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EX-5.1 - EX-5.1 - Artistry Publications Inc | g23766aexv5w1.htm |
EX-23.2 - EX-23.2 - Artistry Publications Inc | g23766aexv23w2.htm |
Table of Contents
AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 2010
REGISTRATION
STATEMENT NO. 333-165983
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA REDSTONE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
2741
(Primary Standard Industrial Classification Code Number)
20-8285559
(I.R.S. Employer Identification Number)
239 Jianxin Road, Jiangbei District,
Chongqing, PRC 400000
(86) 023-67755514
239 Jianxin Road, Jiangbei District,
Chongqing, PRC 400000
(86) 023-67755514
Yiyou Ran, Chief Executive Officer
239 Jianxin Road, Jiangbei District,
Chongqing, PRC 400000
(86) 023-67755514
239 Jianxin Road, Jiangbei District,
Chongqing, PRC 400000
(86) 023-67755514
COPY TO:
Kevin K. Leung, Esq.
Francis Chen, Esq.
Suzanne Fu, Esq.
Richardson & Patel LLP
10900 Wilshire Blvd., Suite 500
Los Angeles, CA 90024
(310) 208-1182
Kevin K. Leung, Esq.
Francis Chen, Esq.
Suzanne Fu, Esq.
Richardson & Patel LLP
10900 Wilshire Blvd., Suite 500
Los Angeles, CA 90024
(310) 208-1182
FROM TIME TO TIME AFTER THE
EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
If any of the securities being registered on this form are to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. þ
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b)
under the Securities Act, please check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
CALCULATION OF REGISTRATION FEE
Proposed | Proposed | |||||||||||||||||||||
Amount to | Maximum | Maximum | ||||||||||||||||||||
be | Per Share | Aggregate | Amount of | |||||||||||||||||||
Title of Each Class of | Registered | Offering | Offering | Registration | ||||||||||||||||||
Securities to be Registered | (1) | Price | Price | Fee | ||||||||||||||||||
Common stock, $0.001 par value per share |
1,402,262 | $ | 5.00 | (2) | $ | 7,011,310 | $ | 499.91 | ||||||||||||||
Common stock, $0.001 par value per share
(issuable upon exercise of common stock
purchase warrants) |
771,239 | $ | 5.00 | (3) | $ | 3,856,195 | $ | 274.95 | ||||||||||||||
Total |
2,173,501 | $ | 774.86 | |||||||||||||||||||
(1) | Pursuant to Rule 416 under the Securities Act of 1933, as amended (the Securities Act), this registration statement shall be deemed to cover additional securities (i) to be offered or issued in connection with any provision of any securities purported to be registered hereby to be offered pursuant to terms which provide for a change in the amount of securities being offered or issued to prevent dilution resulting from stock splits, stock dividends, or similar transactions and (ii) of the same class as the securities covered by this registration statement issued or issuable prior to completion of the distribution of the securities covered by this registration statement as a result of a split of, or a stock dividend on, the registered securities. | |
(2) | Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(c) of the Securities Act based upon the average of the high and low prices of the common stock of the Registrant as reported on the Over-the-Counter Bulletin Board on April 7, 2010. | |
(3) | Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(g) under the Securities Act. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary
to delay its effective date until the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. These securities may not be
sold until the registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and no offer to buy these
securities is being solicited in any state where the offer or sale is not permitted.
Table of Contents
The information in this prospectus is not complete and may be changed. The selling stockholders may
not sell these securities until the registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Preliminary Prospectus
Subject to Completion, July ___, 2010
CHINA REDSTONE GROUP, INC.
2,173,501 shares of Common Stock
This prospectus covers the resale by selling security holders named on page 20 of up to
2,173,501 shares of our common stock, $0.001 par value per share, which includes:
| 1,402,262 shares of common stock issued in conjunction with our financing completed on February 23, 2010 (the Financing); | ||
| 701,126 shares of common stock underlying the common stock purchase warrants issued in conjunction with the Financing; and | ||
| 70,113 shares of common stock underlying the common stock purchase warrants issued to our placement agent and its assignees in conjunction with the Financing. |
All of the shares of common stock offered by this prospectus are being sold by the selling
stockholders. It is anticipated that the selling stockholders will sell these shares of common
stock from time to time in one or more transactions, in negotiated transactions or otherwise, at
prevailing market prices or at prices otherwise negotiated (see Plan of Distribution beginning on
page 23). We will not receive any proceeds from the sales by the selling stockholders. We may
receive proceeds from any exercise of outstanding warrants. The selling shareholders may exercise
the warrants on a cashless basis if the shares of common stock underlying the warrants are not then
registered pursuant to an effective registration statement. In the event the selling shareholders
or placement agents exercise the Warrants on a cashless basis, then we will not receive any
proceeds.
Our common stock is quoted on the Over-the-Counter Bulletin Board, commonly known as the
OTCBB, under the symbol CGPI.OB. On July 26, 2010, the last sale price of our common stock on the
OTCBB was $3.75 per share.
No underwriter or person has been engaged to facilitate the sale of shares of our common stock
in this offering. None of the proceeds from the sale of common stock by the selling stockholder
will be placed in escrow, trust or any similar account. There are no underwriting commissions
involved in this offering. We have agreed to pay all the costs of this offering other than
customary brokerage and sales commissions. The selling stockholders will pay no offering expenses
other than those expressly identified in this prospectus.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE RISK FACTORS BEGINNING ON PAGE
6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is July , 2010
2
No offers to sell are made, nor are offers sought, to buy these securities in any jurisdiction
where the offer or sale is not permitted. The reader should assume that the information contained
in this prospectus is accurate as of the date in the front of this prospectus only. Our business,
financial condition, results of operations, and prospectus may have changed since that date.
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Additional Information |
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EX-5.1 | ||||||||
EX-23.2 |
You should rely only on the information contained in this prospectus. We have not authorized anyone
to provide you with information different from that contained in this prospectus. The selling
stockholders are offering to sell shares of our common stock and seeking offers to buy shares of
our common stock only in jurisdictions where such offers and sales are permitted. You should assume
that the information appearing in this prospectus is accurate only as of the date on the front
cover of this prospectus. Our business, financial condition, results of operations and prospects
may have changed since that date.
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Table of Contents
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. The reader should read the
entire prospectus carefully, especially the risks of investing in our common stock discussed under
Risk Factors. Some of the statements contained in this prospectus, including statements under
Summary and Risk Factors as well as those noted in the documents incorporated herein by
reference, are forward-looking statements and may involve a number of risks and uncertainties. We
note that our actual results and future events may differ significantly based upon a number of
factors. The reader should not put undue reliance on the forward-looking statements in this
document, which speak only as of the date on the cover of this prospectus.
Business
China Redstone Group, Inc. (the Company), through our operating entity, Chongqing
Foguang Tourism Development (Group) Co., Ltd. (Foguang), is a private provider of
cemetery products and services in Chongqing, Peoples Republic of China (PRC or
China). Foguang is primarily focused on developing cemeteries and selling cemetery plots,
although it also provide park and garden development and construction services. Foguangs first
cemetery development project was the Chongqing Guiyuan Cemetery I (Guiyuan I), located in
Changshou District of Chongqing on approximately 66,660 square meters of land. The entire cemetery
plots of Guiyuan I have been sold, at an average price of RMB 30,000 ($4,412) per plot. Foguang is
currently developing the Chongqing Guiyuan Cemetery II (Guiyuan II), its second cemetery
project in Changshou. Guiyuan II, in development since 2002, occupies a land over 667,000 square
meters, of which approximately 46,620 square meters have been developed to date and 620,000 square
meters remain undeveloped. Approximately 565,000 square meters are identified as land to be
developed as a cemetery and the remaining area will be developed as housing, parking and office
space in the future.
Both Guiyuan I and Guiyuan II are among the most highly regarded facilities in their market
area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume
of business, available inventory, name recognition, aesthetics and potential for development or
expansion. In 2006 and 2007, Foguang was ranked amongst the top 50 private-owned enterprises in
Chongqing by the Xinhuanet News Domestic, Xinhua News Agency.
In addition, the Chongqing municipal government has committed to enable Foguang to secure the
land use rights to approximately 1,194,804 square meters of land surrounding Longqiao Lake, which
portions of Guiyuan II overlook. However, as of the date of this prospectus, Foguang has yet to
officially receive such land use rights. Foguang is planning to develop this land as a park, with
mausoleums and temples, to complement and enhance Guiyuan II. The purpose of the Longqiao Lake
project is to make full use of Foguangs land resources, to cultivate and produce flower seeds, and
to increase the overall green effect of its park. So far, Foguang has invested nearly RMB 12
million (approximately US $1.77 million) to cultivate the land for the planting of nursery
seedlings and the purchasing of nursery seedlings. A part of such seedlings will be used for the
development of Guiyuan II, and the remaining seedlings will be sold either to the Changshou
district government for urban landscaping or to outside parties for profit.
History and Corporate Structure
The Company was incorporated in Delaware on July 10, 2007, originally under the name Artistry
Publications, Inc. for the purpose of entering the photography industry and establishing a large
scale photography publishing business focused on American History. The Companys plan was to
develop a successful photo journal publishing company by depicting history and producing excellent
affordable artwork in practical items to entertain and educate.
On February 10, 2010, the Company entered into a share exchange agreement (Share Exchange
Agreement) under which it issued 8,800,000 shares of its common stock, par value $0.001, to
the shareholders of Gold Industry Limited (Gold Industry), a Cayman Island company, in
exchange for all the issued and outstanding shares of Gold Industry (the Share Exchange).
As a result of the Share Exchange, Gold Industry became the Companys wholly-owned subsidiary, and
Gold Industry shareholders acquired a majority of the Companys issued and outstanding stock.
Concurrent with the Share Exchange, Mr. Yiyou Ran (the managing director of Gold Industry, and all
of its operating subsidiaries, Mr. Ran) was appointed the Chief Executive Officer of the
Company.
As a result, the Share Exchange has been accounted for as a reverse acquisition using the
purchase method of accounting, whereby Gold Industry is deemed to be the accounting acquirer (legal
acquire) and the Company to be
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the accounting acquire (legal acquirer). The financial statements before the date of Share
Exchange are those of Gold Industry, with the results of the Company being consolidated from the
date of Share Exchange. The equity section and earnings per share have been retroactively restated
to reflect the reverse acquisition and no goodwill has been recorded.
All of our business operations are carried out by Foguang, which the Company controls through
contractual arrangements between Foguang and Chongqing Ran Ji Industrial Co., Ltd. (Ran
Ji), a company wholly-owned by Gold Holy Industry Limited (Gold Holy). Gold Holy is
wholly-owned by Gold Industry. Through these contractual arrangements, the Company has the ability
to substantially influence Foguangs daily operations and financial affairs, appoint its senior
executives and approve all matters requiring shareholder approval. As a result of these contractual
arrangements, which enable the Company to control Foguang and to receive through Ran Ji all of
Foguangs net income, the Company is considered the primary beneficiary of Foguang. Accordingly, the
Company consolidates Foguangs results, assets and liabilities in its financial statements. Other
than the Companys interests in the contractual arrangements, neither the Company, Gold Industry,
Gold Holy and Ranji own any equity interests in Foguang.
However,
Chinese laws and regulations concerning the validity of the
contractual arrangements is uncertain, as many of these laws and regulations are relatively new and may be subject to
change, and their official interpretation and enforcement by the Chinese government involves
substantial uncertainty. Additionally, the contractual arrangements may not be as effective in
providing control over Foguang as direct ownership, which we are restricted from under current
Chinese law. Due to such uncertainty, the Company may take such additional steps in the future as
may be permitted by the then applicable laws and regulations in China to further strengthen its
control over or toward actual ownership of Foguang or its assets or business operations, which
could include direct ownership of selected assets without jeopardizing any favorable government
policies toward domestic owned enterprises. Because the Company relies on Foguang for its revenue,
any termination of or disruption to the contractual arrangements would detrimentally affect its
business and financial condition.
On April 6, 2010, the Company changed its name from Artistry Publications, Inc. to China
Redstone Group, Inc. to better reflect its business directions.
Financing Transaction
In February 2010, we completed a financing transaction with 24 institutional and/or accredited
investors (collectively the Purchasers) pursuant to which we sold $4,599,415 of units of
our equity securities to the Purchasers in a private placement (the
Financing). Each
unit is comprised of 100,000 shares of our common stock, par value $0.001 per share (the
Common Stock), at a per share purchase price of $3.28 per share, and warrants to purchase
up to 50,000 shares of Common Stock. At the closing of the Transaction on February 23, 2010, we
issued 1,402,262 shares of Common Stock and four-year warrants to purchase 701,126 shares of Common
Stock (the Warrants). In addition, we issued warrants to purchase up to 70,113 shares of
common stock to our placement agent and its assignees for the Financing.
Financial Results
For the fiscal years ended March 31, 2010 and 2009, we had approximately $36.5 million and
$18.31 million in sales, respectively and approximately $12.3 million and $5.50 million in net
income, respectively. Our consolidated financial statements for such periods are included in this
prospectus.
Historical results are not necessarily indicative of the results that may be expected for any
future period. When you read the included historical financial data, it is important that you read
along with it the appropriate historical consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial Condition and Results of Operations included
elsewhere in this prospectus.
The Offering
Common stock offered by the selling stockholders: |
2,173,501 shares (1) | |
Common stock outstanding:
|
12,659,762 shares (2) |
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Use of proceeds:
|
We will not receive any proceeds from the sales by the selling stockholders. We may receive proceeds from any exercise of outstanding warrants. The selling shareholders may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event the selling shareholders exercise the Warrants on a cashless basis, then we will not receive any proceeds. | |
Risk factors:
|
An investment in our common stock involves a high degree of risk. You should carefully consider the information set forth in this prospectus and, in particular, the specific factors set forth in the Risk Factors section beginning on page 6 of this prospectus before deciding whether or not to invest in shares of our common stock. | |
OTC Bulletin Board symbol:
|
CGPI.OB |
(1) | Includes 771,239 shares of our common stock issuable upon exercise of outstanding common stock purchase warrants. | |
(2) | Represents the number of shares of our common stock outstanding as of April 7, 2010 and excludes 771,239 shares of our common stock issuable upon exercise of our outstanding common stock purchase warrants. |
General Information
Our principal executive offices are located at 239 Jianxin Road, Jiangbei District, Chongqing,
PRC 400000 and our telephone number is (86) 023-67755514.
RISK FACTORS
The reader should carefully consider the risks described below together with all of the other
information included in this prospectus. The statements contained in or incorporated into this
prospectus that are not historic facts are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those set forth in or
implied by forward-looking statements. If any of the following risks actually occurs, our business,
financial condition or results of operations could be harmed. In that case, the trading price of
our common stock could decline, and an investor in our securities may lose all or part of their
investment.
Risks Relating to Our Business and Industry
Declines in the number of deaths in Foguangs markets can cause a decrease in revenues. Changes in
the number of deaths are not predictable from market to market or over the short term, and reliable
statistics on deaths in particular markets can be difficult to obtain.
Declines in the number of deaths could cause cemetery services, property and merchandise to
decline which could decrease revenues. Although the National Population and Family Planning
Commission of the PRC estimates that the population of people that are 50 years old or older are
expected to increase by approximately 3% per year, from 276.8 million in 2000 to 298.6 million in
2010, longer life spans could reduce the rate of deaths. Changes in the number of deaths can vary
among local markets and from quarter to quarter, and variations in the number of deaths in
Foguangs markets or from quarter to quarter are not predictable. These variations can cause
revenues to fluctuate.
The death care industry continues to be increasingly competitive and as a result, Foguang may lose
market share to its competitors.
In China, the death care industry is characterized by a large number of locally owned and
independent operations. To compete successfully, Foguangs cemeteries must be maintained in good
condition and Foguang must maintain good reputations and high professional standards, as well as
offer attractive products and services at competitive prices. In addition, Foguang must be marketed
in such a manner as to distinguish itself from its competitors. Foguang
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has historically experienced price competition from independent cemetery operators. New market
entrants tend to attempt to build market share by offering lower cost alternatives. If Foguang is
unable to successfully compete by offering attractive products and services pursuant to consumer
preferences and at competitive prices, Foguang may lose market share to its competitors, and the
Companys financial condition, results of operations, and cash flows could be materially adversely
affected.
Because the cemetery business is a high fixed-cost business, positive or negative changes in
revenue can have a disproportionately large effect on cash flow and profits.
The cemetery business must incur many of the costs of operating and maintaining facilities,
land and equipment regardless of the level of sales in any given period. For example, Foguang must
pay salaries, utilities, property taxes and maintenance costs and maintain the grounds of
cemeteries regardless of the number of sales. Because Foguang cannot decrease these costs
significantly or rapidly when it experiences declines in sales, declines in sales can cause
margins, profits and cash flow to decline at a greater rate than the decline in revenues.
Changes or increases in, or failure to comply with, regulations applicable to Foguangs business
could increase costs or decrease cash flows.
The death care industry is subject to extensive regulation and licensing requirements under
state and local laws. Any construction of cemetery must be approved by the Administration of Civil
Affairs and the construction must be limited away from a certain areas such as cultivated land,
forest land, urban parks, scenic spots, protected areas of water resources, railways and highways.
Compliance with these regulations is burdensome, and Foguang is always at risk of not complying
with the regulations.
In addition, from time to time, governments and agencies propose to amend or add regulations,
which could increase costs or decrease cash flows. If additional legislation or regulations are
adopted by the regulatory authorities of the jurisdictions in which Foguang operates, these and
other possible proposals could have a material adverse effect on the Company, our financial
condition, our results of operations, our cash flows and our future prospects.
If Foguang is not able to respond effectively to changing consumer preferences, its market
share, revenues and profitability could decrease.
Future market shares, revenues and profits will depend in part on Foguangs ability to
anticipate, identify and respond to changing consumer preferences. In past years, Foguang has
implemented new product and service strategies based on results of customer surveys that it
conducts on a continuous basis. However, Foguang may not correctly anticipate or identify trends in
consumer preferences, or Foguang may identify them later than its competitors do. In addition, any
strategies Foguang may implement to address these trends may prove incorrect or ineffective.
Foguangs ability to generate sales depends on a number of factors such as sales strategies and
sales incentives.
Declines in sales would reduce Foguangs revenues and could reduce its future market share.
Foguang has modified its sales strategies to local standards, such as focusing on face-to-face
interaction and spending more time communicating with its customers since the death care business
is a sensitive business requiring compassion and understanding. Foguang is also continuing to
create a more efficient and competitive sales commission and incentive structure in order to
retain good salespeople If Foguang cannot retain good salespeople or if its sales strategies and
sales incentives are ineffective, Foguang could experience declines in sales in the short-run.
Foguangs ability to generate sales depends on local and general economic conditions.
In addition, a weakening economy at the local or national level could cause customers to
reduce discretionary spending, especially spending on pre-need funeral planning or death care
products and services for family members. Also, the growth of the Chinese economy has been uneven
across geographic regions and economic sectors. There can be no assurance that growth of the
Chinese economy will be steady or that any downturn will not have a negative effect on Foguangs
business, especially if it results in either a decreased use of Foguangs products or in pressure
on Foguang to lower its prices. A weak economy could lead to a decline in cemetery sales and/or a
decrease in the
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amounts customers are willing to pay for cemetery products and services. Declines in cemetery
property sales and average revenue per event would reduce Foguangs current revenues. Declines in
cemetery products and services could also reduce Foguangs future revenues and market share.
The success of Foguangs business is typically dependent upon one or a few key employees because of
the localized and personal nature of its business.
Death care businesses have built local heritage and tradition through successive generations,
providing a foundation for ongoing business opportunities from established client family
relationships and related referrals. Foguang believes these relationships build trust in the
community and are a key driver to market share. Foguangs business, which tends to serve small
local markets, has a few key employees that drive its relationships. In particular, we depend on
the services of the two co-founders of Foguang, Mr. Yiyou Ran, who is also our Chief Executive
Officer, President and Chairman of our board of directors, and Mr. Jianquan Chen, who is also a
member of our board of directors. Mr. Ran is responsible for the strategic direction and business
of Foguang. Mr. Chen is responsible for the management of business operations and organization of
Foguang. We also depend on Mr. Anshan Chen, the Vice General Manager of Foguang, since Mr. Chen
plays a key role by developing the sales and distribution channel for Foguang. Currently, neither
we nor Foguang have employment agreements with these key employees and we can give no assurance
that we or Foguang can retain these employees or that these relationships will drive market share.
Foguangs limited operating history may make it difficult for it to respond to changes in the
regulatory environment compared to its competitors, which may have more resources and experience
compared to Foguang.
Foguang, which commenced business in 2002, has a limited operating history and may be
inexperienced in responding to changes in the regulatory environment compared to its competitors.
Foguangs current or potential competitors, many of which have substantial resources, may have more
resources and experience dealing with changes in the regulatory environment compared to Foguang.
Accordingly, you should consider Foguangs future prospects in light of the risks and uncertainties
experienced by early-stage companies in China. If Foguang is unable to respond to changes in the
regulatory environment quickly and effectively, its business may be materially and adversely
affected.
Foguang may be unable to sustain its past growth or manage its future growth, which may have a
material adverse effect on our future operating results.
Foguang has experienced rapid growth since its inception, and has increased its net sales from
$5 million in 2002 to $36.5 million for the fiscal year ended March 31, 2010. We anticipate that
Foguangs future growth rate will depend upon various factors, including the strength of its brand
image, the market success of its current and future products, the success or its growth strategies,
competitive conditions and its ability to manage our future growth. Future growth may place a
significant strain on its management and operations. As Foguang continues to grow in its
operations, its operational, administrative, financial and legal procedures and controls will need
to be expanded. As a result, it may need to train and manage an increasing number of employees,
which could distract its management team from its business. Foguangs future success will depend
substantially on the ability of its management team to manage its anticipated growth. If Foguang is
unable to anticipate or manage its growth effectively, our future operating results could be
adversely affected.
Corporate insiders or their affiliates may be able to exercise significant control matters
requiring a vote of our stockholders and their interests may differ from the interests of our other
stockholders.
As of March 31, 2010, our officers, directors and their affiliates as a group beneficially own
approximately 57.8% of our then outstanding Common Stock. As a result, these stockholders may be
able to exercise significant control over matters requiring approval by our stockholders. Matters
that require the approval of our stockholders include the election of directors and the approval of
mergers or other business combination transactions. Certain transactions are effectively not
possible without the approval of these officers, directors and their affiliates, including, proxy
contests, tender offers, open market purchase programs or other transactions that can give our
stockholders the opportunity to realize a premium over the then-prevailing market prices for their
shares of our common stock.
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We will be required to evaluate our internal control over financial reporting under Section 404 of
the Sarbanes-Oxley Act.
Failure to timely comply with the requirements of Section 404 of the Sarbanes-Oxley Act of
2002 (Section 404) or any adverse results from such evaluation could result in a loss of
investor confidence in our financial reports and have an adverse effect on the trading price of our
debt and equity securities.
We currently are not an accelerated filer as defined in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to
include an internal control report with our annual report on Form 10-K. That report must include
managements assessment of the effectiveness of our internal control over financial reporting as of
the end of the fiscal year. This report must also include disclosure of any material weaknesses in
internal control over financial reporting that we have identified. Additionally, for the fiscal
year ended March 31, 2011, our independent registered public accounting firm will be required to
issue a report on managements assessment of our internal control over financial reporting and
their evaluation of the operating effectiveness of our internal control over financial reporting.
Our assessment requires us to make subjective judgments and our independent registered public
accounting firm may not agree with our assessment.
Achieving compliance with Section 404 within the prescribed period may require us to incur
significant costs and expend significant time and management resources. We cannot assure you that
we will be able to fully comply with Section 404 or that, we and our independent registered public
accounting firm would be able to conclude that our internal reported financial information, which
could have an adverse effect on the trading price of our securities, as well as subject us to civil
or criminal investigations and penalties. In addition, our independent registered public accounting
firm may not agree with our managements assessment or conclude that our internal control over
financial reporting is operating effectively. We will continue to consistently improve our internal
control over the financial reporting with our best efforts and we plan to engage assistance from
outside experts in doing so.
Risks Related to Our Corporate Structure
We conduct our business through Foguang by means of contractual arrangements. If the Chinese
government determines that these contractual arrangements do not comply with applicable
regulations, our contractual arrangements may become invalid or unenforceable.
There are uncertainties regarding the interpretation and application of PRC laws, rules and
regulations, including but not limited to the laws, rules and regulations governing the validity
and enforcement of the contractual arrangements between Ran Ji and Foguang. Although we have been
advised by our PRC counsel, that based on their understanding of the current PRC laws, rules and
regulations, the structure for operating our business in China (including our corporate structure
and contractual arrangements with Foguang and its owners) comply with all applicable PRC laws,
rules and regulations, and do not violate, breach, contravene or otherwise conflict with any
applicable PRC laws, rules or regulations, we cannot assure you that the PRC regulatory authorities
will not determine that our corporate structure and contractual arrangements violate PRC laws,
rules or regulations. If the PRC regulatory authorities determine that our contractual arrangements
are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will
become invalid or unenforceable. In addition, new PRC laws, rules and regulations may be introduced
from time to time to impose additional requirements that may be applicable to our contractual
arrangements. For example, the PRC Property Rights Law that became effective on October 1, 2007 may
require us to register with the relevant government authority the security interests on the equity
interests in Foguang granted to us under the equity pledge agreements that are part of the
contractual arrangements. If we are required to register such security interests, failure to
complete such registration in a timely manner may result in such equity pledge agreements to be
unenforceable against third party claims.
If the PRC regulatory bodies determine that the contractual arrangements by which we control
Foguang do not comply with PRC regulatory restrictions on foreign investment, we or Foguang could
be subject to severe penalties, which may materially and adversely affect our business.
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The Chinese government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and requiring actions
necessary for compliance. In particular, licenses and permits issued or granted to us by relevant
governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict
the effect of the interpretation of existing or new Chinese laws or regulations on our businesses.
We cannot assure you that our current ownership and operating structure would not be found in
violation of any current or future Chinese laws or regulations. As a result, we may be subject to
sanctions, including fines, and could be required to restructure our operations or cease to provide
certain services. Any of these or similar actions could significantly disrupt our business
operations or restrict us from conducting a substantial portion of our business operations, which
could materially and adversely affect our business, financial condition and results of operations.
If Ran Ji or Foguang are determined to be in violation of any existing or future PRC laws,
rules or regulations or fail to obtain or maintain any of the required governmental permits or
approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such
violations, including:
| revoking the business and operating licenses of Ran Ji or Foguang; | ||
| discontinuing or restricting the operations of Ran Ji or Foguang; | ||
| imposing conditions or requirements with which Ran Ji or Foguang may not be able to comply; | ||
| requiring Ran Ji or Foguang to restructure the relevant ownership structure or operations; or | ||
| imposing fines. | ||
The imposition of any of these penalties would severely disrupt our ability to conduct
business and have a material adverse effect on our financial condition, results of operations and
prospects.
Our contractual arrangements with Foguang and its owners may not be as effective in providing
control over these entities as direct ownership.
We have no equity ownership interest in Foguang, and rely on contractual arrangements to control
and operate the company and its businesses. These contractual arrangements may not be as effective
in providing control over the company as direct ownership. For example, Foguang could fail to take
actions required for our business despite its contractual obligation to do so. If Foguang fails to
perform under its agreements with us, we may have to rely on legal remedies under Chinese law,
which may not be effective. In addition, we cannot assure you that the owners of Foguang will act
in our best interests.
Because we rely on the consulting services agreement with Foguang for our revenue, the termination
of this agreement will severely and detrimentally affect our continuing business viability under
our current corporate structure.
We are a holding company and do not have any assets or conduct any business operations other
than the contractual arrangements between Ran Ji, our indirect wholly owned subsidiary, and
Foguang. As a result, we currently rely entirely for our revenues on dividends payments from Ran Ji
after it receives payments from Foguang pursuant to the consulting services agreement which forms a
part of the contractual arrangements. The consulting services agreement may be terminated by
written notice of Ran Ji or Foguang in the event that: (a) Foguang causes a material breach of the
agreement, provided that if the breach does not relate to a financial obligation of the breaching
party, that party may attempt to remedy the breach within 14 days following the receipt of the
written notice; (b) one party becomes bankrupt, insolvent, is the subject of proceedings or
arrangements for liquidation or dissolution, ceases to carry on business, or becomes unable to pay
its debts as they become due; (c) Ran Ji terminates its operations; or (d) circumstances arise
which would materially and adversely affect the performance or the objectives of the agreement.
Additionally, Ran Ji may terminate the consulting services agreement without cause. Because neither
we nor our direct and indirect subsidiaries own equity interests of Foguang, the termination of the
consulting services agreement would sever our ability to continue receiving payments from Foguang
under our current holding company structure. While we are currently not aware of any event or
reason that may cause the consulting services agreement
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to terminate, we cannot assure you that such an event or reason will not occur in the future.
In the event that the consulting services agreement is terminated, this may have a severe and
detrimental effect on our continuing business viability under our current corporate structure,
which in turn may affect the value of your investment.
We rely principally on dividends paid by our consolidated operating entity to fund any cash and
financing requirements we may have, and any limitation on the ability of our consolidated PRC
entities to pay dividends to us could have a material adverse effect on our ability to conduct our
business.
We are a holding company, and rely principally on dividends paid by our consolidated PRC
operating entity for cash requirements, including the funds necessary to service any debt we may
incur. In particular, we rely on earnings generated by Foguang, which are passed on to us through
Ran Ji. If any of our consolidated operating subsidiaries incurs debt in its own name in the
future, the instruments governing the debt may restrict dividends or other distributions on its
equity interest to us. In addition, the PRC tax authorities may require us to adjust our taxable
income under the contractual arrangements Ran Ji currently have in place with Foguang, in a manner
that would materially and adversely affect our ability to pay dividends and other distributions on
our equity interest.
Furthermore, applicable PRC laws, rules and regulations permit payment of dividends by our
consolidated PRC entity only out of its retained earnings, if any, determined in accordance with
PRC accounting standards. Under PRC laws, rules and regulations, our consolidated PRC entities are
required to set aside at least 10.0% of their after-tax profit based on PRC accounting standards
each year to their statutory surplus reserve fund until the accumulative amount of such reserves
reach 50.0% of their respective registered capital. As a result, our consolidated PRC entity is
restricted in its ability to transfer a portion of its net income to us whether in the form of
dividends, loans or advances. As of March 31, 2010, we had retained earnings of approximately $18.7
million. Our retained earnings are not distributable as cash dividends. Any limitation on the
ability of our consolidated operating subsidiaries to pay dividends to us could materially and
adversely limit our ability to grow, make investments or acquisitions that could be beneficial to
our businesses, pay dividends or otherwise fund and conduct our business.
Certain management members of Foguang may have potential conflicts of interest with us which may
result in a breach of their fiduciary duties to us, which may adversely affect our business.
Mr. Yiyou Ran, our Chief Executive Officer and President, is also the Chairman of the board of
directors of Foguang. Mr. Jianquan Chen, who is a member of our board of directors, is the General
Manager of Foguang. Conflicts of interests between their respective duties to our Company and
Foguang may arise. As our directors and executive officer (in the case of Mr. Ran), they have a
duty of loyalty and care to us under U.S. and Hong Kong law when there are any potential conflicts
of interests between our Company and Foguang. We cannot assure you; however, that when conflicts of
interest arise, every one of them will act completely in our interests or that conflicts of
interests will be resolved in our favor. We cannot assure you that they will not breach their
fiduciary duties which require that they exercise good faith and due care in handling our affairs,
For example, they may determine that it is in Foguangs interests to sever the contractual
arrangements with Ran Ji; irrespective of the effect such action may have on us. In addition, any
one of them could violate his legal duties by diverting business opportunities from us to others,
thereby affecting the amount of payment that Foguang is obligated to remit to us under the
consulting services agreement, which may adversely affect our business.
