Attached files
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EX-5.2 - Artistry Publications Inc | v205279_ex5-2.htm |
EX-5.1 - Artistry Publications Inc | v205279_ex5-1.htm |
EX-23.2 - Artistry Publications Inc | v205279_ex23-2.htm |
EX-10.15 - Artistry Publications Inc | v205279_ex10-15.htm |
EX-10.16 - Artistry Publications Inc | v205279_ex10-16.htm |
AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 14,
2010
REGISTRATION
STATEMENT NO. 333-165983
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 2 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
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(State
or other jurisdiction of incorporation or
organization)
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2741
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(Primary
Standard Industrial Classification Code
Number)
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20-8285559
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(I.R.S.
Employer Identification Number)
|
239
Jianxin Road, Jiangbei District,
Chongqing,
PRC 400000
(86)
023-67755514
|
(Address,
including zip code, and telephone number, including area code, of
registrant’s principal executive
offices)
|
Yiyou
Ran, Chief Executive Officer
239
Jianxin Road, Jiangbei District,
Chongqing,
PRC 400000
(86)
023-67755514
COPY
TO:
Nimish
Patel, Esq.
Suzanne
Fu, Esq.
Richardson
& Patel LLP
10900
Wilshire Blvd., Suite 500
Los
Angeles, CA 90024
(310)
208-1182
|
(Name,
address, including zip code, and telephone number, including area code, of
agent for service)
|
FROM
TIME TO TIME AFTER THE
EFFECTIVE
DATE OF THIS REGISTRATION STATEMENT
|
|
(Approximate
date of commencement of proposed sale to the
public)
|
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. R
If
this Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer £
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company R
|
(Do not check if a smaller
reporting company)
|
CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
|
Amount to
be
Registered
(1)
|
Proposed
Maximum
per Share
Offering
Price
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount of
Registration
Fee
|
||||||||||||
Common
stock, $0.001 par value per share
|
1,402,262 | $ | _____ | (2) | $ | _____ | $ | _____ | ||||||||
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 | $ | _____ | (4) |
(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 December 8,
2010.
|
(3)
|
Estimated
solely for the purpose of computing the amount of the registration fee
pursuant to Rule 457(g) under the Securities
Act.
|
(4)
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$774.86
has been previously paid.
|
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.
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, ___, 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
|
•
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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 December 8, 2010, the last sale price
of our common stock on the OTCBB was $$4.32 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
____________ ,
2010
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.
TABLE OF CONTENTS
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Page
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Prospectus
Summary
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4
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Risk
Factors
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6
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Special
Note Regarding Forward-Looking Statements
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17
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Use
of Proceeds
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18
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Selling
Security Holders
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18
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Plan
of Distribution
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21
|
|
Business
|
23
|
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Description
of Property
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33
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Summary
Consolidated Financial Data
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35
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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36
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|
Legal
Proceedings
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48
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Management
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48
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Executive
Compensation
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51
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Security
Ownership of Certain Beneficial Holders and Management
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52
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Certain
Relationships and Related Party Transactions
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53
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Description
of Securities
|
54
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Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
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56
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Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
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56
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Additional
Information
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||
Experts
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58
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Legal
Matters
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58
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Index
to Consolidated Financial Statements
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59
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EX-5.1
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||
EX-5.2
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||
EX-10.15
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EX-10.16
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||
EX-23.2
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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.
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, People’s
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.
Foguang’s
first cemetery development project is the Chongqing Guiyuan Cemetery I (“Guiyuan I”), located
in Changshou District of Chongqing on approximately 66,660 square meters of
land. All cemetery plots in 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 at the cost of
approximately $1.77 million. Of the undeveloped portion of Guiyuan II,
approximately 565,000 square meters are identified as land to be developed for
cemetery use, and the remaining area will be developed as housing, parking and
office space in the future.
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. Based on comparable land use rights granted by the government to others,
Foguang estimates that its payment obligations may be between $2.25 million to
$2.7 million for the land use rights. However, such obligations
should not impact Foguang’s ongoing liquidity because it has sufficient cash
flow from its operations for the estimated payment obligations. Foguang is planning to
develop this land as a park, with mausoleums and temples, to complement and
enhance Guiyuan II (the “Longqiao Lake Project”). Foguang also intends to
cultivate and produce flower seedlings onsite Some of the 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 Company’s 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 12, 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 Company’s wholly-owned
subsidiary, and Gold Industry shareholders acquired a majority of the Company’s
issued and outstanding stock. Concurrent with the Share Exchange, Mr. Yiyou
Ran (the managing director of Gold Industry, and all of its operating
subsidiaries, “Mr. Ran”) 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.
All of
our business operations are carried out by Foguang, which the Company controls
through contractual arrangements that Chongqing Ran Ji Industrial Co., Ltd.
(“Ran Ji”), a
company wholly-owned by Gold Holy Industry Limited (“Gold Holy”), entered
into with Foguang and its owners. Gold Holy is wholly-owned by Gold Industry.
Through these contractual arrangements, the Company has the ability to
substantially influence Foguang’s 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 Foguang’s net
income, the Company is considered the primary beneficiary of Foguang.
Accordingly, the Company consolidates Foguang’s results, assets and liabilities
in its financial statements. Other than the Company’s interests in the
contractual arrangements, neither the Company, Gold Industry, Gold Holy and
Ranji own any equity interests in Foguang. Instead, such equity
interests are owned by Jianquan Chen (27.9%), Yang Chen (24.36%), Yiyou Ran
(24%), Chaoyang Fu (16.74%) and Mingsheng Liu (7%). Mr. Jianquan Chen and Mr.
Yiyou Ran were both appointed to our board of directors in connection with the
Share Exchange, with Mr. Ran as chairman of the board of directors. Mr. Ran was
additionally appointed as our chief executive officer. Mr. Ran and
Mr. Chen are also shareholders and directors of Holy Golden Industry Limited,
which owned approximately 56.4% of our issued and outstanding common stock as of
the date of this prospectus.
4
Although
we have been advised by our PRC counsel that current PRC law does not restrict
or prohibit foreign investment in domestic companies engaging in cemetery
business such as Foguang, governmental approvals are required before we (or our
subsidiaries) can acquire Foguang’s equity interests or assets. Thus, we have
elected to control Foguang and its operations, and to receive the economic
benefits from such operations, through contractual arrangements, thereby
avoiding the necessity of obtaining governmental approvals. 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. 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. 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 three months ended September 30, 2010 and 2009, we had approximately $11.6
million and $6.7 million in sales, respectively, and approximately $4.7 million
and $2.7 million in net income, respectively. For the six months ended September
30, 2010 and 2009, we had approximately $23.7 million and $15.1 million in
sales, respectively, and approximately $9.5 million and $5.9 million in net
income, respectively. 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 “Management’s 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:
|
12,672,262
shares (2)
|
|
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 December 8,
2010 and excludes 771,239 shares of our common stock issuable upon
exercise of our outstanding common stock purchase
warrants.
|
5
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
Foguang’s 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 Foguang’s 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, Foguang’s cemeteries must be
maintained in good condition and Foguang must maintain good reputations and high
professional standards, as well as offer attractive products and services at
competitive prices. In addition, Foguang must be marketed in such a manner as to
distinguish itself from its competitors. Foguang has historically experienced
price competition from independent cemetery operators. New market entrants tend
to attempt to build market share by offering lower cost alternatives. If Foguang
is unable to successfully compete by offering attractive products and services
pursuant to consumer preferences and at competitive prices, Foguang may lose
market share to its competitors, and the Company’s 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.
6
Changes or increases in, or failure
to comply with, regulations applicable to Foguang’s business could increase
costs or decrease cash flows.
Developing
and operating a cemetery in China is subject to both national and local
regulations. 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 may 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 Foguang’s 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.
Foguang’s ability to generate sales
depends on a number of factors such as sales strategies and sales
incentives.
Declines
in sales would reduce Foguang’s 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 cemetery business requires 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.
Foguang’s 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, such as purchasing cemetery plots
for family members prior to their deaths. 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 Foguang’s business, especially
if it results in either a decreased use of Foguang’s products or in pressure on
Foguang to lower its prices. A weak economy could lead to a decline in cemetery
sales and/or a decrease in the amounts customers are willing to pay for cemetery
products and services. Declines in cemetery property sales and average revenue
per event would reduce Foguang’s current revenues. Declines in cemetery products
and services could also reduce Foguang’s future revenues and market
share.
The success of Foguang’s business is
typically dependent upon one or a few key employees because of the localized and
personal nature of its business.
The
death care industry in China is built upon 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. Foguang’s 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.
Foguang’s 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. Foguang’s 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 Foguang’s 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.
7
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 Foguang’s 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. Foguang’s 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
December 8, 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.
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 management’s
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 management’s 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 management’s 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.
8
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.
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:
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•
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revoking
the business and operating licenses of Ran Ji or
Foguang;
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•
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discontinuing
or restricting the operations of Ran Ji or
Foguang;
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•
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imposing
conditions or requirements with which Ran Ji or Foguang may not be able to
comply;
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•
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requiring
Ran Ji or Foguang to restructure the relevant ownership structure or
operations; or
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•
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imposing
fines.
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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 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.
9
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 September 30, 2010,
we had retained earnings of approximately $27.7 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 Foguang’s
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.
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.
10
New labor laws in the PRC may
adversely affect Foguang’s 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
employer’s 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 Foguang’s 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 Foguang’s
business.
All of
Foguang’s 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. China’s 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 Foguang’s costs of doing business, and may negatively
impact our profit margins and/or profitability.
Foguang’s
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 greater
scarcity, may increase Foguang’s 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.
11
Governmental control of currency
conversion may affect the value of your investment.
The
Chinese government imposes controls on the convertibility of RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive substantially all of our revenues in RMB. Under our current structure,
our income is primarily derived from payments from Foguang. Shortages in the
availability of foreign currency may restrict the ability of our Chinese
subsidiaries and our affiliated entity to remit sufficient foreign currency to
pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing Chinese foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be made
in foreign currencies without prior approval from China State Administration of
Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in foreign currencies.
The Chinese government may also at its discretion restrict access in the future
to foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies
to our stockholders.
Fluctuation in the value of RMB may
have a material adverse effect on your investment.
The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while a significant
portion of our financial assets are denominated in U.S. dollars. We rely
entirely on fees paid to us by our affiliated entity in China. Any significant
fluctuation in the value of RMB may materially and adversely affect our cash
flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, our stock in U.S. dollars. For example, an appreciation of
RMB against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.
Dividends we receive from our
subsidiary located in the PRC may be subject to PRC withholding
tax.
The
recently enacted PRC Enterprise Income Tax Law, or the EIT Law, and the
implementation regulations for the EIT Law issued by the PRC State Council,
became effective as of January 1, 2008. The EIT Law provides that a maximum
income tax rate of 20% is applicable to dividends payable to non-PRC investors
that are “non-resident enterprises,” to the extent such dividends are derived
from sources within the PRC, and the State Council has reduced such rate to 10%
through the implementation regulations. We are a Delaware holding company and
substantially all of our income is derived from the operations of Foguang
located in the PRC, which is 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.
Foguang’s
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 Foguang’s business operations. For instance, health or other government
regulations adopted in response may require temporary closure of Foguang’s
stores or offices. Such closures would severely disrupt Foguang’s 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 Foguang’s 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 Foguang’s 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 Foguang’s 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 Foguang’s 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.
12
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 and obtain approvals from SAFE prior to their participation in the plan. In
addition, Circular 78 also requires PRC citizens to register with SAFE and make
the necessary applications and filings if they participated in an overseas
listed company’s covered equity compensation plan prior to April 6, 2007.
We 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. Foguang’s 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 Foguang’s
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.
13
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 SEC’s penny stock
regulations which may limit a shareholder’s 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 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 customer’s
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 customer’s 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
purchaser’s 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 shareholder’s 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 customer’s 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.
|
14
In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
Due to changes in the volatility of our common stock price, we may be the target
of securities litigation in the future. Securities litigation could result in
substantial costs and divert management’s 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 Company’s 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.
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 individual’s 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.
15
The
dealer’s 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
December 8, 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
December 8, 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. 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 management’s 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.
16
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.
17
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):
Anticipated
|
||||||||
Application of Net
|
Percentage of
|
|||||||
Description
|
Proceeds
|
Net Proceeds
|
||||||
Develop
more cemetery plots
|
$ | 1,000,000 | 26 | % | ||||
Marketing
and sales
|
500,000 | 13 | % | |||||
Potential
land acquisitions (1)
|
1,000,000 | 26 | % | |||||
Potential
acquisitions (1)
|
1,356,195 | 35 | % | |||||
Total
|
$ | 3,856,195 | 100 | % |
(1)
|
We
plan to acquire Shenzhen Huaqiao Public Cemetery in 2013, although as of
the date of this prospectus, we have not entered into any letter of intent
or definitive agreement in connection with such acquisition, nor have we
identified any other land or target for potential
acquisition.
|
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
12,672,262 shares of Common Stock outstanding on December 8,
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.
