsheng
should be consolidated under ASC 810.
The VIE
Agreements with our Chinese affiliate and its shareholder, which relate to
critical aspects of our operations, may not be as effective in providing
operational control as direct ownership. In addition, these arrangements
may be difficult and costly to enforce under PRC law. Furthermore, our
failure to perform our obligations under the VIE Agreements could give Dandong
LongSheng the right to cease performance under or terminate the VIE Agreements
and thereby deprive us of the economic benefit of the VIE Agreements from which
we derive all of our revenues. See “Risk Factors - Risks Relating to the
VIE Agreements.”
The
financial statements present the operations of Dandong Longsheng as if the
aforementioned exclusive agreements between Zhihao and Dandong Longsheng had
become effective as of the beginning of the first period presented.
The
Company, along with its subsidiary and VIEs, is engaging in the cultivation and
sales of blueberry seedlings with dominant operation in Dandong Liaoning,
Northeastern China.
6
HONOUR
BOND LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE
MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of
estimates
The
preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the
amounts of revenues and expenses during the reporting periods.
Management
makes these estimates using the best information available at the time the
estimates are made. However, actual results could differ materially
from those results.
Risks and
uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Foreign currency
translation
The
functional currency of the Company is the Chinese Renminbi (“RMB”). For
financial reporting purposes, RMB has been translated into United States dollars
("USD") as the reporting currency. Assets and liabilities are translated at the
exchange rate in effect at the balance sheet date. Income statement accounts are
translated at the average rate of exchange prevailing for the period. Capital
accounts are translated at their historical exchange rates when the capital
transaction occurred. Translation adjustments arising from the use of different
exchange rates from period to period are included as a component of
stockholders' equity as "Accumulated other comprehensive income." Gains and
losses resulting from foreign currency translation are included in accumulated
other comprehensive income.
Cash and cash
equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Accounts
receivable
Accounts
receivables are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible amounts, as needed.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debt
percentages determined by management based on historical experience as well as
current economic climate are applied to customers’ balances categorized by the
number of months the underlying invoices have remained outstanding. The
valuation allowance balance is adjusted to the amount computed as a result of
the aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. The allowances for uncollectible amounts for
the three months ended March 31, 2010 and the year ended December 31, 2009 are
nil.
7
HONOUR
BOND LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE
MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories
are stated at the lower of cost (determined on a weighted average basis) or
market. The management compares the cost of inventories with the fair
market value and an allowance is made for writing down the inventories to fair
market value, if lower than the cost. As of March 31, 2010 and December 31,
2010, the reserves for obsolete inventory are nil.
Revenue
recognition
The
Company recognizes sales in accordance with the United States Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition”. The Company recognizes revenue when the following
fundamental criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered, (iii) the price to
the customer is fixed or determinable and (iv) collection of the resulting
receivable is reasonably assured. Revenue is not recognized until
title and risk of loss is transferred to the customer, which occurs upon
delivery of goods, and objective evidence exists that customer acceptance
provisions have been met. Deposits or advance payments from customers
prior to delivery of goods and passage of title of goods are recorded as advance
from customers.
Property, plant and
equipment
Property,
plant and equipment are recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the year of disposal. The
cost of improvements that extend the life of plant, property, and equipment are
capitalized. These capitalized costs may include structural
improvements, equipment, and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the following estimated useful lives of the assets:
|
Estimated Useful Life
|
Residual value
|
|||||
|
Machinery
and equipment
|
5-10
years
|
5 | % | |||
|
Vehicle
|
10
years
|
5 | % | |||
Impairment of long-lived
assets
Long-lived
assets, which include property, plant and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of long-lived assets to be held
and used is measured by a comparison of the carrying amount of an asset to the
estimated undiscounted future cash flows expected to be generated by the assets.
If the carrying amount of an asset exceeds its estimated undiscounted future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the assets. Fair value is
generally determined using the asset’s expected future discounted cash flows or
market value, if readily determinable.
There was
no impairment loss recorded for the three months ended March 31, 2010 and the
year ended 2009.
8
HONOUR
BOND LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE
MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Concentration of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents and accounts and other
receivables. As of March 31, 2010, most of the Company's cash and cash
equivalents were held by major banks located in the HKSAR which the Company's
management believes are of high credit quality. With respect to accounts
receivable, the Company conducts periodic reviews of its customers' financial
condition and customer payment practices to minimize collection risk on accounts
receivable.
Earnings per
share
Earnings
per share are calculated in accordance with the ASC 260, “Earnings per share.”