Our officers and directors may allocate their time to other businesses, including engaging in
business activities competitive with the Company or Foguang, which may cause conflicts of interest
and adversely affect our business.
Mr. Yiyou Ran, Mr. Michael Wang, and our non-independent directors have the ability to
allocate their time to other businesses and activities, including engaging in business activities
competitive with the Company or Foguang, thereby causing possible conflicts of interest. If these
individuals decide to engage in competitive business activities or be involved with other business
affairs requiring them to devote more substantial amounts of time to such affairs, it could create
conflicts of interest and have a negative impact on our ongoing business.
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Risks Related to Doing Business in China
Foguang is subject to restrictions on making payments to us.
We are a holding company incorporated in Delaware and do not have any assets or conduct any
business operations other than our indirect investments in Foguang. As a result of our holding
company structure, we rely entirely on payments from that company under the contractual
arrangements with our indirect wholly owned subsidiary, Ran Ji. The Chinese government also imposes
controls on the conversion of RMB into foreign currencies and the remittance of currencies out of
China. We may experience difficulties in completing the administrative procedures necessary to
obtain and remit foreign currency. See Government control of currency conversion may affect the
value of your investment. Furthermore, if our affiliated entity in China incurs debt on their own
in the future, the instruments governing the debt may restrict their ability to make payments. If
we are unable to receive all of the revenues from our operations through these contractual
arrangements, we may be unable to pay dividends on our ordinary shares.
New labor laws in the PRC may adversely affect Foguangs results of operations.
On January 1, 2008, the PRC government promulgated the Labor Contract Law of the PRC, or the
New Labor Contract Law. The New Labor Contract Law imposes greater liabilities on employers and
significantly impacts the cost of an employers decision to reduce its workforce. Further, it
requires certain terminations to be based upon seniority and not merit. In the event Foguang
decides to significantly change or decrease its workforce, the New Labor Contract Law could
adversely affect its ability to enact such changes in a manner that is most advantageous to its
business or in a timely and cost effective manner, thus materially and adversely affecting
Foguangs financial condition and results of operations.
Because our assets are located overseas, shareholders may not receive distributions that they would
otherwise be entitled to if we were declared bankrupt or insolvent.
All of our assets are located in the PRC. Because our assets are located overseas, our assets
may be outside of the jurisdiction of U.S. courts to administer if we are the subject of an
insolvency or bankruptcy proceeding. As a result, if we declared bankruptcy or insolvency, our
shareholders may not receive the distributions on liquidation that they would otherwise be entitled
to if our assets were to be located within the U.S., under U.S. Bankruptcy law.
Adverse changes in economic and political policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could adversely affect Foguangs
business.
All of Foguangs business operations are currently conducted in the PRC, under the
jurisdiction of the PRC government. Accordingly, our results of operations, financial condition and
prospects are subject to a significant degree to economic, political and legal developments in
China. Chinas economy differs from the economies of most developed countries in many respects,
including with respect to the amount of government involvement, level of development, growth rate,
and control of foreign exchange and allocation of resources. While the PRC economy has experienced
significant growth in the past 20 years, growth has been uneven across different regions and among
various economic sectors of China. The PRC government has implemented various measures to encourage
economic development and guide the allocation of resources. Some of these measures benefit the
overall PRC economy, but may also have a negative effect on us. For example, our financial
condition and results of operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to Foguang. Since early 2004, the PRC
government has implemented certain measures to control the pace of economic growth. Such measures
may cause a decrease in the level of economic activity in China, which in turn could adversely
affect our results of operations and financial condition.
Unprecedented rapid economic growth in China may increase Foguangs costs of doing business, and
may negatively impact our profit margins and/or profitability.
Foguangs business depends in part upon the availability of relatively low-cost labor and
materials. Rising wages in China may increase its overall costs of production. In addition, rising
raw material costs, due to strong demand and
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greater scarcity, may increase Foguangs overall costs of production. If Foguang is not able
to pass these costs on to its customers in the form of higher prices, our profit margins and/or
profitability could decline.
You may face difficulties in protecting your interests, and your ability to protect your rights
through the U.S. federal courts may be limited, because our subsidiaries are incorporated in
non-U.S. jurisdictions, we conduct substantially all of our operations in China, and all of our
officers reside outside the United States.
Although we are incorporated in Delaware, all of our business operations are conducted in
China by Foguang. Most of our officers and directors reside in China and some or all of the assets
of those persons are located outside of the United States. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in China in the event
that you believe that your rights have been infringed under the securities laws or otherwise. Even
if you are successful in bringing an action of this kind, the laws of the PRC may render you unable
to enforce a judgment against our assets or the assets of our directors and officers.
As a result of all of the above, our public shareholders may have more difficulty in
protecting their interests through actions against our management, directors or major shareholders
than would shareholders of a corporation doing business entirely within the United States.
Governmental control of currency conversion may affect the value of your investment.
The Chinese government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive substantially all of our
revenues in RMB. Under our current structure, our income is primarily derived from payments from
Foguang. Shortages in the availability of foreign currency may restrict the ability of our Chinese
subsidiaries and our affiliated entity to remit sufficient foreign currency to pay dividends or
other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under
existing Chinese foreign exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade-related transactions, can be made in
foreign currencies without prior approval from China State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency and remitted out of
China to pay capital expenses such as the repayment of bank loans denominated in foreign
currencies. The Chinese government may also at its discretion restrict access in the future to
foreign currencies for current account transactions. If the foreign exchange control system
prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not
be able to pay dividends in foreign currencies to our stockholders.
Fluctuation in the value of RMB may have a material adverse effect on your investment.
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected
by, among other things, changes in political and economic conditions. Our revenues and costs are
mostly denominated in RMB, while a significant portion of our financial assets are denominated in
U.S. dollars. We rely entirely on fees paid to us by our affiliated entity in China. Any
significant fluctuation in the value of RMB may materially and adversely affect our cash flows,
revenues, earnings and financial position, and the value of, and any dividends payable on, our
stock in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any
new RMB denominated investments or expenditures more costly to us, to the extent that we need to
convert U.S. dollars into RMB for such purposes. An appreciation of RMB against the U.S. dollar
would also result in foreign currency translation losses for financial reporting purposes when we
translate our U.S. dollar denominated financial assets into RMB, as RMB is our reporting currency.
Dividends we receive from our subsidiary located in the PRC may be subject to PRC withholding tax.
The recently enacted PRC Enterprise Income Tax Law, or the EIT Law, and the implementation
regulations for the EIT Law issued by the PRC State Council, became effective as of January 1,
2008. The EIT Law provides that a maximum income tax rate of 20% is applicable to dividends payable
to non-PRC investors that are non-resident enterprises, to the extent such dividends are derived
from sources within the PRC, and the State Council has reduced such rate to 10% through the
implementation regulations. We are a Delaware holding company and substantially all
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of our income is derived from the operations of Foguang located in the PRC, which is
contractually obligated to pay its quarterly profits to our WFOE. Therefore, dividends paid to us
by our WFOE in China may be subject to the 10% income tax if we are considered as a non-resident
enterprise under the EIT Law. If we are required under the EIT Law and its implementation
regulations to pay income tax for any dividends we receive from our WFOE, it may have a material
and adverse effect on our net income and materially reduce the amount of dividends, if any, we may
pay to our shareholders.
Foguang faces risks related to health epidemics and other outbreaks.
Foguangs business could be adversely affected by the effects of an epidemic outbreak, such as
the SARS epidemic in April 2004. Any prolonged recurrence of such adverse public health
developments in China may have a material adverse effect on Foguangs business operations. For
instance, health or other government regulations adopted in response may require temporary closure
of Foguangs stores or offices. Such closures would severely disrupt Foguangs business operations
and adversely affect its results of operations. Foguang has not adopted any written preventive
measures or contingency plans to combat any future outbreak of SARS or any other epidemic.
If Foguangs land use rights are revoked, it would have no operational capabilities.
Under Chinese law land is owned by the state or rural collective economic organizations. The
state issues to the land users the land use right certificate. Land use rights can be revoked and
the land users forced to vacate at any time when redevelopment of the land is in the public
interest. The public interest rationale is interpreted quite broadly and the process of land
appropriation may be less than transparent. Each of Foguangs cemeteries relies on these land use
rights as the cornerstone of its operations, and the loss of such rights would have a material
adverse effect on its business prospects.
Because Foguangs funds are held in banks which do not provide insurance, the failure of any bank
in which it deposits its funds could affect its ability to continue in business.
Banks and other financial institutions in the PRC do not provide insurance for funds held on
deposit. A significant portion of Foguangs assets are in the form of cash deposited with banks in
the PRC, and in the event of a bank failure, it may not have access to its funds on deposit.
Depending upon the amount of money Foguang maintains in a bank that fails, its inability to have
access to its cash could impair its operations, and, if Foguang is not able to access funds to pay
its suppliers, employees and other creditors, it may be unable to continue in business.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to
penalties and other adverse consequences.
As our ultimate holding company is a Delaware corporation, we are subject to the United States
Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in
bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may
occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other
agents will not engage in such conduct for which we might be held responsible. If our employees or
other agents are found to have engaged in such practices, we could suffer severe penalties and
other consequences that may have a material adverse effect on our business, financial condition and
results of operations.
If we make equity compensation grants to persons who are PRC citizens, they may be required to
register with the State Administration of Foreign Exchange of the PRC, or SAFE. We may also face
regulatory uncertainties that could restrict our ability to adopt an equity compensation plan for
our directors and employees and other parties under PRC law.
On April 6, 2007, SAFE issued the Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas
Listed Company, also known as Circular 78. It is not clear whether Circular 78 covers all forms
of equity compensation plans or only those which provide for the granting of stock options. For any
plans which are so covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with
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and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular
78 also requires PRC citizens to register with SAFE and make the necessary applications and filings
if they participated in an overseas listed companys covered equity compensation plan prior to
April 6, 2007. We have adopted an equity compensation plan in the future and intend to make
securities grants to our officers and directors, most of who are PRC citizens. Circular 78 may
require our officers and directors who receive option grants and are PRC citizens to register with
SAFE. We believe that the registration and approval requirements contemplated in Circular 78 will
be burdensome and time consuming. If it is determined that any of our equity compensation plans are
subject to Circular 78, failure to comply with such provisions may subject us and participants of
our equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from
being able to grant equity compensation to our PRC employees. In that case, our ability to
compensate our employees and directors through equity compensation would be hindered and our
business operations may be adversely affected.
Because Foguang is located in the PRC, we may have difficulty establishing adequate management,
legal and financial controls, which we are required to do in order to comply with U.S. securities
laws.
PRC companies have historically not adopted a US style of management and financial reporting
concepts and practices, which includes strong corporate governance, internal controls and,
computer, financial and other control systems. Most of our middle and top management staff are not
educated and trained in the US system, and we may have difficulty hiring new employees in the PRC
with such training. In addition, we may have difficulty in hiring and retaining a sufficient number
of qualified employees to work in the PRC. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and instituting business
practices that meet US standards. Therefore, we may, in turn, experience difficulties in
implementing and maintaining adequate internal controls as required under Section 404 of the
Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in
our internal controls which could impact the reliability of our financial statements and prevent us
from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of
2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse
effect on our business.
Foguang is subject to a variety of environmental laws and regulations related to its operations,
and Foguang may become subject to forthcoming environmental regulations enacted in response to
climate change. Foguangs failure to comply with environmental laws and regulations may have a
material adverse effect on our business and results of operations.
Foguang is subject to various environmental laws and regulations for its cemetery operations.
We cannot assure you that at all times Foguang will be in compliance with environmental laws and
regulations or its environmental permits or that it will not be required to expend significant
funds to comply with, or discharge liabilities arising under, environmental laws, regulations and
permits. In addition, future environmental regulations that are enacted in response to global and
regional climate change could place additional burdens on Foguangs operations. Complying with
existing and possible future environmental laws and regulations, including laws and regulations
relating to climate change, may impose upon Foguang the need for additional capital equipment or
other process requirements, restrict its ability to expand its operations, disrupt its operations,
increase costs, subject it to liability or cause it to curtail its operations.
Risks Related to an Investment in Our Securities
Our stock is categorized as a penny stock. Trading of our stock may be restricted by the SECs
penny stock regulations which may limit a shareholders ability to buy and sell our stock.
Our stock is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally
defines penny stock to be any equity security that has a market price (as defined) less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.
Our securities are covered by the penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established customers and accredited
investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock
not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form
prepared by the SEC which provides information about penny stocks and the nature and level of risks
in the penny stock market. The broker-dealer also must provide the customer with current bid and
offer quotations for the penny stock, the
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compensation of the broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customers account. The bid and
offer quotations, and the broker-dealer and salesperson compensation information, must be given to
the customer orally or in writing prior to effecting the transaction and must be given to the
customer in writing before or with the customers confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from these rules; the
broker-dealer must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchasers written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of trading activity in the
secondary market for the stock that is subject to these penny stock rules. Consequently, these
penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that
the penny stock rules discourage investor interest in and limit the marketability of our common
stock.
FINRA sales practice requirements may also limit a shareholders ability to buy and sell our stock.
In addition to the penny stock rules described above, FINRA has adopted rules that require
that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to recommending speculative low
priced securities to their non-institutional customers, broker-dealers must make reasonable efforts
to obtain information about the customers financial status, tax status, investment objectives and
other information. Under interpretations of these rules, FINRA believes that there is a high
probability that speculative low priced securities will not be suitable for at least some
customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
We expect to experience volatility in our stock price, which could negatively affect shareholders
investments.
The market price for shares of our common stock may be volatile and may fluctuate based upon a
number of factors, including, without limitation, business performance, news announcements or
changes in general market conditions.
Other factors, in addition to the those risks included in this section, that may have a
significant impact on the market price of our common stock include, but are not limited to:
| receipt of substantial orders or order cancellations of products; | ||
| quality deficiencies in services or products; | ||
| international developments, such as technology mandates, political developments or changes in economic policies; | ||
| changes in recommendations of securities analysts; | ||
| shortfalls in our backlog, revenues or earnings in any given period relative to the levels expected by securities analysts or projected by us; | ||
| government regulations, including stock option accounting and tax regulations; | ||
| energy blackouts; | ||
| acts of terrorism and war; | ||
| widespread illness; | ||
| proprietary rights or product or patent litigation; | ||
| strategic transactions, such as acquisitions and divestitures; or | ||
| rumors or allegations regarding our financial disclosures or practices. |
In the past, securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. Due to changes in the
volatility of our common stock price, we may be
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the target of securities litigation in the future. Securities litigation could result in
substantial costs and divert managements attention and resources.
To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable
future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future and
we may not have sufficient funds legally available to pay dividends. Even if the funds are legally
available for distribution, we may nevertheless decide not to pay any dividends. We presently
intend to retain all earnings for our operations.
Our common shares are not currently traded at high volume, and you may be unable to sell at or near
ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.
Our common shares are currently traded with low volume based on quotations on
the Over-the-Counter Bulletin Board under the symbol CGPI.OB, meaning that the number of persons
interested in purchasing our common shares at or near bid prices at any given time may be
relatively small or non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company which is still relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment community that generate or influence
sales volume, and that even if we came to the attention of such persons, they tend to be
risk-averse and would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned and viable.
We cannot assure that a broader or more active public trading market for our common stock will
develop or be sustained.
There may be periods of several days or more when trading activity in our shares is minimal or
non-existent, as compared to a seasoned issuer which has a large and steady volume of trading
activity that will generally support continuous sales without an adverse effect on share price. We
cannot give you any assurance that a broader or more active public trading market for our common
stock will develop or be sustained, or that trading levels will be sustained. We cannot predict
the extent to which an active public market for our common stock will develop or be sustained.
However, we do not rule out the possibility of applying for listing on the NYSE Alternext (fka
American Stock Exchange) or Nasdaq Capital Market or other markets.
The penny stock market suffers from fraud and abuse and could increase the future volatility of our
Companys share price.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include
(1) control of the market for the security by one or a few broker-dealers that are often related to
the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases; (3) boiler room practices involving high-pressure
sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and
undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale
dumping of the same securities by promoters and broker-dealers after prices have been manipulated
to a desired level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have occurred historically
in the penny stock market. Although we do not expect to be in a position to dictate the behavior of
the market or of broker-dealers who participate in the market, management will strive within the
confines of practical limitations to prevent the described patterns from being established with
respect to our securities. The occurrence of these patterns or practices could increase the future
volatility of our share price.
The OTC Bulletin Board (OTCBB) is a quotation system, not an issuer listing service,
market or exchange, and as a result, it may be difficult for you to sell your common stock or you
may not be able to sell your common stock for an optimum trading price.
The OTCBB is a regulated quotation service that displays real-time quotes, last sale prices
and volume limitations in over-the-counter securities. Because trades and quotations on the OTCBB
involve a manual process, the market information for such securities cannot be guaranteed. In
addition, quote information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result in the failure of
a limit order to execute or the execution of a market order at a significantly different price.
Execution of trades, execution reporting and the delivery of legal trade confirmations may be
delayed significantly. Consequently, one may not be able to sell shares of our common stock at the
optimum trading prices.
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When fewer shares of a security are being traded on the OTCBB, volatility of prices may
increase and price movement may outpace the ability to deliver accurate quote information. Lower
trading volumes in a security may result in a lower likelihood of an individuals orders being
executed, and current prices may differ significantly from the price one was quoted by the OTC
Bulletin Board at the time of the order entry.
Orders for OTCBB securities may be canceled or edited like orders for other securities. All
requests to change or cancel an order must be submitted to, received and processed by the OTCBB.
Due to the manual order processing involved in handling OTC Bulletin Board trades, order processing
and reporting may be delayed, and an individual may not be able to cancel or edit his order.
Consequently, one may not able to sell shares of common stock at the optimum trading prices.
The dealers spread (the difference between the bid and ask prices) may be large and may
result in substantial losses to the seller of securities on the OTCBB if the common stock or other
security must be sold immediately. Further, purchasers of securities may incur an immediate paper
loss due to the price spread. Moreover, dealers trading on the OTCBB may not have a bid price for
securities bought and sold through the OTCBB. Due to the foregoing, demand for securities that are
traded through the OTCBB may be decreased or eliminated.
Legislative actions, higher insurance costs and potential new accounting pronouncements may impact
our future financial position and results of operations.
There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may
potentially be new accounting pronouncements or additional regulatory rulings that will have an
impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002
and other rule changes as well as proposed legislative initiatives following the Enron bankruptcy
are likely to increase general and administrative costs and expenses. In addition, insurers are
likely to increase premiums as a result of high claims rates over the past several years, which we
expect will increase our premiums for insurance policies. Further, there could be changes in
certain accounting rules. These and other potential changes could materially increase the expenses
we report under generally accepted accounting principles, and adversely affect our operating
results.
Holders of our common stock may be diluted in the future.
We are authorized to issue up to 100 million shares of common stock and 20 million shares of
preferred stock. Our board of directors will have the ability, without seeking stockholder
approval, to issue additional shares of common stock and/or preferred stock in the future for such
consideration as our board of directors may consider sufficient. The issuance of additional common
stock and/or preferred stock in the future will reduce the proportionate ownership and voting power
of our common stock held by existing stockholders. At July 9, 2010 there were 12,672,262 shares of
common stock outstanding and warrants to purchase 771,239 shares of common stock.
Shares eligible for future sale may adversely affect the market price of our common stock, as the
future sale of a substantial amount of outstanding stock in the public marketplace could reduce the
price of our common stock.
The market price of our common stock could decline as a result of sales of a large number of
shares of our common stock in the market or the perception that these sales could occur. These
sales, or the possibility that these sales may occur, also might make it more difficult for us to
sell equity securities in the future at a time and at a price that we deem appropriate.
As of July 9, 2010, we had approximately 12,672,262 shares of common stock outstanding. Any
substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse
effect on the market price of our common stock by creating an excessive supply.
We may not be able to achieve access to the capital markets as we have expected to result from the
Share Exchange.
On
February 12, 2010, we concluded the Exchange Agreement and as a result Foguang became our
variable interest entity, and our primary business operations became that of Foguang.
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As a result of the Share
Exchange, we hope to enhance our access to the capital markets of the United States. However, there can be no assurance that such access will be realized
with respect to our new business operations. In addition, the attention and effort devoted to
achieving the benefits of the Share Exchange and attending to the obligations of being a public
company, such as reporting requirements and securities regulations, could significantly divert
managements attention from other important issues, which could materially and adversely affect our
operating results or stock price in the future.
Compliance with changing regulation of corporate governance and public disclosure will result in
additional expenses.
Changing laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created
uncertainty for public companies and significantly increased the costs and risks associated with
accessing the public markets and public reporting. For example, on January 30, 2009, the SEC
adopted rules requiring companies to provide their financial statements in interactive data format
using the eXtensible Business Reporting Language, or XBRL. We will have to comply with these rules
by June 15th, 2011. Our management team will need to invest significant management time and
financial resources to comply with both existing and evolving standards for public companies, which
will lead to increased general and administrative expenses and a diversion of management time and
attention from revenue generating activities to compliance activities.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus, other than statements of historical facts, that
address future activities, events or developments, are forward-looking statements, including, but
not limited to, statements containing the words believe, anticipate, expect and words of
similar import. These statements are based on certain assumptions and analyses made by us in light
of our experience and our assessment of historical trends, current conditions and expected future
developments as well as other factors we believe are appropriate under the circumstances. Whether
actual results will conform to the expectations and predictions of management, however, is subject
to a number of risks and uncertainties that may cause actual results to differ materially. Such
risks are in the section entitled Risk Factors on page 6, and in our previous SEC filings.
Consequently, all of the forward-looking statements made in this prospectus are qualified by
these cautionary statements, and there can be no assurance that the actual results anticipated by
management will be realized or, even if substantially realized, that they will have the expected
consequences to or effects on our business operations.
USE OF PROCEEDS
We
will not receive any proceeds from the sales of the shares of common
stock by the selling stockholders. We
may, however, receive proceeds from any exercise by the selling stockholders of outstanding
warrants, up to $3,856,195 in the event all of the outstanding warrants are exercised.
The selling shareholders may exercise the warrants on a cashless basis if the shares of common
stock underlying the warrants are not then registered pursuant to an effective registration
statement. In the event the selling shareholders exercise the warrants on a cashless basis, then we
will not receive any proceeds.
The Company plans to use the proceeds upon the exercise of warrants for the following items
(assuming full exercise of all outstanding warrants for cash):
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Anticipated | ||||||||
Application of Net | Percentage of | |||||||
Description | Proceeds | Net Proceeds | ||||||
Develop more cemetery plots |
$ | 1,000,000 | 26 | % | ||||
Marketing and sales |
500,000 | 13 | % | |||||
Acquire more land |
1,000,000 | 26 | % | |||||
Potential
acquisitions |
1,356,195 | 35 | % | |||||
Total |
$ | 3,856,195 | 100 | % |
The amounts actually spent by us for any specific purpose may vary significantly and will
depend on a number of factors. Accordingly, our management has broad discretion to allocate the
net proceeds. Subject to the uses described above, we intend to invest the net proceeds from the
warrant exercise in short-term, interest-bearing, investment-grade securities.
SELLING SECURITY HOLDERS
We are registering the following securities:
| 1,402,262 shares of Common Stock sold and issued to the Purchasers in the Financing; | ||
| 701,126 shares of Common Stock underlying the Warrants issued to the Purchasers in the Financing; and | ||
| 70,113 shares of Common Stock underlying the Warrants issued to the placement agent and its assignees in the Financing. |
We are registering these securities in order to permit the selling security holders to dispose
of the shares of Common Stock from time to time. The selling security holders may sell all, some,
or none of their shares in this offering. See Plan of Distribution.
The table below lists the selling security holders and other information regarding the
beneficial ownership of the shares of Common Stock by each of the selling security holders. Column
A lists the names of the selling security holders. Column B lists the number of shares of common
stock beneficially owned by each selling security holder as of
July 26, 2010 (assuming full
exercise of the Warrants held by such selling security holder, if any). Column C lists the shares
of Common Stock covered by this prospectus that may be disposed of by each of the selling security
holders. Column D lists the number of shares of Common Stock that will be beneficially owned by the
selling security holders assuming all of the shares covered by this prospectus are sold. Column E
lists the percentage of class beneficially owned by the selling security holders assuming all of
the shares covered by this prospectus are sold based on 12,402,262 shares of Common Stock
outstanding on July 26, 2010.
We cannot provide an estimate of the number of securities that any of the selling security
holders will hold in the future. For purposes of this table, beneficial ownership is determined in
accordance with the rules of the SEC, and includes voting power and investment power with respect
to such securities.
The inclusion of any securities in the following table does not constitute an admission of
beneficial ownership by the persons named below. Except as indicated in the footnotes to the table,
no selling security holder has had any material relationship with us or our affiliates during the
last three years. Except as indicated below, no selling security holder is the beneficial owner of
any additional shares of common stock or other equity securities issued by us or any securities
convertible into, or exercisable or exchangeable for, our equity securities. Except for Rodman &
Renshaw, LLC, no selling security holder is a FINRA registered broker-dealer or an affiliate of a
broker-dealer.
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Selling Security Holder Table
Securities | Securities | |||||||||||||||
Beneficially | Beneficially | % Beneficial | ||||||||||||||
Owned | Securities | Owned | Ownership | |||||||||||||
Prior | Being | After | After | |||||||||||||
Name | to Offering | Offered | Offering | Offering | ||||||||||||
(A) | (B) | (C) | (D) | (E) | ||||||||||||
Gerald Scott Klayman (1)
|
22,866 | 22,866 | 0 | 0 | % | |||||||||||
Warberg Opportunistic Trading Fund LP (2)
|
34,500 | 34,500 | 0 | 0 | % | |||||||||||
Paul Hickey (3)
|
150,000 | 150,000 | 0 | 0 | % | |||||||||||
Kevin Denuccio (4)
|
57,155 | 57,155 | 0 | 0 | % | |||||||||||
Matthew Hayden (5)
|
114,318 | 114,318 | 0 | 0 | % | |||||||||||
Ronald Nash (6)
|
60,000 | 60,000 | 0 | 0 | % | |||||||||||
David W. Forti (7)
|
22,866 | 22,866 | 0 | 0 | % | |||||||||||
Taylor International Fund, Ltd. (8)
|
300,000 | 300,000 | 0 | 0 | % | |||||||||||
Shira Capital LLC (9)
|
150,000 | 150,000 | 0 | 0 | % | |||||||||||
Barry Honig (10)
|
90,000 | 90,000 | 0 | 0 | % | |||||||||||
The USX China Fund (11)
|
75,000 | 75,000 | 0 | 0 | % | |||||||||||
RL Capital Partners LP (12)
|
75,000 | 75,000 | 0 | 0 | % | |||||||||||
Anthony G. Polak (13)
|
15,000 | 15,000 | 0 | 0 | % | |||||||||||
Jamie Polak (14)
|
15,000 | 15,000 | 0 | 0 | % | |||||||||||
Frederick B. Polak (15)
|
15,000 | 15,000 | 0 | 0 | % | |||||||||||
Domaco Venture Capital Fund (16)
|
15,000 | 15,000 | 0 | 0 | % | |||||||||||
David Frascella (17)
|
37,500 | 37,500 | 0 | 0 | % | |||||||||||
Larry Frascella (18)
|
37,500 | 37,500 | 0 | 0 | % | |||||||||||
Ronald M. Lazar, IRA, Pershing LLC as Custodian (19)
|
15,000 | 15,000 | 0 | 0 | % | |||||||||||
Fort Ashford Funds, LLC (20)
|
57,160 | 57,160 | 0 | 0 | % | |||||||||||
Hammerman Capital Partners, LP (21)
|
75,000 | 75,000 | 0 | 0 | % | |||||||||||
Jayhawk Private Equity Fund II, L.P. (22)
|
548,781 | 548,781 | 0 | 0 | % | |||||||||||
Jeffrey A. Grossman (23)
|
45,732 | 45,732 | 0 | 0 | % | |||||||||||
HCP Opportunity Fund, LP (24)
|
75,000 | 75,000 | 0 | 0 | % | |||||||||||
Rodman & Renshaw, LLC (25)
|
31,552 | 31,552 | 0 | 0 | % | |||||||||||
Ramnarain Jaigobind (26)
|
15,692 | 15,692 | 0 | 0 | % | |||||||||||
Chirag Choudhary (27)
|
5,538 | 5,538 | 0 | 0 | % | |||||||||||
Harry Ioannou (28)
|
2,704 | 2,704 | 0 | 0 | % | |||||||||||
George Anagnostou (29)
|
734 | 734 | 0 | 0 | % | |||||||||||
Eric Lord (30)
|
2,595 | 2,595 | 0 | 0 | % | |||||||||||
Kevin Mangan (31)
|
782 | 782 | 0 | 0 | % | |||||||||||
Tariq
Jawad (32)
|
5,258 | 5,258 | 0 | 0 | % | |||||||||||
Jamil
Abourmeri (33)
|
5,258 | 5,258 | 0 | 0 | % |
(1) | Includes 15,244 shares of Common Stock and 7,622 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing (more fully described under the section titled History and Corporate Structure below), all of which we are registering for resale pursuant to the securities purchase agreement that we entered into as part of the Financing (the Securities Purchase Agreement). | |
(2) | Includes 23,000 shares of Common Stock and 11,500 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Daniel Worsh and Jonathan Blumberg have shared dispositive and voting power over these securities held by Warberg Opportunistic Trading Fund LP. | |
(3) | Includes 100,000 shares of Common Stock and 50,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to Securities Purchase Agreement. | |
(4) | Includes 38,110 shares of Common Stock and 19,055 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. |
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(5) | Includes 76,212 shares of Common Stock and 38,106 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. | |
(6) | Includes 40,000 shares of Common Stock and 20,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. | |
(7) | Includes 15,244 shares of Common Stock and 7,622 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. | |
(8) | Includes 200,000 shares of Common Stock and 100,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Stephen Taylor and Robert Kirkland have shared dispositive and voting power over the securities held by Taylor International Fund, Ltd. | |
(9) | Includes 100,000 shares of Common Stock and 50,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Montgomery Cornell and Michael Ryan have shared dispositive and voting power over the securities held by Shira Capital, LLC. | |
(10) | Includes 60,000 shares of Common Stock and 30,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. | |
(11) | Includes 50,000 shares of Common Stock and 25,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Stephen L. Parr and Kim Williams have shared dispositive and voting power over the securities held by The USX China Fund. | |
(12) | Includes 50,000 shares of Common Stock and 25,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Anthony Polak and Ronald Lazar have shared dispositive and voting power over the securities held by RL Capital Partners LP. | |
(13) | Includes 10,000 shares of Common Stock and 5,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. | |
(14) | Includes 10,000 shares of Common Stock and 5,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. | |
(15) | Includes 10,000 shares of Common Stock and 5,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. | |
(16) | Includes 10,000 shares of Common Stock and 5,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Jack Polak has sole dispositive and voting power over the securities held by Domaco Venture Capital Fund. | |
(17) | Includes 25,000 shares of Common Stock and 12,500 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. |
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(18) | Includes 25,000 shares of Common Stock and 12,500 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. | |
(19) | Includes 10,000 shares of Common Stock and 5,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Ronald Lazar has sole dispositive and voting power over the securities held by Ronald M. Lazar, IRA, Pershing LLC as Custodian. | |
(20) | Includes 38,110 shares of Common Stock and 19,055 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Frank Kavanaugh has sole dispositive and voting power over the securities held by Fort Ashford Funds, LLC. | |
(21) | Includes 50,000 shares of Common Stock and 25,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Jason Hammerman has sole dispositive and voting power over the securities held by Hammerman Capital Partners, LP. | |
(22) | Includes 365,854 shares of Common Stock and 182,927 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Kent McCarthy has sole dispositive and voting power over the securities held by Jayhawk Private Equity Fund II, L.P. | |
(23) | Includes 30,488 shares of Common Stock and 15,244 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. | |
(24) | Includes 50,000 shares of Common Stock and 25,000 shares of Common Stock underlying the Warrants issued to this selling security holder in the Financing, all of which we are registering for resale pursuant to the Securities Purchase Agreement. Jason Hammerman has sole dispositive and voting power over the securities held by HCP Opportunity Fund, LP. | |
(25) | Includes 31,552 shares of Common Stock underlying the Warrants issued to this selling security holder as placement agent in the Financing. David Horin has sole voting and dispositive power over the shares held by Rodman & Renshaw, LLC. | |
(26) | Includes 15,692 shares of Common Stock underlying the Warrants issued to this selling security holder as assignee of placement agent in the Financing. | |
(27) | Includes 5,538 shares of Common Stock underlying the Warrants issued to this selling security holder as assignee of placement agent in the Financing. | |
(28) | Includes 2,704 shares of Common Stock underlying the Warrants issued to this selling security holder as assignee of placement agent in the Financing. | |
(29) | Includes 734 shares of Common Stock underlying the Warrants issued to this selling security holder as assignee of placement agent in the Financing. | |
(30) | Includes 2,595 shares of Common Stock underlying the Warrants issued to this selling security holder as assignee of placement agent in the Financing. | |
(31) | Includes 782 shares of Common Stock underlying the Warrants issued to this selling security holder as assignee of placement agent in the Financing. | |
(32) | Includes 5,258 shares of Common Stock underlying the Warrants issued to this selling security holder as assignee of placement agent in the Financing. | |
(33) | Includes 5,258 shares of Common Stock underlying the Warrants issued to this selling security holder as assignee of placement agent in the Financing. | |
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PLAN OF DISTRIBUTION
Each selling security holder named above and any of their pledgees, assignees, and
successors-in-interest (each a Selling Security Holder and collectively the Selling Security
Holders) may, from time to time, sell any or all of their shares of Common Stock on the NASDAQ OTC
Bulletin Board (OTCBB) or any other stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A
Selling Security Holder may use any one or more of the following methods when selling shares:
| ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; | ||
| block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; | ||
| purchases by a broker-dealer as principal and resale by the broker-dealer for its account; | ||
| an exchange distribution in accordance with the rules of the applicable exchange; | ||
| privately negotiated transactions; | ||
| settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part; | ||
| broker-dealers may agree with the Selling Security Holders to sell a specified number of such shares at a stipulated price per share; | ||
| through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; | ||
| a combination of any such methods of sale; or | ||
| any other method permitted pursuant to applicable law. |
The Selling Security Holders may also sell shares under Rule 144 under the Securities Act of
1933, as amended (the Securities Act), if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Security Holders may arrange for other brokers-dealers
to participate in sales. Broker-dealers may receive commissions or discounts from the Selling
Security Holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the
purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this
prospectus, in the case of an agency transaction not in excess of a customary brokerage commission
in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown
in compliance with FINRA IM-2440.