18
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.
|
(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.
|
19
(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.
|
(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.
|
20
(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.
|
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;
|
21
|
•
|
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 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).
22
BUSINESS
Overview
The
Company, through our operating entity, Foguang, is a private provider of
cemetery products in Chongqing, China. Foguang is primarily focused on
developing cemeteries and selling cemetery plots, although it also provides park
and garden development and construction services.
Foguang’s
first cemetery development project is the Chongqing Guiyuan Cemetery I (“Guiyuan I”), located
in Changshou District of Chongqing on approximately 66,660 square meters of
land. All cemetery plots in 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 at the cost of
approximately $1.77 million. Of the undeveloped portion of Guiyuan II,
approximately 565,000 square meters are identified as land to be developed for
cemetery use, and the remaining area will be developed as housing, parking and
office space in the future.
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. Based on comparable land use rights granted by the government to others,
Foguang estimates that its payment obligations may be between $2.25 million to
$2.7 million for the land use rights. However, such obligations
should not impact Foguang’s ongoing liquidity because it has sufficient cash
flow from its operations for the estimated payment obligations. Foguang is
planning to develop this land as a park, with mausoleums and temples, to
complement and enhance Guiyuan II. Foguang also intends to cultivate and produce
flower seedlings onsite Some of the 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 Company’s 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 12, 2010, the Company entered into the 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, in exchange for all the issued and
outstanding shares of Gold Industry. 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 Company’s issued and outstanding stock.
Concurrent with the Share Exchange, Mr. Yiyou Ran (the managing director of
Gold Industry, and all of its operating subsidiaries) 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 Ran Ji, the Company’s
wholly-owned subsidiary in the PRC. Our relationship with Foguang and its equity
owners are governed by such contractual arrangements. Although we have been
advised by our PRC counsel that current PRC law does not restrict or prohibit
foreign investment in domestic companies engaging in cemetery business such as
Foguang, governmental approvals are required before we (or our subsidiaries) can
acquire Foguang’s equity interests or assets. Thus, we have elected to control
Foguang and its operations, and to receive the economic benefits from such
operations, through contractual arrangements, thereby avoiding the necessity of
obtaining governmental approvals.
23
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 relating to the business engaged in by Foguang (the
“Services”). We
have been advised by our PRC counsel that current PRC law does not restrict Ran
Ji’s ability to provide the Services to Foguang. Ran Ji also has the ability to
send 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 Foguang’s net income for such quarter. The
quarterly net income amount is the amount reported in the quarterly reports that
Foguang is obligated to provide to Ran Ji within 45 days after the end of each
fiscal quarter, which reports must be prepared in accordance with the generally
accepted accounting principles of the PRC and must also be certified by
Foguang’s chief financial officer.
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) Foguang’s 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. A failure by either party to perform its obligations or observe its
covenants as set forth in this agreement would constitute a material breach
subject to termination of this agreement by the non-breaching party. For
example, Ran Ji is obligated to provide consulting services to Foguang as set
forth in section 2 of the agreement. In return for such services, Foguang is
obligated to pay Ran Ji a consulting service fee as set forth in section 3 of
the agreement and as described above, as well as make available information to
Ran Ji as set forth in section 5 of the agreement. Additionally, Foguang
covenants not to engage in certain corporate actions without Ran Ji’s prior
consent as set forth in section 6 of the agreement. Ran Ji may also
terminate the consulting services agreement without cause. Thus, the consulting
services agreement shall continue in effect until terminated under one of the
foregoing described circumstance.
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 Foguang’s daily operations, financial
management and employment issues. The Foguang Owners must designate the
candidates recommended by Ran Ji as their representatives on Foguang’s 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 Foguang’s 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 Ji’s 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 Foguang’s 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 Ji’s interest. The equity
pledge agreement will expire in two years after Foguang’s 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.
24
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 Foguang’s shareholders meetings (or by written consent in lieu of
meetings) in accordance with applicable laws and Foguang’s 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. Otherwise, the proxy agreement shall continue in
effect.
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 Foguang’s 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 Foguang’s net income, the Company is
considered the primary beneficiary of Foguang. Accordingly, the Company
consolidates Foguang’s results, assets and liabilities in its financial
statements. Other than the Company’s interests in the contractual arrangements,
the Company, Gold Industry, Gold Holy and Ran Ji do not 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. 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. 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 Company’s
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 business license issued by the Chongqing municipal government
necessary to operate its cemetery business. We do not own any equity interests
in Foguang, but control and receive the economic benefits of its business
operations through contractual arrangements. Instead, such equity interests are
owned by Jianquan Chen (27.9%), Yang Chen (24.36%), Yiyou Ran (24%), Chaoyang Fu
(16.74%) and Mingsheng Liu (7%). Mr. Jianquan Chen and Mr. Yiyou Ran were both
appointed to our board of directors in connection with the Share Exchange, with
Mr. Ran as chairman of the board of directors. Mr. Ran was additionally
appointed as our chief executive officer. Mr. Ran and Mr. Chen are
also shareholders and directors of Holy Golden Industry Limited, which owned
approximately 56.4% of our issued and outstanding common stock as of the date of
this prospectus.
Corporate
Structure
The
following diagram illustrates the Company’s corporate structure as of the date
of this prospectus:
25
(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
statement is not timely filed or timely declared effective, we are liable to
each Purchaser for liquidated damages of 1% of such Purchaser’s purchase price
per month until the registration statement is filed or declared effective, up to
a maximum of 12% of such Purchaser’s purchase price.
26
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 the date of
this prospectus, 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 six months ended September 30, 2010 and the year
ended March 31, 2010, cemetery revenues account for 100% of Foguang’s total
revenues.
Foguang’s
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, and installation fees.
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 six months ended September 30, 2010 and the year
ended March 31, 2010, Foguang had no park construction services
revenues.
Customers
Foguang’s
customers are individuals and families that purchase graves for members of their
families that are presently living or deceased. The following is a breakdown of
the grave types purchased by Foguang’s 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 | % |
27
Suppliers and
Manufacturers
On
January 28, 2008, Foguang entered into a long term contract with Chongqing
Kun Yu Stone Co., Ltd. (“Kun Yu”), a related
party. In April 2008, Foguang made an advance to Kun Yu in the amount of
$1,437,120 to use as a down payment by Kun Yu to purchase headstones from an
unrelated third-party vendor. The headstones will be received and
sold by Kun Yu. Foguang may refer its customers to Kun Yu to purchase
headstones but will not take possession of or sell these
headstones. Kun Yu will repay the advance down payment to Foguang and
is responsible to pay the balance of the invoice to the vendor of the
headstones. As of November 2010, the entire advance has been returned from Kun
Yu to Foguang.
In
February 2009, Foguang recorded a prepayment related to a contract in the
amount of $4,101,970 (7% of the contract), for the construction of entertainment
boats in connection with a project to develop a park near the Longqiao Lake as a
way to attract tourism in the Changshou area near Guiyuan II. On February 27,
2009, Foguang executed a contract with Chongqing Bo Gao Tourism Company (“Bo Gao”), an
unrelated third party, to jointly develop such project. In September 2009,
Foguang took over as the sole developer on this project. The scope of the
project contemplated the construction of 10 to 20 entertainment boats, a welcome
center, a large sailboat and nine docks. As of September 30, 2010,
the project has been temporarily suspended by Foguang due to funds
being used to focus on Foguang’s cemetery development projects. Foguang
plans to resume the project at a later time. Foguang expects delivery
of some of the boats by December 2010 and the remaining boats in fiscal year
2012. As of September 30, 2010, Foguang’s total prepayment for this project is
$8,682,600. The total price of the contract is approximately $64,000,000. The
Company plans to fund this project through its free cash flows as well as
through financing transactions. Foguang is currently in discussions with banks
to get loans for the balance, as well as possibly raising more money through the
private placement of the Company’s equity securities.
On May
20, 2010, Foguang entered into a Construction Agreement with Chongqing Hongxing
Construction Co., Ltd. (“Hongxing”) for the construction of
infrastructure on Foguang’s cemetery plots. Foguang achieved
favorable contract terms with Hongqing due to Hongqing’s excess capacity and
Foguang agreeing to develop approximately 7,000 cemetery plots at a time instead
of 500 cemetery plots at a time. As such, Foguang was able to reduce average
cost per cemetery plot by approximately 5% through economy of
scale.
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, Foguang’s sales and marketing force included 6 employees,
who also oversaw 42 independent contractors including 12 salespeople (selling
Foguang’s cemetery plots exclusively) and 30 agents (selling Foguang’s cemetery
plots as well as those of our competitors). 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. Foguang’s training program includes
pre-employment training and on-employment training of professional ethics and
sales techniques. Each employee’s 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, Foguang’s 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 agents based on a percentage of sales varying from 10% to 12% and also
offer an extra 2% or 3% award to yearly sales of 1.8 million RMB or
more.
Foguang
spent $196,945 and $426,415 on marketing and advertising expenses for the years
ended March 31, 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. During the year
ended March 31, 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. Foguang’s primary
competitors in Chongqing include Chongqing Long Tai Mountain Cemetery, Chongqing
Hua Yan Ta Yuan and Chongqing Hua Xia Cemetery.
28
Each
of these competitors has a more established and longer operating history
compared to Foguang, and each enjoys a good reputation with a mature sales
network. Foguang’s management believes that land reserve is the most important
factor of success in the cemetery business. Thus, 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 can 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
Foguang
currently does not have any intellectual properties.
Governmental
Regulations
Regulations
Relating to Cemetery Development and Funeral Services
Under
the Regulations on Funeral and Interment Control promulgated by Decree
No. 225 of the State Council of the PRC on July 21, 1997, all funeral
services are under the jurisdiction of the Ministry of Civil Affairs, with local
civil affairs authorities above county level to supervise within their
respective administrative areas. Each such local civil affairs authority shall
designate specific areas for cemetery and shall include such areas in its urban,
rural and capital construction planning, provided that such planning shall be
approved by the relevant provincial-level government. If body interment or
cremains interment is permitted under such planning, the relevant provincial or
municipal government shall determine how big cemetery plots within its
jurisdiction can be, as well as how long the plots may be used, in conformity
with the national policy of preserving land, especially arable
lands.
In
accordance with the foregoing regulations, the municipal government of
Chongqing, where Foguang operates, promulgated the Rules of Chongqing on Funeral
and Interment Control on May 29, 1998. Under such rules, each cemetery plot
within Chongqing may be used for up to 20 years, after which its owner must
apply to extend its use. Additionally, a burial vault for one or two persons’
cremains shall not exceed one square meter, a burial vault for one body shall
not exceed four square meters, and a burial vault for two bodies shall not
exceed six square meters.
We
believe that Foguang and its business operations are in compliance with the
foregoing regulations and rules.
Compliance with Circular 106 and the
2006 M&A Regulations
On
May 29, 2007, China’s State Administration of Foreign Exchange (“SAFE”) issued an
official notice known as “Circular 106”, which requires the owners of any
Chinese companies to obtain SAFE’s approval before establishing any offshore
holding company structure in so-called “round-trip” investment transactions for
foreign financing as well as subsequent acquisition matters in China. Likewise,
the “Provisions on Acquisition of Domestic Enterprises by Foreign Investors”,
issued jointly by Ministry of Commerce (“MOFCOM”), State-owned
Assets Supervision and Administration Commission, State Taxation Bureau, State
Administration for Industry and Commerce (“SAIC”), China
Securities Regulatory Commission and SAFE in August 2006, impose approval
requirements from MOFCOM for “round-trip” investment transactions, including
acquisitions in which equity was used as consideration.
Dividend
Distribution
The
principal laws, rules and regulations governing dividends paid by our PRC
operating subsidiary include the Company Law of the PRC (1993), as amended in
1999, 2004 and 2005 respectively, Wholly Foreign Owned Enterprise Law (1986), as
amended in 2000, and Wholly Foreign Owned Enterprise Law Implementation Rules
(1990), as amended in 2001. Under these laws and regulations, our PRC subsidiary
may pay dividends only out of its accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, our PRC
subsidiary is required to set aside at least 10% of its after-tax profit based
on PRC accounting standards each year to its statutory surplus reserve fund
until the accumulative amount of such reserve reaches 50% of its respective
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a wholly foreign-owned enterprise (“WFOE”) has the
discretion to allocate a portion of its after-tax profits to its staff welfare
and bonus funds. After the allocation of relevant welfare and funds, the equity
owners can distribute the rest of the after-tax profits provided that all the
losses of the previous fiscal year have been made up.