Basic net earnings per share are based upon the weighted average number of
common shares outstanding, but excluding shares issued as compensation that have
not yet vested. Diluted net earnings per share are based on the assumption that
all dilutive convertible shares and stock options were converted or exercised,
and that all unvested shares have vested. 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.
Income
taxes
The
Company accounts for income tax under the provisions of ASC 740,"Accounting for
Income Taxes", which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, whenever necessary,
against net deferred tax assets when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The Company did
not have any deferred tax asset or liabilities in the HKSAR tax jurisdiction for
the three months ended March 31, 2010 and the year ended 2009.
All of
the Honour’s operations are conducted in China. Commencing January 1,
2008, the PRC’s new Enterprise Income Tax ("EIT") law replaced the laws for
Domestic Enterprises ("DES") and Foreign Invested Enterprises ("FIEs"). The new
standard EIT rate of 25% replaced the 33% rate formerly applicable to both DES
and FIEs.
According
to the PRC’s new Enterprise Income Tax, the Company is exempt from paying income
taxes because it operates its business in the agriculture industry, which the
government encourages and offers special incentives.
9
HONOUR
BOND LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE
MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Fair values of financial
instruments
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, prepaid expenses, accounts
payable, accrued expenses, and other loans payable. Management has estimated
that the carrying amounts approximate their fair value due to the short-term
nature.
Statement of cash
flows
In
accordance with ASC 230, "Statements of Cash Flows", cash flows from the
Company’s operations is calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statement of cash
flows may not necessarily agree with changes in the corresponding balances on
the balance sheet.
Recent accounting
pronouncements
In
February 2010, FASB issued new standards in ASC 855, Subsequent Event. This
amendment removes the requirement for an SEC filer to disclose a date through
which subsequent events have been evaluated in both issued and revised financial
statements. Revised financial statements include financial statements revised as
a result of either correction of an error or retrospective application of GAAP.
All of the amendments are effective upon issuance of the final update, except
for the use of the issued date for conduit debt obligors. That amendment is
effective for interim or annual periods ending after June 15, 2010. The Company
does not expect the adoption of this amendment to have a material impact on its
consolidated financial statements.
In
January 2010, FASB amended ASC 820 Disclosures about Fair Value Measurements.
This update provides amendments to Subtopic 820-10 that requires new disclosure
as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value
measurements. In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should present
separately information about purchases, sales, issuances, and settlements (that
is, on a gross basis rather than as one net number). The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The Company has determined the adoption of this rule does
not have a material impact on its financial statements.
In
January 2010, FASB amended Accounting for Distributions to Shareholders with
Components of Stock and Cash. The amendments in this Update clarify that the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this rule to
have a material impact on its financial statements.
10
HONOUR
BOND LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE
MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
NOTE
3 – ACCOUNTS RECEIVABLE
Accounts
receivable consists of trade receivables resulting from sales of products during
the normal course of business. Accounts receivable as of March 31, 2010 and
December 31, 2009 amounted to $4,022,898 and $3,677,797, net of allowance,
respectively. The major account receivable is from an affiliated Company.
The management considered all accounts receivable collectible and no allowance
was made as of March 31, 2010 and December 31, 2009. As of June 28,
2010, the affiliated Company paid back RMB 25,095,318, which is all the
outstanding balance due to the Company.
The
Accounts receivable has the following breakdown between affiliated Company and
non-affiliated Company:
|
As
of
|
March
31,
|
December
31,
|
||||||
|
2010
|
2009
|
|||||||
|
Accounts
receivable
|
||||||||
|
-
from affiliated companies
|
$ | 3,670,999 | $ | 3,670,409 | ||||
|
-
from outside companies
|
351,899 | 7,388 | ||||||
|
Less:
Allowance for doubtful accounts
|
- | - | ||||||
|
Accounts
receivable, net
|
$ | 4,022,898 | $ | 3,677,797 | ||||
NOTE
4 – OTHER RECEIVABLES
Other
receivables are mainly composed of advances to employees for the daily
operation of business. Other receivables as of March 31, 2010 and December 31,
2009 amounted to $ 57,842 and $100,746, respectively.
NOTE
5 – INVENTORIES
Inventories
consist of the following as of March 31, 2010 and December 31,
2009:
|
As
of
|
March
31,
|
December
31,
|
||||||
|
2010
|
2009
|
|||||||
|
Raw
material
|
$ | 10,721 | $ | 8,732 | ||||
|
Finished
goods
|
210,372 | 174,077 | ||||||
|
Work
in process
|
669,296 | 433,325 | ||||||
|
Total
|
$ | 890,389 | $ | 616,134 | ||||
No
allowance for inventories was made as of March 31, 2010 and December 31,
2009.