In connection with the sale of the Common Stock or interests therein, the Selling Security
Holders may enter into hedging transactions with broker-dealers or other financial institutions,
which may in turn engage in short sales of the Common Stock in the course of hedging the positions
they assume. The Selling Security Holders may also sell shares of the Common Stock short and
deliver these securities to close out their short positions, or loan or pledge the Common Stock to
broker-dealers that in turn may sell these securities. The Selling Security Holders may also enter
into option or other transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities which require the delivery to such broker-dealer or
other financial institution of shares offered by this prospectus, which shares such broker-dealer
or other financial institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
The Selling Security Holders and any broker-dealers or agents that are involved in selling the
shares may be deemed to be underwriters within the meaning of the Securities Act in connection
with such sales. In such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be underwriting commissions
or discounts under the Securities Act. Each Selling Security
24
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Holder has informed the Company that
it does not have any written or oral agreement or understanding, directly or indirectly, with any
person to distribute their shares of Common Stock.
The Company is required to pay certain fees and expenses incurred by the Company incident to
the registration of the shares. The Company has agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities under the Securities
Act.
Because Selling Security Holders may be deemed to be underwriters within the meaning of the
Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act
including Rule 172 thereunder. In addition, any securities covered by this prospectus which qualify
for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under
this prospectus. There is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the Selling Security Holders.
We agreed to use commercially reasonable efforts to keep this prospectus effective until the
earlier of (i) the date on which all of the registrable shares may be resold by the Selling
Security Holders without registration and without regard to any volume or manner-of-sale
limitations by reason of Rule 144, or (ii) all of the registrable shares have been sold pursuant to
this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The
resale shares will be sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale shares may not be sold
unless they have been registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Securities and Exchange Act of 1934, as
amended (the Exchange Act), any person engaged in the distribution of the resale shares may not
simultaneously engage in market making activities with respect to the Common Stock for the
applicable restricted period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the Selling Security Holders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit
the timing of purchases and sales of shares of the Common Stock by the Selling Security Holders or
any other person. We will make copies of this prospectus available to the Selling Security Holders
and have informed them of the need to deliver a copy of this prospectus to each purchaser at or
prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
BUSINESS
Overview
The Company, through our operating entity, Foguang, is a private provider of cemetery
products in Chongqing, China. Foguagn is primarily focused on developing cemeteries and selling
cemetery plots, although it also provides park and garden development and construction services.
Foguangs first cemetery development project was the Chongqing Guiyuan Cemetery I (Guiyuan
I), located in Changshou District of Chongqing on approximately 66,660 square meters of land.
The entire cemetery plots of Guiyuan I have been sold, at an average price of RMB 30,000 ($4,412)
per plot. Foguang is currently developing the Chongqing Guiyuan Cemetery II (Guiyuan II),
its second cemetery project in Changshou. Guiyuan II, in development since 2002, occupies a land
over 667,000 square meters, of which approximately 46,620 square meters have been developed to date
and 620,000 square meters remain undeveloped. Approximately 565,000 square meters are identified as
land to be developed as a cemetery and the remaining area will be developed as housing, parking and
office space in the future.
Both Guiyuan I and Guiyuan II are among the most highly regarded facilities in their market
area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume
of business, available inventory, name recognition, aesthetics and potential for development or
expansion. In 2006 and 2007, Foguang was ranked amongst the top 50 private-owned enterprises in
Chongqing by the Xinhuanet News Domestic, Xinhua News Agency.
In addition, the Chongqing municipal government has committed to enable Foguang to secure the
land use rights to approximately 1,194,804 square meters of land surrounding Longqiao Lake, which
portions of Guiyuan II overlook. However, as of the date of this prospectus, Foguang has yet to
officially receive such land use rights.
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Foguang is planning to develop this land as a park, with
mausoleums and temples, to complement and enhance Guiyuan II. The purpose of the Longqiao Lake
project is to make full use of Foguangs land resources, to cultivate and produce flower seeds, and
to increase the overall green effect of its park. So far, Foguang has invested nearly RMB 12
million (approximately US $1.77 million) to cultivate the land for the planting of nursery
seedlings and the purchasing of nursery seedlings. A part of such seedlings will be used for the
development of Guiyuan II, and the remaining seedlings will be sold either to the Changshou
district government for urban landscaping or to outside parties for profit.
History and Corporate Structure
The Company was incorporated in Delaware on July 10, 2007, originally under the name Artistry
Publications, Inc. for the purpose of entering the photography industry and establishing a large
scale photography publishing business focused on American History. The Companys plan was to
develop a successful photo journal publishing company by depicting history and producing excellent
affordable artwork in practical items to entertain and educate.
On February 10, 2010, the Company entered into a share exchange agreement (Share Exchange
Agreement) under which it issued 8,800,000 shares of its common stock, par value $0.001, to
the shareholders of Gold Industry Limited (Gold Industry), in exchange for all the issued
and outstanding shares of Gold Industry (the Share Exchange). As a result of the Share
Exchange, Gold Industry became a wholly-owned subsidiary of the Company and Gold Industry
shareholders acquired a majority of the Companys issued and outstanding stock. Concurrent with the
Share Exchange, Mr. Yiyou Ran (the managing director of Gold Industry, and all of its operating
subsidiaries, Mr. Ran) was appointed the Chief Executive Officer of the Company.
As a result, the Share Exchange has been accounted for as a reverse acquisition using the
purchase method of accounting, whereby Gold Industry is deemed to be the accounting acquirer
(legal acquire) and the Company to be the accounting acquire (legal acquirer). The financial
statements before the date of Share Exchange are those of Gold Industry, with the results of the
Company being consolidated from the date of Share Exchange. The equity section and earnings per
share have been retroactively restated to reflect the reverse acquisition and no goodwill has been
recorded.
On April 6, 2010, the Company effectuated a name change, from Artistry Publications, Inc. to
China Redstone Group, Inc. by merging with a wholly-owned subsidiary named China Redstone Group,
Inc., with the Company as the surviving entity. The Company changed its name to better reflect its
business.
Contractual Arrangements with Foguang and its Owners
All of our business operations are carried out by Foguang, which the Company controls through
contractual arrangements between Foguang and Chongqing Ran Ji Industrial Co., Ltd. (Ran
Ji), a company wholly-owned by Gold Holy Industry Limited (Gold Holy). Gold Holy is
wholly-owned by Gold Industry. On December 15, 2009, Ran Ji entered into the following contractual
arrangements with Foguang and its owners:
Consulting Services Agreement. Pursuant to the exclusive consulting services agreement
between Ran Ji and Foguang, Ran Ji has the exclusive right to provide to Foguang general consulting
services related to the tourism development industry as well as consulting services related to
tourism project, cemetery management, funeral ashes, planting of flowers, nursery stock and Chinese
herbal, biomass research, production and marketing of arts and crafts, and designing of landscape
(the Services). Ran Ji also sends employees to Foguang and Foguang bears the costs and
expenses for such employees. Under this agreement, Ran Ji owns the intellectual property rights
developed through the Services provided to Foguang. Foguang pays a quarterly consulting service fee
in Renminbi (RMB) to Ran Ji that is equal to all
of Foguangs net income for such quarter.
The consulting services agreement is in effect unless and until terminated by written notice of
either party in the event that: (a) the other party causes a material breach of this agreement,
provided that if the breach does not relate to a financial obligation of the breaching party, that
party may attempt to remedy the breach within fourteen (14) days following the receipt of the
written notice; (b) the other party becomes bankrupt, insolvent, is the subject of proceedings or
arrangements for liquidation or dissolution, ceases to carry on business, or becomes unable to pay
its debts as they become due; (c) Ran Ji terminates its operations; (d) Foguangs business license
or any other license or approval for its business operations is terminated, cancelled or
revoked; or (e) circumstances arise which would materially and adversely affect the
performance or the objectives of the consulting services agreement. Additionally, Ran Ji may
terminate the consulting services agreement without cause. Pursuant to the consulting services
agreement, Ran Ji has the right to collect the consulting services fee from Foguang.
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Operating Agreement. Pursuant to the operating agreement among Ran Ji, Foguang and the
owners of Foguang who collectively hold 100% of the issued and outstanding equity interests of
Foguang (collectively the Foguang Owners), Ran Ji provides guidance and instructions on
Foguangs daily operations, financial management and employment issues. The Foguang Owners must
designate the candidates recommended by Ran Ji as their representatives on Foguangs board of
directors. Ran Ji has the right to appoint senior executives of Foguang. In addition, Ran Ji agrees
to guarantee the performance of Foguang under any agreements or arrangements relating to Foguangs
business arrangements with any third party. Foguang, in return, agrees to pledge its accounts
receivable and all of its assets to Ran Ji. Moreover, Foguang agrees that without the prior consent
of Ran Ji, Foguang will not engage in any transactions that could materially affect the assets,
liabilities, rights or operations of Foguang, including, without limitation, incurrence or
assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any
encumbrance on any of its assets or intellectual property rights in favor of a third party or
transfer of any agreements relating to its business operation to any third party. The term of this
agreement is ten years from December 15, 2009, and may be extended only upon Ran Jis written
confirmation prior to the expiration of the agreement, with the extended term to be mutually agreed
upon by the parties.
Equity Pledge Agreement Under the equity pledge agreement between the Foguang Owners
and Ran Ji, the Foguang Owners pledged all of their equity interests in Foguang to Ran Ji to
guarantee Foguangs performance of its obligations under the consulting services agreement. If
Foguang or the Foguang Owners breach their respective contractual obligations, Ran Ji, as pledgee,
will be entitled to certain rights, including, but not limited to, the right to sell the pledged
equity interests, the right to vote and control the pledged assets. The Foguang Owners also agreed,
that upon occurrence of any event of default, Ran Ji shall be granted an exclusive, irrevocable
power of attorney to take actions in the place and instead of the Foguang Owners to carry out the
security provisions of the equity pledge agreement and take any action and execute any instrument
that Ran Ji may deem necessary or advisable to accomplish the purposes of the equity pledge
agreement. The Foguang Owners agreed not to dispose of the pledged equity interests or take any
actions that would prejudice Ran Jis interest. The equity pledge agreement will expire in two
years after Foguangs obligations under the exclusive consulting services agreement have been
fulfilled.
Option Agreement. Under the option agreement between the Foguang Owners and Ran Ji,
the Foguang Owners irrevocably granted Ran Ji or its designated person an exclusive option to
purchase, to the extent permitted under Chinese law, all or part of the equity interests in Foguang
for the cost of the initial contributions to the registered capital, which is RMB 100,000,000. The
current applicable PRC laws require that the purchase consideration of the equity interests in a
PRC domestic enterprise by a foreign investor shall not be significantly lower than the assessment
value of such equity interests appraised by a qualified asset assessment institution. The term of
this agreement is ten years from December 15, 2009, and may be extended prior to its expiration by
written agreement of the parties.
Proxy Agreement. Pursuant to the proxy agreement among Ran Ji, the Foguang Owners, and
Foguang, the Foguang Owners agreed to entrust all the rights to exercise their voting power to
designee(s) of Ran Ji. Such designee(s) shall have the right to exercise the Foguang Owners voting
and other rights, including the attendance at and the voting of their shares at Foguangs
shareholders meetings (or by written consent in lieu of meetings) in accordance with applicable
laws and Foguangs Article of Association. This agreement may not be terminated without the
unanimous consent of all parties, except that Ran Ji may, by giving a thirty (30) day prior written
notice to the Foguang Owners, terminate the proxy agreement, with or without cause.
The operating agreement, equity pledge agreement, option agreement and proxy agreement ensure
that Foguang pays the consulting services fee to Ran Ji under the consulting services agreement
during the term of the consulting services agreement. Other than pursuant to the consulting
services agreement, Foguang does not pay any other fees to Ran Ji.
Through these contractual arrangements, the Company has the ability to substantially influence
Foguangs daily operations and financial affairs, appoint its senior executives and approve all
matters requiring shareholder approval.
As a result of these contractual arrangements, which enable the Company to control Foguang and
to receive through Ran Ji all of Foguangs revenues, the Company is considered the primary
beneficiary of Foguang. Accordingly, the Company consolidates Foguangs results, assets and
liabilities in its financial statements. Other than the Companys
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interests in the contractual
arrangements, neither the Company, Gold Industry, Gold Holy and Ranji own any equity interests in
Foguang.
However,
Chinese laws and regulations concerning the validity of the contractual arrangements
is uncertain, as many of these laws and regulations are relatively new and may be subject to
change, and their official interpretation and enforcement by the Chinese government involves
substantial uncertainty. Additionally, the contractual arrangements may not be as effective in
providing control over Foguang as direct ownership, which we are restricted from under current
Chinese law. Due to such uncertainty, the Company may take such additional steps in the future as
may be permitted by the then applicable laws and regulations in China to further strengthen its
control over or toward actual ownership of Foguang or its assets or business operations, which
could include direct ownership of selected assets without jeopardizing any favorable government
policies toward domestic owned enterprises. Because the Company relies on Foguang for its revenue,
any termination of or disruption to the contractual arrangements would detrimentally affect its
business and financial condition.
Organization of the Companys Subsidiaries and Consolidated Entity
Gold Industry is a holding company incorporated in Cayman Islands and wholly-owned by the
Company. Since incorporation, Gold Industry has not conducted any substantive operations of its own
except for holding 100% equity interests of Gold Holy.
Gold Holy is a holding company established in Hong Kong Special Administration Region on
September 29, 2009. Other than holding 100% equity interests of Ran Ji, Gold Holy has no other
separate operations of its own.
Ran Ji is a shareholding limited company organized in the PRC on December 15, 2009. Ran Ji was
formed by Gold Holy. Other than the activities relating to its contractual arrangements with
Foguang as described below, Ran Ji has no other business operations.
Foguang is a shareholding limited company organized in the PRC on October 10, 2002. Foguang
holds the government licenses and approvals necessary to operate the death care business in China.
We do not own any equity interests in Foguang, but control and receive the economic benefits of its
business operations through contractual arrangements.
Corporate Structure
The following diagram illustrates the Companys corporate structure as of the date of this
prospectus:
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(1) | Our management includes: Yiyou Ran as Chief Executive Officer, President and Chairman, Michael Wang as Chief Financial Officer, Treasurer, Secretary and Director, and Jianquan Chen and Tim Hudson as members of the board of directors. | |
(2) | The management of Gold Industry is comprised of Yiyou Ran, Jianquan Chen and Yang Chen as its directors. Artistry is the sole shareholder of Gold Industry. | |
(3) | The management of Gold Holy is comprised of Yiyou Ran, Jianquan Chen and Yang Chen as its directors. Gold Industry is the sole shareholder of Gold Holy. | |
(4) | The management of Ran Ji is comprised of Yiyou Ran, Jianquan Chen and Yang Chen as its directors. Holy Gold is the sole shareholder of Ran Ji. | |
(5) | Ran Ji controls Foguang through contractual arrangements designed to mimic equity ownership of Foguang by Ran Ji. These contracts include a consulting services agreement, operating agreement, equity pledge agreement, option agreement, and proxy agreement. | |
(6) | The management of Foguang is comprised of Yiyou Ran, Jianquan Chen and Yang Chen as its directors. |
Financing Transaction
In February, 2010, the Company completed a financing transaction with 24 institutional and/or
accredited investors (collectively the Purchasers) pursuant to which it sold $4,599,415
of units of its equity securities to the Purchasers in a private placement (the
Transaction). Each unit is comprised of 100,000 shares of its common stock, par value
$0.001 per share (the Common Stock), at a per share purchase price of $3.28 per share,
and warrants to purchase up to 50,000 shares of Common Stock. At the closing of the Transaction on
February 23, 2010, the Company issued 1,402,262 shares of Common Stock and four-year warrants to
purchase 701,126 shares of Common Stock (the Warrants). In addition, the Company issued
warrants to purchase up to 70,113 shares of common stock to its placement agent and its assignees
for the Transaction.
The Agreement includes customary representations and warranties by each party thereto.
Additionally:
| We agree to grant to the Purchasers certain registration rights pursuant to a registration rights agreement (the Registration Rights Agreement), which terms are further described below; and | ||
| We covenant to use our best efforts to meet the listing requirements for a senior exchange within six months after the closing of the Transaction. |
The Warrants entitle each Purchaser to purchase up to 50% of the number of shares of Common
Stock acquired by such Purchaser in the Transaction, and expire on the fourth anniversary of their
issuance date (the Termination Date). The Warrants may be exercised on a cashless basis if, at
any time after the first anniversary of their issuance date, there is no registration statement in
effect registering the resale of the shares of Common Stock underlying the Warrants, provided that
all Warrants outstanding on Termination Date shall be exercised on a cashless basis. The exercise
price of the Warrants is $4.10 per share, subject to certain adjustments as described further in
Description of Securities below.
In connection with the Transaction, we also entered into a registration rights agreement (the
Registration Rights Agreement) with the Purchasers, pursuant to which we are required to
file a registration statement registering the resale of the Shares and the Common Stock underlying
the Warrants (including any additional shares issuable resulting from the anti-dilution provisions
of the Warrants) with the Securities and Exchange Commission (the SEC) not later than 45
days from the closing of the Transaction, and be declared effective by the SEC not later than 180
days from the closing of the Transaction (or 210 days in the event of a full review by the SEC). If
the registration
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statement is not timely filed or timely declared effective, we are liable to each
Purchaser for liquidated damages of 1% of such Purchasers purchase price per month until the
registration statement is filed or declared effective, up to a maximum of 12% of such Purchasers
purchase price.
Operations
Information for each of our business segments is presented below and in our financial
statements set forth herein.
Cemetery Operations
Foguang conducts its cemetery operations only in Chongqing, China. As of March 31, 2010,
Foguang has two cemeteries, Guiyuan I and Guiyuan II. The cemetery operations are managed by a team
of experienced death care industry and sales professionals. During the year ended March 31, 2010,
cemetery revenues account for 100% of Foguangs total revenues.
Foguangs cemetery operations include, the rights to interment in cemetery sites (including
grave sites, mausoleum crypts and niches) and related cemetery merchandise such as memorials and
vaults. Cemetery operations generate revenues through sales of cemetery plots and memorials,
installation fees.
Foguangs cemetery operating results are impacted by the success of its sales organization
because approximately 97% of its cemetery revenues during the year ended March 31, 2010 was
generated from sales of interment rights. The remaining 3% of its 2010 cemetery revenues was
generated from deliveries of merchandise previously sold, such as plants and services on Foguangs
contracts. Foguang believes that changes in the level of consumer confidence (a measure of whether
consumers will spend money on discretionary items) impact the amount of cemetery revenues and are
currently having a significant negative impact on its sales and the industry as a whole. Cemetery
revenues generated from at-need services are principally a service business that provides burial
plots. Given the high fixed cost structure associated with cemetery operations, Foguang believes
the following are key factors affecting its profitability:
| demographic trends in terms of population growth and average age, which impact death rates and number of deaths; | ||
| establishing and maintaining leading market share positions supported by strong local heritage and relationships; | ||
| effectively responding to increasing cremation trends by packaging complimentary services and merchandise; | ||
| controlling salary and merchandise costs; and | ||
| exercising pricing leverage related to its at-need business to increase average revenues per contract. | ||
Park Construction Services
Foguang is also able to provide park and garden construction/landscaping services on a per
contract basis. However, Foguang only performs such services when it has the capacity to do so.
During the year ended March 31, 2010, Foguang had no park construction services revenues.
Customers
Foguangs customers are individuals or families that would purchase graves for members for
their families that are presently living or deceased. According to National Population and Family
Planning Commission of the PRC, the current annual death rate of Chongqing is 0.65% and it is
predicted to go up to approximately 0.7% in the next three years. In the meantime, the population
for the city keeps growing and the pace of urbanization has accelerated. For example, in 2009, the
population of urban residents has increased by approximately 500,000 compared to 2008. This will
increase the market demand of nearly 3,000 graves in Foguangs target market annually. The number
of cremation in the city is about 50,000 each year, in which 60% to 70% of the deceaseds relatives
will purchase graves. Their demand also constitutes Foguangs target market.
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The following is a breakdown of the grave types purchased by Foguangs current customers:
Percentage of | ||||||
Grave Type | Price | Customer | ||||
Double Graves | Below $1,500 (Below RMB 10,000)
|
0 | % | |||
Double Graves | Between $1,500 and $4,500 (Between RMB 10,000 and 30,000)
|
40 | % | |||
Single Graves | Between $4,500 and $7,500 (Between RMB 30,000 and 50,000)
|
42 | % | |||
Single Graves | Between $7,500 and $15,000 (Between RMB 50,000 and 100,000)
|
11 | % | |||
Single Graves | Between $15,000 and $45,000 (Between RMB 100,000 and 300,000)
|
4 | % | |||
Single Graves | Between $45,000 and $75,000 (Between RMB 300,000 and 500,000)
|
2 | % | |||
Single Graves | 0.5%Over $75,000 (Over RMB 500,000)
|
1 | % |
Suppliers and Manufacturers
On January 28, 2008, an affiliated party of Foguang entered into a long term manufacturing
contract with a local manufacturer to manufacture tombstone memorials for Foguangs cemetery
operations. The manufacturer is provided with Foguangs own design specifications, and then
produces, delivers and mounts the memorials to the burial vaults. Foguang arranges for quality
inspection after the installation of the memorials. If there are quality issues, the manufacturer
will be responsible for conducting on-site repairs until the memorials pass Foguangs inspection.
After the memorials pass satisfactory inspection, Foguang assumes responsibility for the management
and upkeep of the memorials. For each memorial, 50% of its cost is paid by the affiliate of
Foguang to the manufacturer after Foguangs acceptance, and the remaining 50% will be paid by the
affiliate of Foguang to the manufacturer at the time the tombstone memorial is sold to the
customer. Foguang advances the payments to the affiliate of Foguang for all payments made to the
manufacturer. The manufacturing contract does not provide for any termination provisions.
In February 2009, the Company recorded a prepayment related to a contract in the amount of
$4,101,970 (7% of the contract), for the construction of entertainment boats. Chongqing Bo Goa
Tourism Company (Bo Goa), an unrelated third
party, and the Company had intended to jointly
develop the project. In September 2009, the Company took over as the sole
developer on this project. This project includes development of a park near the Longqiao Lake as a
way to attract more tourism in the Changshou area near the Companys cemetery site. The scope of
the project currently contemplates 10 to 20 entertainment boats, a welcome center, a large sailboat
and nine docks. As of March 31, 2010, the Companys total prepayment for this project is
$10,122,300. The total price of the contract is approximately $63,961,200.
Foguang also entered into various project-based construction agreements with local contractors
in connection with its cemetery facilities. For example, on November 4, 2009, Foguang entered into
an agreement with Chongqing Hongxing Construction Co., Ltd. to construct a garden at Guiyuan I.
Other projects include turning hillside into terraced fields, building roads, pathways and office
facilities, digging up burial vaults, and building a lake dam.
Sales and Marketing
As of March 31, 2010, Foguangs sales and marketing force included 6 employees, who also
oversaw 12 salespeople and 30 agents who are independent contractors. Foguang has made a strong
commitment to the training of its employees in order to ensure that its customers receive the
highest quality customer service. Foguangs training program includes pre-employment training and
on-employment training of professional ethics and sales techniques. Each employees sales
performance will be evaluated by his supervisor on an as needed basis but at least once per
twelve-month period. Based on the evaluation, the employee may be granted a year-end bonus, pay
raise or promotion.
Foguang rewards its salespeople with incentives for generating new customers. Substantially
all of its sales force is compensated based on performance. Commissions are augmented with various
bonus and incentive packages to ensure a high quality, motivated sales force. Foguang pays
commissions to its sales personnel based on a percentage of the price of the products and services,
which varies from 6% to 30% of the total contract price. In addition, Foguangs sales personnel
receive an award varying from 1,000 RMB to 10,000 RMB for yearly sales of 1 million RMB or more by
the sales agents assigned to them. Foguang pays its sales agent based on a percentage of sales
varying from 10% to 12% and also offer an extra 2% or 3% award to yearly sales of 1.8 million RMB
or more.
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Foguang spent $196,945 and $426,415 on marketing and advertising expenses for its fiscal year
2010 and 2009, respectively. Foguang spent less on marketing expenses for the year ended March 31,
2010 due to the ability to focus its advertising on the channels that have been proven as the most
effective. Foguang focuses its advertising on mainstream television shows, such as Chongqing
Commercial Daily, Evening, Morning, and Chongqing TV 12, which have proven to be the most effective
dissemination of advertising to the public. In fiscal 2010, Foguang also cut back on its television
advertisements and print advertisements by 50% to reduce advertising expenses.
Competition
The operating environment in the death care industry has been highly competitive. Although
Foguang is the largest private provider of cemetery products and services in Chongqing, management
believes that it nevertheless faces intense competition from numerous local funeral homes and
cemetery firms based on internal research and site visits conducted by its management. Foguangs
primary competitors in Chongqing and their relative strengths and weaknesses are:
Name of Competitors | Strength of Competitors | Weakness of Competitors | ||
Chongqing Long Tai Mountain Cemetery |
Established in 1996 with a long operating history, conveniently located in downtown Chongqing, and consists of over 41 acres. | This cemetery has more demand than its land could supply, has a conservative operation and closed 80% of its sales offices since 2009. | ||
Chongqing Hua Yan Ta Yuan
|
This was a Hong Kong based project and currently the only pagoda cemetery project in China. | This cemetery is limited to 40,000 tombs, all of which have been sold as of November 2009, and it has no land for further development. | ||
Chongqing Hua Xia Cemetery
|
The most elaborate cemetery site in China popular with high income families in urban areas, known for its good management and exceptional construction features. | The high price is not affordable for the average family, with a cost per tomb starting at 60,000 RMB (approximately US$10,000). The cemetery is relatively small with only 8.7 acres in size and has no land for further expansion. |
Each of the above-mentioned competitors has a more established and longer operating history
compared to Foguang, and each enjoys a good reputation with a mature sales network. However, none
of these competitors have land reserves, so they do not have any more land to further develop and
expand their businesses, and as a result, will lose their competitiveness in the marketplace. By
comparison, Foguangs cemetery has a rich land reserve which gives it an unparallel edge to further
develop and expand its business. Foguangs management believes that land reserve is the most
important factor of success in the cemetery business. So even though Foguang is relatively new in
the cemetery business and has a shorter operating history and less of an established customer
network, it still has a lot of room to grow and believes that it shall remain competitive in the
cemetery business for a long time. Foguang also conducts market research and prices its products
and services more competitively than its competitors and provides more added values for its
services and products.
Intellectual Properties and Licenses
Foguang currently does not have any intellectual properties and licenses.
Governmental Regulations
Compliance with Circular 106 and the 2006 M&A Regulations
On May 29, 2007, Chinas State Administration of Foreign Exchange (SAFE) issued an
official notice known as Circular 106, which requires the owners of any Chinese companies to
obtain SAFEs approval before establishing any offshore holding company structure in so-called
round-trip investment transactions for foreign financing as well as subsequent acquisition
matters in China. Likewise, the Provisions on Acquisition of Domestic
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Enterprises by Foreign
Investors, issued jointly by Ministry of Commerce (MOFCOM), State-owned Assets
Supervision and Administration Commission, State Taxation Bureau, State Administration for Industry
and Commerce (SAIC), China Securities Regulatory Commission and SAFE in August 2006,
impose approval requirements from MOFCOM for round-trip investment transactions, including
acquisitions in which equity was used as consideration.
Dividend Distribution
The principal laws, rules and regulations governing dividends paid by our PRC operating
subsidiary include the Company Law of the PRC (1993), as amended in 1999, 2004 and 2005
respectively, Wholly Foreign Owned Enterprise Law (1986), as amended in 2000, and Wholly Foreign
Owned Enterprise Law Implementation Rules (1990), as amended in 2001. Under these laws and
regulations, our PRC subsidiary may pay dividends only out of its accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. In addition, our PRC
subsidiary is required to set aside at least 10% of its after-tax profit based on PRC accounting
standards each year to its statutory surplus reserve fund until the accumulative amount of such
reserve reaches 50% of its respective registered capital. These reserves are not distributable as
cash dividends. The board of directors of a wholly foreign-owned enterprise (WFOE) has
the discretion to allocate a portion of its after-tax profits to its staff welfare and bonus funds.
After the allocation of relevant welfare and funds, the equity owners can distribute the rest of
the after-tax profits provided that all the losses of the previous fiscal year have been made up.