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:
29
|
•
|
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 People’s Congress (“NPC”) on
October 31, 1993;
|
|
•
|
Notice
on Relevant Policies Concerning Individual Income Tax issued by Ministry
of Finance and the State Tax Bureau on May 13,
1994;
|
|
•
|
Notice
on Reduction of Income Tax in Relation to Interests and Gains Derived by
Foreign Enterprises from the PRC, promulgated by the State Council on
November 18, 2000; and
|
|
•
|
Enterprise
Income Tax Law of the PRC (“New EIT Law”)
issued by NPC on March 16, 2007, which came into effect on
January 1, 2008.
|
Income Tax on Foreign Investment
Enterprises
According
to the New EIT Law, PRC domestic enterprises and foreign investment enterprises
(including Sino-foreign equity joint ventures, Sino-foreign co-operative joint
ventures and WFOEs established in the territory of the PRC) are required to pay
a uniform income tax at a rate of 25% of their taxable income and the former tax
exemption, reduction and preferential treatments applicable to foreign
investment enterprises are revoked.
Value Added Tax
The
Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the
State Council came into effect on January 1, 1994 and were amended in 2008.
Under these regulations and the Implementing Rules of the Provisional
Regulations of the PRC Concerning Value Added Tax, value added tax is imposed on
goods sold in or imported into the PRC and on processing, repair and replacement
services provided within the PRC.
Value
added tax payable in the PRC is charged on an aggregated basis at a rate of 13%
or 17% (depending on the type of goods involved) on the full price collected for
the goods sold or, in the case of taxable services provided, at a rate of 17% on
the charges for the taxable services provided but excluding, in respect of both
goods and services, any amount paid in respect of value added tax included in
the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and service in the same financial
year.
Business Tax
According
to the Provisional Regulations of the PRC Concerning Business Tax promulgated by
the State Council on December 13, 1993 and came into effect on
January 1, 1994, which was revised by the State Council on
November 10, 2008 and enforced from January 1, 2009, business that
provides services, assigns intangible assets or sells immovable property became
liable to business tax at a rate ranging from 3 to 5% of the charges of the
services provided, intangible assets assigned or immovable property sold, as the
case may be.
Tax on Dividends from PRC Enterprise
with Foreign Investment
According
to the Applicable Foreign Enterprises Tax Law, income such as rental, royalty
and profits from the PRC derived by a foreign enterprise which has no
establishment in the PRC or has establishment but the income has no relationship
with such establishment is subject to a 10% withholding tax, subject to
reduction as provided by any 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”).
30
(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
enterprise’s registered capital, the enterprise will not be required to
make any additional contribution. The reserve fund may be used by a WFOE
to make up its losses and with the consent of the examination and approval
authority, can also be used to expand its production operations and to
increase its capital. The enterprise is prohibited from distributing
dividends unless the losses (if any) of previous years have been made up.
The development fund is used for expanding the capital base of the company
by way of capitalization issues. The employee bonus and welfare fund can
only be used for the collective benefit and facilities of the employees of
the WFOE.
|
Catalogue for the Guidance of
Foreign Investment Industries
China
issued the Catalogue for the Guidance of Foreign Investment Industries (“Guidance Catalogue”)
in 1995, which was amended in 2002, 2004 and 2007 respectively. The current
version of the Guidance Catalogue was promulgated by the MOFCOM and the National
Development and Reform Commission (“NDRC”) on
October 31, 2007 and became effective as of December 1, 2007, which
retains the classification methodology and organizational structure used in the
previous versions without significant changes. The Guidance Catalogue divides
all industries, and the levels of foreign investments permissible in each
industry, into four categories:
(i) Encouraged
Category. Industries within this category are deemed ideal for foreign
investments, and there are various incentives and preferential treatments,
mainly tax exemptions and rebates, to encourage foreign investments in companies
of the industries within this category. Foreign investments are allowed to take
a majority stake or more of a PRC company in this category, and most take the
form of WFOE;
(ii) Permitted
Category. Industries that are not specifically identified in the “encouraged,”
“restricted” or “prohibited” category fall within this category, where foreign
investments are permitted but generally without tax incentives or other
preferential treatments. Like those in the “encouraged” category, foreign
investments in the “permitted” category are allowed to, and do, take the form of
WFOE;
(iii) Restricted
Category. While foreign investments are permitted in industries within this
category, such investments are subject to stricter approvals or filing
requirements. Additionally, foreign investments can generally hold a minority
interest in PRC companies within this category, or as a joint venture;
and
(iv) Prohibited
Category. Foreign investments are not allowed in industries within this
category.
We
have been advised by our PRC counsel that Foguang’s business is in the permitted
category, as it is not specifically identified in the “encouraged,” “restricted”
or “prohibited” category, and as such, foreign investment in Foguang is
permitted.
Foreign Exchange
Controls
Major
reforms have been introduced to the foreign exchange control system of the PRC
since 1993.
On
December 28, 1993, the People’s 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.
31
The
foreign exchange earnings of all PRC enterprises, other than those foreign
investment enterprises (“FIE”), who are
allowed to retain a part of their regular foreign exchange earnings or
specifically exempted under the relevant regulations, are to be sold to
designated banks. Foreign exchange earnings obtained from borrowings from
foreign institutions or issues of shares or bonds denominated in foreign
currency need not be sold to designated banks, but must be kept in foreign
exchange bank accounts of designated banks unless specifically approved
otherwise.
At
present, control of the purchase of foreign exchange is relaxed. Enterprises
within the PRC which require foreign exchange for their ordinary trading and
non-trading activities, import activities and repayment of foreign debts may
purchase foreign exchange from designated banks if the application is supported
by the relevant documents. Furthermore, FIEs may distribute profit to their
foreign investors with funds in their foreign exchange bank accounts kept with
designated banks. Should such foreign exchange be insufficient, enterprises may
purchase foreign exchange from designated banks upon the presentation of the
resolutions of the directors on the profit distribution plan of the particular
enterprise.
Although
the foreign exchange control over transactions under current accounts has
decreased, enterprises shall obtain approval from SAFE before they accept
foreign-currency loans, provide foreign currency guarantees, make investments in
foreign countries or carry out any other capital account transactions involving
the purchase of foreign currencies. In foreign exchange transactions, designated
banks may freely determine applicable exchange rates based on the rates
publicized by PBOC and subject to certain governmental
restrictions.
On
October 21, 2005, SAFE issued the Notice of the State Administration of
Foreign Exchange on Exchange Control Issues Relating to Financing and Reverse
Investment by Persons Resident in the People’s 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.
Seasonality
The
cemetery 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 Foguang’s areas
of operations and as a percentage of its total workforce as of March 31,
2010:
Number of
|
%
|
|||||||
Employees
|
of Employees
|
|||||||
Management
& Administration
|
11 | 25.58 | % | |||||
Finance
|
5 | 11.62 | % | |||||
Cemetery
Administration Office
|
8 | 18.60 | % | |||||
Sales
& Marketing
|
6 | 13.95 | % | |||||
Construction
Projects
|
8 | 18.60 | % | |||||
Customer
Service
|
5 | 11.62 | % | |||||
TOTAL
|
43 | 100.0 | % |
32
Foguang’s
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 Foguang’s 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. Foguang’s 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
Foguang’s
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
|
|||||
71
E. Jianxin Road, F/2
Jiangbei
District
Chongqing,
PRC 300000
|
Office
of Foguang
|
1,053 |
12/31/2012
(a)
|
|||||
Fuli
Bowling House
131
Changshou Road
Changshou
District
Chongqing,
PRC 401220
|
Office
of Guiyuan I
|
1,363.2 |
N/A
(property use rights
owned
by Foguang)
|
|||||
1
Huigong Road
Nan’an
District
Chongqing,
PRC 400000
|
Rented
out for commercial uses
|
1,938.15 |
N/A
(property use
rights
owned by Foguang)
|
|||||
Longqiao
Village and Qianfo Village
Jiangnan
Town, Changshou District
Chongqing,
PRC 401258
|
Cemetery
(Guiyuan I and part of Guiyuan II)
|
339,444 |
N/A
(property use
rights
owned by Foguang)
|
|||||
Agricultural
Land, Group 6
Longqiao
Village, Changshou District
Chongqing,
PRC 401258
|
Employee
housing and parking, to
be
developed in 2011 to 2013
|
54,027 |
12/31/2027
(b) (c)
|
|||||
Wasteland,
Group 6
Longqiao
Village, Changshou District
Chongqing,
PRC 401258
|
(1)
Cemetery in development (Guiyuan II)
(2)
Cemetery, to be developed in
2011to
2015 (Guiyuan II)
|
(1)
79,373
(2)
120,060
|
12/31/2055
(b) (d)
|
|||||
Timberland,
Group 6
Longqiao
Village, Changshou District
Chongqing,
PRC 401258
|
Cemetery,
to be developed in 2011
to
2015 (Guiyuan II)
|
100,050 |
12/31/2055
(b) (d)
|
|||||
House
Land, Group 6
Longqiao
Village, Changshou District
Chongqing,
PRC 401258
|
Cemetery,
to be developed in 2011
to
2015 (Guiyuan II)
|
28,014 |
12/31/2105
(b) (d)
|
33
(a)
|
The
term of this lease is from August 1, 2009 to December 31, 2012,
at which time Foguang has priority to renew the lease on identical terms
except that rent will be adjusted based on the then prevailing market
price. If Foguang fails to pay the rent on time, a penalty will be
assessed, and if rent is unpaid for three months, the counterparty may
terminate the lease. As of March 31, 2010, lease expense was
$14,191.
|
(b)
|
Foguang
is leasing the land use rights for these lands from a group of farmers and
villagers (collectively the “Longqiaohu Village Sixth Villager Group”),
for an annual fee of approximately $23,000 in the aggregate on or before
October 31 for the duration of the leases. Foguang initially
paid approximately $836,000 to the Changshou district government in
connection with the leases, to relocate the households of the Longqiaohu
Village Six Villager Group from the lands that Foguang is leasing. The
cash payment and the annual fee are provided by the Changshou district
government to the Longqiaohu Village Six Villager Group for distributions
to its households. As of March 31, 2010 and 2009, lease expense was
$22,641 and $22,515,
respectively.
|
(c)
|
The
current lease term of agricultural land is 22 years but it is renewable up
to a total of 100 years according to Chinese
laws.
|
(d)
|
The
current lease term of non-agricultural land is 22 years but it is
renewable up to a total of 100 years according to Chinese
laws.
|
Future
minimum operating lease payments relating to the leases under (a) and (b) above
are as follows:
Years
|
||||
Ending
|
||||
March 31,
|
||||
2010
|
$ | 22,641 | ||
2011
|
$ | 43,927 | ||
2012
|
$ | 43,927 | ||
2013
|
$ | 38,606 | ||
2014
|
$ | 22,641 | ||
Thereafter
|
$ | 294,337 | ||
Total
|
$ | 466,079 |
34
SUMMARY
CONSOLIDATED FINANCIAL DATA
You
should read the summary consolidated financial data set forth below in
conjunction with “Management’s 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 three and six months
ended September 30, 2010 and 2009 are derived from our unaudited financial
statements for such periods included in this prospectus. The financial data for
the years ended March 31, 2010 and 2009 are derived from our audited
financial statements for such periods included in this prospectus. The
historical results are not necessarily indicative of the results to be expected
for any future period.
(Amounts
in USD)
Three Months ended
|
Six Months ended
|
Year ended
|
||||||||||||||||||||||
September 30,
|
September 30,
|
March 31,
|
||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||||||
Income
statement data:
|
||||||||||||||||||||||||
Revenues
|
$ | 11,581,873 | $ | 6,746,388 | $ | 23,676,460 | $ | 15,063,916 | $ | 36,498,969 | $ | 18,313,720 | ||||||||||||
Cost
of goods sold
|
4,487,805 | 2,870,697 | 9,261,263 | 6,770,583 | 17,565,765 | 9,938,853 | ||||||||||||||||||
Gross
profit
|
7,094,068 | 3,875,691 | 14,415,197 | 8,293,333 | 18,933,204 | 8,374,867 | ||||||||||||||||||
Total
operating expenses
|
722,728 | 415,771 | 2,573,451 | 753,984 | 1,792,584 | 1,471,475 | ||||||||||||||||||
Income
from operations
|
6,371,340 | 3,459,920 | 11,841,746 | 7,539,349 | 17,140,620 | 6,903,392 | ||||||||||||||||||
Total
other income (expense)
|
(14,782 | ) | 89,959 | 1,055,700 | 201,702 | (106,026 | 283,560 | |||||||||||||||||
Income
before income taxes
|
6,356,558 | 3,549,879 | 12,897,446 | 7,741,051 | 17,034,594 | 7,186,952 | ||||||||||||||||||
Income
taxes
|
1,634,562 | 815,721 | 3,378,635 | 1,853,291 | 4,707,374 | 1,689,693 | ||||||||||||||||||
Net
income
|
$ | 4,721,996 | $ | 2,734,158 | $ | 9,518,811 | $ | 5,887,760 | $ | 12,327,230 | $ | 5,497,259 |
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 September 30,
|
At March 31,
|
At March 31,
|
||||||||||
2010
|
2010
|
2009
|
||||||||||
(Unaudited)
|
||||||||||||
Consolidated Balance Sheet Data:
|
||||||||||||
Cash
and cash equivalents
|
$ | 8,005,280 | $ | 9,367,276 | $ | 1,392,961 | ||||||
Total
Current Assets
|
$ | 33,047,191 | $ | 20,564,611 | $ | 7,713,109 | ||||||
Total
Current Liabilities
|
$ | 5,147,467 | $ | 6,437,449 | $ | 4,202,072 | ||||||
Total
Shareholders’ Equity
|
$ | 47,557,216 | $ | 35,848,868 | $ | 19,774,555 |
35
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The
following discussion and analysis of the results of our operations and financial
condition for the three and six months ended September 30, 2010 and 2009, and
for the 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, People’s
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.