11
HONOUR
BOND LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE
MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
NOTE
6 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following as of March 31, 2010 and
2009:
|
As
of
|
March
31,
|
December
31,
|
||||||
|
2010
|
2009
|
|||||||
|
Machine
Equipment
|
$ | 13,613 | $ | 13,611 | ||||
|
Vehicle
|
24,576 | 24,571 | ||||||
|
Office
Equipment
|
8,973 | 6,924 | ||||||
|
Total
costs
|
47,162 | 45,106 | ||||||
|
Less:
Accumulated Depreciation
|
(9,570 | ) | (8,224 | ) | ||||
|
Total
property, plant and equipment, net
|
$ | 37,592 | $ | 36,882 | ||||
Depreciation
expense for the three months ended March 31, 2010 and 2009 were $1,345 and
$1,204, respectively.
NOTE
7 - RELATED PARTY TRANSACTIONS
As of
March 31, 2010 and December 31, 2009, the Company has a payable balance of $
610,501 and $ 411,833 due to Mr. Guang Zhao. These amounts due are
generally unsecured, non-interest bearing and due upon demand.
For the
year 2008, the company’s 100% sales were made to an affiliated Company Yichun
Lindu Shanyeguo Development Company, which is owned by Mr. Guang Zhao, the
Company’s Chairman and controlling shareholder.
NOTE
8 – INCOME TAX
As all of
the Honour’s operations are conducted its wholly owned subsidiary Zhihao and its
variable interest entity, Dandong Longsheng in China, those Companies are
governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are currently subject to tax at a statutory rate of 25% on
income reported in the statutory financial statements after appropriated tax
adjustments.
However,
the Company is exempt from both income tax and value-added tax because it
operates its business in the agriculture industry. The Chinese government has
long been encouraging and promoting agriculture-related businesses by offering
tax exemption and many other incentives.
Reconciliation
of the difference between the actual income tax rate and the effective tax rate
computed by applying the related tax exemption for the operation of the periods
presented as follows:
|
2010
|
2009
|
|||||||
|
US
statutory rate
|
34 | % | 34 | % | ||||
|
Tax
rate difference
|
(9 | )% | (9 | )% | ||||
|
Effect
of tax exempt
|
(25 | )% | (25 | )% | ||||
|
Tax
per financial statements
|
0 | % | 0 | % | ||||
12
HONOUR
BOND LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE
MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
NOTE
9 - CONCENTRATION AND RISKS
(a)
Concentration risk
A summary
of the major clients who accounted for 10% or more of the Company’s
sales are as follows:
|
For the three
months ended
|
For the three
months ended
|
|||||||
|
Major Clients' sales
|
March 31, 2010
|
March 31, 2009
|
||||||
|
Client
A
|
279,651 | - | ||||||
|
Client
B
|
247,439 | - | ||||||
|
Client
C
|
153,876 | - | ||||||
|
Client
D
|
146,284 | - | ||||||
|
Total
|
827,250 | - | ||||||
A summary
of the major suppliers who provided 10% or more of the Company’s
purchases are as follows:
|
For the three
months ended
|
For the three
months ended
|
|||||||
|
Major Suppliers
|
March 31, 2010
|
March 31, 2009
|
||||||
|
Supplier
A
|
226,096 | - | ||||||
|
Supplier
B
|
49,781 | 52,461 | ||||||
|
Supplier
C
|
- | 47,143 | ||||||
|
Supplier
D
|
- | 26,038 | ||||||
|
Others
|
27,761 | 85,214 | ||||||
|
Total
|
303,638 | 210,856 | ||||||
(b)
Credit risk
Financial
instruments that potentially expose the Company to concentrations of credit risk
consist primarily of cash, cash equivalents and accounts receivable. The Company
places its cash, cash equivalents with financial institutions that management
believes are of high-credit ratings and quality.
The
Company has not experienced significant losses from uncollectible accounts. The
Company will continue to evaluate its collection experience and will provide for
an allowance for doubtful accounts as appropriate.
(c)
Foreign currency risk
A
majority of the Company’s sales and expenses transactions and a significant
portion of the Company’s assets and liabilities are denominated in RMB. RMB is
not freely convertible into foreign currencies. In the PRC, certain foreign
exchange transactions are required by law to be transacted only by authorized
financial institutions at exchange rates set by the People’s Bank of China
(“PBOC”). Remittances in currencies other than RMB by the Company in China must
be processed through the PBOC or other China foreign exchange regulatory bodies
which require certain supporting documentation in order to affect the
remittance.