Taxation
The applicable income tax laws, regulations, notices and decisions (collectively referred to
as Applicable Foreign Enterprises Tax Law) related to foreign investment enterprises and
their investors mainly include the following:
| Notice Relating to Taxes Applicable to Foreign Investment Enterprises / Foreign Enterprises and Foreign Nationals in Relation to Dividends and Gains obtained from Holding and Transferring of Shares promulgated by State Tax Bureau on July 21, 1993; | ||
| Amendments to the Income Tax Law Applicable to Individuals of the PRC promulgated by Standing Committee of the National Peoples Congress (NPC) on October 31, 1993; | ||
| Notice on Relevant Policies Concerning Individual Income Tax issued by Ministry of Finance and the State Tax Bureau on May 13, 1994; | ||
| Notice on Reduction of Income Tax in Relation to Interests and Gains Derived by Foreign Enterprises from the PRC, promulgated by the State Council on November 18, 2000; and | ||
| Enterprise Income Tax Law of the PRC (New EIT Law) issued by NPC on March 16, 2007, which came into effect on January 1, 2008. |
Income Tax on Foreign Investment Enterprises
According to the New EIT Law, PRC domestic enterprises and foreign investment enterprises
(including Sino-foreign equity joint ventures, Sino-foreign co-operative joint ventures and WFOEs
established in the territory of the PRC) are required to pay a uniform income tax at a rate of 25%
of their taxable income and the former tax exemption, reduction and preferential treatments
applicable to foreign investment enterprises are revoked.
Value Added Tax
The Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State
Council came into effect on January 1, 1994 and were amended in 2008. Under these regulations and
the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value
added tax is imposed on goods sold in or imported into the PRC and on processing, repair and
replacement services provided within the PRC.
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Value added tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17%
(depending on the type of goods involved) on the full price collected for the goods sold or, in the
case of taxable services provided, at a rate of 17% on the charges for the taxable services
provided but excluding, in respect of both goods and services, any amount paid in respect of value
added tax included in the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and service in the same financial year.
Business Tax
According to the Provisional Regulations of the PRC Concerning Business Tax promulgated by the
State Council on December 13, 1993 and came into effect on January 1, 1994, which was revised by
the State Council on November 10, 2008 and enforced from January 1, 2009, business that provides
services, assigns intangible assets or sells immovable property became liable to business tax at a
rate ranging from 3 to 5% of the charges of the services provided, intangible assets assigned or
immovable property sold, as the case may be.
Tax on Dividends from PRC Enterprise with Foreign Investment
According to the Applicable Foreign Enterprises Tax Law, income such as rental, royalty and
profits from the PRC derived by a foreign enterprise which has no establishment in the PRC or has
establishment but the income has no relationship with such establishment is subject to a 10%
withholding tax, subject to reduction as provided by any applicable double taxation treaty, unless
the relevant income is specifically exempted from tax under the Applicable Foreign Enterprises Tax
Law. The profit derived by a foreign investor from a PRC enterprise with foreign investment is
exempted from PRC withholding tax according to the Applicable Foreign Enterprises Tax Law.
Wholly-Owned Foreign Enterprise (WFOE)
WFOEs are governed by the Law of the PRC Concerning Enterprises with Sole Foreign Investments,
which was promulgated on April 12, 1986 and amended on October 31, 2000, and its Implementation
Regulations promulgated on December 12, 1990 and amended on April 12,2001 (together the
Foreign Enterprises Law).
(a) | Procedures for establishment of a WFOE | ||
The establishment of a WFOE will have to be approved by the MOFCOM (or its delegated authorities). If two or more foreign investors jointly apply for the establishment of a WFOE, a copy of the contract between the parties must also be submitted to the MOFCOM (or its delegated authorities) for its record. A WFOE must also obtain a business license from the SAIC before it can commence business. | |||
(b) | Nature | ||
A WFOE is a limited liability company under the Foreign Enterprises Law. It is a legal person which may independently assume civil obligations, enjoy civil rights and has the right to own, use and dispose of property. It is required to have a registered capital contributed by the foreign investor(s). The liability of the foreign investor(s) is limited to the amount of registered capital contributed. A foreign investor may make its contributions by installments and the registered capital must be contributed within the period as approved by the MOFCOM (or its delegated authorities) in accordance with relevant regulations. | |||
(c) | Profit distribution | ||
The Foreign Enterprise Law provides that after payment of taxes, a WFOE must make contributions to a reserve fund, an enterprise development fund and an employee bonus and welfare fund. The allocation ratio for the employee bonus and welfare fund may be determined by the enterprise. However, at least 10% of the after tax profits must be allocated to the reserve fund. If the cumulative total of allocated reserve funds reaches 50% of an enterprises registered capital, the enterprise will not be required to make any additional contribution. The reserve fund may be used by a WFOE to make up its losses and with the consent of the examination and approval authority, can also be used to expand its production operations and to increase its capital. The enterprise is prohibited from distributing dividends unless the losses (if any) of previous years have been made up. The development fund is used for expanding the capital base of the company by way of capitalization issues. The employee bonus and welfare fund can only be used for the collective benefit and facilities of the employees of the WFOE. |
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Catalogue for the Guidance of Foreign Investment Industries
China issued the Catalogue for the Guidance of Foreign Investment Industries (Guidance
Catalogue) in 1995, which was amended in 2002, 2004 and 2007 respectively. The current version
of the Guidance Catalogue was promulgated by the MOFCOM and the National Development and Reform
Commission (NDRC) on October 31, 2007 and became effective as of December 1, 2007, which
retains the classification methodology and organizational structure used in the previous versions
without significant changes. The Guidance Catalogue divides foreign investments into four
categories:
(i) Encouraged Category. There are various incentives and preferential treatments for
encouraged projects, mainly tax exemptions and rebates. Most foreign investment projects in the
encouraged sector are allowed to take the form of WFOE;
(ii) Permitted Category. Sectors not listed therein belong to the permitted category and
they are determined by the rule of exception. Therefore, unless the items are transferred among the
encouraged, restricted and prohibited categories, any addition to or deletion from the
encourage, restricted and prohibited categories would consequently affect the scope of the
permitted category. Like those in the encouraged sector, foreign investment projects in the
permitted sector are allowed to take the form of WFOE. However, they are generally not eligible
for extra incentives and preferential treatments;
(iii) Restricted Category. There are stricter approvals or filing requirements for
restricted projects. Furthermore, foreign investment projects in the restricted sectors may be
required to take the form of Joint Venture. The foreign investors may only hold a minority interest
in the investment projects; and
(iv) Prohibited Category. Foreign investments are not allowed in these sectors.
Foreign Exchange Controls
Major reforms have been introduced to the foreign exchange control system of the PRC since
1993.
On December 28, 1993, the Peoples Bank of China (PBOC), with the authorization of
the State Council issued the Notice on Further Reform of the Foreign Exchange Control System which
came into effect on January 1, 1994. Other new regulations and implementation measures include the
Regulations on the Foreign Exchange Settlement, Sale and Payments which were promulgated on June
20, 1996 and took effect on July 1, 1996 and which contain detailed provisions regulating the
settlement, sale and payment of foreign exchange by enterprises, individuals, foreign organizations
and visitors in the PRC and the regulations of the PRC on Foreign Exchange Control which were
promulgated on January 1, 1996 and took effect on April 1, 1996 and which contain detailed
provisions in relation to foreign exchange control.
The foreign exchange earnings of all PRC enterprises, other than those foreign investment
enterprises (FIE), who are allowed to retain a part of their regular foreign exchange
earnings or specifically exempted under the relevant regulations, are to be sold to designated
banks. Foreign exchange earnings obtained from borrowings from foreign institutions or issues of
shares or bonds denominated in foreign currency need not be sold to designated banks, but must be
kept in foreign exchange bank accounts of designated banks unless specifically approved otherwise.
At present, control of the purchase of foreign exchange is relaxed. Enterprises within the PRC
which require foreign exchange for their ordinary trading and non-trading activities, import
activities and repayment of foreign debts may purchase foreign exchange from designated banks if
the application is supported by the relevant documents. Furthermore, FIEs may distribute profit to
their foreign investors with funds in their foreign exchange bank accounts kept with designated
banks. Should such foreign exchange be insufficient, enterprises may purchase foreign exchange from
designated banks upon the presentation of the resolutions of the directors on the profit
distribution plan of the particular enterprise.
Although the foreign exchange control over transactions under current accounts has decreased,
enterprises shall obtain approval from SAFE before they accept foreign-currency loans, provide
foreign currency guarantees, make
35
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investments in foreign countries or carry out any other capital
account transactions involving the purchase of foreign currencies.
In foreign exchange transactions, designated banks may freely determine applicable exchange
rates based on the rates publicized by PBOC and subject to certain governmental restrictions.
On October 21, 2005, SAFE issued the Notice of the State Administration of Foreign Exchange on
Exchange Control Issues Relating to Financing and Reverse Investment by Persons Resident in the
Peoples Republic of China Through Offshore Special Purpose Vehicles (SAFE Notice No.
75), which became effective as of November 1, 2005. According to the SAFE Notice No. 75, prior
registration with the local SAFE branch is required for PRC residents to establish or to control an
offshore company for the purposes of financing that offshore company with assets or equity
interests in an onshore enterprise located in the PRC. An amendment to registration or filing with
the local SAFE branch by such PRC resident is also required for the injection of equity interests
or assets of an onshore enterprise in the offshore company or overseas funds raised by such
offshore company, or any other material change involving a change in the capital of the offshore
company.
Moreover, the SAFE Notice No. 75 applies retroactively. As a result, PRC residents who have
established or acquired control of offshore companies that have made onshore investments in the PRC
in the past are required to complete the relevant registration procedures with the local SAFE
branch by March 31, 2006. Under the relevant rules, failure to comply with the registration
procedures set forth in the SAFE Notice No. 75 may result in restrictions being imposed on the
foreign exchange activities of the relevant onshore company, including the increase of its
registered capital, the payment of dividends and other distributions to its offshore parent or
affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC
residents to penalties under PRC foreign exchange administration regulations. PRC residents who
control our Company from time to time are required to register with the SAFE in connection with
their investments in us.
PRC Funeral Regulations and Compliance with Environmental Laws
Foguangs cemetery operations are subject to regulations and supervision under state, and
local laws, ordinances, and regulations, including extensive regulations concerning cemetery
construction, sales of funeral and cemetery products and services, and various other aspects of its
business.
Foguang is subject to the requirements of the Regulations on Funeral and Interment Control
promulgated by Decree No. 225 of the State Council of the PRC on July 21, 1997 and Rules of
Chongqing on Funeral and Interment Control promulgated by the local government on May 29, 1998.
Pursuant to the laws and regulations, the type of funeral equipment it uses and the size of burial
vaults Foguang constructs and sells to its customers must comply with state unified specifications
and standards. In addition, any construction of cemetery or funeral home must be approved by the
Administration of Civil Affairs and the construction must be limited away from a certain areas such
as cultivated land, forest land, urban parks, scenic spots, protected areas of water resources,
railways and highways.
We believe that Foguang is in substantial compliance with all such laws and regulations.
Seasonality
The death care business is relatively stable and predictable. However, Foguang generally
experiences fewer sales in the summer season due to the extreme hot weather in Chongqing since less
people are willing to conduct site visits in extreme heat; even though these decreases have not
historically had any significant impact on its results of operations.
Employees
The following table sets forth the number of employees for each of Foguangs areas of
operations and as a percentage of its total workforce as of March 31, 2010:
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Number of | % | |||||||
Employees | of Employees | |||||||
Management & Administration |
11 | 25.58 | % | |||||
Finance |
5 | 11.62 | % | |||||
Cemetery Administration Office |
8 | 18.60 | % | |||||
Sales & Marketing |
6 | 13.95 | % | |||||
Construction Projects |
8 | 18.60 | % | |||||
Customer Service |
5 | 11.62 | % | |||||
TOTAL |
43 | 100.0 | % |
Foguangs employees are interviewed and hired by management team and generally, it offers
training programs to new workers to better understand its corporate regulations and professional
ethics and improve their relevant skills during the training period. Management believes that
relationship with its employees is good. Management also expects that Foguangs access to
reasonably priced and competent labor will continue into the foreseeable future.
Foguang is in full compliance with Chinese labor laws and regulations. Foguang believes in the
importance of maintaining its social responsibilities, and it is committed to providing employees
with a safe, clean and comfortable working environment and accommodations. Foguangs employees are
also entitled to time off during public holidays, and it is in full compliance with its obligations
to provide pension benefits and other social insurance benefit to its workers, as mandated by the
PRC government.
Environmental Matters
Foguangs operations are subject to certain PRC environmental regulations. We believe that
Foguang is in substantial compliance with all such laws and regulations. For more information on
such environmental laws and regulations, please refer to the section on PRC Funeral Regulations
and Compliance with Environmental Law.
Offices
Our principal executive office is located at 239 Jianxin Road, Jiangbei District, Chongqing,
PRC 400000. Our main telephone number is (86) 023-67755514, and our fax number is (86)
023-67759771.
DESCRIPTION OF PROPERTY
Chongqing offices and facilities
The table below provides a general description of our offices and facilities, all of which are
located in Chongqing, China.
Location | Principal Activities | Area (sq. meters) | Lease Expiration Date | |||||
LongQiao Village and QianFo
Village, JiangNan Town,
ChangShou District, Chongqing,
PRC 401258
|
Cemetery | 339,444 | N/A (property use rights owned by the Company) |
|||||
Fuli Bowling House, 131 Changshou
Rd., ChangShou District, Chongqing,
PRC 401220
|
Office of Gui Yuan Cemetery | 1,363.2 | N/A | |||||
71 E. Jianxin Rd., F/2 Jiangbei
District, Chongqing, PRC 300000
|
Office of Foguang | 1,053 | 12/31/2012 Foguang may renew the lease upon expiration (a) |
|||||
1 Huigong Rd., Nanan District,
Chongqing, PRC 400000
|
Rented out | 1,938.15 | N/A (property use rights owned by the Company) |
|||||
Agricultural Land, Group 6, Longqiao Village, ChangShou District, |
(1) Employee housing, parking, to be developed in | (1) 54,027 | 12/31/2027 |
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Location | Principal Activities | Area (sq. meters) | Lease Expiration Date | |||||
Chongqing, PRC 401258
|
2011 to 2014 | According to Chinese Laws, the maximum | ||||||
(2) Cemetery, 46,620 square meters developed, 32,753 square meters on development | (2) 79,373 | lease term of agricultural land is 22 years. (a) | ||||||
Wasteland, Group 6 Longqiao Village, ChangShou District, Chongqing, PRC 401258 |
Cemetery, to be developed in 2011 to 2015 | 120,060 | 12/31/2055 | |||||
According to Chinese Laws, the maximum lease term of non-agricultural land is 50 years. (a) | ||||||||
Timberland, Group 6 Longqiao Village, Changshou District, |
Cemetery, to be developed in 2011 to 2015 | 100,050 | 12/31/2055 | |||||
Chongqing, PRC 401258
|
According to Chinese Laws, the maximum lease term of non-agricultural land is 50 years. (a) | |||||||
House Land, Group 6 Longqiao Village, ChangShou District, Chongqing, PRC 401258 |
Cemetery, to be developed in 2011 to 2015 | 28,014 | 12/31/2105 According to Chinese Laws, the maximum lease term of non-agricultural land is 50 years. (a) |
(a) | Lease commitments | |
The Company has a lease commitment in relation to the land use lease rights that were acquired by
the Company from local farmers through a cash payment of $836,000. The tenure of arable land is 22
years, from January 1, 2005 to December 31, 2027. The tenure of non-arable land is 50 years, from
January 1, 2005 to December 31, 2055. At the end of these terms, the Company will have to negotiate
new lease terms. The Company pays annual lease payment on or before
October 31st to the municipal government in Changshou, Chongqing, and in turn the
government then pays the sixth villager group, Longqiaohu village, according to the terms of the
contract, and the sixth villager group re-distributes the funds to each farmer household. This is
the consideration that was agreed upon by the farmers for relocating in ChangShou Jiang Nan. As of
March 31, 2010 and 2009, lease expense was $22,641 and $22,515, respectively.
The Company leased office space of 1,053 square meters at 239 Jianxi Road in Chongqing, PRC. The
term of the lease was for four and a half years from August 1, 2009 to December 31, 2012, at which
time the Company would have priority to renew it lease under the same conditions, with rent
adjusted based on the market price. If the Company fails to pay the rent on time, a penalty will be
assessed and if rent is due for three months, the counterparty could terminate its lease. As of
March 31, 2010, lease expense was $14,191.
Future minimum operating lease payments relating to the above leases are as follows:
Years | ||||
Ending | ||||
March 31, | ||||
2010 |
$ | 22,641 | ||
2011 |
$ | 43,927 | ||
2012 |
$ | 43,927 | ||
2013 |
$ | 38,606 |
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Years | ||||
Ending | ||||
March 31, | ||||
2014 |
$ | 22,641 | ||
Thereafter |
$ | 294,337 | ||
Total |
$ | 466,079 |
SUMMARY CONSOLIDATED FINANCIAL DATA
You should read the summary consolidated financial data set forth below in conjunction with
Managements Discussion and Analysis of Financial Condition or Plan of Operations and our
financial statements and the related notes included elsewhere in this prospectus. The financial
data for the years ended March 31, 2010, 2009 and 2008 were derived from our audited financial
statements included in this prospectus. The historical results are not necessarily indicative of
the results to be expected for any future period.
(Amounts in USD)
Twelve Months | ||||||||||||
Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Income statement data: |
||||||||||||
Revenues |
$ | 36,498,969 | $ | 18,313,720 | $ | 22,121,639 | ||||||
Cost of Goods Sold |
$ | 17,565,765 | $ | 9,938,853 | $ | 12,694,927 | ||||||
Gross Profit |
$ | 18,933,204 | $ | 8,374,867 | $ | 9,426,712 | ||||||
Total Operating Expenses |
$ | 1,792,584 | $ | 1,471,475 | $ | 1,685,737 | ||||||
Income from Operations |
$ | 17,140,620 | $ | 6,903,392 | $ | 7,740,975 | ||||||
Total Other Income |
$ | (106,026 | ) | $ | 283,560 | $ | 330,614 | |||||
Earnings Before Tax |
$ | 17,034,594 | $ | 7,186,952 | $ | 8,071,589 | ||||||
Income Tax |
$ | (4,707,374 | ) | $ | (1,689,693 | ) | $ | (2,346,605 | ) | |||
Net Income |
$ | 12,327,230 | $ | 5,497,259 | $ | 5,724,984 |
Footnotes
The share exchange transaction between us and Gold Industry is deemed to be a reverse acquisition,
where we (the legal acquirer) are considered the accounting acquiree and Gold Industry (the legal
acquiree) is considered the accounting acquirer.
Balance Sheet Data
(Amounts in USD)
At March 31, | At March 31, | At March 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Consolidated Balance Sheet Data: |
||||||||||||
Cash and cash equivalents |
$ | 9,367,276 | $ | 1,392,961 | $ | 1,719,620 | ||||||
Total Current Assets |
$ | 20,564,611 | $ | 7,713,109 | $ | 11,766,222 | ||||||
Total Current Liabilities |
$ | 6,437,449 | $ | 4,202,072 | $ | 5,787,182 | ||||||
Total Shareholders Equity |
$ | 35,848,868 | $ | 19,774,555 | $ | 13,765,547 |
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MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis of the results of our operations and financial condition
for the fiscal years ended March 31, 2010 and 2009 should be read in conjunction with the Selected
Consolidated Financial Data, our financial statements, and the notes to those financial statements
that are included elsewhere in this prospectus. Our discussion includes forward-looking statements
based upon current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events could differ
materially from those anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors, Cautionary Notice Regarding
Forward-Looking Statements and Business sections in this prospectus. We use words such as
anticipate, estimate, plan, project, continuing, ongoing, expect, believe,
intend, may, will, should, could, and similar expressions to identify forward-looking
statements.
OVERVIEW
The Company, through its operating entity, Chongqing Foguang Tourism Development (Group) Co.,
Ltd. (Foguang), is a private provider of cemetery products and services in Chongqing,
Peoples Republic of China (PRC or China). Foguang is primarily focused on
developing cemeteries and selling cemetery plots, although it also provides park and garden
development and construction services. Foguangs first cemetery development project was the
Chongqing Guiyuan Cemetery I (Guiyuan I), located in Changshou District of Chongqing on
approximately 66,660 square meters of land. The entire cemetery plot of Guiyuan I have been sold,
at an average price of RMB 30,000 ($4,412) per plot. Foguang is currently developing the Chongqing
Guiyuan Cemetery II (Guiyuan II), its second cemetery project in Changshou. Guiyuan II,
in development since 2002, occupies a land area of 667,000 square meters, of which approximately
46,620 square meters have been developed to date and 620,000 square meters remain undeveloped.
Approximately 565,000 square meters are identified as land to be developed as a cemetery and the
remaining area will be developed as housing, parking and office space in the future.
Both Guiyuan I and Guiyuan II are among the most highly regarded facilities in their market
area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume
of business, available inventory, name recognition, aesthetics and potential for development or
expansion. In 2006 and 2007, Foguang was ranked amongst the top 50 private-owned enterprises in
Chongqing by the Xinhuanet News Domestic, Xinhua News Agency.
The Chongqing municipal government has also committed to enable Foguang to secure the land use
rights to approximately 1,194,804 square meters of land surrounding Longqiao Lake, which portions
of Guiyuan II overlook. However, as of the date of this Prospectus, Foguang has yet to officially
receive those land use rights. Foguang is planning to develop this land as a park, with mausoleums
and temples, to complement and enhance Guiyuan II. The purpose of the Longqiao Lake project is to
make full use of its land resources, to cultivate and produce flower seeds, and to increase the
overall green effect of its park. The project is about 33 acres in size. So far, Foguang has
invested nearly RMB 12 million (approximately US $1.77 million) to cultivate the land for the
planting of nursery seedlings and the purchasing of nursery seedlings. A part of such seedlings
will be used for the development of Guiyuan II, and the remaining seedlings will be sold either to
the Changshou district government for urban landscaping or to outside parties for profit.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities and
expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to
accrued expenses, fair valuation of stock related to stock-based compensation and income taxes. We
based our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
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Table of Contents
This summary of significant accounting policies is presented to assist the understanding of the
consolidated financial statements. The consolidated financial statements and notes are
presentations of the Companys management, which is responsible for their integrity and
objectivity. These accounting policies conform to the accounting principles generally accepted in
the United States of America and have been consistently applied in the preparation of the
consolidated financial statements.
Basis for Consolidation and Presentation
Gold Industry Limited (Gold Industry) was incorporated on September 11, 2009,
under the laws of the Cayman Islands. Gold Industry has no substantive operations of its own except
for its 100% holding of Gold Holy Industry Limited (Gold Holy), which was incorporated on
September 29, 2009, under the laws of Hong Kong Special Administrative Region. In turn, Gold Holy
owns 100% of Chongqing Ran Ji Industry Co., Ltd. (Gold Industry
Ran Ji), a PRC company. Through Chongqing Ran Ji, Gold Industry controls Foguang.
Ran Ji was established in the PRC on December 15, 2009 as a wholly foreign owned
enterprise (WFOE), with registered capital of $25,000,000, with the first $3,000,000 to be
contributed by March 20, 2010, and the balance within two years. Chongqing Ran Ji has no
substantive operations of its own except for entering into certain exclusive agreements with Foguang and performing its obligations thereunder.
Foguang, a PRC limited liability company established on October 10, 2002 with registered
capital of 100,000,000 Renminbi (RMB), is engaged in selling death care products and services,
and holds the licenses and approvals necessary to operate its business in China.
PRC law currently has limits on foreign ownership of companies. To comply with these foreign
ownership restrictions, on December 15, 2009, Ran Ji entered into following exclusive
agreements with Foguang and its owners (collectively the Contractual Arrangements):
(1) Consulting Services Agreement, through which Ran Ji has the right to
advise, consult, manage and operate Foguang, and collect and own all of its net
profits;
(2) Operating Agreement , through which Ran Ji has the right to recommend
director candidates and appoint the senior executives of Foguang, approve any
transactions that may materially affect the assets, liabilities, rights or operations of Foguang, and guarantee the contractual performance by Foguang of any
agreements with third parties, in exchange for a pledge by Foguang of its accounts
receivable and assets;
(3) Proxy Agreement , under which the owners of Foguang have vested their
collective voting control over Foguang to Ran Ji and will only transfer
their respective equity interests in Foguang to Ran Ji or its
designee(s);
(4) Option Agreement , under which the owners of Foguang have granted Ran Ji the irrevocable right and option to acquire all of their equity interests
in Foguang; and
(5) Equity Pledge Agreement, under which the owners of Foguang have
pledged all of their rights, titles and interests in Foguang to Ran Ji
to guarantee the performance of their obligations under the Consulting Services Agreement.
In accordance with Accounting Standards Codification (ASC) 810 variable interest entities (VIEs)
are generally entities that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate decision making ability.
All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary
of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for
financial reporting purposes.
As a result of these Contractual Arrangements, which obligates Ran Ji to absorb a
majority of the risk of loss from Foguangs activities and enable Ran Ji to
receive a majority of its expected residual
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returns, the Company believes that Foguang is a Variable Interest Entity (VIE) under
Accounting Standards Codification 810, because the owners of Foguang do not have the
characteristics of a controlling financial interest and the Company should be considered the
primary beneficiary of Foguang. Accordingly, the Company consolidates Foguangs
results, assets and liabilities in the accompanying consolidated financial statements.
The consolidated financial statements include the financial statements for the Company, its
subsidiaries and the VIE, Foguang. All significant inter-company
transactions and balances between the Company, its subsidiary and the variable interest entity are
eliminated upon consolidation.
FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. This topic also establishes a fair value hierarchy
which requires classification based on observable and unobservable inputs when measuring fair
value. The fair value hierarchy distinguishes between assumptions based on market data (observable
inputs) and an entitys own assumptions (unobservable inputs). The hierarchy consists of three
levels:
o | Level one Quoted market prices in active markets for identical assets or liabilities; | ||
o | Level two Inputs other than level one inputs that are either directly or indirectly observable; and | ||
o | Level three Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use. | ||
Determining which category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates its hierarchy disclosures each quarter.
Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Fair value measurement using inputs | Carrying amount at March 31, | |||||||||||||||||||
Financial instruments | Level 1 | Level 2 | Level 3 | 2010 | 2009 | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Derivative instruments Warrants |
$ | | $ | 1,366,327 | $ | | $ | 1,366,327 | $ | | ||||||||||
Total |
$ | | $ | 1,366,327 | $ | | $ | 1,366,327 | $ | |
Derivative Instruments Warrants
The
Company issued 701,126 Warrants in connection with the February 2010 Private Placement of
1,402,262 shares of common stock, which are further disclosed in Note 13. 70,113 Warrants were
issued to the placement agent. The strike price of these Warrants is $4.10 per share. These
Warrants were not issued with the intent of effectively hedging any future cash flow, fair value of
any asset, liability or any net investment in a foreign operation.
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These Warrants were issued with a down-round provision whereby the exercise price would be adjusted
downward in the event that, during additional shares of the Companys common stock or securities
exercisable, convertible or exchangeable for the Companys common stock were issued at a price less
than the exercise price. Therefore, according to the guidance provided in FASB ASC 815-40-15-5
through 815-40-15-8, which was adopted by the Company on April 1, 2009, the Company accounted for
these warrants as derivative liabilities. All changes in the fair value of these warrants were
recognized in statement of income until they are exercised or expire or otherwise extinguished.
The Company estimates the fair value of the warrants using the Black-Scholes option pricing model
using the following assumptions:
Warrants | Underwriter Warrants | |||||||||||||||
March 31, | Feb. 19, | March 31, | Feb. 19, | |||||||||||||
2010 | 2010 | 2010 | 2010 | |||||||||||||
Market price and estimated fair value of common stock: |
$ | 4.55 | $ | 3.50 | $ | 4.55 | $ | 3.50 | ||||||||
Exercise price: |
$ | 4.10 | $ | 4.10 | 4.10 | $ | 4.10 | |||||||||
Expected term (years): |
3.87 | 4.00 | 3.87 | 4.00 | ||||||||||||
Dividend yield: |
| | | | ||||||||||||
Expected volatility: |
41. | % | 41 | % | 41 | % | 41 | % | ||||||||
Risk-free interest rate: |
2.07 | % | 2.11 | % | 2.07 | % | 2.11 | % |
The fair value of the warrants on February 18, 2009 was determined using the Black-Scholes option
pricing model based on the following assumptions: dividend yield: 0%, expected volatility:41.40%,
risk-free interest rate: 1.88%, and expected term: 3.86 years.
Before the reverse merger, the Companys common stock had not been publicly traded. Whilst the
Companys common stock began public trading and was quoted on the OTCBB in February 2010, the fair
value of the Companys common stock as of February 19, 2010 has been determined based on market
price.
As the Companys stock only begun public trading effective with the reverse merger date, historical
volatility information is limited and considered not representative of the expected volatility. In
accordance with ASC 718-10-30-2 (formerly SFAS No. 123R, Accounting for Stock-Based Compensation
), the Company identified similar public entities for which share and option price information was
available, and considered the historical volatilities of those public entities share prices in
calculating the expected volatility appropriate to the Company (i.e. the calculated value).
The risk-free rate of return reflects the interest rate for United States Treasury Note with
similar time-to-maturity to that of the warrants.
Allocation of Proceeds from Private Placement
The proceeds from the Private Placement were first allocated between the Common Shares and the
warrants issued in connection with the Private Placement based upon their estimated fair values as
of the closing date, resulting in an aggregate amount of $794,376 being allocated to the Warrants
and $3,400,995 to the common shares.
Accounts receivable
Accounts receivable are carried at original invoice amount less allowance for doubtful receivables.
Managements evaluation on the adequacy of the allowance for doubtful accounts is based on a review
of all outstanding amounts by account on a monthly basis. Specifically, the Company analyzes the
aging of accounts receivable balances, historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in the customer payment terms. Significant
changes in customer concentration or payment terms, deterioration of customer credit-worthiness or
weakening in economic trends could have a significant impact on the collectability of receivables
and
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the Companys operating results. If the financial condition of the Companys customers were to
deteriorate, resulting in an impairment of their ability to make payments, the Company will write
off 100% as bad debt.
Inventory
Inventory consists of completed cemetery plots ready for sale. Inventory includes all direct costs
associated with land development and construction of cemetery plots, including interest, costs of
land use rights based on units of production and other carryings costs incurred. Inventory is
valued at the lower of cost or market (determined on a weighted average cost basis) or net
realizable value.
The Company uses the full cost absorption method of accounting for direct costs associated with
land development and construction of cemetery plots, including interest and costs of land use
rights. Such costs are allocated to the estimated number of cemetery plot to be developed using the
selling price relative fair value method. When the cemetery plots are sold, the carrying costs are
charged to cost of goods sold.
During 2005, the Company received land use rights which were contributed by the PRC government for
no consideration. Under PRC law, all land in the PRC is state-owned.
Inventory Reserve
Management periodically compares the carrying cost of inventory with the expected net realizable
value to arrive at market prices. An allowance is made for the decline in market value of inventory
if lower than the carrying cost. As of March 31, 2010 and 2009, inventory reserve was $999,805 and
$0, respectively.
Contributed property
The Company received land use rights from the PRC government for no consideration paid. The Company
recorded the fair value of the land use rights as an intangible asset and deferred revenue as
determined by management with the advice of PRC legal counsel and third party consultants.
Article 12 of the PRCs Regulations on the Land Use Right sets forth the maximum term of the land
use rights for different uses as follows: (1) 70 years for residential use; (2) 50 years for
industrial use; (3) 50 years for educational, technological, cultural, health, and sport site use;
(4) 40 years for commercial, tourist and recreational use; (5) 50 years for comprehensive or other
use; (6) 20 years for gas station use. Article 11 of the PRCs Regulations on Funeral
Administration stipulates that the term of the use of cemetery land or grave yard shall be
determined by each provincial government. Article 21 of the Chongqing Funeral Rules states that the
land use rights for graves shall be no more than 20 years, subject to renewal. Foguangs land use
rights consists of two parts: one piece of allocated land from the PRC government and one piece of
land leased from the local farmers which the Company acquired by paying $835,000. The leased land
is comprised of both farm land and residential land. The farm land is subject to a maximum term of
20 years and the Company has a priority to renew the lease when it expires. The residential land is
under a lease term of 100 years.