Foguang’s
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. All of the 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 area of 667,000 square meters, of which approximately 69,930
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.
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. Based on comparable land use rights granted by the government to others,
Foguang estimates that its payment obligations may be between $2.25 million to
$2.7 million for the land use rights. However, such obligations
should not impact Foguang’s ongoing liquidity because it has sufficient cash
flow from its operations for the estimated payment obligations. 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 Foguang’s 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 $1.8 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.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of the condensed consolidated
financial statements.
VARIABLE
INTEREST ENTITIES
Pursuant
to ASC 810 “Consolidation of Variable Interest Entities” (“ASC 810”), an
Interpretation of Accounting Research Bulletin No. 51, we are required to
include in our condensed consolidated financial statements the financial
statements of variable interest entity (“VIE”). ASC 810
requires a VIE to be consolidated by a company if that company is subject to a
majority of the risk of loss for the VIE or is entitled to receive a majority of
the VIE’s residual returns. VIE is the entity in which we, through contractual
arrangements, bear the risk of, and enjoy the rewards normally associated with
ownership of the entity, and therefore we are the primary beneficiary of the
entity.
36
Foguang
is considered VIE and we are the primary beneficiary. We entered into agreements
with Foguang pursuant to which we shall receive 100% of Foguang’s net income. In
accordance with these agreements, Foguang shall pay consulting fees equal to
100% of its net income to us and we shall supply business consulting and other
general business operation services needed to Foguang The accounts of Foguang
are consolidated in the accompanying condensed consolidated financial
statements. As a VIE, Foguang’s sales are included in our total sales, Foguang’s
income from operations is consolidated with ours, and our net income includes
all of Foguang’s net income, and Foguang’s assets and liabilities are included
in our condensed consolidated balance sheet. The VIE do not have any
non-controlling interest and accordingly, did not subtract any net income in
calculating the net income attributable to us. Because of the contractual
arrangements, we have pecuniary interest in Foguang that requires consolidation
of Foguang financial statements with our condensed consolidated financial
statements.
STOCK-BASED
COMPENSATION
Stock
based compensation is accounted for based on the requirements of the Share-Based
Payment topic of ASC 718 which requires recognition in the financial statements
of the cost of employee and director services received in exchange for an award
of equity instruments over the period the employee or director is required to
perform the services in exchange for the award (presumptively, the vesting
period). The Accounting Standards Codification also requires measurement of the
cost of employee and director services received in exchange for an award based
on the grant-date fair value of the award.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other
third-parties, compensation expense is determined at the “measurement date.” The
expense is recognized over the vesting period of the award. Until the
measurement date is reached, the total amount of compensation expense remains
uncertain. We record compensation expense based on the fair value of the award
at the reporting date. The awards to consultants and other third-parties are
then revalued, or the total compensation is recalculated based on the then
current fair value, at each subsequent reporting date.
FOREIGN
CURRENCY TRANSLATION
Our
financial statements are expressed in U.S. dollars and the functional
currency of our parent company is U.S. dollars, but the functional currency of
our operating subsidiaries and affiliates is Chinese Reminbi (“RMB”). For the
subsidiaries and affiliates whose functional currencies are the RMB, results of
operations and cash flows are translated at average exchange rates during the
period, assets and liabilities are translated at the unified exchange rate at
the end of the period, and equity is translated at historical exchange
rates. Translation adjustments resulting from the process of translating the
local currency financial statements into U.S. dollars are included in
determining comprehensive income. Transactions denominated in foreign currencies
are translated into the functional currency at the exchange rates prevailing on
the transaction dates with any 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. All of our revenue transactions are transacted in the functional
currency. We do not enter any material transaction in foreign currencies and
accordingly, transaction gains or losses have not had, and are not expected to
have, a material effect on the results of operations of us.
INVENTORY
Inventory
is stated at the lower of cost or fair value, as determined in accordance with
U.S. generally accepted accounting principles (“GAAP”), specifically
ASC 360-10. In addition to direct land acquisition, land development and plot
development costs, when applicable costs also include interest, any real estate
taxes and direct overhead related to development and construction, which are
capitalized to inventory during periods beginning with the commencement of
development and ending with the completion of construction. If any cemetery
sections are temporarily closed, no additional interest is allocated to that
specific area plot inventory until it re-opens, and other carrying costs are
expensed as incurred. Once a parcel of land has been approved for development
and we open the plots for sale, it can typically take several more years to
fully develop, sell and deliver all the plots. Longer or shorter time
periods are possible depending on the number of plot sites in a section and the
sales and delivery pace of the plots. Our cemetery may take up to ten years or
more to complete. Because our inventory is considered a long-lived asset under
GAAP, we are required to regularly review the carrying value of each of our
plots and write down the value of those plots for which we believe the values
are not recoverable.
When
the profitability of an area of plots deteriorates, the sales pace declines
significantly or some other factor indicates a possible impairment in the
recoverability of the asset, the asset is reviewed for impairment by comparing
the estimated future undiscounted cash flow for the plot to its carrying value.
If the estimated future undiscounted cash flow is less than the designated area
plots’ carrying value, the carrying value is written down to its estimated fair
value. Estimated fair value is primarily determined by discounting the estimated
future cash flow. The impairment is charged to cost of revenues in the period in
which the impairment is determined. In estimating the future undiscounted cash
flow of an area of plots, we use various estimates such as: (a) the
expected sales pace in a community, based upon general economic conditions that
will have a short-term or long-term impact on the market in which the community
is located and on competition within the market, including the number of plot
sites available and pricing and incentives being offered by us or by other
cemeteries; (b) the expected sales prices and sales incentives to be
offered on the plots; (c) costs expended to date and expected to be
incurred in the future, including, but not limited to, land and land development
costs, plot construction costs, interest costs and overhead
costs; and (d) alternative uses for the
property.
37
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 PRC’s 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 PRC’s 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. Foguang’s 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
$840,000. 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
AND COST RECOGNITION
The
construction time of our plots is generally less than one year, although some
plot areas may take more than one year to complete. Revenues and cost of
revenues from these plot sales are recorded at the time each plot is delivered
and title and possession are transferred to the buyer.
For
our standard plots, land, land development and related costs, incurred and
estimated to be incurred in the future, are amortized to the cost of plots
closed based upon the total number of plots to be constructed in each area. Any
changes resulting from a change in the estimated number of plots to be
constructed or in the estimated costs subsequent to the commencement of delivery
of plots are allocated to the remaining undelivered plots in the area. Plot
construction and related costs are charged to the cost of plots closed under the
specific identification method. The estimated land, common area development and
related costs of a cemetery area, including the cost of the surrounding grounds,
net of their estimated residual value, are allocated to individual cemetery plot
areas within the cemetery on a relative sales value basis. Any changes resulting
from a change in the estimated number of plots to be constructed or in the
estimated costs are allocated to the remaining plot sites in each of the area of
overall cemetery.
Any
changes resulting from a change in the estimated total costs or revenues of the
project are allocated to the remaining units to be delivered.
Sales
Incentives: In order to promote sales of our plots, we grant
our plot buyers sales incentives from time-to-time. These incentives will vary
by type of incentive and by amount on cemetery area-by-area and plot-by-plot
basis. Incentives that impact the value of the plot or the sales price paid,
such as special or additional options are generally reflected as a reduction in
sales revenues. Incentives that we pay to an outside sales
representative are recorded as an additional cost of revenues.
Incentives are recognized at the time the plot is delivered to the plot buyer
and we receive the sales proceeds.
Revenue Recognition: The
Company recognizes revenue when the amount of revenue can be reliably measured,
it is probably that economic benefits will flow to the entity and specific
criteria have been met for the Company’s revenue producing activities. Four
basic criteria 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 management's judgments regarding the fixed
nature of the selling prices of the products and services delivered and the
collectability of those amounts.
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 Company’s 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.
38
DERIVATIVE
INSTRUMENTS
Our
derivative financial instruments consisted of warrants to purchase common
stock. The warrants have certain price reset feature, which causes them to
be classified as a liability. The accounting treatment of derivative financial
instruments required that the we record the derivatives at their fair values as
of the issuance date and at fair value as of each subsequent balance sheet
date. Any change in fair value was recorded as non-operating,
non-cash income or expense at each reporting date. If the fair value
of the derivatives was higher at the subsequent balance sheet date, we recorded
a non-operating, non-cash charge. If the fair value of the
derivatives was lower at the subsequent balance sheet date, we recorded
non-operating, non-cash income. At September 30, 2010, the warrant
derivatives were valued using the Black Scholes Option Pricing
Model.
RECENT
ACCOUNTING PRONOUNCEMENTS
In the
first quarter of fiscal 2011, we adopted the following accounting standards,
none of which had a material impact on our financial position, results of
operations or cash flows:
·
|
The amendments to the
recognition and measurement guidance for the transfers of financial
assets. The amendments in this update are the result of ASU 860,
Accounting for Transfers of Financial
Assets.
|
|
·
|
The amendment to the
guidelines for determining the primary beneficiary in a variable interest
entity and for improvements to financial reporting by enterprises involved
with variable interest
entities.
|
|
·
|
The accounting standard
improving disclosures about recurring and nonrecurring fair value
measurements.
|
|
·
|
The amendment to the
accounting and reporting guidance for noncontrolling interests and changes
in ownership interests of a
subsidiary.
|
Accounting Standards Issued
But Not Yet Adopted
In
July 2010, the Financial Accounting Standards Board (“FASB”) issued an
accounting standard update, Receivables (Topic 310): Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses.
This Update is intended to provide additional information to assist financial
statement users in assessing an entity’s credit risk exposures and evaluating
the adequacy of its allowance for credit losses. The disclosures as of the end
of a reporting period are effective for interim and annual reporting periods
ending on or after December 15, 2010 or our second quarter of fiscal 2011. We
are currently evaluating the impact this update will have on our consolidated
financial statements.
Other
recent accounting pronouncements issued by the FASB, the American Institute of
Certified Public Accountants, and the SEC did not or are not believed by
management to have a material impact on the Company's consolidated financial
statements.
RESULTS
OF OPERATIONS
Comparison
of Three Month and Six Months Periods Ended September 30, 2010 and September 30,
2009
Net
Revenues
Net
revenues for the three month period ended September 30, 2010 were $11,581,873 as
compared to $6,746,388 for the three month period ended September 30, 2009, an
increase of $4,835,485 or approximately 71.68%. Net revenues for the six month
period ended September 30, 2010 were $23,676,460 as compared to $15,063,916 for
the six month period ended September 30, 2009, an increase of $8,612,544 or
approximately 57.17%.For the three month and six month periods ended September
30, 2010 and 2009, net revenues consisted of the following:
|
Three Month
Period Ended
Sep 30, 2010
|
Three Month
Period Ended
Sep 30, 2010
|
Six Month
Period Ended
Sep 30, 2009
|
Six Month
Period Ended
Sep 30, 2009
|
||||||||||||
Cemetery
|
$
|
11,581,873
|
$
|
6,746,388
|
$
|
23,676,460
|
$
|
15,063,916
|
||||||||
Net
Revenues
|
$
|
11,581,873
|
$
|
6,746,388
|
$
|
23,676,460
|
$
|
15,063,916
|
Cemetery
For
the three month period ended September 30, 2010, cemetery revenues increased by
$4,835,485 or 71.68% from the comparable three month period ended September 30,
2009. For the six month periods ended September 30, 2010, cemetery
revenues increased by $8,612,544 or 57.17% from the comparable six month period
ended September 30, 2009. The significant increase in revenues was mainly
attributable to the development of new cemetery, which led to an increase of
sales of cemetery plots and cemetery plot price. The new cemetery is
being built on approximately 11 acres of land and will have approximately 7,000
plots. The new cemetery plots were located on more desirable property
which was higher up on the hill and had better views of the lake. The new
cemetery plots are being sold for approximately 17% more than the old cemetery
plots.
39
The
total number of cemetery plots sold increased by 444 plots from 1,282 for three
month period ended September 30, 2009 to 1,726 for the comparable three month
period ended September 30, 2010. In addition, the average sales price increased
by approximately $1,395 per cemetery plot. The total number of cemetery plots
sold increased by 672 plots from 2,908 for the six month period ended September
30, 2009 to 3,580 for the comparable six month period ended September 30, 2010.