13
HONOUR
BOND LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE
MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
NOTE
9 - CONCENTRATION AND RISKS (CONTINUED)
(d)
Country and Political risk
The
Company’s operations are all carried out in the PRC. Accordingly, The Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC's economy.
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results of operations may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
14
IDCENTRIX,
INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JANUARY
31, 2010
|
iDcentrix Inc.
|
HK Bond
|
Adjustments
|
Notes
|
Pro
Forma
|
||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
assets
|
||||||||||||||||||||
|
Cash
& cash equivalents
|
$ | - | $ | 5,382 | $ | 5,382 | ||||||||||||||
|
Accounts
receivable, net of allowance
|
- | 3,831,815 | 3,831,815 | |||||||||||||||||
|
Other
receivables
|
- | 215,792 | 215,792 | |||||||||||||||||
|
Advance
to suppliers
|
- | 3,861 | 3,861 | |||||||||||||||||
|
Inventory
|
- | 705,164 | 705,164 | |||||||||||||||||
|
Other
assets
|
2,106 | 13,237 | 15,343 | |||||||||||||||||
|
Total
current assets
|
2,106 | 4,775,251 | 4,777,357 | |||||||||||||||||
|
Property,
plant and equipment, net
|
- | 38,505 | 38,505 | |||||||||||||||||
|
Total
Assets
|
$ | 2,106 | $ | 4,813,756 | $ | 4,815,862 | ||||||||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||||||||||
|
Current
liabilities
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 6,096 | $ | 386,015 | (6,096 | ) |
a
|
$ | 386,015 | |||||||||||
|
Accrued
expenses and other payables
|
- | 47,933 | 47,933 | |||||||||||||||||
|
Due
to shareholders
|
- | 411,851 | 411,851 | |||||||||||||||||
|
Total
current liabilities
|
6,096 | 845,799 | 845,799 | |||||||||||||||||
|
|
|
|
||||||||||||||||||
|
Total
Liabilities
|
6,096 | 845,799 | 845,799 | |||||||||||||||||
|
Shareholders'
equity
|
||||||||||||||||||||
|
Common
stock, $0.00001 par value; 100,000,000 shares authorized; 68,176,300 and
32,242,000 shares issued and outstanding at January 31, 2010 and January
31, 2009, respectively
|
682 | 682 | ||||||||||||||||||
|
Common
stock, $0.1289 Par value; 10,000 shares authorized; 999 shares issued and
outstanding
|
129 | (129 | ) |
b
|
- | |||||||||||||||
|
Additional
paid-in capital
|
4,077,434 | 13,930 | (4,075,881 | ) |
a,b
|
15,483 | ||||||||||||||
|
Accumulated
other comprehensive income
|
- | 30,977 | 30,977 | |||||||||||||||||
|
Retained
earnings (Accumulated deficits)
|
(4,082,106 | ) | 3,922,921 | 4,082,106 |
a,b
|
3,922,921 | ||||||||||||||
|
Total
shareholders' equity
|
(3,990 | ) | 3,967,957 | 3,970,063 | ||||||||||||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 2,106 | $ | 4,813,756 | $ | 4,815,862 | ||||||||||||||
1
IDCENTRIX,
INC
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE
YEAR ENDED JANUARY 31, 2010
|
iDcentrix Inc.
|
HK Bond
|
Adjustments
|
Notes
|
Pro Forma
|
||||||||||||||||
|
Revenues
|
$ | - | $ | 5,309,482 | $ | 5,309,482 | ||||||||||||||
|
Cost
of revenue
|
- | (1,339,742 | ) | (1,339,742 | ) | |||||||||||||||
|
Gross
profit
|
- | 3,969,740 | 3,969,740 | |||||||||||||||||
|
Selling,
general and administrative expenses
|
(269,414 | ) | (586,354 | ) | 269,414 |
a
|
(586,354 | ) | ||||||||||||
|
Compensation
to officer
|
(2,471,510 | ) | (2,471,510 | ) | ||||||||||||||||
|
Income
from operations
|
(269,414 | ) | 911,876 | 911,876 | ||||||||||||||||
|
Non-operating
income (expenses):
|
||||||||||||||||||||
|
Interest
income
|
372 | 117 | (372 | ) |
a
|
117 | ||||||||||||||
|
Other
income
|
39 | 39 | ||||||||||||||||||
|
Other
expenses
|
(713 | ) | (15 | ) | 713 |
a
|
(15 | ) | ||||||||||||
|
Total
non-operating income (expenses)
|
(341 | ) | 141 | 141 | ||||||||||||||||
|
Income
before income taxes
|
(269,755 | ) | 912,017 | 912,017 | ||||||||||||||||
|
Provision
for income taxes
|
- | - | - | |||||||||||||||||
|
Net
income (loss)
|
(269,755 | ) | 912,017 | 912,017 | ||||||||||||||||
|
Other
comprehensive item
|
||||||||||||||||||||
|
Foreign
currency translation income
|
- | - | - | |||||||||||||||||
|
Comprehensive
income (loss)
|
$ | (269,755 | ) | 912,017 | $ | 912,017 | ||||||||||||||
| - | ||||||||||||||||||||
|
Weighted
average number of common shares outstanding
|
41,837,004 | 10,000 | 41,837,004 | |||||||||||||||||
|
Basic
and diluted net loss per common share
|
$ | (0.01 | ) | 91.20 | 91.18 |
b
|
$ | 0.02 | ||||||||||||
2
IDCENTRIX,
INC.