REVENUE RECOGNITION
The Company recognizes revenue when four basic criteria must be met. The four basic criteria are :
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred with no future other
than perfunctory performance obligations; (3) the selling price is fixed and determinable; and (4)
collectability is reasonably assured. Determination of criteria (3) and (4) is based on
managements judgments regarding the fixed nature of the selling prices of the products and
services delivered and the collectability of those amounts.
The Company has two revenue sources including the following revenue recognition policies:
The Company recognizes revenue from the sale of cemetery plots when it is realized or realizable
and earnings process is complete. In general, a potential customer will tour the Companys facility
and choose a particular spot or location of the cemetery plot that is ready and available for use.
A sales agreement is executed with Foguang for the exact location at a fixed price. The sales
process ends when the consideration is paid in full, at which time, the
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Company provides the customer full access to the use of the plot. The Company does not provide any
other post-death type services, other than to develop and sell the cemetery plots, obtain executed
agreements, full payment and deliver the keys to the plot embedded in a concrete box. The Company
records revenue when the title or right to use the completed cemetery plots has passed to the
customer in accordance with the terms of the fixed price sale agreement and consideration is
exchanged. The costs associated with revenue from sale of cemetery plots are the costs to convert
the land into the actual burial plots. Additionally direct selling costs incurred in selling the
cemetery plots are recorded in cost of goods sold.
Park construction income is recognized when the Company is contracted to provides services for
third party clients. These services include the construction of sidewalks, pagodas, landscaping and
other structures for parks. These projects are not associated with the Companys sales of cemetery
plots. Revenue is recognized upon the completion of the park, and the project has been approved by
the customer and collection is assured. The costs associated with the park construction income are
raw materials purchased for that specific project and services performed by the Company recorded in
costs of goods sold.
Foreign Currency
The Companys reporting currency is the U.S. dollar. The functional currency of the parent company
is the U.S. dollar and the functional currency of the Companys operating subsidiaries is the
Chinese Reminbi (RMB). For the subsidiaries whose functional currencies are the RMB,
Assets and liabilities are translated at the exchange rates at the balance sheet date and revenue
and expenses are translated at the average exchange rates and stockholders equity is translated at
historical exchange rates. Any translation adjustments resulting are not included in determining
net income but are included in foreign exchange adjustment to other comprehensive income, a
component of equity. There is no significant fluctuation in exchange rate for the conversion of RMB
to U.S. dollars after the balance sheet date.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued Accounting Standards Update No. 2009-01, ASC 105 Generally Accepted
Accounting Principles which establishes the FASB Accounting Standards Codification (the
Codification) as the official single source of authoritative US GAAP. All existing
accounting standards are superseded. All other accounting guidance not included in the Codification
will be considered non-authoritative. The Codification also includes all relevant Securities and
Exchange Commission guidance organized using the same topical structure in separate sections within
the Codification.
Following the Codification, the Board will not issue new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (ASU) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the changes to the
Codification. The Codification is not intended to change US GAAP, but it will change the way US GAAP
is organized and presented. The Codification is effective for our third-quarter 2009 financial
statements and the principal impact on our financial statements is limited to disclosures as all
future references to authoritative accounting literature will be referenced in accordance with the
Codification.
In August 2009, the FASB issued an Accounting Standards Update (ASU 2009-05) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the measurement of
liabilities at fair value in circumstances in which a quoted price in an active market for the
identical liability is not available; under those circumstances, a reporting entity is required to
measure fair value using one or more of valuation techniques, as defined. This ASU is effective for
the first reporting period, including interim periods, beginning after the issuance of this ASU.
The adoption of this ASU did not have a material impact on the Companys consolidated financial
position, results of operations or cash flows.
In October 2009, the FASB issued an Accounting Standards Update (ASU 2009-15) regarding the
accounting for own-share lending arrangements in contemplation of convertible debt issuance or
other financing. This ASU requires that at the date of issuance of the shares in a share-lending
arrangement entered into in contemplation of a convertible debt offering or other financing, the
shares issued shall be measured at fair value and be recognized as an issuance
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cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic
and diluted earnings per share unless default of the share-lending arrangement occurs, at which
time the loaned shares would be included in the basic and diluted earnings-per-share calculation.
This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods
within those fiscal years for arrangements outstanding as of the beginning of those fiscal years.
The Company is currently evaluating the impact of this ASU on its consolidated financial
statements.
In December 2009, the FASB issued an Accounting Standards Update regarding the accounting for
transfers of financial assets which amends previous guidance. The amendments in this ASU improve
financial reporting by eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the transferred financial
assets. In addition, the amendments require enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on portions of financial
assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU
to have a material impact on its consolidated financial position, results of operations or cash
flows.
In December 2009, the FASB issued an Accounting Standards Update regarding improvements to
financial reporting by enterprises involved with variable interest entities which amends previous
guidance. The amendments in this ASU replace the quantitative-based risks and rewards calculation
for determining which reporting entity, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which reporting entity has the power to
direct the activities of a variable interest entity that most significantly impact the entitys
economic performance and (1) the obligation to absorb losses of the entity or (2) the right to
receive benefits from the entity. An approach that is expected to be primarily qualitative will be
more effective for identifying which reporting entity has a controlling financial interest in a
variable interest entity. The amendments in this ASU also require additional disclosures about a
reporting entitys involvement in variable interest entities, which will enhance the information
provided to users of financial statements. The adoption of this ASU did not have any material
impact on its consolidated financial position, results of operations or cash flows.
In December 2009, the FASB issued an accounting standard update, Transfers and Servicing (Topic
860) Accounting for Transfers of Financial Assets. The adoption of this update did not have any
impact on the Companys consolidated financial statements.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting and
reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to
deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the
subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair value. In contrast, an
entity is required to account for a decrease in its ownership interest of a subsidiary that does
not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies
the scope of the decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for
beginning in the first interim or annual reporting period ending on or after December 31, 2009. The
adoption of this ASU did not have any material impact on its consolidated financial position,
results of operations or cash flows.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting for
distributions to shareholders with components of stock and cash. The amendments in this ASU clarify
that the stock portion of a distribution to shareholders that allows them to elect to receive cash
or stock with a potential limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and
is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this ASU are effective for interim and annual periods ending on or after
December 15, 2009, and should be applied on a retrospective basis. The adoption of this ASU did not
have a material impact on the Companys consolidated financial position, results of operations or
cash flows.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting and
reporting for decreases in ownership of a subsidiary a scope clarification. The amendments in
this ASU affect accounting and
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reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business
or nonprofit activity. The amendments also affect accounting and reporting by an entity that
exchanges a group of assets that constitutes a business or nonprofit activity for an equity
interest in another entity. The amendments in this update are effective beginning in the period
that an entity adopts accounting for Non-controlling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51. The amendments in this update are effective beginning in
the first interim or annual reporting period ending on or after December 15, 2009. The amendments
in this update should be applied retrospectively to the first period that an entity adopted
accounting for Non-controlling Interests in Consolidated Financial Statements An Amendment of
ARB No. 51. The adoption of this ASU did not have a material impact on the Companys consolidated
position, results of operations or cash flows.
In January 2010, the FASB issued an Accounting Standard Update regarding improving disclosures
about fair value measurements. This update provides amendments to Subtopic 820-10 that requires new
disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should
disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value
measurements. In the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about purchases, sales,
issuances, and settlements (that is, on a gross basis rather than as one net number). This update
provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of
disaggregation. A reporting entity should provide fair value measurement disclosures for each class
of assets and liabilities. A class is often a subset of assets or liabilities within a line item in
the statement of financial position. A reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation
techniques. A reporting entity should provide disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value measurements. Those
disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The
new disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. The Company is currently evaluating the impact
of this ASU, however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial position, results of operations or cash flows.
In January 2010, the FASB issued an accounting standard update to address implementation issues
related to the changes in ownership provisions in the ConsolidationOverall Subtopic (Subtopic
810-10) of the FASB Accounting Standards Codification, originally issued as FASB Statement No.
160, Noncontrolling Interests in Consolidated Financial Statements. Subtopic 810-10 establishes the
accounting and reporting guidance for noncontrolling interests and changes in ownership interests
of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity
recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary
at fair value. The gain or loss includes any gain or loss associated with the difference between
the fair value of the retained investment in the subsidiary and its carrying amount at the date the
subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in its
ownership interest of a subsidiary that does not result in a change of control of the subsidiary as
an equity transaction.
While Subtopic 810-10 provides general guidance on accounting for the decreases in ownership of a
subsidiary, including a deconsolidation, some constituents raised concerns that the guidance
appears to conflict with the gain or loss treatment or derecognition criteria of other U.S.
generally accepted accounting principles, such as the guidance for sales of real estate, transfers
of financial assets, conveyances of oil and gas mineral rights, and transactions with equity method
investees.
Some constituents also questioned whether the FASB intended for the decrease in ownership
provisions of Subtopic 810-10 to apply to all entities because a subsidiary is defined as an
entity, including an unincorporated entity such as a partnership or trust, in which another entity,
known as its parent, holds a controlling financial interest. Those constituents were concerned that
such an interpretation could result in the accounting for a transaction being driven by its form
rather than its substance. For example, different accounting might be applied to a transaction
involving the same underlying assets depending on whether those assets were transferred in asset or
entity form. The amendments in this update are effective beginning in the period that an entity
adopts Subtopic 810-10. If an entity has previously adopted Subtopic 810-10 as of the date of the
amendments in this update are included in the Accounting
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Standards Codification, the amendments in this update are effective beginning in the interim or
annual reporting period ending on or after December 31, 2009. The amendments in this update should
be applied retrospectively to the first period upon adoption. The adoption of this update for the
changes in the accounting and reporting guidance for noncontrolling interests and changes in
ownership interests of a subsidiary, as codified in ASC 810-10, did not have any impact on the
Companys financial position, results of operations or cash flows.
Other recent accounting pronouncements issued by the FASB, the American Institute of Certified
Public Accountants (AICPA), and the SEC did not or are not believed by management to have a
material impact on the Companys present condensed consolidated financial statements.
RESULTS OF OPERATIONS
Comparison of Years Ended March 31, 2010 and March 31, 2009
Net Revenues
Net revenues for the year ended March 31, 2010 were $36,498,969 as compared to $18,313,720 for
the year ended March 31, 2009, an increase of $18.185.249 or approximately 99.3%. For the years
ended March 31, 2010 and 2009, net revenues consisted of the following:
Year Ended | Year Ended | |||||||
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
Cemetery |
$ | 36,498,969 | $ | 17,647,785 | ||||
Park and Nursery Garden Services |
| 665,935 | ||||||
Net Revenues |
$ | 36,498,969 | $ | 18,313,720 | ||||
Cemetery
For the year ended March 31, 2010, cemetery revenues increased by $18,851,184 or 106.8%. The
significant increase in revenues was mainly attributable to the development of new cemetery which
led to an increase of sales of cemetery plots. The total number of cemetery plots sold increased
from 4,051 in fiscal 2009 to 6,730 in fiscal 2010. In addition, the average sales price increased
by approximately US$1,000 per cemetery plot. The increase in cemetery revenues was also
attributable to better marketing as Foguang started to focus its advertising costs on television
advertisements in targeted areas and increased incentives for its sales agents and hired additional
agents to better promote and sell its services and products. Also, the opening of the Changshou
Bridge shortened the driving distance between Foguangs cemetery and the downtown area of Changshou
from two hours to 12 minutes, which brought Foguang more customers who used to limit their choices
of cemetery products and services to the downtown area for transportation reasons. The overall
improvement of local economic conditions in Chongqing also contributed to the increase of economic
value of Foguangs cemetery and increased the number of cemeteries sold. The local economic
environment experienced overall improvement in fiscal 2010 due to the assistance of large-scale
state-owned enterprises and their projects in the Chongqing area.
Park and Nursery Garden Services
For the year ended March 31, 2010, we had no revenues for park and nursery garden services
compared to $665,935 in revenues for the year ended March 31, 2009. We did not incur any revenues
for fiscal 2010 because Foguang shifted its focus to the development of its cemetery business.
Foguang gradually decreased the input of its resources on the park and nursery garden business
starting from fiscal year of 2009. We do not expect this trend to change in the next fiscal year as
Foguang continues to focus on developing its cemetery business.
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Cost of Sales
Cost of sales includes amortization of land use rights, raw materials, conversion costs,
direct labor, commissions and bonuses, manufacturing costs, and utilities. For the year ended March
31, 2010, cost of sales amounted to $17,565,765 or approximately 48.1% of total net revenues as
compared to $9,938,853 or approximately 54.3% of total net revenues for the year ended March 31,
2009. The decrease in cost of sales as a percentage of total net revenues was primarily due to
economies of scale that Foguang achieved in developing more plots of land, from favorable contract
terms with a supplier due to such suppliers excess capacity, and from being more cost efficient in
the development of cemetery derived from its past experiences. Costs associated with the
development of the cemetery were reduced because of an improvement in the production process and
the more efficient use of technology. Specifically, a change was made to the way shale stone
memorials were casted into cement walls for the cemetery which significantly decreased labor costs
and materials. The new technology led to a 60% decrease in the use of raw material for the
construction of the cemetery cement walls.
Total cost of sales increase of $7,626,912 or 76.7% was attributable to the following:
For the year ended March 31, 2010, cemetery costs amounted to $17,565,765 as compared to
$9,445,153 for the year ended March 31, 2009, an increase of $8,120,612 or 85.9% from the
comparable period in fiscal 2009. This increase was primarily attributable to the increase in the
number of cemetery plots sold and markdown of certain products to the lower of cost or market.
For the year ended March 31, 2010, we incurred no park and nursery garden services costs
because Foguang did not provide such services for fiscal 2010 as compared to $493,700 for costs
incurred for the park and nursery garden services for the year ended March 31, 2009. We do not
expect Foguang to provide much park and nursery garden services as it plans to focus on expanding
its cemetery business.
Gross Profit
Gross profit for the year ended March 31, 2010 was $18,933,204 or 51.9% of total net revenues,
as compared to $8,374,867 or 45.7% of total net revenues for the year ended March 31, 2009. The
increase in gross profit was attributable to a decrease in the cost of goods sold as Foguang was
able to develop cemetery plots for a cheaper price due to the advantage of economies of scale.
Foguang was also able to sell higher margin products since it was able to utilize its historical
sales records to develop and sell higher margin cemetery plots. In the cemetery industry, the sale
of a deluxe tomb is able to generate a 20% higher margin for Foguang as compared to the simple
tombs. As Foguang continues to develop its cemeteries, it will focus on the development of such
deluxe tombs to achieve higher profit margins. In addition, Foguang utilizes Feng Shui concepts to
develop its cemetery with the best Feng Shui to attract more customers. By having good Feng
Shui, Foguang is able market its cemetery plots at higher prices while keeping the cost of sales
relatively constant to achieve higher profit margins.
Operating Expenses
Total operating expenses for the year ended March 31, 2010 were $1,792,584, an increase of
$321,109 or 21.8% from total operating expenses in the year ended March 31, 2009 of $1,471,475.
This increase included the following:
For the year ended March 31, 2010, advertising and selling expenses amounted to $196,945 as
compared to $426,415 for the year ended March 31, 2009, a decrease of $229,470 or 53.8%. Foguang
spent less on advertising expenses for the year ended March 31, 2010 due to the ability to focus
its advertising on the channels that have been proven as the most effective. Foguang focused its
advertising on mainstream television shows, such as Chongqing Commercial Daily, Evening, Morning,
and Chongqing TV 12, which have proven to be the most effective dissemination of advertising to the
public. In fiscal 2010, Foguang also cut back on its television advertisements and print
advertisements by 50% to reduce advertising expenses.
For the year ended March 31, 2010, general and administrative expenses amounted to $1,595,639
as compared to $1,045,060 for the year ended March 31, 2009, an increase of $550,579 or 52.7%. The
increase in expenses was mainly attributable to the increase in costs associated with the increase
in sales and costs associated with using more sales agents. Foguang paid a higher sales commission
to its sales agents in order to stay competitive to industry
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standards due to the rapidly increasing labor costs in China. In addition, the cost of
gasoline has also increased which increased Foguangs transportation costs to visit the sales
agents and taking the customers to view the cemetery accordingly. Our general and administrative
expenses increased due to the overall increase of labor costs and rise of inflation in China. For
example, the cost to print a high quality pamphlet used in our sales offices went from $.03 to
$.05, up 44%
Income from Operations
We reported income from operations of $17,140,620 for the year ended March 31, 2010 as compared to
income from operations of $6,903,392 for the year ended March 31, 2009, an increase of $10,237,228
or approximately 148.3%. The substantial increase in income from operations was attributable to the
increase in the sale of cemetery plots. Also, the opening of the Changshou Bridge shortened the
driving distance between Foguangs cemetery and the downtown area of Changshou from two hours to 12
minutes, which brought Foguang more customers who used to limit their choices of cemetery products
and services to the downtown area for transportation reasons. The local economic environment
experienced overall improvement in fiscal 2010 due to the assistance of large-scale state-owned
enterprises and their projects in the Chongqing area, which led to higher overall consumer
consumption. The significant increase in income from operations was mainly attributable to
Foguangs overall development momentum and a healthy sales pipeline. Foguang has been able to
increase traffic to the cemetery and build momentum, which makes the rest of the cemetery land more
desirable and valuable.
Other Income
For the year ended March 31, 2010, total other income amounted to $(106,026) as compared to
$283,560 for the year ended March 31, 2009, an decrease of $389,586 or 135% from the comparable
period in 2009. This change was primarily attributable the following:
For the year ended March 31, 2010, other income amounted to $427,510 as compared to $255,893
for the year ended March 31, 2009, an increase of $171,617 or 67.1% from the comparable period in
2009. This change was primarily attributable to the divesture of some of our non-core assets to an
unrelated third party.
For the year ended March 31, 2010, loss on change in fair value of warrants classified as a
derivative liability is $571,950 as compared to $0.00 for the year ended March 31, 2009, an
increase of $571,950 or 100% from the comparable period. This change was attributable to warrants
that were issued in connection with the February 2010 Private Placement of common stock.
For the year ended March 31, 2010, interest expense stayed approximately the same from
$235,240 as compared to $235,208 for the year ended March 31, 2009 because our outstanding loans
did not change and interest rates stayed stable.
For the year ended March 31, 2010, rental income, net amounted to $261,750 as compared to
$260,286 for the year ended March 31, 2009, an increase of $1,464 or 0.5% from the comparable
period in 2009. This change was primarily attributable to the change in the foreign exchange rate
between the RMB and the US dollar, since the income was paid in RMB and then converted to US
dollar.
For the year ended March 31, 2010, non-operating expense amounted to $12,642 as compared to
$3,772 for the year ended March 31, 2009, an increase of $8,870 or 235.2% from the comparable
period in 2009. This change was primarily attributable to the cost associated with the divesture of
non-core assets.
Liquidity and Capital Resources
Year Ended March 31, 2010
For the year ended March 31, 2010, net cash provided by operating activities was $9,497,685,
as compared to net cash provided by operating activities of $6,489,196 for the year ended March 31,
2009. The increase was primarily attributable to the increase in the sales of cemetery plots,
offset by costs incurred to build up inventory.
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For the year ended March 31, 2010, net cash used in investing activities was $5,998,116 as
compared to net cash used in investing activities of $6,988,020 for the year ended March 31, 2009.
The decrease was mainly due to a previous prepayment for trees which the company received in full
this year. Further, we did not make any significant prepayments for headstones or other products
to a related party as we did in the prior year.
For fiscal year 2010, the net cash provided by financing activities was $4,195,371 compared to
no cash used in or provided by financing activities for fiscal year 2009. On February 19, 2010, we
completed a financing transaction with 24 institutional and/or accredited investors (collectively
the Purchasers) pursuant to which we sold $4,599,371 of units of our equity securities to
the Purchasers in a private placement (the Transaction). Each unit is comprised of
100,000 shares of our common stock, par value $0.001 per share (the Common Stock), at a
per share purchase price of $3.28 per share, and warrants to purchase up to 50,000 shares of Common
Stock. At the closing of the Transaction on February 23, 2010, we issued 1,402,262 shares of Common
Stock and four-year warrants to purchase 701,126 shares of Common Stock (the Warrants) at
$4.10 per share. In addition, we issued warrants to purchase up to 70,113 shares of common stock at
$4.10 per share to our placement agent and its assignees for the Transaction. Offering costs of
approximately $404,000 was netted against the proceeds.
As of March 31, 2010, we had available and unrestricted cash and cash equivalents of
$9,367,276. Our total current assets were $20,564,611 and our total current liabilities were
$6,437,449. We believe that we have adequate working capital to sustain operations and maintain
positive operating cash flows for at least the next twelve months.
We have various short term loans of approximately $2.5 million that are due and payable by
March 2011. We plan to use all the funds from the Transaction to develop the Gui Yuan II project.
In 2010, we plan to complete the first phase of land acquisition and the construction of the
cemetery and supporting facilities within the acquired land. We plan to develop 5,000 external
tombs and 2,000 internal tombs. After the Gui Yuan II project is completed, our next focus will be
the development of the Longqiao Lake project. In 2011, we plan to develop tourism, leisure,
entertainment, dining accommodation, transportation and other comprehensive services and
facilities. We plan to expand our seedling base in the Longqiao Lake area. Management believes that
the funds for such short-term developments can be obtained through the sale of securities or
issuance of debt instruments in addition to our retained earnings. Foguangs projected income is
approximately US$12 and US$16 million in 2011 and 2012, respectively, so Foguang expects to have
enough funds for its short term development projects.
Our long term development includes acquisition and merger with cemeteries locally or in other
cities. We plan to acquire Shenzhen Huaqiao Public Cemetery in 2013. The funds needed for this
acquisition is approximately US$29.33 million.
We believe that cash and cash equivalents currently on hand and cash flows from operations
will be sufficient to continue our operations and to pursue our growth strategy for the foreseeable
future. Our future capital requirements will depend on many factors, including the rate of our
revenue growth; the timing and extent of spending to enhance our advertising and marketing
programs; investing in our sales force; the levels of the inventory we carry; and other factors
relating to our business. We will require additional financing in the future in order to execute
our operating and growth plans and we may not be able to obtain such financing. We cannot predict
whether this additional financing will be in the form of equity, debt, or a combination of debt and
equity. There are no assurances that our plans will be successful, or even be implemented.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated
payments. Changes in our business needs, cancellation provisions, changing interest rates, and
other factors may result in actual payments differing from the estimates. We cannot provide
certainty regarding the timing and amounts of payments. We have presented below a summary of the
most significant assumptions used in our determination of amounts presented in the tables, in order
to assist in the review of this information within the context of our consolidated financial
position, results of operations, and cash flows.
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The following tables summarize our contractual obligations as of March 31, 2010, and the
effect these obligations are expected to have on our liquidity and cash flows in future periods.
Payments Due by Period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 Years | 3-5 Years | 5 Years + | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Contractual Obligations : |
||||||||||||||||||||
Bank Indebtedness |
$ | 2,475 | $ | 2,475 | $ | | $ | | $ | | ||||||||||
Other Indebtedness |
$ | 443 | $ | 44 | $ | 104 | $ | 69 | $ | 225 | ||||||||||
Capital Lease Obligations |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Purchase Obligations |
$ | 50,000 | $ | 25,000 | $ | 25,000 | $ | | $ | | ||||||||||
Total Contractual Obligations: |
$ | 52,918 | $ | 27,519 | $ | 25,104 | $ | 69 | $ | 225 |
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the
payment obligations of any third parties. We have not entered into any derivative contracts that
are indexed to our shares and classified as shareholders equity or that are not reflected in our
consolidated financial statements. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk
support to such entity. We do not have any variable interest in any unconsolidated entity that
provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging
or research and development services with us.
Exchange Rates
We maintain our books and records in Renminbi (RMB), the lawful currency of the PRC. In general,
for consolidation purposes, the Company translates our assets and liabilities into U.S. Dollars
using the applicable exchange rates prevailing at the balance sheet date, and the statement of
income is translated at average exchange rates during the reporting period. Adjustments resulting
from the translation of our financial statements are recorded as accumulated other comprehensive
income.
Until July 21, 2005, RMB had been pegged to USD at the rate of RMB8.30: USD$1.00. On July 21, 2005,
the PRC government reformed the exchange rate system into a managed floating exchange rate system
based on market supply and demand with reference to a basket of currencies. In addition, the
exchange rate of RMB to USD was adjusted to RMB8.11: USD$1.00 as of July 21, 2005. The Peoples
Bank of China announces the closing price of a foreign currency such as USD$ traded against RMB in
the inter-bank foreign exchange market after the closing of the market on each working day, which
will become the unified exchange rate for the trading against RMB on the following working day. The
daily trading price of USD against RMB in the inter-bank foreign exchange market is allowed to
float within a band of ±0.3% around the unified exchange rate published by the Peoples Bank of
China. This quotation of exchange rates does not imply free convertibility of RMB to other foreign
currencies. All foreign exchange transactions continue to take place either through the Bank of
China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by
the Peoples Bank of China. Approval of foreign currency payments by the Bank of China or other
institutions required submitting a payment application form together with invoices, shipping
documents and signed contracts.
The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing
the consolidated financial statements or otherwise stated in this report were as follows:
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
Balance sheet items, except for
the registered and paid-up capital,
as of end of period/year. |
USD1:RMB 0.1467 | USD1:RMB 0.1465 | ||||||
Amounts included in the statement of
operations, statement of changes in
stockholders equity and statement of
cash flows for the period/year ended. |
USD1:RMB | USD1:RMB | ||||||
0.14664 | 0.14582 |
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No representation is made that RMB amounts have been, or would be, converted into US$ at the above
rates.
Inflation
We believe that inflation has not had a material effect on our operations to date.
Related Party Transactions
For a description of our related party transactions, see the section of this prospectus
entitled Certain Relationships and Related Transactions.
Quantitative and Qualitative Disclosures About Market Risk
We do not use derivative financial instruments in our investment portfolio and has no foreign
exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts
receivable, accounts payable and long-term obligations. We consider investments in highly liquid
instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be
cash equivalents.
Interest Rates. Our exposure to market risk for changes in interest rates relates primarily to
our short-term investments and short-term obligations; thus, fluctuations in interest rates would
not have a material impact on the fair value of these securities. At March 31, 2010, we had
approximately $9,367,276 in cash and cash equivalents. A hypothetical 5% increase or decrease in
interest rates would not have a material impact on our earnings or loss, or the fair market value
or cash flows of these instruments.
Foreign Exchange Rates. A substantial portion of our sales is denominated in Renminbi
(RMB). As a result, changes in the relative values of U.S. Dollars and RMB affect our
reported levels of revenues and profitability as the results are translated into U.S. Dollars for
reporting purposes. In particular, fluctuations in currency exchange rates could have a significant
impact on our financial stability due to a mismatch among various foreign currency-denominated
sales and costs. Fluctuations in exchange rates, particularly among the U.S. dollar, and RMB,
affect our gross and net profit margins and could result in foreign exchange and operating losses.
Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting
from all of our revenue and cost of goods sold being conducted in RMB and converting it to USD. We
translate monetary assets and liabilities denominated in other currencies into RMB, the functional
currency of our operating business. Our results of operations and cash flow are translated at
average exchange rates during the period, and assets and liabilities are translated at the unified
exchange rate as quoted by the Peoples Bank of China at the end of the period. Translation
adjustments resulting from this process are included in accumulated other comprehensive income in
our statement of shareholders equity. We recorded net foreign currency gains of $346,088 and
$511,749 in fiscal 2010 and 2009 respectively. We have not used any forward contracts, currency
options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict
the impact of future exchange rate fluctuations on our results of operations and may incur net
foreign currency losses in the future. As our sales denominated in foreign currencies, such as RMB,
continue to grow, we will consider using arrangements to hedge our exposure to foreign currency
exchange risk.
Our financial statements are expressed in U.S. dollars but the functional currency of our
operating subsidiary is RMB. The value of your investment in our stock will be affected by the
foreign exchange rate between U.S. dollars and RMB. To the extent we hold assets denominated in
U.S. dollars, including the net proceeds to us from this offering, any appreciation of the RMB
against the U.S. dollar could result in a change to our statement of operations and a reduction in
the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB
against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results,
the value of your investment in our company and the dividends we may pay in the future, if any, all
of which may have a material adverse effect on the price of our stock.
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Country Risk. The substantial portion of our assets and operations are located and conducted
in China. While the PRC economy has experienced significant growth in the past twenty years, growth
has been uneven, both geographically and among various sectors of the economy. The Chinese
government has implemented various measures to encourage economic growth and guide the allocation
of resources. Some of these measures benefit the overall economy of China, but may also have a
negative effect on us. For example, our operating results and financial condition may be adversely
affected by government control over capital investments or changes in tax regulations applicable to
us. If there are any changes in any policies by the Chinese government and our business is
negatively affected as a result, then our financial results, including our ability to generate
revenues and profits, will also be negatively affected.
Interest Rate Risk. We may face some risk from potential fluctuations in interest rates,
although our debt obligations are primarily short-term in nature, but some bank loans have
different rates. If interest rates have great fluctuations, our financing cost may be significantly
affected.
LEGAL PROCEEDINGS
Currently there are no legal proceedings pending or threatened against us. However, from time
to time, we may become involved in various lawsuits and legal proceedings which arise in the
ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result
in these or other matters.
MANAGEMENT
The following table identifies our current executive officers and directors, their respective
offices and positions, and their respective dates of election or appointment:
Name | Age | Position | Effective Date of Appointment | |||||
Yiyou Ran
|
47 | President, Chief Executive Officer and Chairman of the Board | February 12, 2010 | |||||
Michael Wang
|
32 | Chief Financial Officer, Treasurer, Secretary and Director | February 12, 2010 | |||||
Jianquan Chen
|
36 | Director | February 12, 2010 | |||||
Tim Hudson
|
56 | Director | February 12, 2010 | |||||
Michael Rudolph
|
59 | Director | April 1, 2010 | |||||
Lihua Zhang
|
54 | Director | April 1, 2010 | |||||
Ray Hsu
|
40 | Director | May 1, 2010 |
Biographical Information
The following is a brief account of the education and business experience of these directors
and executive officers during at least the past five years, indicating the persons principal
occupation during the period, the name and principal business of the organization by which he or
she was employed. Below also includes a discussion of the specific experience, qualifications,
attributes or skills of our directors that led to the conclusion that such persons are qualified to
serve on our board of directors.
Yiyou Ran received a bachelor degree in Atmosphere Quality Assessment from Chengdu Institute
of Meteorology in 1983 and a master degree in Economic Management from Southwestern University of
Finance and Economics in 1997. Mr. Ran established Chongqing Fo Guang Tourism Development Co., Ltd.
in October 2002 and serve as the legal representative and Chairman of the Company. Mr. Ran is a
member of the Association of Industry and Commerce of ChangShou and the President of the Chamber of
Industry and Commerce of Jiangnan Town. Mr. Ran was given the honor as Non-Public Ownership System
Public Figure, Excellent Socialism Constructor in 2006 by the United Front Work Department of the
CPC and the Association of Industry and Commerce of Changshou District in Chongqing.
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Mr. Ran is the founder and Chairman of Foguang and he has developed Foguang from a small local
company into one of the 50 largest private companies in Chongqing City. Mr. Ran is very
experienced in the death care industry and he is responsible for developing Foguangs strategic
vision and mission. Mr. Ran has also developed good relationships with the local government and
other key players in the industry. Mr. Ran is considered the soul of Foguang and his service and
knowledge are invaluable to the Company.