In addition, the average sales price increased by approximately $1,409 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, with the new cemetery development, we were able to increase
average cemetery plot prices. The new cemetery plots were located on
a more desirable property which was higher up on the hill and had better views
of the lake. The new cemetery plots are being sold for approximately 17% more
than the old cemetery plots. The overall improvement of
local economic conditions in Chongqing with the economy starting to grow at
approximately 8% also contributed to the increase of economic value
of Foguang’s 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 has helped the economy to grow at approximately
8%.
Cost
of Sales
Cost
of sales includes amortization of land use rights, raw materials, conversion
costs, direct labor, manufacturing costs, and utilities. For the three month
period ended September 30, 2010, cost of sales amounted to $4,487,805 or
approximately 38.75% of total net revenues as compared to $2,870,697 or
approximately 42.56% of total net revenues for the three month period ended
September 30, 2009. For the six months period ended September 30, 2010, cost of
sales amounted to $9,261,263 or approximately 39.12% of total net revenues as
compared to $6,770,583 or 44.95% of total net revenues for the six months period
ended September 30, 2009. The decrease in cost of sales as a percentage of total
net revenues was primarily due to economies of scale. We were able to
cut the average cost for per cemetery plot by approximately 5% by developing
plots a larger scale. Foguang achieved favorable contract terms with
a supplier due to such supplier’s excess capacity and our agreeing to develop
approximately 7,000 cemetery plots at a time instead of 500 cemetery plots at a
time. 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, which lead to
a cost savings on average of approximately 3% per cemetery
plot.
Total
cost of sales increased by $1,617,108 or 56.33% for the three month period ended
September 30, 2010 as compared to the three month period ended September 30,
2009. Total cost of sales increased by $2,490,680 or 36.79% for the
six month periods ended September 30, 2010 as compared to the six month period
ended September 30, 2009. The increases were attributable to the
following:
Gross
Profit
Gross
profit for the three month and six month periods ended September 30, 2010 was
$7,094,068 or 61.25% and $14,415,197 or 60.88% of total net revenues,
respectively, as compared to $3,875,691 or 57.41% and $8,293,333 or 55.05% of
total net revenues for the comparable three and six month periods ended
September 30, 2009. The increase in gross profit was attributable to a decrease
in the cost of goods sold as a percentage of sales 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 basic tombs. Foguang was able
to charge higher sales prices as it developed the second phase of the cemetery,
which was on more desirable land. 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
sales prices while keeping the cost of sales relatively constant to achieve
higher profit margins. The new cemetery plots are located
on more desirable property which is higher up on the hill
and has better views of the lake. The new cemetery plots are being sold for
approximately 17% more than the old cemetery plots. The revenue
during the month period ended September 30, 2010 did not increase as compared to
the three month period ended June 30, 2010 because of some seasonality in our
business, since sales are generally slower when the weather becomes extremely
hot.
Operating
Expenses
Total
operating expenses for the three month period ended September 30, 2010 were
$722,728, an increase of $306,957 or 73.83% from total operating expenses in the
three month period ended September 30, 2009 of $415,771. Total operating
expenses for the six month period ended September 30, 2010 were $2,573,451, an
increase of $1,819,467 or 241.05% from total operating expenses in the six
months period ended September 30, 2009 of $753,984. This increase included the
following:
40
For
the three months ended September 30, 2010, selling expenses amounted to $66,274
as compared to $36,421 for the same period ended September 30, 2009, an increase
of $29,853 or 81.97%. For the six months ended September 30, 2010, selling
expenses amounted to $135,199 as compared to $81,341 for the same period ended
September 30, 2009, an increase of $53,853 or 66.21%. Foguang incurred more
selling expenses for the three months and six months ended September 30, 2010
due to the increase in number of cemetery plots sold, as we had more expenses
associated with sales that came with the higher volume. We
signed a contract that allowed us to develop approximately 7,000 plots at a time
versus 500 plots at a time. This increase in the batch of cemetery
plots being developed has decreased costs.
For
the three months ended September 30, 2010, general and administrative expenses
amounted to $656,454 as compared to $379,350 for the same period ended September
30, 2009, an increase of $277,104 or 73.05%. For the six months ended September
30, 2010, general and administrative expenses amounted to $2,438,252 as compared
to $672,643 for the same period ended September 30, 2009, an increase of
$1,765,609 or 262.49%. The substantial increase in expenses was
mainly attributable to the increase in salary and wages and to non-cash stock
for compensation for directors and consultants to the
company. In addition, the cost of gasoline has also increased
which increased Foguang’s transportation costs and costs reimbursed to sales
agents for taking the customers to view the cemetery. 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 67%. In addition,
we incurred additional expenses for being a public company in the United States
for the three month period ended September 30, 2010, which included legal and
auditing expenses.
Income
from Operations
We
reported income from operations of $6,371,340 for the three month period ended
September 30, 2010 as compared to income from operations of $3,459,920 for the
same period ended September 30, 2009, an increase of $2,911,420 or approximately
84.15%. For the six months ended September 30, 2010, income from operations
amounted to $11,841,746 as compared to $7,539,349 for the same period ended
September 30, 2009, an increase of $4,302,397 or 57.07%. The increase in income
from operations was attributable to the increase in the sale of cemetery
plots. In addition, we were able to increase the average price of
cemetery plot as we expanded into new developments, which had a more desirable
location. 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 Foguang’s 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 and Expenses
For
the three months ended September 30, 2010, total other income (expenses)
amounted to ($14,782) as compared to $89,959 for the three months ended
September 30, 2009, a decrease of $104,741 or 116.43% from the comparable period
in 2009. For the six months ended September 30, 2010, total other income
(expenses) amounted to $1,055,700 as compared to $201,702 from the comparable
period in 2009. The change was primarily attributable the
following:
For
the three months ends September 30, 2010, other income amounted to $223,043 as
compared to $81,431 for the three months ended September 30, 2009, an increase
of $141,612 or 173.90%. For the six month period ended September 20,
2010, other income amounted to $340,887 as compared to $184,712 for the six
months ended September 30, 2009, an increase of $156,175 or 84.55%. The change
was primarily attributable to deferred revenue recorded as other income, which
increased with the increase in the sale of cemetery plots over the prior
period.
For
the three months ended September 30, 2010, loss on change in fair value of
warrants classified as derivatives amounted to $269,933 as compared to $0 for
the three months ended September 30, 2009. This change was primarily
attributable to share price changes, which lead to loss on change in fair value
of warrants classified as derivatives. For the six months ended
September 30, 2010, gain on change in fair value of warrants classified as
derivatives amounted to $664,499 as compared to $0 for the six months ended
September 30, 2009. This change was primarily attributable to warrants that were
issued in connection with the sale of company shares in private placement
transaction during February 2010.
For
the three months ended September 30, 2010, interest expense decreased by 17 %
from $59,400 as compared to $50,419 for the three months ended September 30,
2009. For the six months ended September 30, 2010, interest expense
decreased by 10% from $106,675 as compared to $118,000 for the six months ended
September 30, 2009. The change was primarily attributable to the repayment of a
loan in May 2010.
For
the three months ended September 30, 2010, rental income, net amounted to
$59,483 as compared to $65,433 for the three months ended September 30, 2009, a
decrease of $9.09% from the comparable period in 2009. For the six months ended
September 30, 2010, rental income, net amounted to $120,789 as compared to
$130,866 for the six months ended September 30, 2009, a decrease of 7.7 %. This
change was primarily due to depreciation costs decrease as the building is
depreciated over its useful economic life decrease rental
fees.
41
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 Foguang’s 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 Foguang’s cemetery and increased the number of cemeteries sold. The
local economic environment experienced overall improvement in fiscal 2010 due to
the assistance of large-scale state-owned enterprises and their projects in the
Chongqing area.
Park
and Nursery Garden Services
For the
year ended March 31, 2010, we had no revenues for park and nursery garden
services compared to $665,935 in revenues for the year ended March 31,
2009. We did not incur any revenues for fiscal 2010 because Foguang shifted its
focus to the development of its cemetery business. Foguang gradually decreased
the input of its resources on the park and nursery garden business starting from
fiscal year of 2009. We do not expect this trend to change in the next fiscal
year as Foguang continues to focus on developing its cemetery
business.
Cost
of Sales
Cost of
sales includes amortization of land use rights, raw materials, conversion costs,
direct labor, commissions and bonuses, manufacturing costs, and utilities. For
the year ended March 31, 2010, cost of sales amounted to $17,565,765 or
approximately 48.1% of total net revenues as compared to $9,938,853 or
approximately 54.3% of total net revenues for the year ended March 31,
2009. The decrease in cost of sales as a percentage of total net revenues was
primarily due to economies of scale that Foguang achieved in developing more
plots of land, from favorable contract terms with a supplier due to such
supplier’s 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.
42
Gross
Profit
Gross
profit for the year ended March 31, 2010 was $18,933,204 or 51.9% of total
net revenues, as compared to $8,374,867 or 45.7% of total net revenues for the
year ended March 31, 2009. The increase in gross profit was attributable to
a decrease in the cost of goods sold as Foguang was able to develop cemetery
plots for a cheaper price due to the advantage of economies of scale. Foguang
was also able to sell higher margin products since it was able to utilize its
historical sales records to develop and sell higher margin cemetery plots. In
the cemetery industry, the sale of a deluxe tomb is able to generate a 20%
higher margin for Foguang as compared to the simple tombs. As Foguang continues
to develop its cemeteries, it will focus on the development of such deluxe tombs
to achieve higher profit margins. In addition, Foguang utilizes Feng Shui
concepts to develop its cemetery with the best “Feng Shui” to attract more
customers. By having good “Feng Shui”, Foguang is able market its cemetery plots
at higher prices while keeping the cost of sales relatively constant to achieve
higher profit margins.
Operating
Expenses
Total
operating expenses for the year ended March 31, 2010 were $1,792,584, an
increase of $321,109 or 21.8% from total operating expenses in the year ended
March 31, 2009 of $1,471,475. This increase included the
following:
For the
year ended March 31, 2010, advertising and selling expenses amounted to
$196,945 as compared to $426,415 for the year ended March 31, 2009, a
decrease of $229,470 or 53.8%. Foguang spent less on advertising expenses for
the year ended March 31, 2010 due to the ability to focus its advertising
on the channels that have been proven as the most effective. Foguang focused its
advertising on mainstream television shows, such as Chongqing Commercial Daily,
Evening, Morning, and Chongqing TV 12, which have proven to be the most
effective dissemination of advertising to the public. In fiscal 2010, Foguang
also cut back on its television advertisements and print advertisements by 50%
to reduce advertising expenses.
For the
year ended March 31, 2010, general and administrative expenses amounted to
$1,595,639 as compared to $1,045,060 for the year ended March 31, 2009, an
increase of $550,579 or 52.7%. The increase in expenses was mainly attributable
to the increase in costs associated with the increase in sales and costs
associated with using more sales agents. Foguang paid a higher sales commission
to its sales agents in order to stay competitive to industry standards due to
the rapidly increasing labor costs in China. In addition, the cost of gasoline
has also increased which increased Foguang’s 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 Foguang’s 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 Foguang’s 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 (expense) amounted to
$(106,026) as compared to $283,560 for the year ended March 31, 2009, a
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 recognition of deferred revenue from the government’s
contribution of the land use rights for the land underlying Guiyuan
I.
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.
43
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
Six
Months Ended September 30, 2010
For
the six months ended September 30, 2010, net cash provided by operating
activities was $10,613,353, as compared to net cash used in operating
activities of ($1,061,361) for the six months ended September 30, 2009. The
increase was primarily attributable to decreased inventory costs and prepayment
to suppliers.
For
the six months ended September 30, 2010, net cash used in investing activities
was $11,832,041. The increase was primarily attributable to cash paid for
construction in progress – cemetery inventory developed for sale for the six
months ended September 30, 2010 is more than the cash paid for inventory
developed for sales for six months ended September 30, 2009.
During
the second quarter of 2010, the Company’s management modified the strategy for
the development and construction of cemetery plots. Historically, the
cemetery plots were developed in batches of approximately 500 plots, which were
completed on a monthly basis. The walls, roads, and other
infrastructure were only built where necessary for the individual
batch. The Company is now developing approximately 7,000 cemetery
plots simultaneously, along with the related infrastructure.
Details
of the project are as follows:
|
·
|
The term of the contract is
from May 20, 2010 to January 29, 2011 (250
days)
|
|
·
|
The estimated total cost is
approximately $19.6M
|
|
·
|
The Company is required to pay
up to 80% of the project cost, as it is being developed on a monthly
basis
|
|
·
|
The Company will pay an
additional 15% of the project cost when
completed
|
|
·
|
The Company will pay an
additional 2% of the project funds until inspection of the
project
|
|
·
|
The Company will hold back 3%
as a warranty fee for 2 years (no interest accrued) as a warranty, upon
expiration of warranty period the balance of $589,349 recorded
as long-term other payables will be paid under the contract terms to the
developer
|
Upon
final completion of the project, all costs associated with developing walls,
roads, and other infrastructure will be reclassified into
inventory.