INTRODUCTION
TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
On July
16, 2010, iDcentrix, Inc. (the “Company” or “iDcentrix’) acquired all of the
outstanding capital stock of Honour Bond Limited ("Honour"). Honour
is a holding company whose only asset is 100% of the registered capital of
Shenzhen Zhihao Dongbo Technology Co., Ltd. (“Zhihao”), a limited liability
company organized under the laws of the People’s Republic of
China. Substantially all of Honour’s operations are conducted in
China though Zhihao, and through contractual arrangements with Zhihao’s
consolidated affiliated entity in China, Dandong Longsheng Horticulture
Technology Co., Ltd (“Dandong Longsheng”). Dandong Longsheng is a blueberry
cultivating company with operations in Dandong Liaoning, Northeastern
China.
Before
the share exchange, the Company had 68,176,300 shares issued and outstanding as
of January 31, 2010 and on June 1, 2010, the Company effected a one for two
hundred eighty-four (1:284) reverse stock split. The Company had 68,176,300
shares of common stock outstanding immediately prior to the reverse stock split
and 240,130 shares of common stock outstanding immediately after the reverse
stock split and immediately before the reverse merger with Honour. In
connection with the reverse merger, the Company issued 49,870,814 shares of its
common stock, in exchange for all the shares of the capital stock of Honour (the
“Share Exchange”). Upon completion of the Share Exchange, the
shareholders of Honour owned approximately 99.74% of the common stock of the
Company.
Anticipated
Accounting Treatment of the Acquisition Transaction
For
accounting purposes, the transaction is being accounted for as a reverse merger,
since the stockholders of Honour will own a majority of the issued and
outstanding shares of common stock of the Company, and the director and
executive officer of Honour became the director and executive officer of the
Company. This acquisition is being accounted for at historical cost in a manner
similar to that in pooling of interests method since the former stockholders of
Honour acquired a majority of the outstanding shares of the Company. The
historical financial statements will be those of Honour.
The
accompanying unaudited pro forma condensed consolidated balance sheet has been
presented with consolidated subsidiaries at January 31, 2010 and the
unaudited pro forma condensed consolidated statement of income for the year
ended January 31, 2010 has been presented as if the acquisition had
occurred.
3
IDCENTRIX,
INC.
INTRODUCTION
TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
You are
being provided this information to aid in your analysis of the financial aspects
of the merger. This information has been derived from the unaudited financial
statements of Honour as of and for the year ended January 31, 2010 and
the audited financial statements of iDcentrix for the respective periods. The
pro forma adjustments are based on available information and assumptions that
are believed to be reasonable. The unaudited pro forma condensed financial
information does not represent the results of operations that would have
occurred had such transactions been consummated on the dates indicated or the
financial position for any future date or period. Honour and iDcentrix do not
assume any responsibility for the accuracy or completeness of the information
provided by the other party. This information should be read in conjunction with
the companies’ respective historical financial statements and notes included
thereto.
4
IDCENTRIX,
INC.
NOTES
TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
STATEMENTS
The
following unaudited pro forma adjustments are included in the accompanying
unaudited pro forma condensed consolidated balance sheet as of January 31, 2010
and the unaudited pro forma condensed consolidated statement of income for the
year ended January 31, 2010 to reflect the acquisition of Honour Bond Limited by
the Company:
|
a.
|
To
record the payment of the Company’s liabilities prior to
closing;
|
|
b.
|
These
adjustments reflect the recapitalization as a result of the transactions
related to the share exchange.
|
5