Michael Wang graduated from University of Texas in 2001 with a masters degree in Accounting
and received a M.B.A from the Tuck School of Business in 2007. Licensed as a CPA in the state of
Texas, Mr. Wang formerly worked as an auditor at Ernst and Young and started his career as a
financial analyst at Arthur Anderson. Mr. Wang formerly worked as the Chief Financial Officer of
Snif Labs Inc., a RFID technology company based in Massachusetts and served as a special consultant
to the CEO of JTec Inc., a software company based in Beijing.
Mr. Wang is an asset to the Company due to his education and background in accounting and
finance. Mr. Wang has professional knowledge in U.S. GAAP and is very experienced in financial
management from his previous finance and auditing positions with Ernst and Young and Arthur
Anderson, and several executive positions with U.S. companies. Mr. Wangs professional experience
in the United States offers a good balance to Foguang, which is based in China.
Jianquan Chen graduated from Wuhan University of Electric Engineering in 1996 with a major in
Construction Engineering. Mr. Chen formerly worked as the Vice President of the Chamber of Industry
and Commerce of Jiangnan Town and served as the chief engineer of Chongqing Shenglin Architectural
Engineering Co., Ltd. Currently, Mr. Chen serves as the Vice President, Deputy Chairman, Deputy
General Manager and the Senior Engineer of Chongqing Fo Guang Tourism Development (Group) Co., Ltd.
Mr. Chen also serves as the founder and General Manager of Foguang. He has managed Foguang
alongside Mr. Ran for over 8 years and is responsible for Foguangs overall operation and
management. Mr. Chen formulated Foguangs current strategic plan and has comprehensive knowledge
of the death care industry. Mr. Chen has established a very good partnership with Mr. Ran and the
key employees of Foguang so it is a good prospect for Foguangs long-term development.
Tim Hudson is currently President of the University of Houston, Victoria. Previously, Dr.
Hudson served as provost and founding dean of the College of International and Continuing Education
at the University of Southern Mississippi. Prior to that, he served as an analyst for the U. S.
Department of State. Dr. Hudson received his Ph.D. in Geography from Clark University in Worcester,
Massachusetts.
Mr. Hudson has a deep background in the development of education in the United States Mr. Hudson
was also invited as the sole U.S. representative to serve on the European Commissions Millennium
Committee, which was responsible for producing a strategic plan for European higher education for
the next decade. Mr. Hudsons familiarity with U.S. regulations and relations in the United States
is valuable to Foguang, a company based in China.
Michael Rudolph is currently the founder, chief financial officer and managing member of
Viking Asset Management, LLC and an investment adviser to Longview Fund, LP and Longview Fund
International, Ltd. (BVI). Previously, Mr. Rudolph served as the president of The Edgehill Group,
Inc. and held various senior management positions with Charles Schwabs Institutional Trading
Division, Bank of America and Wells Fargo Bank. Mr. Rudolph also served on several board of
directors, including ElectroSource, LLC and the Stanford University Medical Center Stroke Advisory
Board. Mr. Rudolph received his Bachelors degree in Biochemistry from Purdue University in 1973
and a Master of Business Administration degree from Washington University in 1975.
Mr. Rudolph has over 30 years of experience in the financial services industry, spanning from
sales, marketing, finance, operations, lending, strategic planning, trust administration,
investment management and administration. Mr. Rudolph also holds directorships in several other
companies. Mr. Rudolphs breadth of experience can help the Company to develop and mature in many
ways, including helping the Company understand and adapt to the U.S. regulatory and stock market.
Lihua Zhang is currently the chairman of Songyuan Hydropower Plant, Bo Gong Ken Hydropower
Plant and Huaxi Hydropower Plant and has invested a total of RMB One Hundred Million in building
these three plants. Mr.
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Zhang also serves as vice chairman of Zhejiang Commercial Association and is responsible for
public relations between the Zhejiang Commercial Association and other government agencies in other
provinces, including Taiwan and Hong Kong. Mr. Zhang also has served as a member of Political
Consultant Conference in Songxi, Fujiang province. Mr. Zhang received his professional degree from
Hangzhou Water Resources and Hydropower Professional School in 1980.
Mr. Zhang has over 20 years of business experience in the management, operation and
development of Chinese companies, including knowledge of accounting, finance and public relation
principles accumulated from his two decades of business experience. He has also served as the vice
chairman of Zhejiang Commerce Association so he is skilled in handling public affairs and has good
relationships with the local government. Mr. Zhangs vast understanding of Chinese companies and
relationships with the government makes him a valuable asset to the Company.
Ray Hsu also serves as the senior product manager at National Instruments (NI) where he
leads initiatives to create innovative products to enable hands-on learning for science,
technology, engineering, and math education. Mr. Hsu works closely with educators and industry
partners such as LEGO, FIRST, and Project Lead the Way to significantly improve K-12 curriculum and
better prepare students for a successful career in science and engineering. Mr. Hsu has over 17
years of experience leading high-growth companies to create highly successful software products and
solutions for a variety of industries. Prior to joining NI, Mr. Hsu was the vice president and
founding member of @hand Corporation and responsible for delivering enterprise mobile solutions for
the Oil & Gas industry and federal government agencies. Mr. Hsu started his professional career as
senior member of the LabVIEW software development team at NI. He was awarded two U.S. patents for
his work related to detecting differences between two graphical programs. Mr. Hsu received a Master
of Science degree from the Georgia Institute of Technology in 1994 and a Bachelor of Science degree
from the University of Texas at Arlington in 1992.
Mr. Hsu has vast experience in management and software development and his unique experience
adds value to the Company. Mr. Hsu is a Chinese-American whom is fluent in Mandarin and Chinese.
Mr. Hsus background should bridge the gap between the Chinese and American directors on the board
of directors, and his language skills will be very useful with communicating with Foguangs
China-based management and U.S.-based directors.
Family Relationships
There are no family relationships between or among any of our directors and executive
officers.
Involvement in Certain Legal Proceedings
There are no orders, judgments, or decrees of any governmental agency or administrator, or of
any court of competent jurisdiction, revoking or suspending for cause any license, permit or other
authority to engage in the securities business or in the sale of a particular security or
temporarily or permanently restraining any of our officers or directors from engaging in or
continuing any conduct, practice or employment in connection with the purchase or sale of
securities, or convicting such person of any felony or misdemeanor involving a security, or any
aspect of the securities business or of theft or of any felony. Nor are any of the officers or
directors of any corporation or entity affiliated with us so enjoined.
Board of Directors
Our board of directors is currently composed of seven members. All members of our board of
directors serve in this capacity until their terms expire or until their successors are duly
elected and qualified. Our bylaws provide that the authorized number of directors will be not less
than one.
Board Committees; Director Independence
Effective May 1, 2010, our board of directors established an audit committee, a nominating
committee and a compensation committee.
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Audit Committee
Currently, three directors comprise the Audit Committee: Michael Rudolph, Ray Hsu and Tim
Hudson. Mr. Rudolph serves as Chairman of the Audit Committee. The members of the Audit Committee
are currently independent directors as that term is defined under the listing standards of both
the American Stock Exchange and the NASD Marketplace Rules. Mr. Rudolph also qualifies as an audit
committee financial expert as defined by the rules of the SEC. Mr. Rudolph has the requisite
attributes of an audit committee financial expert as defined by regulations promulgated by the
SEC and that such attributes were acquired through relevant education and experience.
Our Audit Committee is responsible, in accordance with the Audit Committee charter,
recommending our independent auditors, and overseeing our audit activities and certain financial
matters to protect against improper and unsound practices and to furnish adequate protection to all
assets and records.
Our Audit Committee pre-approves all audit and non-audit services provided by our independent
auditors. These services may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as
to particular service or category of services and is generally subject to a specific budget. The
Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is
necessary. The independent auditors and management are required to periodically report to the full
Audit Committee regarding the extent of services provided by the independent auditor in accordance
with this pre-approval, and the fees for the services performed to date.
Compensation Committee
The Compensation Committee currently consists of Mr. Hudson, Mr. Rudolph and Mr. Zhang. Mr.
Hudson serves as Chairman of the Compensation Committee. The members of the Compensation Committee
are currently independent directors under the listing standards of both the American Stock
Exchange and the NASD Marketplace Rules.
In accordance with the Compensation Committees charter, the Compensation Committee is
responsible for overseeing and, and as appropriate, making recommendations to the board regarding
the annual salaries and other compensation of the Companys executive officers and general
employees and other polices, providing assistance and recommendations with respect to the
compensation policies and practices of the Company.
Nominating Committee
The Nominating Committee currently consists of Mr. Hsu, Mr. Rudolph and Mr. Zhang. Mr. Hsu
serves as the Chairman of the Nominating Committee. The members of the Nominating Committee are
currently independent directors under the listing standards of both the American Stock Exchange
and the NASD Marketplace Rules.
In accordance with the Nominating Committees charter, the Nominating Committee is responsible
for proposing to the board a slate of nominees for election by the stockholders at the Annual
Meeting of Stockholders, to periodically review and develop criteria for selection of new directors
and nominees for vacancies on the board, to review the desired experience and qualities to assure
appropriate board composition, and to recommend to the board qualified candidates for the board.
Code of Ethics
The Company has formally adopted a written financial code of ethics to be applied to the
Companys Chief Executive Officer, Chief Financial Officer and finance department personnel. The
Chief Executive Officer, Chief Financial Officer and finance department personnel have a special
role both to adhere to the principles of integrity and also to ensure that a culture exists
throughout China Redstone as a whole that ensures the fair and timely reporting of our financial results
and conditions.
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Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors and the board of directors
or compensation committee of any other company, nor has any interlocking relationship existed in
the past.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Companys
officers and directors, and persons who own more than ten percent of a registered class of the
Companys equity securities, to file reports of ownership of Form 3 and changes in ownership on
Form 4 or Form 5 with the Securities and Exchange Commission. Such officers, directors and 10%
stockholders are also required by SEC rules to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms received by it, the Company
believes that, as of the date of filing of the Companys annual
report on Form 10-K for the fiscal year ended March 31, 2010, all Section 16(a) filing requirements
applicable to its officers, directors and 10% stockholders were satisfied.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The Compensation Committee of our board of directors and our Chief Executive Officer, and
Chief Financial Officer are collectively responsible for implementing and administering all aspects
of our benefit and compensation plans and programs, as well as developing specific policies
regarding compensation of our executive officers. The Board of Directors has determined that all of
the members of our Compensation Committee, Mr. Hudson, Mr. Rudolph and Mr. Zhang are currently
independent directors under the listing standards of both the American Stock Exchange and the
NASD Marketplace Rules.
Compensation Objectives
Our primary goal with respect to executive compensation has been to set compensation at levels
that attract and retain the most talented and dedicated executives possible. Individual executive
compensation is set at levels believed to be comparable with executives in other companies of
similar size and stage of development operating in China. The Committee has implemented and
maintained compensation policies that attempt to accomplish our strategic goals.
Elements of Compensation
Base Salary. All full time executives are paid a base salary. In all cases, the Committee
establishes a minimum base salary for our executive officers. Base salaries for our executives are
established based on the scope of their responsibilities, taking into account competitive market
compensation paid by other companies in our industry for similar positions, professional
qualifications, academic background, and the other elements of the executives compensation,
including stock-based compensation. Our intent is to set executives base salaries near the median
of the range of salaries for executives in similar positions with similar responsibilities at
comparable companies, in line with our compensation philosophy. Base salaries are reviewed
annually, and may be increased to align salaries with market levels after taking into account the
subjective evaluation described previously.
Chinese Government Imposed Compensation. As a result of mandatory government employment
standards, our executives are also entitled to certain annual statutory benefits, including fully
subsidized, Company-paid health insurance, seven days of paid vacation and unlimited paid sick
leave.
Determination of Compensation
Our Chief Executive Officer and Chief Financial Officer meet during the last several weeks of
our fiscal year to evaluate each non-executive employees performance and determine his or her
compensation for the following year.
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In the case of our executive officers, the Compensation Committee similarly evaluates the
executives performance and the objectives set forth above at or about the end of our fiscal year
to determine executive compensation.
Summary Compensation Tables
The following table sets forth information concerning the compensation for the fiscal years
ended March 31, 2010 and 2009 of the principal executive officer, principal financial officer, in
addition to our three most highly compensated officers whose annual compensation exceeded $100,000,
and up to two additional individuals for whom disclosure would have been required but for the fact
that the individual was not serving as an executive officer of the registrant at the end of the
last fiscal year.
Non-Equity | ||||||||||||||||||||||||||||||||||||
Incentive | Nonqualified | |||||||||||||||||||||||||||||||||||
Plan | Deferred | |||||||||||||||||||||||||||||||||||
Stock | Option | Compen- | Compensation | All Other | ||||||||||||||||||||||||||||||||
Name and | Salary | Bonus | Awards | Awards | sation | Earnings | Compensation | Total | ||||||||||||||||||||||||||||
principal position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
Yiyou Ran, CEO (1) |
2010 | 220,558 | 0 | 0 | 0 | 0 | 0 | 0 | 220,558 | |||||||||||||||||||||||||||
2009 | 137,507 | 0 | 0 | 0 | 0 | 0 | 0 | 137,507 | ||||||||||||||||||||||||||||
Michael Wang, CFO (2) |
2010 | 9,000 | 0 | 0 | 0 | 0 | 0 | 0 | 9,000 | |||||||||||||||||||||||||||
2009 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||
Jianquan Chen, General
Manager (3) |
2010 | 148,200 | 0 | 0 | 0 | 0 | 0 | 0 | 148,200 | |||||||||||||||||||||||||||
2009 | 106,950 | 0 | 0 | 0 | 0 | 0 | 0 | 106,950 |
(1) | Mr. Ran received his compensation for the fiscal year ended March 31, 2010 from Foguang, which was paid in RMB. For reporting purposes, the amount has been converted to U.S. dollars at the conversion rate of RMB 6.82 to one U.S. dollar. | |
(2) | Mr. Wang received his compensation for the fiscal year ended March 31, 2010 from the Company, which was paid in U.S. dollar, paid by Foguang to the Company. Mr. Wang was appointed as CFO on February 10, 2010. | |
(3) | Mr. Chen received his compensation for the fiscal year ended March 31, 2010 from Foguang, which was paid in RMB. For reporting purposes, the amount has been converted to U.S. dollars at the conversion rate of RMB 6.82 to one U.S. dollar. | |
None of our executive officers received, nor do we have any arrangements to pay out, any
bonus, stock awards, option awards, non-equity incentive plan compensation, or non-qualified
deferred compensation.
Employment Agreements
We have no employment agreements with any of our executive officers as of March 31, 2010.
Director Compensation
For the year ended March 31, 2010, none of the members of our board of directors received
compensation for his or her service as a director. The following directors has executed a director
offer and acceptance letter with the Company: Tim, Hudson, Ray Hsu, S. Michael Rudolph, and Lihua
Zhang. The term of the agreement is for one (1) year and shall continue until his or her successor
is duly elected and qualified. The position shall be up for re-election each year at the annual
stockholders meeting and upon re-election, the terms and provisions of the agreement shall remain
in full force and effect. The annual compensation for each of the directors is 12,500 shares of the
Companys restricted common stock. Effective April 1, 2010, Tim Hudson, Michael Rudolph and Lihua
Zhang have each executed and delivered a director offer and acceptance letter with the Company.
Effective May 1, 2010, Ray Hsu has
executed and delivered a director offer and acceptance letter with the Company on May 1, 2010.
Under the terms of
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the agreements, Mr. Hudson, Mr. Rudolph, Mr. Zhang and Mr. Hsu shall be
entitled to the annual compensation of $12,500 shares of the Companys common stock.
Potential Payments Upon Termination or Change-in-Control
SEC regulations state that we must disclose information regarding agreements, plans or
arrangements that provide for payments or benefits to our executive officers in connection with any
termination of employment or change in control of the company. We currently have no employment
agreements with any of our executive officers, nor any compensatory plans or arrangements resulting
from the resignation, retirement or any other termination of any of our executive officers, from a
change-in-control, or from a change in any executive officers responsibilities following a
change-in-control. As a result, we have omitted this table.
Pension Benefits
We do not sponsor any qualified or non-qualified defined benefit plans.
Nonqualified Deferred Compensation
We do not maintain any non-qualified defined contribution or deferred compensation plans.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERS AND MANAGEMENT
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange
Commission. Unless otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth opposite the
shareholders name. Unless otherwise indicated, the address of each beneficial owner listed below
is 239 Jianxin Road, Jiangbei District, Chongqing, PRC 400000. The percentage of class beneficially
owned set forth below is based on 12,672,262 shares of common stock outstanding on July 9, 2010.
Number of | ||||||||
Shares | Percentage of | |||||||
beneficially | class beneficially | |||||||
Named executive officers and directors: | owned | owned | ||||||
Yiyou Ran (1) |
7,150,000 | (1) | 56.4 | % | ||||
Michael Wang (2) |
30,000 | * | % | |||||
Jianquan Chen (1) |
7,150,000 | (1) | 56.4 | % | ||||
Tim Hudson (3) |
102,500 | * | % | |||||
Michael Rudolph (4) |
12,500 | * | % | |||||
Lihua Zhang (5) |
12,500 | * | % | |||||
Ray Hsu (6) |
12,500 | * | % | |||||
All directors and executive officers as a group (7 persons) |
7,320,000 | (1) | 57.8 | % | ||||
5% Shareholders: |
||||||||
Holy Golden Industry Limited (1) |
7,150,000 | (1) | 56.4 | % |
* | Less than 1%. | |
(1) | The address of Holy Golden Industry Limited (Holy Golden) is Scotia Centre, 4th Floor, P.O. Box 2804, George Town, Grand Cayman KY 1-1112, Cayman Islands. The shareholders of Holy Goldenare Yiyou Ran (24.00%), Jianquan Chen (27.9%), Chaoyang Fu (16.74%), Yang Chen (24.36%) and Mingsheng Liu (7.00%), |
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with Yiyou Ran, Jianquan Chen and Yang Chen also as its directors. As such they are deemed to have or share investment control over Holy Goldens portfolio. The number of shares of common stock reported herein as beneficially owned by Mr. Ran and Mr. Chen are held by Holy Golden, which they in turn own indirectly through their respective ownership of Holy Golden. | ||
(2) | Mr. Wangs address is: 2500 Citywest Boulevard, Suite 304, Houston, Texas 77402. | |
(3) | Dr. Hudsons address is: 3007 North Ben Wilson, Victoria, Texas 77901. | |
(4) | Mr. Rudolphs address is: 1435 Alvarado Ave., Burlingame, California 94010. | |
(5) | Mr. Zhangs address is: No. 4, Row 1, Wenquan Garden, Wuyi, Zhejiang Province, P.R.C 321200. | |
(6) | Mr. Hsus address is: 10304 Tularosa Pass, Austin, Texas 78726 | |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Share Exchange Agreement
On February 12, 2010 (Closing or the Closing Date), we executed the
Exchange Agreement with Gold Industry and the Cayman Shareholder. Gold Industry owns 100% of Gold
Holy, which in turn owns 100% of Ran Ji, a WFOE under the laws of the PRC. On the Closing Date of
the Exchange Agreement, we issued 8,800,000 shares of our common stock to the Cayman Shareholder in
exchange for 100% of the issued and outstanding common stock of Gold Industry. Immediately after
the Closing, we had a total of 11,000,000 shares of Common Stock outstanding, with the Cayman
Shareholder owning approximately 80% of our total issued and outstanding common shares.
Our Officers and Directors Relationship with Us, Our Subsidiaries and VIE
As described in Business Our History and Corporate Structure above, we control Foguang
through contractual arrangements between Foguang and Ran Ji. These contracts include a consulting
services agreement, operating agreement, equity pledge agreement, option agreement, and proxy
agreement. As described below, some of our officers and directors are also management members of
Gold Industry, Gold Holy, Ran Ji and Foguang:
Mr. Yiyou Ran, our Chairman and Chief Executive Officer, is also a director of Gold Industry,
Gold Holy, Ran Ji and Foguang. He is also a shareholder and director of Holy Golden Industry
Limited, which owned approximately 56.4% of our common stock issued and outstanding as of July 9,
2010.
Mr. Jianquan Chen, a member of our board of directors, is also a director of Gold Industry,
Gold Holy, Ran Ji and Foguang. He is also a shareholder and director of Holy Golden Industry
Limited, which owned approximately 56.4% of our common stock issued and outstanding as of July 9,
2010.
Other Related Party Transactions
The Company had $1,408,320 and $1,406,400 in prepayments to a related party supplier as of
March 31, 2010 and 2009, respectively.
DESCRIPTION OF SECURITIES
The following information describes our capital stock and provisions of our articles of
incorporation and our bylaws, both in effect as of the date of this prospectus. This description is
only a summary. The reader should also refer to our articles of incorporation and bylaws that have
been incorporated by reference of filed with the SEC as exhibits.
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General
Our authorized capital stock consists of 100,000,000 shares of common stock at a par value of
$0.001 per share and 20,000,000 shares of preferred stock at a par value of $0.001 per share.
Common Stock
Holders of our common stock are entitled to one vote per share on all matters submitted to a
vote of the stockholders, including the election of directors. Generally, all matters to be voted
on by stockholders must be approved by a majority of the votes entitled to be cast by all shares of
our common stock that are present in person or represented by proxy. Holders of our common stock
representing fifty percent (50%) of our capital stock issued, outstanding, and entitled to vote,
represented in person or by proxy, are necessary to constitute a quorum at any meeting of our
stockholders. A vote by the holders of a majority of our outstanding shares is required to
effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to our
certificate of incorporation. Our certificate of incorporation does not provide for cumulative
voting in the election of directors.
The holders of shares of our common stock will be entitled to such cash dividends as may be
declared from time to time by our board of directors from funds available therefore. Upon
liquidation, dissolution, or winding up, the holders of shares of our common stock will be entitled
to receive pro rata all assets available for distribution to such holders after distribution of
assets to the holders of Series A Preferred. In the event of any merger or consolidation with or
into another company in connection with which shares of our common stock are converted into or
exchangeable for shares of stock, other securities, or property (including cash), all holders of
our common stock will be entitled to receive the same kind and amount of shares of stock and other
securities and property (including cash).Holders of our common stock have no pre-emptive rights and
no conversion rights, and there are no redemption provisions applicable to our common stock.
Preferred Stock
Our board of directors, without further stockholder approval, may issue preferred stock in one
or more classes or series as the board may determine from time to time. Each such class or series
shall be distinctly designated. All shares of any one class or series of the preferred stock shall
be alike in every particular, except that there may be different dates from which dividends
thereon, if any, shall be cumulative, if made cumulative. The voting powers, designations,
preferences, limitations, restrictions and relative rights thereof, if any, may differ from those
of any and all other series outstanding at any time. Our board of directors has express authority
to fix (by resolutions adopted prior to the issuance of any shares of each particular class or
series of preferred stock) the number of shares, voting powers, designations, preferences,
limitations, restrictions and relative rights of each such class or series. The rights granted to
the holders of any series of preferred stock could adversely affect the voting power of the holders
of common stock and issuance of preferred stock may delay, defer or prevent a change in our
control.
Common Stock Purchase Warrants
The Warrants entitle each Purchaser to purchase up to 50% of the number of shares of Common
Stock acquired by such Purchaser at the Initial Closing, and expire on the fourth anniversary of
their issuance date (the Termination Date). The Warrants may be exercised on a cashless
basis if, at any time after the first anniversary of their issuance date, there is no registration
statement in effect registering the resale of the shares of Common Stock underlying the Warrants,
provided that all Warrants outstanding on Termination Date shall be exercised on a cashless basis.
The exercise price of the Warrants is $4.10 per share, subject to certain adjustments:
| If the Registrant issue rights to all holders of Common Stock (but not to holders of the Warrants) to purchase shares of Common Stock at a price per share less than the VWAP at the record date for determination of stockholders entitled to receive such rights, the exercise price shall be adjusted by multiplying a fraction, of which the denominator shall be the number of Common Stock outstanding on the issuance date of such rights plus the number of Common Stock issuable under such rights, and of which the numerator shall be the number |
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of Common Stock outstanding on the issuance date of such rights plus the number of Common Stock issuable under such rights at the VWAP; |
| If the Registrant distribute evidence of its indebtedness or assets or rights to purchase any security other than the Common Stock to all holders of Common Stock (but not to holders of the Warrants), the exercise price shall be adjusted by multiplying a fraction, of which the denominator shall be the VWAP on the record date for determination of stockholders entitled to receive such distribution, and of which the numerator shall be such VWAP minus the then per share fair market value at such record date of the portion of such evidence of indebtedness or assets so distributed to one outstanding share of Common Stock as determined in good faith by the Registrants board of directors; | ||
| The exercise price is subject to proportional adjustment for stock splits, stock dividends, recapitalizations and the like; and | ||
| For purposes of the Warrants, VWAP is defined as the volume weighted average price of the Common Stock on the date a price determination is required. |
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
AND RELATED SHAREHOLDER MATTERS
Market Information
The
Companys shares are currently listed on Over-The-Counter
Bulletin Board, or OTCBB, under the symbol
CGPI.OB.
Market Price of Common Stock
The following table sets forth for the periods indicated the high and low prices
per share traded for our common stock as reported on the OTCBB.
Year Ending March 31, 2010 | High | Low | ||||||
First Quarter |
$ | | $ | | ||||
Second Quarter |
| | ||||||
Third Quarter |
| | ||||||
Fourth Quarter |
| |
Year Ending December 31, 2009 | High | Low | ||||||
First Quarter |
$ | | $ | | ||||
Second Quarter |
| | ||||||
Third Quarter |
| | ||||||
Fourth Quarter |
| |
As of July 9, 2010, we had 12,672,262 shares of common stock issued and outstanding.
Additionally, there were warrants to purchase up to 701,126 shares of common stock outstanding as
of such date. Assuming the full exercise of these warrants as of such date, we would have had
approximately 13,373,388 shares of common stock outstanding.
Holders
As of July 9, 2010, there were approximately 44 shareholders of record of our common stock
(not including beneficial owners who hold shares at broker/dealers in street name). Our transfer
agent is Continental Stock Transfer & Trust Company. The transfer agents address is 17 Battery
Place, 8th Floor, New York, New York 10004 and its phone number is (212)
845-3299.
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Dividends
We have never paid cash dividends on our common stock. We intend to keep future earnings, if
any, to finance the expansion of our business, and we do not anticipate that any cash dividends
will be paid in the foreseeable future. Our future payment of dividends will depend on our
earnings, capital requirements, expansion plans, financial condition and other relevant factors
that our board of directors may deem relevant. Our retained earnings deficit currently limits our
ability to pay dividends.
Recent Sales of Unregistered Securities
Reference is made to the Current Report on Form 8-K (Form 8-K) filed with the SEC on
February 24, 2010, for a description of recent sales of unregistered securities, which is hereby
incorporated by reference.
Equity Compensation Plan Information
The Company does not have any equity compensation plans as of March 31, 2010 and 2009.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ACCOUNTING AND FINANCIAL DISCLOSURE
As reported in a Form 8-K Current Report filed with the SEC on April 8, 2010, we changed our
independent accountants from Webb & Company, P.A. to PMB Helin Donovan, LLP effective April 5,
2010.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
FOR SECURITIES ACT LIABILITIES
Delaware Law
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a
corporations board of directors to grant, indemnity to directors and officers in terms
sufficiently broad to permit indemnification for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act. Pursuant to the provisions of Section 145, a
corporation may indemnify its directors, officers, employees, and agents as follows:
(a) A corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action by or in the right
of the corporation) by reason of the fact that the person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with such action, suit or
proceeding if the person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the persons conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which the person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the persons conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by reason of the fact that the person
is or was a director, officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses (including attorneys fees)
actually and reasonably incurred by the person in connection with the defense or settlement of such
action or suit if the person
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acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery
or the court in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a present or former director or officer of a corporation has been
successful on the merits or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys fees) actually and reasonably
incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case upon a
determination that indemnification of the present or former director, officer, employee or agent is
proper in the circumstances because the person has met the applicable standard of conduct set forth
in subsections (a) and (b) of this section. Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a majority vote of
the directors who are not parties to such action, suit or proceeding, even though less than a
quorum, or (2) by a committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys fees) incurred by an officer or director in defending any
civil, criminal, administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or proceeding upon receipt of
an undertaking by or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses (including attorneys fees) incurred by former directors
and officers or other employees and agents may be so paid upon such terms and conditions, if any,
as the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the
other subsections of this section shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in such persons
official capacity and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such persons status as
such, whether or not the corporation would have the power to indemnify such person against such
liability under this section.
(h) For purposes of this section, references to the corporation shall include, in addition
to the resulting corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and employees or agents,
so that any person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with respect to the resulting or
surviving corporation as such person would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to other enterprises shall include employee
benefit plans; references to fines shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to serving at the request of the corporation
shall include any service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or agent with respect
to an employee benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in
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a manner such person reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to
the best interests of the corporation as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this
section shall, unless otherwise provided when authorized or ratified, continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine
all actions for advancement of expenses or indemnification brought under this section or under any
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporations obligation to advance expenses (including
attorneys fees).
Charter Provisions and Other Arrangements of the Registrant
We currently have not adopted any indemnification provisions in our certificate of
incorporation or bylaws for our officers and directors.
EXPERTS
The consolidated financial statements of Gold Industry Limited and its subsidiaries as of
March 31, 2010 and 2009 appearing in this prospectus and registration statement have been audited
by PMB Helin Donovan, LLP, an independent registered public accounting firm, as set forth in their
report appearing herein, and are included in reliance upon such reports given on the authority of
such firm as experts in auditing and accounting.
LEGAL MATTERS
Richardson & Patel LLP has passed upon the validity of the shares of common stock to be sold
in this offering.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration statement on Form
S-1, together with any amendments and related exhibits, under the Securities Act, with respect to
our shares of common stock offered by this prospectus. The registration statement contains
additional information about us and our shares of common stock that we are offering in this
prospectus.
We file annual, quarterly and current reports and other information with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended. Our Securities and
Exchange Commission filings are available to the public over the Internet at the Securities and
Exchange Commissions website at http://www.sec.gov. You may also read and copy any document we
file at the Securities and Exchange Commissions public reference room located at 100 F Street,
N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330
for further information on the public reference rooms and their copy charges. Access to those
electronic filings is available as soon as practicable after filing with the Securities and
Exchange Commission. You may also request a copy of those filings, excluding exhibits, from us at
no cost. Any such request should be addressed to us at: 239 Jianxin Road, Jiangbei District,
Chongqing, PRC 400000.
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CHINA
REDSTONE GROUP, INC.
Consolidated Financial Statements
March 31, 2010 and 2009
March 31, 2010 and 2009
TABLE OF CONTENTS
PAGE | ||||
68 | ||||
69 | ||||
70 | ||||
71 | ||||
72 | ||||
73 |
(COMPANY LOGO)
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REPORT OF INDEPENDENT REGISTER PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of China Redstone Group, Inc. (the
Company) as of March 31, 2010 and 2009, and the related consolidated statement of operations and
comprehensive income, stockholders equity, and cash flows for the years ended March 31, 2010 and
2009. The Companys management is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of China Redstone Group, Inc. as of March 31, 2010 and
2009 and the results of its operations and comprehensive income and its cash flows for the years
ended March 31, 2010 and 2009 in conformity with accounting principles generally accepted in the
United States of America.