For
six months ended September 30, 2010, net cash provided by financing
activities was $140,249 compared to no cash used in or provided by financing
activities for six months ended September 30, 2009. For the three
months ended June 30, 2010, the Company paid off a loan
payable.
We
have one short term loan of approximately $2 million that is due and
payable by March 2011. We plan to use all the funds of approximately $4.6
million from our February 2010 financing to develop the Guiyuan II project.
By the end of fiscal year 2011, 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 Guiyuan 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 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. Foguang’s projected income is
approximately $12 million and $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
$100 million.
44
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 next eighteen months. 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.
Funding
for our business has been provided principally by cash flow from operating
activities before inventory additions, bank borrowings and equity markets. Prior
to fiscal 2009, we used our cash flow from operating activities before inventory
additions, bank borrowings and the proceeds of equity offerings, to develop
additional land for new plots needed to meet the requirements of our
backlog.
In
general, our cash flow from operating activities assumes that, as each plot is
delivered, we will develop a plot site to replace it. Because we own several
years’ supply of plot sites, we do not need to develop plot sites immediately to
replace those which we deliver.
We had
in our inventory 5,130 cemetery plot sites, as compared to approximately 4,540
at March 31, 2010, 2,634 at March 31, 2009 and 6,856 at June 20, 2010, the
high point of our plot sites owned and controlled.
Year
Ended March 31, 2010
For the
year ended March 31, 2010, net cash provided by operating activities was
$9,497,685, as compared to net cash provided by operating activities of
$6,489,196 for the year ended March 31, 2009. The increase was primarily
attributable to the increase in the sales of cemetery plots, offset by costs
incurred to build up inventory.
For the
year ended March 31, 2010, net cash used in investing activities was
$5,998,116 as compared to net cash used in investing activities of $6,988,020
for the year ended March 31, 2009. The decrease was mainly due to a
previous prepayment for trees which the company received in full this year.
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 Guiyuan 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 Guiyuan 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 and other comprehensive services and facilities. We
also plan to resume the entertainment boats project in 2011. So far, $8,682,600
out of the $63,961,200 has been paid for the entertainment boats project and the
remaining balance shall be paid at the completion of the project. We also 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 its free cash
flows, bank loans and the sale of securities or issuance of debt instruments in
addition to our retained earnings. Foguang’s projected income is approximately
US$12 and US$16 million in 2011 and 2012, respectively.
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.
45
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.
There
were no material changes in our contractual obligations in the three months
ended September 30, 2010 from those for the year ended March 31, 2010. 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
shareholder’s 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$1.00 as of July 21, 2005. The People’s
Bank of China announces the closing price of a foreign currency such as USD$
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
People’s 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 People’s 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:
46
September 30,
2010
|
March 31,
2010
|
September 30,
2009
|
March 31,
2009
|
||||||
Balance
sheet items, except for the registered and paid-up capital, as of end of
period/year
|
USD1:
RMB
0.1497
|
USD1:RMB
0.1467
|
USD1:
RMB
0.1465
|
USD1:RMB
0.1465
|
|||||
Amounts
included in the statement of operations, statement of changes in
stockholders’ equity and statement of cash flows for the period/year
ended
|
USD1:
RMB
0.1473
|
USD1:RMB
0.14664
|
USD1:
RMB
0.1463
|
USD1:RMB
0.14582
|
No
representation is made that RMB amounts have been, or would be, converted into
US$ at the above rates.
Inflation
We
believe that inflation has not had a material effect on our operations to
date.
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
September 30, 2010, we had approximately $8,005,000 in cash and cash
equivalents. 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 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 People’s 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 foreign currency gain of $850,962 for the six
months ended September 30, 2010 compared to foreign currency gain of $50,280 for
the same period in 2009. We recorded
net foreign currency gains of $346,088 and $511,749 for the years ended March
31, 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.
47
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
|
|||
S.
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 person’s 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 founded Foguang in
October 2002 and has led the company into one of the 50 largest private
companies in Chongqing. Mr. Ran is also 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. Mr. 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 is responsible for developing Foguang’s
strategic vision and mission, and his knowledge and experience in the death care
industry are invaluable to the Company.
Michael Wang graduated from
University of Texas in 2001 with a master 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 from
April 2002 to January 2005, and started his career as a financial analyst at
Arthur Anderson from September 2001 to April 2002. From July 2007 to November
2008, Mr. Wang worked as the Chief Financial Officer of Snif Labs Inc., a
RFID technology company based in Massachusetts, and from January 2005 to June
2005 served as a special consultant to the CEO of JTec Inc., a software company
based in Beijing, where he provided mergers and acquisitions and growth strategy
services. Mr. Wang’s accounting and financial background in the United States
and his working knowledge of U.S. GAAP offers a good balance to Foguang which is
based in China.
48
Jianquan Chen helped founded
Foguang with Mr. Ran. As Foguang’s General Manager, Mr. Chen has managed Foguang
alongside Mr. Ran for over 8 years and is responsible for Foguang’s
overall operation and management, including formulating its current strategic
plan. Mr. Chen also serves as the Vice President, Deputy Chairman and Senior
Engineer of Foguang. As such, Mr. Chen’s years of working with Mr. Ran and other
key employees of Foguang are crucial to the company’s long-term development. Mr.
Chen graduated from Wuhan University of Electric Engineering in 1996 with a
major in Construction Engineering. Mr. Chen has been the Vice President of
the Chamber of Industry and Commerce of Jiangnan Town since March 2007, and
served as the chief engineer of Chongqing Shenglin Architectural Engineering
Co., Ltd. from March 2002 to April 2004.
Tim Hudson is currently the
University of Houston System Chancellor's Special Assistant for International
Initiatives and Programs. He was President of the University of Houston-Victoria
from September 2004 to September 2010. Previously, Dr. Hudson served as provost
and founding dean of the College of International and Continuing Education at
the University of Southern Mississippi from August 1987 to August 2004.
Prior to that, he was an analyst for the U. S. Department of State from December
1983 to August 1985. Hudson received his Ph.D. in Geography from Clark
University in Worcester, Massachusetts in 1980. Dr. Hudson has initiated more
than 40 study-abroad programs worldwide including China and Japan. In 2001, he
was invited as the sole U.S. representative to serve on the European
Commission's Millennium Committee, which was responsible for producing a
strategic plan for European higher education for the next decade. Dr. Hudson's
familiarity with U.S. regulations and relations in the United States is valuable
to Foguang, a company based in China.
S. Michael Rudolph is a
founder and currently chief financial officer and managing member of Viking
Asset Management, LLC, and an investment advisor to Longview Fund, LP and
Longview Fund International, Ltd. (BVI). Previously, Mr. Rudolph served as
the president of The Edgehill Group, Inc. from July 1995 to December 2000, and
held various senior management positions with Charles Schwab’s Institutional
Trading Division, Bank of America and Wells Fargo Bank between June 1986 and
June 1995. Mr. Rudolph also served on several boards of directors,
including ElectroSource, LLC and the Stanford University Medical Center Stroke
Advisory Board. Mr. Rudolph received his Bachelor’s degree in Biochemistry
from Purdue University in 1973 and a Master of Business Administration degree
from Washington University in St. Louis in 1975. The Company believes that Mr.
Rudolph’s experience in the financial services industry can assist the Company
in better understanding and adapting 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 100 million in building these
three plants. Mr. Zhang also serves as vice chairman of Zhejiang Commercial
Association and is responsible for public relations between the Zhejiang
Commercial Association and other government agencies in other provinces,
including Taiwan and Hong Kong. Mr. Zhang also has served as a member of
Political Consultant Conference in Songxi, Fujiang Province from January 2003 to
present. Mr. Zhang received his professional degree from Hangzhou Water
Resources and Hydropower Professional School in 1980. The Company believes that
Mr. Zhang’s experience with Chinese companies and public relations can help
guide Foguang’s continuing growth in China.
Ray Hsu 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. Prior to joining NI in March 2010, Mr. Hsu
was the vice president and founding member of @hand Corporation from January
1999 to March 2010, and was 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 from October 1994 to December 1998. He was
awarded three U.S. patents for his work related to detecting and merging
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. With his
corporate work experience and as a bilingual in Mandarin Chinese and English,
Mr. Hsu can bridge the cultural and language gaps between Foguang’s China-based
management and the Company’s 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.
49
Board
Committees; Director Independence
Effective
May 1, 2010, our board of directors established an audit committee, a
nominating committee and a compensation committee.
Audit
Committee
Currently,
three directors comprise the Audit Committee: Michael Rudolph, Ray Hsu and Tim
Hudson. Mr. Rudolph serves as Chairman of the Audit Committee. The members
of the Audit Committee are currently “independent directors” as that term is
defined under the listing standards of both the American Stock Exchange and the
NASD Marketplace Rules. Mr. Rudolph also qualifies as an “audit committee
financial expert” as defined by the rules of the SEC. Mr. Rudolph has the
requisite attributes of an “audit committee financial expert” as defined by
regulations promulgated by the SEC and that such attributes were acquired
through relevant education and experience.
Our Audit
Committee is responsible, in accordance with the Audit Committee charter,
recommending our independent auditors, and overseeing our audit activities and
certain financial matters to protect against improper and unsound practices and
to furnish adequate protection to all assets and records.
Our Audit
Committee pre-approves all audit and non-audit services provided by our
independent auditors. These services may include audit services, audit-related
services, tax services and other services. Pre-approval is generally provided
for up to one year and any pre-approval is detailed as to particular service or
category of services and is generally subject to a specific budget. The Audit
Committee has delegated pre-approval authority to its Chairman when expedition
of services is necessary. The independent auditors and management are required
to periodically report to the full Audit Committee regarding the extent of
services provided by the independent auditor in accordance with this
pre-approval, and the fees for the services performed to date.
Compensation
Committee
The
Compensation Committee currently consists of Dr. Hudson, Mr. Rudolph
and Mr. Zhang. Dr. 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 Committee’s 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 Company’s
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 Committee’s 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 Company’s 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.
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.
50
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 Company’s
officers and directors, and persons who own more than ten percent of a
registered class of the Company’s 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 Company’s 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, Dr. 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 executive’s 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 employee’s performance and
determine his or her compensation for the following year. In the case of our
executive officers, the Compensation Committee similarly evaluates the
executive’s 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 |
51
(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 12,
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 have 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 stockholder’s 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
Company’s 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 the agreements, Dr. Hudson,
Mr. Rudolph, Mr. Zhang and Mr. Hsu shall be entitled to the
annual compensation of 12,500 shares of the Company’s 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 officer’s
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
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 shareholder’s 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 December 8, 2010.
52
Number of
|
||||||||
Shares
|
Percentage of
|
|||||||
beneficially
|
class beneficially
|
|||||||
Named executive officers and directors:
|
owned
|
owned
|
||||||
Yiyou
Ran (1)
|
7,150,000 | (1) | 56.4 | % | ||||
Michael
Wang (2)
|
30,000 | * | % | |||||
Jianquan
Chen (1)
|
7,150,000 | (1) | 56.4 | % | ||||
Tim
Hudson (3)
|
102,500 | * | % | |||||
Michael
Rudolph (4)
|
12,500 | * | % | |||||
Lihua
Zhang (5)
|
12,500 | * | % | |||||
Ray
Hsu (6)
|
12,500 | * | % | |||||
All
directors and executive officers as a group (7 persons)
|
7,320,000 | (1) | 57.8 | % | ||||
5%
Shareholders:
|
||||||||
Holy
Golden Industry Limited (1)
|
7,150,000 | (1) | 56.4 | % |
*
|
Less
than 1%.
|
(1)
|
The
address of Holy Golden Industry Limited (“Holy Golden”) is Scotia Centre,
4th Floor, P.O. Box 2804, George Town, Grand Cayman KY 1-1112, Cayman
Islands. The shareholders of Holy Goldenare Yiyou Ran (24.00%), Jianquan
Chen (27.9%), Chaoyang Fu (16.74%), Yang Chen (24.36%) and Mingsheng Liu
(7.00%), with Yiyou Ran, Jianquan Chen and Yang Chen also as its
directors. As such they are deemed to have or share investment control
over Holy Golden’s 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. Wang’s
address is: 2500 Citywest Boulevard, Suite 304, Houston, Texas
77402.
|
(3)
|
Dr. Hudson’s
address is: 3007 North Ben Wilson, Victoria, Texas
77901.
|
(4)
|
Mr. Rudolph’s
address is: 1435 Alvarado Ave., Burlingame, California
94010.
|
(5)
|
Mr. Zhang’s
address is: No. 4, Row 1, Wenquan Garden, Wuyi, Zhejiang Province,
P.R.C 321200.
|
(6)
|
Mr. Hsu’s
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:
53
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 $1,437,120, $1,408,320
and $1,406,400 in prepayments to Chongqing Kun Yu Stone Co., Ltd. (“Kun Yu”), a related
party, as of September 30, 2009, March 31, 2010 and 2009, respectively. The
shareholders of Kun Yu and their respective interests in Kun Yu are: Mingsheng
Liu (51%), Yongsheng Xie (30%) and Yang Chen (19%). Mr. Yang Chen and Mr.