/s/ PMB Helin Donovan, LLP
PMB Helin Donovan, LLP
Spokane, WA
July 14, 2010
Spokane, WA
July 14, 2010
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CHINA REDSTONE GROUP, INC
CONSOLIDATED BALANCE SHEETS
March 31, 2010 | March 31, 2009 | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 9,367,276 | $ | 1,392,961 | ||||
Accounts receivable |
| 61,384 | ||||||
Inventory |
11,194,905 | 6,178,182 | ||||||
Other current assets |
2,430 | 80,582 | ||||||
TOTAL CURRENT ASSETS |
20,564,611 | 7,713,109 | ||||||
PROPERTY AND EQUIPMENT, NET |
7,241,174 | 7,629,342 | ||||||
OTHER NON-CURRENT ASSETS |
||||||||
Costs incurred for real estate projects in progress |
10,122,300 | 4,101,970 | ||||||
Related party receivable |
1,408,320 | 1,406,400 | ||||||
Prepaid lease expense |
787,412 | 828,124 | ||||||
Other assets |
| 16,592 | ||||||
Intangible assets, net |
11,787,903 | 12,319,893 | ||||||
TOTAL OTHER NON-CURRENT ASSETS |
24,105,935 | 18,672,979 | ||||||
TOTAL ASSETS |
$ | 51,911,720 | 34,015,430 | |||||
LIABILITIES & STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable |
$ | 113,197 | $ | 308,637 | ||||
Welfare payable |
97,064 | 96,932 | ||||||
Taxes payable |
1,441,490 | 845,525 | ||||||
Other accrued payables |
76,507 | 54,523 | ||||||
Current portion of deferred revenue |
425,000 | 425,000 | ||||||
Accrued inventory purchases |
443,036 | | ||||||
Short-term notes payable |
2,474,829 | 2,471,455 | ||||||
Warrent derivative liability |
1,366,326 | | ||||||
TOTAL CURRENT LIABILITIES |
6,437,449 | 4,202,072 | ||||||
LONG-TERM LIABILITIES |
||||||||
Deferred revenue |
9,625,403 | 10,038,803 | ||||||
TOTAL LONG-TERM LIABILITIES |
9,625,403 | 10,038,803 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 17) |
| | ||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, 20,000,000 shares authorized, $0.001 par
value; no shares issued and outstanding |
| | ||||||
Common stock, 100,000,000 shares authorized,
$0.001 par value; 12,402,262 and 8,800,000 shares
issued and outstanding, respectively |
12,402 | 8,800 | ||||||
Additional paid-in capital |
15,488,593 | 12,091,200 | ||||||
Retained earnings |
18,161,863 | 5,834,633 | ||||||
Accumulated other comprehensive income |
2,186,010 | 1,839,922 | ||||||
TOTAL STOCKHOLDERS EQUITY |
35,848,868 | 19,774,555 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 51,911,720 | $ | 34,015,430 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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CHINA REDSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the year ended | For the year ended | |||||||
March 31, 2010 | March 31, 2009 | |||||||
REVENUE |
||||||||
Cemetery |
$ | 36,498,969 | $ | 17,647,785 | ||||
Park construction services |
| 665,935 | ||||||
Total revenue |
36,498,969 | 18,313,720 | ||||||
COST OF GOODS SOLD |
||||||||
Cemetery |
17,565,765 | 9,445,153 | ||||||
Park construction services |
| 493,700 | ||||||
Total cost of goods sold |
17,565,765 | 9,938,853 | ||||||
GROSS PROFIT |
18,933,204 | 8,374,867 | ||||||
OPERATING EXPENSES |
||||||||
Selling expenses |
196,945 | 426,415 | ||||||
General & administrative expenses |
1,595,639 | 1,045,060 | ||||||
TOTAL OPERATING EXPENSES |
1,792,584 | 1,471,475 | ||||||
INCOME FROM OPERATIONS |
17,140,620 | 6,903,392 | ||||||
OTHER INCOME (EXPENSES) |
||||||||
Other income |
427,510 | 255,893 | ||||||
Loss on change in fair value of warrants classified as derivatives |
(571,950 | ) | | |||||
Interest expenses |
(235,240 | ) | (235,208 | ) | ||||
Interest income |
24,546 | 6,361 | ||||||
Rental income, net |
261,750 | 260,286 | ||||||
Non-operating expenses |
(12,642 | ) | (3,772 | ) | ||||
TOTAL OTHER INCOME |
(106,026 | ) | 283,560 | |||||
INCOME BEFORE INCOME TAXES |
17,034,594 | 7,186,952 | ||||||
INCOME TAXES |
(4,707,364 | ) | (1,689,693 | ) | ||||
NET INCOME |
$ | 12,327,230 | $ | 5,497,259 | ||||
OTHER COMPREHENSIVE INCOME |
||||||||
Foreign currency translation adjustment |
346,088 | 511,749 | ||||||
COMPREHENSIVE INCOME |
$ | 12,673,318 | $ | 6,009,008 | ||||
EARNINGS PER SHARE: |
||||||||
EARNINGS PER SHARE BASIC |
$ | 1.33 | $ | 0.62 | ||||
EARNINGS PER SHARE DILUTED |
$ | 1.33 | $ | 0.62 | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC |
9,283,591 | 8,800,000 | ||||||
WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED |
9,283,591 | 8,800,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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GOLD
INDUSTRY LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Common Stock | ||||||||||||||||||||||||
Number | Accumulated Other | Stockholders | ||||||||||||||||||||||
of Shares | Amount | APIC | Retained Earnings | Comprehensive income (loss) | Equity | |||||||||||||||||||
Balance, March 31, 2008 |
8,800,000 | $ | 8,800 | $ | 12,091,200 | $ | 337,374 | $ | 1,328,174 | $ | 13,765,548 | |||||||||||||
Net income for the year
ended March 31, 2009 |
| | | 5,497,259 | | 5,497,259 | ||||||||||||||||||
Foreign currency
translation adjustment |
| | | | 511,748 | 511,748 | ||||||||||||||||||
Balance, March 31, 2009 |
8,800,000 | $ | 8,800 | $ | 12,091,200 | $ | 5,834,633 | $ | 1,839,922 | $ | 19,774,555 | |||||||||||||
Sale of common shares and
warrants (units) for cash,
net of costs of $404,000 |
1,402,262 | 1,402 | 3,399,593 | | | 3,400,995 | ||||||||||||||||||
Effect of reverse merger |
2,200,000 | 2,200 | (2,200 | ) | | | | |||||||||||||||||
Net income for the year
ended March 31, 2010 |
| | | 12,327,230 | | 12,327,230 | ||||||||||||||||||
Foreign currency
translation adjustment |
| | | | 346,088 | 346,088 | ||||||||||||||||||
Balance, March 31, 2010 |
12,402,262 | $ | 12,402 | $ | 15,488,593 | $ | 18,161,863 | $ | 2,186,010 | $ | 35,848,868 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CHINA REDSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended | For the year ended | |||||||
March 31, 2010 | March 31, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net Income |
$ | 12,327,230 | $ | 5,497,259 | ||||
Adjustments to reconcile net loss to net cash used by operating activities: |
||||||||
Depreciation and amortization |
440,245 | 422,774 | ||||||
Loss on change in fair value of warrants classified as derivatives |
571,950 | | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
61,467 | 122,828 | ||||||
Other receivable |
78,052 | | ||||||
Inventory |
(4,459,479 | ) | 2,915,901 | |||||
Prepaid lease expense |
39,412 | (828,124 | ) | |||||
Advances to suppliers |
| 263,703 | ||||||
Related party receivable |
2,641 | 373,572 | ||||||
Other current assets |
| 50,898 | ||||||
Accounts payable |
(195,862 | ) | (1,549,472 | ) | ||||
Welfare payable |
(44 | ) | 2,448 | |||||
Taxes payable |
594,812 | 263,206 | ||||||
Other accrued payables |
21,910 | (53,422 | ) | |||||
Related party payables |
| (735,289 | ) | |||||
Accrued inventory purchases |
443,036 | | ||||||
Deferred revenue |
(427,685 | ) | (257,086 | ) | ||||
Net cash provided by operating activities |
9,497,684 | 6,489,196 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
| (1,479,650 | ) | |||||
Costs incurred for real estate projects in progress |
(5,998,116 | ) | (4,101,970 | ) | ||||
Prepayments to related party suppliers |
| (1,406,400 | ) | |||||
Net cash used in investing activities |
(5,998,116 | ) | (6,988,020 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITY: |
||||||||
Sale of common stock units including warrants, net of costs of $404,000 |
4,195,371 | | ||||||
Net cash provided by financing activities |
4,195,371 | | ||||||
Net (decrease) increase in cash and cash equivalents |
7,694,940 | (498,824 | ) | |||||
Effects of foreign exchange translation |
279,375 | 172,165 | ||||||
Cash and cash equivalents, beginning of period |
1,392,961 | 1,719,620 | ||||||
Cash and cash equivalents, end of period |
$ | 9,367,276 | $ | 1,392,961 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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CHINA
REDSTONE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2010 and 2009
March 31, 2010 and 2009
NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS
China Redstone Group, Inc. (the Company) was incorporated in Delaware on July 10, 2007,
originally under the name Artistry Publications, Inc. China Redstone Group Inc., and its
subsidiaries and its controlled entity, Chongqing Foguang Tourism Development (Group) Co., Ltd, are
principally engaged in the development of cemetery plots and cemetery in the Peoples Republic of
China. All operations are carried out under Chongqing Foguang Tourism Development (Group) Co.,
Ltd., which sells the burial spaces. As a part of business integration and cross-marketing,
Chongquing Fouguang Tourism Development Co.., Ltd., is also engaged in the development of a park in
the PRC.
In the PRC, the Company has developed 113,280 square meters and will develop 565,000 square meters
for cemetery plots, and will develop 1,194,804 square meters for a park in Chongqing.
History
Artistry Publications, Inc. was originally formed for the purpose of entering the photography
industry and establishing a large scale photography publishing business focused on American
History. The Companys plan was to develop a successful photo journal publishing company by
depicting history and producing excellent affordable artwork in practical items to entertain and
educate.
On February 10, 2010, the Share Exchange closed and Gold Industry became the Companys wholly-owned
subsidiary. On April 6, 2010, in connection with the Share Exchange, the Company changed its name
to China Redstone Group, Inc. to better reflect its business operations.
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All of the Companys business operations are carried out by Chongqing Foguang Tourism Development
(Group) Co., Ltd. (Foguang), which the Company controls through contractual arrangements
between Foguang and Chongqing Ran Ji Industrial Co., Ltd. (Ran Ji), a company
wholly-owned by Gold Holy Industry Limited (Gold Holy), a company wholly-owned by Gold
Industry. Further, Mr. Yiyou Ran, the Companys chairman and chief executive officer, and Mr.
Jianquan Chen, a Company director, are directors of Gold Industry, Gold Holy, Ran Ji and Foguang.
Mr. Ran and Mr. Chen are also shareholders and directors of Holy Golden Industry Limited, a British
Virgins Island company which currently owns approximately 56% of the Companys issued and
outstanding common stock. Through these contractual arrangements, the Company has the ability to
substantially influence Foguangs daily operations and financial affairs, appoint its senior
executives and approve all matters requiring shareholder approval. As a result of these contractual
arrangements, which enable the Company to control Foguang, the Company is considered the primary
beneficiary of Foguang. Accordingly, the Company consolidates Foguangs results, assets and
liabilities in its financial statements.
Specifically, on December 15, 2009, Ran Ji entered into following exclusive agreements with Foguang
and its owners (collectively the Contractual Arrangements):
(1) Consulting Services Agreement, through which Ran Ji has the right to advise, consult,
manage and operate Foguang, and collect and own all of its net profits;
(2) Operating Agreement, through which Ran Ji has the right to recommend director
candidates and appoint the senior executives of Foguang, approve any transactions that may
materially affect the assets, liabilities, rights or operations of Foguang, and guarantee the
contractual performance by Foguang of any agreements with third parties, in exchange for a pledge
by Foguang of its accounts receivable and assets;
(3) Proxy Agreement, under which the owners of Foguang have vested their collective voting
control over Foguang to Ran Ji and will only transfer their respective equity interests in Foguang
to Ran Ji or its designee(s);
(4) Option Agreement, under which the owners of Foguang have granted Ran Ji the irrevocable
right and option to acquire all of their equity interests in Foguang; and
(5) Equity Pledge Agreement, under which the owners of Foguang have pledged all of their
rights, titles and interests in Foguang to Ran Ji to guarantee the performance of their obligations
under the Consulting Services Agreement.
Other than the interests in the contractual arrangements, neither the Company, Gold Industry, Gold
Holy nor Ranji owns any equity interests in Foguang. As a result of these Contractual Arrangements,
which obligates Ran Ji to absorb a majority of the risk of loss from Foguangs activities and
enable Ran Ji to receive a majority of its expected residual returns, the Company believes that
Foguang is a Variable Interest Entity (VIE), because the owners of Foguang do not have the
characteristics of a controlling financial interest and the Company should be considered the
primary beneficiary of Foguang. Accordingly, the Company consolidates Foguangs results, assets and
liabilities in the accompanying consolidated financial statements.
However, Chinese laws and regulations concerning the validity of the contractual arrangement is
uncertain, as many of these laws and regulations are relatively new and may be subject to change,
and their official interpretation and enforcement by the Chinese government involves substantial
uncertainty. Additionally, the contractual arrangement may not be as effective in providing control
over Foguang as direct ownership, which the Company is restricted from under current Chinese law.
Due to such uncertainty, the Company may take such additional steps in the future as may be
permitted by the then applicable laws and regulations in China to further strengthen our control
over or toward actual ownership of Foguang or its assets or business operations, which could
include direct ownership of selected assets without jeopardizing any favorable government policies
toward domestic owned enterprises. Because the Company relies on Foguang for its revenue, any
termination of or disruption to the contractual arrangement would detrimentally affect the
Companys business and financial condition.
Gold Industry was incorporated on September 11, 2009, under the laws of the Cayman Islands. Gold
Holy was incorporated on September 29, 2009, under the laws of Hong Kong Special Administrative
Region. Ran Ji was established under the laws of the Peoples Republic of China (China or
the PRC) on December 15, 2009, as a wholly foreign owned enterprise (WFOE),
with registered capital of $25,000,000 USD, of which the first
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$3,000,000 USD has been contributed and the balance due within two years. Foguang is a PRC limited
liability company established on October 10, 2002 with registered capital of 100,000,000 RMB.
Foguang is engaged in selling death care products, and holds the licenses and approvals necessary
to operate its business in China.
All of the Companys business operations are carried out by Foguang in the PRC. The Companys
fiscal year-end is March 31st.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the understanding of the
Companys consolidated financial statements. The consolidated financial statements and notes are
presentations of the Companys management, which is responsible for their integrity and
objectivity. These accounting policies conform to the accounting principles generally accepted in
the United States of America and have been consistently applied in the preparation of the
consolidated financial statements.
Reverse Acquisition
On February 10, 2010, Artistry Publications, Inc., entered into a share exchange agreement
(Share Exchange Agreement) under which it issued 8,800,000 shares of its Common Stock, par
value $0.001, to the shareholders of Gold Industry Ltd, a Cayman Island company., in exchange for
all the issued and outstanding shares of Gold Industry Limited (the
Share Exchange). As
a result of the Share Exchange, Gold Industry Ltd. has become a wholly-owned legal subsidiary of
Artistry Publications, Inc., and Gold Industry Ltd. shareholders acquired a majority of Artistry
Publications, Inc.s issued and outstanding stock. Concurrent with the Share Exchange, Mr. Yiyou
Ran (the managing director of Gold Industry Ltd., and all of its operating subsidiaries, Mr.
Ran) has been appointed the Chief Executive Officer of the Company.
As a result, the Share Exchange has been accounted for as a reverse acquisition using the purchase
method of accounting, whereby Gold Industry, Ltd., is deemed to be the accounting acquirer (legal
acquiree) and Artistry Publications, Inc., to be the accounting acquiree (legal acquirer). The
financial statements before the date of Share Exchange are those of Gold Industry, Ltd., with the
results of Artistry Publications, Inc. being consolidated from the date of Share Exchange. The
equity section and earnings per share have been retroactively restated to reflect the reverse
acquisition and no goodwill has been recorded.
The reporting entities
The Companys consolidated financial statements reflect the activities of the Company and the
following subsidiaries and VIE:
Percentage of | ||||||
Subsidiaries/VIE | Incorporated in | Ownership | ||||
Gold Industry Limited |
Cayman Islands | 100.00 | % | |||
Gold Holy Industry Limited |
Hong Kong | 100.00 | % | |||
Chongqing Ran Ji Industry Co, Limited |
PRC | 100.00 | % | |||
Foguang |
PRC | VIE by Contractual Arrangements |
Basis of presentation
The accompanying consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America (GAAP). The Companys
functional currency is the Chinese Renminbi ( RMB), however, the accompanying
consolidated financial statements have been re-measured, translated and presented in United States
Dollars ($).
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Consolidation of variable interest entities
VIEs are generally entities that lack sufficient equity to finance their activities without
additional financial support from other parties or whose equity holders lack adequate decision
making ability. Each VIE with which the Company is involved must be evaluated to determine the
primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to
consolidate the VIE for financial reporting purposes.
The Company has concluded that Foguang is a VIE and that the Companys indirect wholly owned
subsidiary, Chongqing Ran Ji, absorbs a majority of the risk of loss from the activities of
Foguang, and enable the Company to receive a majority of Foguangs expected residual returns.
Accordingly, the Company accounts for Foguang as a VIE.
Because the Company and Foguang are under common control, the initial measurement of the assets and
liabilities of Foguang for the purpose of consolidation by the Company is at book value. Neither
the Company nor any of its subsidiaries has had any other business activities except for the
entering into the Contractual Arrangements with Foguang and its shareholders. For the purpose of
presenting the financial statements on a consistent basis, the consolidated financial statements
are prepared as if the Company had been in existence since April 1, 2007 and throughout each of the
two-year period ended March 31, 2010.
The consolidated financial statements include the financial statements for the Company, its
subsidiaries and the VIE. All significant inter-company transactions and balances between the
Company, its subsidiaries and the VIE are eliminated upon consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates reflected in the Companys consolidated financial
statements include the fair value of financial instruments, the useful lives of and impairment for
property and equipment, estimates of intangible assets, and accruals for taxes due. Actual results
could differ from those estimates.
Fair value of financial instruments
FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. This topic also establishes a fair value hierarchy
which requires classification based on observable and unobservable inputs when measuring fair
value. The fair value hierarchy distinguishes between assumptions based on market data (observable
inputs) and an entitys own assumptions (unobservable inputs). The hierarchy consists of three
levels:
o | Level one Quoted market prices in active markets for identical assets or liabilities; | ||
o | Level two Inputs other than level one inputs that are either directly or indirectly observable; and | ||
o | Level three Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use. | ||
Determining which category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates its hierarchy disclosures each quarter.
Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Fair value measurement using inputs | Carrying amount at March 31, | |||||||||||||||||||
Financial instruments | Level 1 | Level 2 | Level 3 | 2010 | 2009 | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Derivative instruments Warrants |
$ | | $ | 1,366,327 | $ | | $ | 1,366,327 | $ | | ||||||||||
Total |
$ | | $ | 1,366,327 | $ | | $ | 1,366,327 | $ | |
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Derivative Instruments Warrants
The Company issued 701,126 Warrants in connection with the February 2010 Private Placement of
1,402,262 shares of common stock, which are further disclosed in Note 13. 70,113 Warrants were
issued to the placement agent. The strike price of these warrants is $4.10 per share. These
warrants were not issued with the intent of effectively hedging any future cash flow, fair value of
any asset, liability or any net investment in a foreign operation.
These Warrants were issued with a down-round provision whereby the exercise price would be adjusted
downward in the event that, during additional shares of the Companys common stock or securities
exercisable, convertible or exchangeable for the Companys common stock were issued at a price less
than the exercise price. Therefore, according to the guidance provided in FASB ASC 815-40-15-5
through 815-40-15-8, which was adopted by the Company on April 1, 2009, the Company accounted for
these warrants as derivative liabilities. All changes in the fair value of these warrants were
recognized in statement of income until they are exercised or expire or otherwise extinguished.
The Company estimates the fair value of the warrants using the Black-Scholes option pricing model
using the following assumptions:
Warrants | Underwriter Warrants | |||||||||||||||
March 31, | Feb. 19, | March 31, | Feb. 19, | |||||||||||||
2010 | 2010 | 2010 | 2010 | |||||||||||||
Market price and estimated fair value of common stock: |
$ | 4.55 | $ | 3.50 | $ | 4.55 | $ | 3.50 | ||||||||
Exercise price: |
$ | 4.10 | $ | 4.10 | 4.10 | $ | 4.10 | |||||||||
Expected term (years): |
3.87 | 4.00 | 3.87 | 4.00 | ||||||||||||
Dividend yield: |
| | | | ||||||||||||
Expected volatility: |
41. | % | 41 | % | 41 | % | 41 | % | ||||||||
Risk-free interest rate: |
2.07 | % | 2.11 | % | 2.07 | % | 2.11 | % |
The fair value of the warrants on February 18, 2009 was determined using the Black-Scholes option
pricing model based on the following assumptions: dividend yield: 0%, expected volatility: 41.40%,
risk-free interest rate: 1.88%, and expected term: 3.86 years.
Before the reverse merger, the Companys common stock had not been publicly traded. Whilst the
Companys common stock began public trading and was quoted on the OTCBB in February 2010, the fair
value of the Companys common stock as of February 19, 2010 has been determined based on market
price.
As the Companys stock only begun public trading effective with the reverse merger date, historical
volatility information is limited and considered not representative of the expected volatility. In
accordance with ASC 718-10-30-2 (formerly SFAS No. 123R, Accounting for Stock-Based
Compensation), the Company identified similar public entities for which share and option price
information was available, and considered the historical volatilities of those public entities
share prices in calculating the expected volatility appropriate to the Company (i.e. the calculated
value).
The risk-free rate of return reflects the interest rate for United States Treasury Note with
similar time-to-maturity to that of the warrants.
Allocation of Proceeds from Private Placement
The proceeds from the Private Placement were first allocated between the Common Shares and the
warrants issued in connection with the Private Placement based upon their estimated fair values as
of the closing date, resulting in an aggregate amount of $794,376 being allocated to the Warrants
and $3,400,995 to the common shares.
In April 2009, the FASB issued the following updates that provide additional application guidance
and enhance disclosures regarding fair value measurements and impairments of securities: FSP FAS
157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly, ASC 820-10-65. This
update relates to determining fair values when
there is no active market or where the price inputs being used represent distressed sales. It
reaffirms the need to
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exercise judgment to ascertain if a formerly active market has become
inactive and in determining fair values when markets have become inactive.
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, ASC
320-10-65. This update applies to investments in debt securities for which other-than-temporary
impairments may be recorded. If an entitys management asserts that it does not have the intent to
sell a debt security and it is more likely than not that it will not have to sell the security
before recovery of its cost basis, then an entity may separate other-than-temporary impairments
into two components: (1) the amount related to credit losses (recorded in earnings) and (2) all
other amounts (recorded in other comprehensive income).
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, ASC
320-10-65. This update requires fair value disclosures for financial instruments that are not
currently reflected on the balance sheet at fair value on a quarterly basis.
We elected to adopt these updates effective for interim and annual reporting periods ending after
June 15, 2009.
ASC 825-10
Financial Instruments, previously SFAS No. 159, allows entities to voluntarily choose to
measure certain financial assets and liabilities at fair value (fair value option). The fair value
option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new
election date occurs. If the fair value option is elected for an instrument, unrealized gains and
losses for that instrument should be reported in earnings at each subsequent reporting date. The
Company did not elect to apply the fair value option to any outstanding instruments. The carrying
values of the Companys financial instruments, including cash and cash equivalents, trade
receivables, other receivables, prepayments and deposits, trade payables, accruals and other
payables, and short-term notes payable approximate their fair values due to the short-term maturity
of such instruments.
It is managements opinion that the Company is not exposed to significant interest, price or credit
risks arising from these financial instruments. In respect of foreign currency risk, the Company is
not exposed to this risk as majority of its trading transactions are denominated in its functional
currency.
Cash and cash equivalents
For the purpose of the statement of cash flows, the Company considers all highly liquid investments
with maturities of three months or less to be cash equivalents.
Concentrations of credit risk
Financial instruments, which potentially subject the Company to concentrations of credit risk,
consist of cash and cash equivalents and accounts receivables. The Company extends credit based on
an evaluation of the customers financial condition, generally without collateral. Exposure to
losses on receivables is principally dependent on each customers financial condition. The Company
periodically reviews its trade receivables in determining its allowance for doubtful accounts. The
Company maintains certain amounts of its cash at state-owned banks in the PRC and has some cash on
hand. The total cash balances maintained in accounts at these state-owned banks are not. The
Company has not experienced any losses on such accounts.
The company maintains additional cash in a US Bank which, at times, may exceed federally insured
limits. The amount in excess of the federally insured limits was $2,703,523 and $0 at March 31,
2010 and 2009 respectively.
Country risk
As the Companys principal operations are conducted in the PRC, the Company is subject to special
considerations and significant risks not typically associated with companies in the United States.
These risks include, among others, risks associated with the political, economic and legal
environments and foreign currency exchange limitations encountered in the PRC. The Companys
results of operations may be adversely affected by changes in the political and social conditions
in the PRC, and by changes in governmental policies with respect to laws and regulations, among
other things.
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In addition, all of the Companys transactions undertaken in the PRC are denominated in RMB, which
must be converted into other currencies before remittance out of the PRC may be considered. Both
the conversion of RMB into foreign currencies and the remittance of foreign currencies abroad
require the approval of the PRC government.
Accounts receivable
Accounts receivable are carried at original invoice amount less allowance for doubtful receivables.
Managements evaluation on the adequacy of the allowance for doubtful accounts is based on a
review of all outstanding amounts by account on a monthly basis. Specifically, the Company analyzes
the aging of accounts receivable balances, historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in customer payment terms. Significant
changes in customer concentration or payment terms, deterioration of customer credit-worthiness or
weakening in economic trends could have a significant impact on the collectability of receivables
and the Companys operating results. If the financial condition of the Companys customers were to
deteriorate, resulting in an impairment of their ability to make payments, the Company will write
off 100% as bad debt. In managements opinion, no allowance for doubtful accounts is necessary at
March 31, 2010 and 2009.
Inventory
Inventory is stated at the lower of cost or market (using the first in, first out method). Market
value is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
The Company uses the full cost absorption method of accounting for direct costs associated with
land development and construction of cemetery plots, including interest and costs of land use
rights. Such costs are allocated to the estimated number of cemetery plots to be developed using
the selling price relative fair value method. When the cemetery plots are sold, the carrying costs
are charged to cost of goods sold.
During 2005, the Company received land use rights which were contributed by the PRC government for
no consideration. Under PRC law, all land in the PRC is state-owned.
Inventory Impairment
Management periodically compares the carrying cost of inventory with the expected net realizable
value. An allowance is made for the decline in market value of inventory if lower than the carrying
cost. As of March 31, 2010 and 2009, the impairment was $999,805 and $0, respectively.
Property and equipment
Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as
incurred; major replacements and improvements are capitalized. When assets are retired or disposed
of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or
losses are included in income in the year of disposition. Depreciation and amortization are
computed on the straight-line method over the following estimated useful lives of the related
assets, which range from five to thirty years, and are as follows:
Buildings, improvements and structures
|
25 to 30 years | |
Machinery and equipment
|
5 to 10 years | |
Office equipment
|
5 years |
Long-lived asset
Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed
for impairment annually or whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a forecasted inability
to achieve break-even operating results over an extended period. Management assesses the
recoverability of the Companys long-lived assets by determining whether the depreciation and
amortization of long-lived assets over their remaining lives can be recovered through projected
undiscounted
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future cash flows. The amount of long-lived asset impairment if any, is measured based on fair
value and is charged to operations in the period in which long lived assets impairment is
determined by management. At March 31, 2010 and 2009, the Companys management believes there was
no impairment of the Companys long lived assets. There can be no assurance however, that market
conditions will not change or competition will increase or demand for the Companys services will
continue, which could result in an impairment of long-lived assets in the future.
Contributed property
The Company received land use rights from the PRC government for no consideration paid. The Company
recorded the fair value of the land use rights as an intangible asset and deferred revenue as
determined by management with the advice of PRC legal counsel and third party consultants.
Article 12 of the PRCs Regulations on the Land Use Right sets forth the maximum term of land use
rights for different uses as follows: (1) 70 years for residential use; (2) 50 years for industrial
use; (3) 50 years for educational, technological, cultural, health, and sport site use; (4) 40
years for commercial, tourist and recreational use; (5) 50 years for comprehensive or other use;
and (6) 20 years for gas station use. Article 11 of the PRCs Regulations on Funeral Administration
stipulates that the term of the use of cemetery land or grave yard shall be determined by each
provincial government. Article 21 of the Chongqing Funeral Rules states that the land use rights
for graves shall be no more than 20 years, subject to renewal. Foguangs land use rights consist of
two parts: one piece of allocated land and contributed by the PRC government and one piece of land
leased from local farmers which the Company acquired by paying $836,000. The leased land is
comprised of both farm land and residential land. The farm land is subject to a maximum term of 20
years and the Company has a priority to renew the lease when it expires. The residential land is
under a lease term of 100 years.
Intangible assets
Intangible assets consist primarily of the land use rights contributed by the PRC government and
are recorded at estimated fair value.
The Company reviews annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable for impairment of long lived assets and
intangible assets in accordance with accounting for impairment of long lived assets. An impairment
loss of the excess of the carrying value over the fair value of the underlying long lived assets
will be recognized if the carrying amount of the long lived asset is not recoverable and its
carrying amount exceeds its fair value. During the year ended March 31, 2010 and 2009, the Company
performed these reviews and concluded that no impairment existed.
Income taxes
The Company uses the asset-liability method of accounting for income taxes prescribed by ASC 740
Income Taxes. Under the asset-liability method of ASC 740, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences between the
financial statements carrying amounts of existing assets and liabilities and loss carry forwards
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company is
governed by the PRCs Income Tax Law and local income tax laws (collectively the PRC Income Tax
Law). Pursuant to the PRC Income Tax Law, enterprises are subject to tax at a statutory rate of
25%. The local government has also provided companies with various incentives to encourage economic
development in the region. Such incentives include reduced tax rates and other measures.
Revenue recognition
The Company recognized revenue when the amount of revenue can be reliably measured, it is probable
that economic benefits will flow to the entity and specific criteria have been met for the
Companys revenue producing activities.
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The requires that four basic criteria that must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred with no future other than
perfunctory performance obligations; (3) the selling price is fixed and determinable; and (4)
collectability is reasonably assured. Determination of criteria (3) and (4) is based on
managements judgments regarding the fixed nature of the selling prices of the products and
services delivered and the collectability of those amounts.
The Company has two revenue sources and the following revenue recognition policies:
The Company recognizes revenue from the sale of cemetery plots when it is realized or realizable
and earnings process is complete. In general, a potential customer will tour the Companys facility
and choose a particular spot or location of the cemetery plot that is ready and available for use.
A sales agreement is executed with Foguang for the exact location at a fixed price. The sales
process ends when the consideration is paid in full, at which time, the Company provides the
customer full access to the use of the plot. The Company does not provide any other post-death type
services, other than to develop and sell the cemetery plots, obtain executed agreements, full
payment and deliver the keys to the plot embedded in a concrete box. The Company records revenue
when the title or right to use the completed cemetery plot has passed to the customer in accordance
with the terms of the fixed price sale agreement and consideration is exchanged. The costs
associated with revenue from sale of cemetery plots are the costs to convert the land into the
actual burial plots. Additionally, direct selling costs incurred in selling the cemetery plots are
recorded in cost of goods sold.
Park construction income is recognized when the Company is contracted to provides services for
third party clients. These services include the construction of sidewalks, pagodas, landscaping and
other structures for parks. These projects are not associated with the Companys sales of cemetery
plots. Revenue is recognized upon the completion of the park, and the project has been approved by
the customer and collection is assured. The costs associated with the park construction income are
raw materials purchased for that specific project and services performed by the Company recorded in
costs of goods sold.
Cost of goods sold
Cost of goods sold includes the capitalized costs of cemetery plots sold and services provided by
the Company to third parties for development and construction of parks.