Mingsheng Liu also hold a 24.36% and 7% interest in Foguang,
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.
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.
54
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 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 Registrant’s 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
Market
Information
The
Company’s 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.
High
|
Low
|
|||||||
Quarter
ended September 30, 2010
|
$ | 4.25 | $ | 2.95 | ||||
Quarter
ended June 30, 2010
|
6.60 | 2.80 | ||||||
Quarter
ended March 31, 2010
|
$ | $ | ||||||
Quarter
ended December 31, 2009
|
||||||||
Quarter
ended September 30, 2009
|
||||||||
Quarter
ended June 30, 2009
|
||||||||
Quarter
ended March 31, 2009
|
$ | $ |
As of
December 8, 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
December 8, 2010, there were approximately 42 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 agent’s address is 17 Battery Place, 8th Floor,
New York, New York 10004 and its phone number is (212)
845-3299.
Dividends
We have
never paid cash dividends on our common stock. We intend to keep future
earnings, if any, to finance the expansion of our business, and we do not
anticipate that any cash dividends will be paid in the foreseeable future. Our
future payment of dividends will depend on our earnings, capital requirements,
expansion plans, financial condition and other relevant factors that our board
of directors may deem relevant. Our retained earnings deficit currently limits
our ability to pay dividends.
55
Recent
Sales of Unregistered Securities
The
following is a summary of our transactions during the last three years involving
sales of our securities that were not registered under the Securities Act of
1933, as amended (the “Act”):
On
March 1, 2009, we entered into an agreement with a consultant to provide
investor relations related consulting services for the Company. Under the terms
of the agreement, compensation to the consultant includes an issuance of 60,000
shares of our common stock, which shares were issued to the consultant on April
2, 2010. The issuance of these securities was exempt under Section 4(2) under
the Act, as it was a transaction by the Company not involving any public
offering.
On
February 10, 2010, we entered into an agreement with a consultant to provide
public relations related consulting services for the Company. Under the terms of
the agreement, compensation to the consultant was an issuance of 250,000 shares
of our common stock, which shares were issued to the consultant on April 2,
2010. The issuance of these securities was exempt under Section 4(2) under the
Act, as it was a transaction by the Company not involving any public
offering.
On
February 23, 2010, we sold and issued to 24 investors 1,402,262 shares of
Common Stock (the “Shares”) and Warrants
to purchase 701,126 shares of Common Stock. The Shares and Warrants were issued
to accredited investors in a private placement transaction exempt from
registration under the Act, pursuant to Rule 506 of Regulation D
promulgated thereunder. Neither the Shares nor the Warrants have been registered
under the Securities Act or applicable state securities laws and may not be
offered or sold in the United States absent registration under the Securities
Act and applicable state securities laws or an applicable exemption from
registration requirements. We also issued warrants to purchase up to 70,113
shares of Common Stock to our placement agent for this transaction and its
assignees.
On
February 12, 2010, we issued 8,800,000 shares of our common stock to the
Cayman Shareholder in exchange for 100% of the capital stock of Gold Industry.
The issuance of the common stock to the Cayman Shareholder was exempt from
registration pursuant to Regulation S under the Act. We made this
determination based on the representations of the Cayman Shareholder, which
included, in pertinent part, that such shareholder was not a “U.S. person” as
that term is defined in Rule 902(k) of Regulation S under the Act, and that
such shareholder was acquiring the common stock for investment purposes for its
own account and not as nominee or agent, and not with a view to the resale or
distribution thereof, and that such shareholder understood that the shares of
common stock may not be sold or otherwise disposed of without registration under
the Act or an applicable exemption therefrom.
In
February 2009, we issued 375,000 shares of common stock to an individual at
$0.02 per share. The shares were issued under an exemption from
registration of Section 4(2) of the Act.
Equity
Compensation Plan Information
The
Company did not have any equity compensation plans as of March 31, 2010 and
2009.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
As
reported in a Current Report on Form 8-K filed with the SEC on April 8,
2010, we changed our independent accountants from Webb & Company, P.A. to
PMB Helin Donovan, LLP effective April 5, 2010.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION
FOR
SECURITIES ACT LIABILITIES
Delaware
Law
Section 145
of the Delaware General Corporation Law authorizes a court to award, or a
corporation’s 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
person’s 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
person’s conduct was unlawful.
56
(b) A
corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys’
fees) actually and reasonably incurred by the person in connection with the
defense or settlement of such action or suit if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the 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 person’s 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 person’s 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.
57
(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 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 corporation’s 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 Commission’s website at
http://www.sec.gov. You may also read and copy any document we file at the
Securities and Exchange Commission’s 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.
58
CHINA
REDSTONE GROUP, INC.
Consolidated
Financial Statements
TABLE OF CONTENTS
PAGE
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2010 (unaudited) and March 31,
2010
|
60
|
Consolidated Statements of Operations and
Comprehensive Income for the Three and Six Months Ended September 30, 2010
and 2009 (unaudited)
|
61
|
Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2010 and 2009
(unaudited)
|
62
|
Notes to the Condensed Consolidated Financial
Statements as of September 30, 2010 and 2009
(unaudited)
|
63
|
Report of Independent Registered Public
Accounting Firm
|
76
|
Consolidated Balance
Sheets
|
77
|
Consolidated Statements of Operations and
Comprehensive Income for the Years Ended March 31, 2010 and
2009
|
78
|
Consolidated Statements of Stockholders’
Equity
|
79
|
Consolidated Statements of Cash Flows for the
Years Ended March 31, 2010 and 2009
|
80
|
Consolidated Notes to the Financial Statements
as of March 31, 2010 and 2009
|
81
|
59
CHINA
REDSTONE GROUP, INC
CONSOLIDATED
BALANCE SHEETS
September 30,
2010
|
March 31,
2010
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 8,005,280 | $ | 9,367,276 | ||||
Inventory
|
13,209,870 | 11,194,905 | ||||||
Construction
in progress - cemetery property
|
11,832,041 | - | ||||||
Other
current assets
|
- | 2,430 | ||||||
TOTAL
CURRENT ASSETS
|
33,047,191 | 20,564,611 | ||||||
PROPERTY
AND EQUIPMENT, NET
|
7,171,687 | 7,241,174 | ||||||
OTHER
NON-CURRENT ASSETS
|
||||||||
Costs
incurred for real estate projects in progress
|
8,682,600 | 10,122,300 | ||||||
Related
party receivable
|
1,437,120 | 1,408,320 | ||||||
Prepaid
lease expense
|
784,232 | 787,412 | ||||||
Intangible
assets , net
|
11,758,545 | 11,787,903 | ||||||
TOTAL
OTHER NON-CURRENT ASSETS
|
22,662,497 | 24,105,935 | ||||||
TOTAL
ASSETS
|
$ | 62,881,375 | $ | 51,911,720 | ||||
LIABILITIES
& STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 110,070 | $ | 113,197 | ||||
Welfare
payable
|
99,049 | 97,064 | ||||||
Taxes
payable
|
1,655,381 | 1,441,490 | ||||||
Other
accrued payables
|
68,370 | 76,507 | ||||||
Current
portion of deferred revenue
|
436,431 | 425,000 | ||||||
Accrued
inventory purchases
|
- | 443,036 | ||||||
Short-term
notes payable
|
2,076,339 | 2,474,829 | ||||||
Warrant
derivative liability
|
701,827 | 1,366,326 | ||||||
TOTAL
CURRENT LIABILITIES
|
5,147,467 | 6,437,449 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Long-term
other payables
|
589,349 | - | ||||||
Deferred
revenue
|
9,587,343 | 9,625,403 | ||||||
TOTAL
LONG-TERM LIABILITIES
|
10,176,692 | 9,625,403 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
- | - | ||||||
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; 12,672,262 and
12,402,262 shares issued and outstanding, respectively
|
12,673 | 12,402 | ||||||
Additional-paid-in
capital
|
16,826,897 | 15,488,593 | ||||||
Retained
earnings
|
27,680,674 | 18,161,863 | ||||||
Accumulated
other comprehensive income
|
3,036,972 | 2,186,010 | ||||||
TOTAL
STOCKHOLDERS' EQUITY
|
47,557,216 | 35,848,868 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 62,881,375 | $ | 51,911,720 |
The
accompanying notes are an integral part of these consolidated financial
statements.
60
CHINA
REDSTONE GROUP, INC.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three
months ended
September 30,
2010
|
For the three
monts ended
September 30,
2009
|
For the six
months ended
September 30,
2010
|
For the six
months ended
September 30,
2009
|
|||||||||||||
REVENUE
|
$ | 11,581,873 | $ | 6,746,388 | $ | 23,676,460 | $ | 15,063,916 | ||||||||
COST
OF GOODS SOLD
|
4,487,805 | 2,870,697 | 9,261,263 | 6,770,583 | ||||||||||||
GROSS
PROFIT
|
7,094,068 | 3,875,691 | 14,415,197 | 8,293,333 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Selling
expenses
|
66,274 | 36,421 | 135,199 | 81,341 | ||||||||||||
General
& administrative expenses
|
656,454 | 379,350 | 2,438,252 | 672,643 | ||||||||||||
TOTAL
OPERATING EXPENSES
|
722,728 | 415,771 | 2,573,451 | 753,984 | ||||||||||||
INCOME
FROM OPERATIONS
|
6,371,340 | 3,459,920 | 11,841,746 | 7,539,349 | ||||||||||||
OTHER
INCOME (EXPENSES)
|
||||||||||||||||
Other
income
|
223,043 | 81,431 | 340,887 | 184,712 | ||||||||||||
Gain
on change in fair value of warrants classified as
derivatives
|
(269,933 | ) | - | 664,499 | - | |||||||||||
Interest
expenses
|
(50,419 | ) | (59,400 | ) | (106,675 | ) | (118,800 | ) | ||||||||
Interest
income
|
23,044 | 2,495 | 38,812 | 4,924 | ||||||||||||
Rental
income, net
|
59,483 | 65,433 | 120,789 | 130,866 | ||||||||||||
Non-operating
expenses
|
- | - | (2,612 | ) | - | |||||||||||
TOTAL
OTHER INCOME (EXPENSES)
|
(14,782 | ) | 89,959 | 1,055,700 | 201,702 | |||||||||||
INCOME
BEFORE INCOME TAXES
|
6,356,558 | 3,549,879 | 12,897,446 | 7,741,051 | ||||||||||||
INCOME
TAXES
|
(1,634,562 | ) | (815,721 | ) | (3,378,635 | ) | (1,853,291 | ) | ||||||||
NET
INCOME
|
$ | 4,721,996 | $ | 2,734,158 | $ | 9,518,811 | $ | 5,887,760 | ||||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
Foreign
currency translation
|
694,332 | 31,327 | 850,962 | 50,280 | ||||||||||||
COMPREHENSIVE
INCOME
|
$ | 5,416,328 | $ | 2,765,485 | $ | 10,369,773 | $ | 5,938,040 | ||||||||
EARNINGS
PER SHARE:
|
||||||||||||||||
EARNINGS
PER SHARE - BASIC
|
$ | 0.37 | $ | 0.31 | $ | 0.75 | $ | 0.67 | ||||||||
EARNINGS
PER SHARE - DILUTED
|
$ | 0.37 | $ | 0.31 | $ | 0.75 | $ | 0.67 | ||||||||
WEIGHTED
AVERAGE SHARES OUTSTANDING - BASIC
|
12,672,262 | 8,800,000 | 12,663,929 | 8,800,000 | ||||||||||||
WEIGHTED
AVERAGE SHARES OUTSTANDING - DILUTED
|
12,672,262 | 8,800,000 | 12,663,929 | 8,800,000 |
The
accompanying notes are an integral part of these consolidated financial
statements.