Operating Expenses
Operating expenses include management and staff salaries, administrative and facilities related
expenses, and other expenses to the non-production functions of the business, all of which are
expensed as incurred.
Advertising
Advertising is expensed as incurred. Advertising expenses were included in selling expenses.
Advertising expense amounted to $0 and $291,640 for the years ended March 31, 2010 and 2009,
respectively.
Foreign currency translation
As of March 31, 2010 and 2009, the accounts of the Company were maintained, and its consolidated
financial statements were expressed, in the RMB. Such consolidated financial statements were
translated into U.S. Dollars with the RMB as the functional currency. All assets and liabilities
were translated at the exchange rate on the consolidated balance sheet dates, stockholders equity
are translated at the historical rates and the statements of income items are translated at the
weighted average exchange rate for the year. The resulting translation adjustments are reported
under other comprehensive income. The exchange rate for the conversion of one US Dollar to RMB was
6.8194 and 6.8256 at March 31, 2010 and 2009, respectively.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as
incurred. Such amounts were not material during each of the years ended March 31, 2010 and 2009.
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Cash flow from the Companys operations included in the statement of cash flows is calculated based
upon the functional currency using the average translation rate. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not necessarily agree with
arithmetical changes in the corresponding balances on the consolidated balance sheet. No
presentation is made that the RMB amounts could have been, or could be, converted into U.S. dollars
at the rates used in translation.
Earnings per common share
Basic earnings per share is computed by dividing net income available to common shareholders by the
weighted average number of shares of common stock outstanding during the period. Diluted income per
share is computed by dividing net income available to common shareholders (as adjusted for income
and expenses arising from certain potentially dilutive securities) by the weighted average number
of shares of common stock, common stock equivalents and potentially dilutive securities outstanding
during each period. Potentially dilutive common shares consist of common stock warrants (using the
treasury stock method). The following table presents a reconciliation of basic and diluted net
income per share:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net income for basic and diluted earnings per share |
$ | 12,327,230 | $ | 5,497,259 | ||||
Weighted average shares outstanding basic |
9,283,591 | 8,800,000 | ||||||
Weighted average shares outstanding diluted |
9,283,591 | 8,800,000 | ||||||
Earnings per share basic |
$ | 1.33 | $ | .62 | ||||
Earnings per share diluted |
$ | 1.33 | $ | .62 | ||||
Comprehensive income
Comprehensive income or loss is defined as the change in equity during a period resulting from
transactions and other events and circumstances from non-owner sources. The Companys total
comprehensive income or loss consists of net unrealized income or loss from foreign currency
translation adjustments and net income. The Company has presented comprehensive income or loss on
the Statement of Operations and Comprehensive Income.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing performance. For the
years ended March 31, 2010 and 2009, the Company derived almost all of its revenue from the sale of
cemetery plots and operated only in one segment.
Recent accounting pronouncements
In August 2009, the FASB issued an Accounting Standards Update regarding measuring liabilities at
fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair
value in circumstances in which a quoted price in an active market for the identical liability is
not available; under those circumstances, a reporting entity is required to measure fair value
using one or more of valuation techniques, as defined. This ASU is effective for the first
reporting period, including interim periods, beginning after the issuance of this ASU. The adoption
of this ASU did not have a material impact on the Companys consolidated financial position,
results of operations or cash flows.
In October 2009, the FASB issued an Accounting Standards Update regarding the accounting for
own-share lending arrangements in contemplation of convertible debt issuance or other financing.
This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered
into in contemplation of a convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in
capital. Further, loaned shares are excluded from basic and diluted earnings per share unless
default of the share-lending arrangement occurs, at which time the loaned shares would be included
in the basic and
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diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding
as of the beginning of those fiscal years. The Company is currently evaluating the impact of this
ASU on its consolidated financial statements.
In December 2009, the FASB issued an Accounting Standards Update regarding the accounting for
transfers of financial assets which amends previous guidance. The amendments in this ASU improve
financial reporting by eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the transferred financial
assets. In addition, the amendments require enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on portions of financial
assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU
to have a material impact on its consolidated financial position, results of operations or cash
flows.
In December, 2009, the FASB issued an Accounting Standards Update regarding improvements to
financial reporting by enterprises involved with variable interest entities which amends previous
guidance. The amendments in this ASU replace the quantitative-based risks and rewards calculation
for determining which reporting entity, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which reporting entity has the power to
direct the activities of a variable interest entity that most significantly impact the entitys
economic performance and (1) the obligation to absorb losses of the entity or (2) the right to
receive benefits from the entity. An approach that is expected to be primarily qualitative will be
more effective for identifying which reporting entity has a controlling financial interest in a
variable interest entity. The amendments in this ASU also require additional disclosures about a
reporting entitys involvement in variable interest entities, which will enhance the information
provided to users of financial statements. The adoption of this ASU did not have any material
impact on its consolidated financial position, results of operations or cash flows.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting and
reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to
deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the
subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair value. In contrast, an
entity is required to account for a decrease in its ownership interest of a subsidiary that does
not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies
the scope of the decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for
beginning in the first interim or annual reporting period ending on or after December 31, 2009. The
adoption of this ASU did not have any material impact on its consolidated financial position,
results of operations or cash flows.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting for
distributions to shareholders with components of stock and cash. The amendments in this ASU clarify
that the stock portion of a distribution to shareholders that allows them to elect to receive cash
or stock with a potential limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and
is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this ASU are effective for interim and annual periods ending on or after
December 15, 2009, and should be applied on a retrospective basis. The adoption of this ASU did not
have a material impact on the Companys consolidated financial position, results of operations or
cash flows.
In January 2010, the FASB issued an Accounting Standards Update regarding the accounting and
reporting for decreases in ownership of a subsidiary a scope clarification. The amendments in
this ASU affect accounting and reporting by an entity that experiences a decrease in ownership in a
subsidiary that is a business or nonprofit activity. The amendments also affect accounting and
reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit
activity for an equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts accounting for Non-controlling Interests in
Consolidated Financial Statements An Amendment of ARB No. 51. The amendments in this update are
effective beginning in the first interim or annual reporting period ending on or after December 15,
2009. The amendments in this update should be applied retrospectively to the first period that an
entity adopted accounting for Non-controlling Interests in
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Consolidated Financial Statements An Amendment of ARB No. 51. The adoption of this ASU did
not have a material impact on the Companys consolidated position, results of operations or cash
flows.
In January 2010, the FASB issued an Accounting Standard Update regarding improving disclosures
about fair value measurements. This update provides amendments to Subtopic 820-10 that requires new
disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should
disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value
measurements. In the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about purchases, sales,
issuances, and settlements (that is, on a gross basis rather than as one net number). This update
provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of
disaggregation. A reporting entity should provide fair value measurement disclosures for each class
of assets and liabilities. A class is often a subset of assets or liabilities within a line item in
the statement of financial position. A reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation
techniques. A reporting entity should provide disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value measurements. Those
disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The
new disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. The Company is currently evaluating the impact
of this ASU, however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial position, results of operations or cash flows.
In January 2010, the FASB issued an accounting standard update to address implementation issues
related to the changes in ownership provisions in the ConsolidationOverall Subtopic (Subtopic
810-10) of the FASB Accounting Standards Codification, originally issued as FASB Statement No.
160, Noncontrolling Interests in Consolidated Financial Statements. Subtopic 810-10 establishes the
accounting and reporting guidance for noncontrolling interests and changes in ownership interests
of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity
recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary
at fair value. The gain or loss includes any gain or loss associated with the difference between
the fair value of the retained investment in the subsidiary and its carrying amount at the date the
subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in its
ownership interest of a subsidiary that does not result in a change of control of the subsidiary as
an equity transaction.
While Subtopic 810-10 provides general guidance on accounting for the decreases in ownership of a
subsidiary, including a deconsolidation, some constituents raised concerns that the guidance
appears to conflict with the gain or loss treatment or derecognition criteria of other U.S.
generally accepted accounting principles, such as the guidance for sales of real estate, transfers
of financial assets, conveyances of oil and gas mineral rights, and transactions with equity method
investees.
Some constituents also questioned whether the FASB intended for the decrease in ownership
provisions of Subtopic 810-10 to apply to all entities because a subsidiary is defined as an
entity, including an unincorporated entity such as a partnership or trust, in which another entity,
known as its parent, holds a controlling financial interest. Those constituents were concerned that
such an interpretation could result in the accounting for a transaction being driven by its form
rather than its substance. For example, different accounting might be applied to a transaction
involving the same underlying assets depending on whether those assets were transferred in asset or
entity form. The amendments in this update are effective beginning in the period that an entity
adopts Subtopic 810-10. If an entity has previously adopted Subtopic 810-10 as of the date of the
amendments in this update are included in the Accounting Standards Codification, the amendments in
this update are effective beginning in the interim or annual reporting period ending on or after
December 31, 2009. The amendments in this update should be applied retrospectively to the first
period upon adoption. The adoption of this update for the changes in the accounting and reporting
guidance for noncontrolling interests and changes in ownership interests of a subsidiary, as
codified in ASC 810-10, did not have any impact on the Companys financial position, results of
operations or cash flows..
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Other recent accounting pronouncements issued by the FASB, the American Institute of Certified
Public Accountants AICPA, and the Securities and Exchange Commission did not or are not believed by
management to have a material impact on the Companys present consolidated financial statements.
Reclassifications
Certain prior year items have been reclassified to conform to the current year presentation. These
reclassifications had no impact on the Companys consolidation financial statements.
NOTE 3 INVENTORY
Cemetery plots and other inventories, net of reserves, at March 31, 2010 and 2009, consisted of the
following:
2010 | 2009 | |||||||
Basic plots |
$ | 981,764 | 1,885,623 | |||||
Standard plots |
6,842,800 | 1,818,225 | ||||||
Deluxe plots |
1,929,406 | 1,904,877 | ||||||
Artist plots |
1,437,490 | 565,963 | ||||||
Small tools and supplies |
3,445 | 3,494 | ||||||
Total |
$ | 11,194,905 | $ | 6,178,182 | ||||
NOTE 4 PREPAID LEASE EXPENSES
Prepaid lease expense consists of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Prepaid Lease expenses |
$ | 787,412 | $ | 828,124 | ||||
During 2009, the Company leased land use rights for an additional 377,634 square meters from a
group of local farmers and villagers for a period of 20 years, subject to renewals, in exchange for
a cash payment of approximately $836,000. Pursuant to the agreement, the payment was made to the
PRC government for the benefit of the local farmers and villagers. The Company is also obligated to
pay an annual fee of approximately $23,000 for the duration of the lease to the farmers. (Note 17)
None of this land area was developed as of March 31, 2010. The Company has presented this amount as
prepaid lease expense on the consolidated balance sheet. The villagers and farmers were originally
located in Longqiao and Qianfo villages. The cash received by the PRC from the Company is expected
to be redistributed to the local farmers and villagers by the Government as a payment for
relocating them to ChangShou Jiang Nan. The Company also agreed to clear land for the building of
these homes at the relocated site.
Payments made to the Government for the building of homes and relocation of farmers is the cost to
the Company to lease the land use rights for the development and sale of the cemetery plots. The
Company capitalizes any direct and incremental costs associated with the development of the project
and amortizes over the estimated future benefit period as cost of the plots. When the plots are
sold, the related carrying costs are charged off to the statement of income.
The prepaid expenses are amortized over 20 years per the terms of the contract. For the years ended
March 31, 2010 and 2009, the Company had recorded approximately $41,000 and $8,000 which was
recorded as an operating expense.
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NOTE 5 RELATED PARTY RECEIVABLE
Related party receivable consists of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Prepayments on contracts on behalf of related party |
$ | 1,408,320 | $ | 1,406,400 |
In April 2008, the Company recorded a prepayment on behalf of a related party for a purchase
commitment in the amount of $1,403,400 (87% of the contract) for cemetery headstones to Chongqing
Kun Yu Stone Wood Company (Kun Yu). Under the terms of the contract, Kun Yu is obligated
to finish the production of, and deliver the headstones at the specified time defined by the
related party affiliate for inspection and performance of quality control functions. Kun Yu is
obligated to fix any product related damages and allow the Companys representative to perform a
final inspections prior to acceptance. The related party affiliate of the Company is to pay upon
final inspection the remaining balance within one month after delivery of the headstones to the
Company. As of March 31, 2010, the related party affiliate had not taken possession of the
headstones.
NOTE 6-COSTS INCURRED WITH REAL ESTATE PROJECTS IN PROGRESS
Real estate projects in progress consist of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Costs incurred with real estate projects in progress |
$ | 10,122,300 | $ | 4,101,970 | ||||
In February 2009, the Company recorded a prepayment related to a contract in the amount of
$4,101,970 (7% of the contract), for the construction of entertainment boats. Chongqing Bo Goa
Tourism Company (Bo Goa), an unrelated third party, and the Company were going to jointly
develop the Liang Jiang Yu project. In September 2009, the Company took over as the sole
developer on this project. This project includes development of a park near the Longqiao Lake as a
way to attract more tourism in the Changshou area near the Companys cemetery site. The scope of
the project currently contemplates 10 to 20 entertainment boats, a welcome center, a large sailboat
and nine docks. As of March 31, 2010, the Companys total prepayment for this project is
$10,122,300. The total price of the contract is approximately $63,961,200.
NOTE 7 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Buildings and structures |
$ | 8,052,142 | $ | 8,041,165 | ||||
Machinery and equipment |
858,529 | 855,542 | ||||||
Office equipment |
6,269 | 8,077 | ||||||
Less: accumulated depreciation |
(1,675,766 | ) | (1,275,442 | ) | ||||
Total Property and equipment |
$ | 7,241,174 | $ | 7,629,342 | ||||
Depreciation expense for the years ended March 31, 2010 and 2009 were approximately $399,000
and $414,000, respectively.
NOTE 8 INTANGIBLE ASSETS
Land use rights are stated at the estimated fair value on the contribution date less accumulated
units of production costs and any impairment losses. The land use rights are expensed on ratable
basis based on the number of plots developed over the life of the rights.
During 2005, the Company received land use rights for 339,444 square meters for a period of 20
years, subject to four 20-year renewals, which were contributed by the PRC government for no
consideration. The Company recorded this transaction at fair value of approximately $13.2 million
as determined by management after consultation with PRC counsel and consultants. The land use
rights include the Companys cemetery site located in Changshou. Under PRC regulations, all land in
the PRC is state-owned. The Companys management determined the fair market value of the
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land use rights based upon the actual square meters of useable land underlying the land use rights.
The Company expects approximately 210,000 plots can be developed and sold from the 339,444 square
meters of land.
The Company leased land use rights for an additional 377,634 square meters from a group of local
farmers and villagers for a period of 20 years, subject to renewals, in exchange for a cash payment
of approximately $836,000. Pursuant to the agreement, the payment was made to the PRC government
for the benefit of the local farmers and villagers. The Company is also obligated to pay an annual
fee of approximately $23,000 for the duration of the lease to the farmers. None of this land area
was developed as of March 31, 2010. The Company has presented this amount as prepaid lease expense
on the consolidated balance sheet.
The Company has yet to receive the rights to use the land surrounding the Longqiao Lake for
approximately 1,196,000 square meters (which have been committed to the Company), and therefore,
the Company has yet to incur any costs related to these rights and land usage. If and when the
Company receives these rights, management will evaluate the estimated useful life based on the
facts that exists at the moment and continue to re-evaluate periodically.
Intangible assets consist of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Land use rights |
$ | 13,345,299 | $ | 13,236,805 | ||||
Less: Accumulated units of production costs |
1,557,396 | 916,912 | ||||||
Total |
$ | 11,787,903 | $ | 12,319,893 | ||||
At March 31, 2010 and 2009, the Company reviewed the land use rights for impairment and
concluded that no impairment existed. The land use rights contributed by the PRC government are
expensed based upon the number of cemetery plots capitalized in inventory using the units of
production method. During the year ended March 31, 2010 and 2009, the Company expensed $640,484 and
$172,890, respectively, which was included in the capitalized cost of inventory. Cemetery plots
sold are then expensed through cost of goods sold.
NOTE 9 ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables consist of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Welfare payable |
$ | 97,064 | $ | 96,932 | ||||
Taxes payable |
1,441,490 | 845,525 | ||||||
Other accrued payables |
76,507 | 54,523 | ||||||
Total |
$ | 1,615,061 | $ | 996,980 | ||||
These expenses are accrued by the Company over time and paid to the PRC government.
NOTE 10 DEFERRED REVENUE
At December 31, 2005, the Company recorded deferred revenue related to land use rights that were
contributed to the Company by the PRC government. As the Company sells cemetery plots, a portion of
the deferred revenue is recognized as a reduction of cost of the land use rights based on the
number of cemetery plots that the Company sells during the year. As of March 31, 2010 and 2009, the
Company recorded $427,510 and $255,893 of income, respectively as other income.
NOTE 11 SHORT-TERM NOTES PAYABLE
Short term notes payable represent amounts due to a bank normally due within one year.
The principal balance of the loans is due at maturity and the loans can be renewed each year.
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Short-term note payable Chongqing Rural Commercial Bank, is secured by Chongqing bowling museum
building, is due on demand, bears interest at an annual rate of 8.4% and matures in March 2011. The
company is responsible for all economic disputes or liabilities related to this property. If any
terms of the contract were breached the company would have to pay a penalty of approximately
$37,000. As of March 31, 2010 and 2009, the Company had short-term notes payable in the amount of
$440,100 and $439,500, respectively. The company paid off the outstanding loan balance in May 2010.
Short-term note payable Chongqing Rural Commercial Bank, is secured by approximately 123,334
square meters of land use rights valued at approximately $882,353 at inception, is due on demand,
bears interest at an annual rate of 9.6% and matures in March 2011. In the event of default on this
short-term notes payable, the interest rate is calculated at annual rate of 9.6%. As of March 31,
2010 and 2009, the Company had a loan payable of $2,034,729 and $2,031,955, respectively. This
short-term notes payable contain covenants that restrict the use of proceeds to developing cemetery
plots. If the Company uses the money in breach of these covenants, the interest rate is calculated
at 19.2%. As of March 31, 2010 and 2009, the Company was in compliance with these covenants.
As of March 31, 2010 and 2009, interest expense was $235,240 and $235,208, respectively.
NOTE 12 RENTAL INCOME FROM OPERATING LEASE
Rental income consists of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Rental income |
$ | 337,859 | $ | 335,969 | ||||
Less Depreciation of building |
(76,109 | ) | (75,683 | ) | ||||
Net rental income |
$ | 261,750 | $ | 260,286 | ||||
The Company rents its excess office space in Changshou to an unrelated third party under a
cancellable operating lease that is on a month to month basis. The third party is responsible for
all expenses related to the occupancy of the office space. As of March 31, 2010 and 2009, the lease
called for monthly rental of approximately $28,000 and $28,000, respectively.
NOTE 13 STOCKHOLDERS EQUITY
Preferred Stock
The Company is authorized to issue 20,000,000 shares of preferred stock, par value $0.001 per
share. At March 31, 2010 and 2009, no shares were issued and outstanding.
Common Stock
The Company is authorized to issue 100,000,000 shares of common stock, par value $0.001 per share.
At March 31, 2010 and 2009, the Company had 12,402,262 and 8,800,000 common shares issued and
outstanding, respectively.
The Companys board of directors has the ability, without seeking stockholder approval, to issue
additional shares of common stock and/or preferred stock in the future for such consideration under
the discretion of board of directors.
On February 19, 2010, the Company initiated a financing transaction with 24 institutional and/or
accredited investors pursuant for which the Company sold $4,599,371 of units of its equity
securities to investors in a private placement. Each unit is comprised of 100,000 shares of the
Companys common stock and warrants to purchase up to 50,000 shares of common stock at a per share
purchase price of $3.28 per share. At the closing of the transaction on February 23, 2010, the
Company issued 1,402,262 shares of common stock and 701,126 four-year warrants with an exercise
price of $4.10 per share. In addition, the Company issued warrants to purchase up to 70,113 shares
of common stock with an exercise price of $4.10 per share to the placement agent and its assignees.
Offering costs of approximately $404,000 was netted against the proceeds.
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The Company issued the following warrants at the corresponding exercise price as of March 31, 2010:
Warrants | Exercise Price | |||||||
Outstanding as of March 31, 2009 |
| $ | | |||||
Issued and Vested |
771,239 | $ | 4.10 | |||||
Cancelled or expired |
| $ | | |||||
Exercised |
| $ | | |||||
Outstanding as of March 31, 2010 |
771,239 | $ | 4.10 |
At March 31, 2010, the vested warrants of 771,239 had an aggregate intrinsic value of $347,058.
NOTE 14 CONCENTRATION RISK
Suppliers
The Company obtained approximately 100% of its inventory purchases from two suppliers for the years
ended March 31, 2010 and 2009, respectively. Management believes other suppliers could provide
similar products and services on comparable terms in the area. Although alternate suppliers may
provide identical or similar products, such a change could result in delays and a possible loss of
sales. The Company did have long-term contracts with its suppliers for the years ended March 31,
2010 and 2009.
Customers
The Company did not have concentrations related to any of its customers and revenue for the years
ended March 31, 2010 and 2009.
NOTE 15 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
As described in Note 1 above, the Company controls Foguang through the Contractual Arrangements
between Foguang and Ran Ji, which include a consulting services agreement, an operating agreement,
an equity pledge agreement, an option agreement, and a proxy agreement. As described below, some of
the Companys officers and directors are also management members of Ran Ji and Foguang:
Mr. Yiyou Ran, the Companys chairman and chief executive officer, is also a director of Gold
Industry, Gold Holy, Ran Ji and Foguang. Mr. Jianquan Chen, a member of the Companys board of
directors, is also a director of Gold Industry, Gold Holy, Ran Ji and Foguang. Both Mr. Ran and Mr.
Chen are also shareholders and directors of Holy Golden Industry Limited, which owned approximately
56.4% of the Companys common stock issued and outstanding as of July 9, 2010. The Company does not
have any other relationship with Mr. Ran or Mr. Chen, except as described herein and except for
employer/employee compensation relationship.
The Company had $1,408,320 and $1,406,400 in prepayments to a related party receivable as of March
31, 2010 and 2009, respectively. (See Note 5)
NOTE 16 INCOME TAXES
The Company uses the asset-liability method of accounting for income taxes prescribed by ASC 740
Income Taxes.
United States
China Redstone Group Inc. is subject to the United States of America Tax law at tax rate of up to
35%. No provision for the US federal income taxes has been made as the Company had no US taxable
income for the years ended March 31, 2010 and 2009 and believes that its earnings are permanently
invested in PRC.
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BVI
Gold Industry was incorporated in the Cayman Islands and, under the current laws of the Cayman
Islands, it is not subject to income taxes.
Hong Kong
Gold Holy was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is
subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or
derived from Hong Kong. The applicable statutory tax rate for the fiscal years ended March 31, 2010
and 2009 was 16.5%. The company had no income derived from its Hong Kong subsidiary.
PRC
The Company generated substantially all of its net income from its PRC operations for the year
ended December 31, 2009. The components of income tax consist of the following as of:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Current Taxes |
||||||||
Chinese Operations |
4,707,364 | 1,689,693 | ||||||
Total |
$ | 4,707,364 | $ | 1,689,693 | ||||
Deferred tax assets and liabilities are provided for significant income and expense items
recognized in different years for tax and financial reporting purposes. The Company did not have
any temporary differences, which give rise to a net deferred tax asset for years end March 31, 2010
and 2009.
The reconciliation of the effective income tax rate to the statutory rate for years ended March 31,
2010 and 2009 is as follows:
2010 | 2009 | |||||||
Statutory income tax rate for funeral company |
25.0 | % | 33.0 | % | ||||
Tax exemptions |
(1.0 | %) | (4.0 | %) | ||||
Effective income tax rate for funeral chains |
24.0 | % | 29.0 | % | ||||
Beginning January 1, 2008, the new PRC Enterprise Income Tax (EIT) law replaced the
existing laws for PRC Domestic Enterprises (DEs) such as Foguang and PRC Foreign Invested
Enterprises (FIEs) such as Ran Ji.
The key changes are:
| The new standard PRC EIT rate of 25% replaced the 33% rate then applicable to both DEs and FIEs, except for high-tech companies which pays a reduced rate of 15%; and | |
| Companies established before March 16, 2007 will continue to enjoy tax holiday treatment approved by local government for a grace period of the next 5 years or until the tax holiday term is completed, whichever is sooner. | |
NOTE 17 COMMITMENTS AND CONTINGENCIES
(a) Lease commitments
The Company has a lease commitment in relation to the land use lease rights that were acquired by
the Company through a cash payment of $836,000 from local farmers. The tenure of arable land is 22
years, from January 1, 2005 to December 31, 2027. The tenure of non-arable land is 50 years, from
January 1, 2005 to December 31, 2055. At the
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end of these terms, the Company will have to negotiate new lease terms. The Company pays annual
lease payment on or before October 31st to the provincial government in Changshou Chongqing,
Peoples Republic of China (PRC) and in turn the PRC government then pays the sixth
villager group, Longqiaohu village according to the terms of the contract, and the sixth villager
group re-distributes the funds to each farmer household. This is the consideration that was agreed
upon by the farmers for relocating in ChangShou Jiang Nan. As of March 31, 2010 and 2009, lease
expense was $22,641 and $22,515, respectively.
The Company leased office space of 1,053 square meters at 239 Jianxi Road in Chongqing, PRC. The
term of the lease was for four and a half years from August 1, 2009 to December 31, 2012, at which
time the Company would have priority to renew it lease under the same conditions, with rent
adjusted based on the market price. If the Company fails to pay the rent on time, a penalty will be
assessed and if rent is due for three months, the counterparty could terminate its lease. As of
March 31, 2010, lease expense was $14,191.
Future minimum operating lease payments relating to the above lease is as follows:
Years Ending | ||||
March 31, | ||||
2010 |
$ | 22,641 | ||
2011 |
43,927 | |||
2012 |
43,927 | |||
2013 |
38,606 | |||
2014 |
22,641 | |||
Thereafter |
294,337 | |||
Total |
$ | 466,079 | ||
(b) Litigation
In the ordinary course of business, the Company is generally subject to claims, complaints, and
legal actions. At March 31, 2010 and 2009, management believes that the Company is not a party to
any action which would have a material impact on its financial condition, operations, or cash
flows.
(c) Economic Environment
Because all of the Companys operations are conducted in the PRC, the Company is subject to special
considerations and significant risks not typically associated with companies operating in the
United States. These risks include, among others, the political, economic and legal environments
and foreign currency exchange. The Companys results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and
rates and methods of taxation, among other things.
The granting of land use rights is a common practice in China as all land is state-owned, and, at
present, no option to purchase land has ever been granted. However, the Company does have very
limited rights in accordance with land use rights for the cemetery plot development and
corresponding sales of the burial spaces.
(d) Retirement Plans
The Company participates in a defined contribution retirement program organized by the relevant
local government authority. Employees of the Company eligible to participate in the retirement plan
are entitled to retirement benefits from the plan. The local government authority is responsible
for the pension liabilities to retired employees. The Company is required to make monthly
contributions to the retirement plan up to the time of retirement of the eligible employees, at 20%
of the local standard basic salaries. As of March 31, 2010 and 2009, the Company had no significant
obligation apart from the contribution as stated above.
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Note 18 SUBSEQUENT EVENT
In the three months ended June 30, 2010, the Company issued 220,000 shares of common stock for
consulting services and 50,000 shares of common stock to independent directors as part of their
compensation for a fair value of $1,228,500.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this registration statement to be signed on its behalf by the
undersigned hereunto duly authorized in the Province of Chongqing, Peoples Republic of China, on
July 28, 2010.
CHINA REDSTONE, INC. | ||||||
By: | /s/ Yiyou Ran
Chief Executive Officer (Principal Executive Officer) |
|||||
By: | /s/ Michael Wang
Chief Financial Officer (Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons in the capacities and on the dates indicated:
Signature | Title | Date | ||
/s/ Yiyou Ran
|
Chairman of the Board, President and | July 28, 2010 | ||
Chief Executive Officer | ||||
/s/ Michael Wang
|
Chief Financial Officer and Director | July 28, 2010 | ||
/s/ Jianquan Chen
|
Director | July 28, 2010 | ||
/s/ Tim Hudson
|
Director | July 28, 2010 | ||
/s/ Michael Rudolph
|
Director | July 28, 2010 | ||
/s/ Lihua Zhang
|
Director | July 28, 2010 | ||
/s/ Ray Hsu
|
Director | July 28, 2010 |
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EXHIBIT INDEX
Exhibit | Description | |
2.1
|
Share Exchange Agreement by and among Artistry and Your Out Doors LLC. (YOD) and the members of YOD dated March 12, 2009 (2) | |
2.2
|
Share Exchange Agreement by and among Artistry Publications, Inc. , Gold Industry Limited and the shareholders of Gold Industry dated February 12, 2010 (4) | |
3.1
|
Articles of Incorporation (1) | |
3.2
|
By-Laws (1) | |
3.3
|
Amended and Restated By-Laws (10) | |
4.1
|
Form of Warrant Issued to Purchasers in the February 2010 Financing (6) | |
5.1
|
Opinion of Richardson & Patel LLP* | |
5.2
|
Opinion of Tian Yuan Law Firm (10) | |
10.1
|
Consulting Service Agreement (4) | |
10.2
|
Operating Agreement (4) | |
10.3
|
Equity Pledge Agreement (4) | |
10.4
|
Option Agreement (4) | |
10.5
|
Voting Rights Proxy Agreement (4) | |
10.6
|
Rural Land Lease Agreement (4) | |
10.7
|
Jiangbei Office Lease Agreement (4) | |
10.8
|
Nanan Office Lease Agreement (4) | |
10.9
|
Bowling House Lease Agreement (4) | |
10.10
|
Form of Securities Purchase Agreement dated February 23, 2010 (6) | |
10.11
|
Form of Registration Rights Agreement, dated February 23, 2010 (6) | |
10.12
|
Form of Board Offer and Acceptance Letter (8) | |
10.13
|
Bluestone Pavement Slab and Tombstone Memorial Contract dated January 28, 2010. (10) | |
10.14
|
Construction Agreement dated November 4, 2009 (10) | |
14.1
|
Code of Ethics (3) | |
21.1
|
List of subsidiaries(9) | |
23.1
|
Consent of Richardson & Patel LLP (contained in Exhibit 5.1) | |
23.2
|
Consent of PMB Helin Donovan, LLP* | |
99.1
|
Presentation materials (5) | |
99.2
|
Press Release dated March 4, 2010 (7) | |
99.3
|
Schedule to Form of Warrant (10) | |
99.4
|
Schedule to Form of Securities Purchase Agreement (10) | |
99.5
|
Schedule to Form of Registration Rights Agreement(10) | |
99.6
|
Schedule Form of Board Offer and Acceptance Letter (10) |
* | Filed herewith. | |
(1) | Filed as an Exhibit to Form SB-2 filed with the SEC on October 26, 2007. | |
(2) | Filed as an Exhibit to Form 8-K filed with the SEC on March 20, 2009. |
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(3) | Filed as an Exhibit to Form 10-K filed with the SEC on December 1, 2008. | |
(4) | Filed as an Exhibit to Form 8-K filed with the SEC on February 18, 2010. | |
(5) | Filed as an Exhibit to Form 8-K filed with the SEC on February 23, 2010. | |
(6) | Filed as an Exhibit to Form 8-K filed with the SEC on February 24, 2010. | |
(7) | Filed as an Exhibit to Form 8-K filed with the SEC on March 4, 2010. | |
(8) | Filed as an Exhibit to Form 8-K filed with the SEC on April 6, 2010. | |
(9) | Filed as an Exhibit to Form S-1 filed with the SEC on April 9, 2010. | |
(10) | Filed as an Exhibit to Form 10-K filed with the SEC on July 15, 2010. | |
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