61
CHINA
REDSTONE GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the six
months ended
September 30,
2010
|
For the six
months ended
September 30,
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
Income
|
$ | 9,518,811 | $ | 5,887,760 | ||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
178,720 | 161,465 | ||||||
Gain
on change in fair value of warrants classified as
derivatives
|
(664,499 | ) | - | |||||
Stock
issued for consulting services
|
1,220,450 | - | ||||||
Stock
issued for board of director fees
|
118,126 | - | ||||||
Changes
in assets and liabilities:
|
- | |||||||
Accounts
receivable
|
- | 61,468 | ||||||
Inventory
|
189,219 | (2,334,934 | ) | |||||
Prepaid
lease expense
|
2,662 | - | ||||||
Other
currents assets
|
- | 30 | ||||||
Prepayments
to related party supplies
|
- | (4,841,130 | ) | |||||
Accounts
payable
|
(29,940 | ) | 29,609 | |||||
Taxes
payable
|
184,412 | (29,062 | ) | |||||
Other
accrued payables
|
(9,702 | ) | 3,433 | |||||
Accrued
inventory purchases
|
(452,097 | ) | - | |||||
Deferred
revenue
|
(232,158 | ) | - | |||||
Net
cash provided by (used in) operating activities
|
10,613,353 | (1,061,361 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Construction
in progress - cemetery property
|
(11,832,041 | ) | - | |||||
Net
cash used in investing activities
|
(11,832,041 | ) | - | |||||
CASH
FLOWS FROM FINANCING ACTIVITY:
|
||||||||
Long-term
other payables
|
589,349 | - | ||||||
Payment
on note payable
|
(449,100 | ) | - | |||||
Net
cash provided by financing activities
|
140,249 | - | ||||||
Net
decrease in cash and cash equivalents
|
(1,667,788 | ) | (1,061,361 | ) | ||||
Effects
of foreign exchange
|
305,792 | 1,902 | ||||||
Cash
and cash equivalents, beginning of period
|
9,367,276 | 1,392,961 | ||||||
Cash
and cash equivalents, end of period
|
$ | 8,005,280 | $ | 333,502 | ||||
SUPPLIMENTAL
INFORMATION
|
||||||||
Interest
paid
|
$ | 109,052 | $ | 59,552 | ||||
Taxes
paid
|
$ | 3,463,456 | $ | 1,034,519 |
The
accompanying notes are an integral part of these consolidated financial
statements.
62
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
NOTE
1 - BASIS OF PRESENTATION
China
Redstone Group, Inc. (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 Company’s 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 12, 2010, the Company entered into a share exchange agreement (the
“Exchange Agreement”) with Gold Industry Limited, a Cayman Island company (“Gold
Industry”), and the holders of 100% of Gold Industry’s issued and outstanding
capital stock (the “Cayman Shareholder”), pursuant to which the Company agreed
to issue an aggregate of 8,800,000 shares of its common stock, par value
$0.001 per share (the “Common Stock”) to the Cayman Shareholder in exchange for
all of the issued and outstanding capital stock of Gold Industry (the “Share
Exchange”). On February 12, 2010, the Share Exchange closed and Gold
Industry became the Company’s wholly-owned subsidiary. On April 6, 2010, in
connection with the Share Exchange, the Company changed its name to “China
Redstone Group, Inc.” to better reflect its business
operations.
All of
the Company’s 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
Company’s chairman and chief executive officer, and Mr. Jianquan Chen, a Company
director, are directors of Gold Industry, Gold Holy, Ran Ji and Foguang. Messrs.
Ran and Chen are also shareholders and directors of Holy Golden Industry
Limited, a British Virgins Island company which currently owns approximately 56%
of the Company’s issued and outstanding common stock. Through these contractual
arrangements, the Company has the ability to substantially influence Foguang’s
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 Foguang’s 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 Foguang’s 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 Foguang’s results, assets and liabilities in the accompanying
consolidated financial statements.
63
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
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 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 Arrangements would detrimentally affect the Company’s 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 People’s Republic of China (“China” or the “PRC”) on December 15, 2009,
as a wholly foreign owned enterprise (“WFOE”), with registered capital of
$25,000,000 USD, of which the first $3,000,000 USD has been contributed and the
balance due within two years. Foguang is a PRC limited liability company
established on October 10, 2002 with registered capital of 100,000,000 Renminbi.
Foguang is engaged in selling death care products, and holds the licenses and
approvals necessary to operate its business in China.
All of
the Company’s business operations are carried out by Foguang in the PRC. The
Company’s fiscal year-end is March 31st.
NOTE
2 – ORGANIZATION AND DESCRIPTION OF BUSINESS
The
interim unaudited consolidated financial statements include herein, presented in
accordance with US GAAP principles and stated in US Dollars have been prepared
by the Company, without audit, pursuant to the rules and regulations of the SEC.
Certain information and footnote disclosers normally included in the financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading.
These
statements reflect all adjustments, consisting of normal recurring adjustments,
which, in the opinion of management, are necessary for fair presentation of the
information contained therein. It is suggested that these consolidated interim
financial statements be read in conjunction with the consolidated financial
statements of the Company for the period ended March 31, 2010 and notes thereto
included in the Company’s Form 10-K. The Company follows the same accounting
policies in the preparation of consolidated interim reports. Results of
operations for the interim periods are not indicative of annual
results.
The
accompanying consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America
(“GAAP”). The Company’s functional currency is the Chinese Renminbi (“RMB”);
however, the accompanying consolidated financial statements have been
re-measured, translated and presented in United States Dollars
($).
Foreign
Currency Translation
The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of the Company’s Chinese subsidiaries is the
Renminbi, the official currency of the People’s Republic of China, (“RMB”).
Capital accounts of the consolidated financial statements are translated into
United States dollars from RMB at their historical exchange rates when the
capital transactions occurred. Assets and liabilities are translated at the
exchange rates as of the balance sheet date. Income and expenditures are
translated at the average exchange rates for the three month period ended
September 30, 2010 and 2009. A summary of the conversion rates for the periods
presented is as follows:
September 30,
|
||||||
2010
|
2009
|
|||||
Quarter
end RMB: U.S. dollar exchange rate
|
6.6800
|
6.8248
|
||||
Average
year-to-date RMB: U.S. dollar exchange rate
|
6.7879
|
6.8345
|
The
RMB is not freely convertible into foreign currency and all foreign exchange
transactions must take place through PRC authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into United States dollars at the rates applied in the
translation.
64
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies is presented to assist the
understanding of the Company’s consolidated financial statements. The
consolidated financial statements and notes are presentations of the Company’s
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 12, 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
Company’s consolidated financial statements reflect the activities of the
Company and the following subsidiaries and VIE:
Subsidiaries/VIE
|
Incorporated in
|
Percentage of 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
|
Recent Accounting
Pronouncements
In the
first quarter of fiscal 2011, we adopted the following accounting standards,
none of which had a material impact on our financial position, results of
operations or cash flows:
|
·
|
The amendments to the
recognition and measurement guidance for the transfers of financial
assets. The amendments in this update are the result of
formerly, FASB Statement No. 166, Accounting for Transfers of
Financial Assets.
|
|
·
|
The amendment to the
guidelines for determining the primary beneficiary in a variable interest
entity and for improvements to financial reporting by enterprises involved
with variable interest
entities.
|
|
·
|
The accounting standard
improving disclosures about recurring and nonrecurring fair value
measurements.
|
|
·
|
The amendment to the
accounting and reporting guidance for noncontrolling interests and changes
in ownership interests of a
subsidiary.
|
Accounting Standards Issued
But Not Yet Adopted
In
July 2010, the Financial Accounting Standards Board (“FASB”) issued an
accounting standard update, Receivables (Topic 310): Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses.
This Update is intended to provide additional information to assist financial
statement users in assessing an entity’s credit risk exposures and evaluating
the adequacy of its allowance for credit losses. The disclosures as of the end
of a reporting period are effective for interim and annual reporting periods
ending on or after December 15, 2010 or our second quarter of fiscal 2011. We
are currently evaluating the impact this update will have on our consolidated
financial statements.
65
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Other
recent accounting pronouncements issued by the FASB, the American Institute of
Certified Public Accountants, and the SEC did not or are not believed by
management to have a material impact on the Company's consolidated financial
statements.
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 Company’s indirect
wholly owned subsidiary, Ran Ji, absorbs a majority of the risk of loss from the
activities of Foguang, and enable the Company to receive a majority of Foguang’s
expected residual returns. Accordingly, the Company accounts for Foguang as a
VIE.
Because
the Company and Foguang are under common control, the initial measurement of the
assets and liabilities of Foguang for the purpose of consolidation by the
Company is at book value. Neither the Company nor any of its subsidiaries has
had any other business activities except for entering into the Contractual
Arrangements with Foguang and its shareholders. For the purpose of presenting
the financial statements on a consistent basis, the consolidated financial
statements are prepared as if the Company had been in existence since April 1,
2007 and throughout each of the two year periods ended March 31, 2010 and period
ended September 30, 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 Company’s 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 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 entity’s own assumptions (unobservable inputs). The
hierarchy consists of three levels:
|
·
|
Level one — Quoted market
prices in active markets for identical assets or
liabilities;
|
|
·
|
Level two — Inputs other than
level one inputs that are either directly or indirectly observable;
and
|
|
·
|
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 amounts
|
||||||||||||||||||
Financial instruments
|
Level 1
|
Level 2
|
Level 3
|
September 30,
2010
|
March 31,
2010
|
|||||||||||||||
Liabilities:
|
||||||||||||||||||||
Derivative instruments −
Warrants
|
$ | — | $ | 701,827 | $ | — | $ | 701,827 | $ | 1,366,326 | ||||||||||
Total
|
$ | — | $ | 701,827 | $ | — | $ | 701,827 | $ | 1,366,326 |
66
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
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, during the year ended March 31,
2010. 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
Company’s common stock or securities exercisable, convertible or exchangeable
for the Company’s 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. As of September 30,
2010, the Company recorded a gain of $664,499 for the re-measurement of the
derivative liability.
The
Company estimates the fair value of the warrants using the Black-Scholes option
pricing model using the following assumptions:
Warrants
|
Underwriter
Warrants
|
|||||||
September 30,
2010
|
September 30,
2010
|
|||||||
Market
price and estimated fair value of common stock:
|
$ | 3.44 | $ | 2.80 | ||||
Exercise
price:
|
$ | 4.10 | 4.10 | |||||
Expected
term (years):
|
3.39 | 3.39 | ||||||
Dividend
yield:
|
– | – | ||||||
Expected
volatility:
|
41 | % | 41 | % | ||||
Risk-free
interest rate:
|
1.68 | % | 1.68 | % |
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.
Financial Instruments, The
carrying values of the Company’s 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
management’s 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 customer's financial condition,
generally without collateral. Exposure to losses on receivables is principally
dependent on each customer's financial condition. The Company periodically
reviews its trade receivables in determining its allowance for doubtful
accounts. The Company maintains certain amounts of its cash at state-owned banks
in the PRC and has some cash on hand. The total cash balances maintained in
accounts at these state-owned banks are not insured. The Company has not
experienced any losses on such accounts.
The
company maintains additional cash in a US Bank which, at times, may exceed
federally insured limits. The amount in excess of the federally insured limits
was $560,514 and $2,703,253 at September 30, 2010 and March 31, 2010,
respectively.
67
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
As the
Company's 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 Company's results of
operations may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, among other things.
In
addition, all of the Company's 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.
Inventory
Inventory
is stated at the lower of cost or fair value, as determined in accordance with
U.S. generally accepted accounting principles (“GAAP”), specifically ASC
360-10. In addition to direct land acquisition, land development and plot
development costs, when applicable costs also include interest, any real estate
taxes and direct overhead related to development and construction, which are
capitalized to inventory during periods beginning with the commencement of
development and ending with the completion of construction. If any cemetery
sections are temporarily closed, no additional interest is allocated to that
specific area plot inventory until it re-opens, and other carrying costs are
expensed as incurred. Once a parcel of land has been approved
for development and we open the plots for sale, it can typically take
several more years to fully develop, sell and deliver all the plots. Longer or
shorter time periods are possible depending on the number of plot sites in a
section and the sales and delivery pace of the plots. Our cemetery may take up
to ten years or more to complete. Because our inventory is considered a
long-lived asset under GAAP, we are required to regularly review the carrying
value of each of our plots and write down the value of those plots for
which we believe the values are not recoverable.
When the profitability of
an area of plots deteriorates, the sales pace declines significantly or some
other factor indicates a possible impairment in the recoverability of the asset,
the asset is reviewed for impairment by comparing the estimated future
undiscounted cash flow for the plot to its carrying value. If the estimated
future undiscounted cash flow is less than the designated area plots’ carrying
value, the carrying value is written down to its estimated fair value. Estimated
fair value is primarily determined by discounting the estimated future cash
flow. The impairment is charged to cost of revenues in the period in which the
impairment is determined. In estimating the future undiscounted cash flow of an
area of plots, we use various estimates such as: (a) the expected sales
pace in a community, based upon general economic conditions that will have a
short-term or long-term impact on the market in which the community is located
and on competition within the market, including the number of plot sites
available and pricing and incentives being offered by us or by other cemeteries;
(b) the expected sales prices and sales incentives to be offered on the
plots; (c) costs expended to date and expected to be incurred in the
future, including, but not limited to, land and land development costs, plot
construction costs, interest costs and overhead costs; and
(d) alternative uses for the property.
Construction in progress –
cemetery property
Construction
in progress – cemetery property includes the costs of materials, labor and
overhead costs associated with constructing walls, roads and other
infrastructure costs in the Company’s cemetery. Upon completion of
the project, the capitalized construction in progress costs will be
allocated and reclassified to inventory.
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.
68
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Article
12 of the PRC’s 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 PRC’s 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. Foguang’s 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
approximately $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 and Cost
Recognition
The
Company recognizes revenue when the amount of revenue can be reliably measured,
it is probably that economic benefits will flow to the entity and specific
criteria have been met for the Company’s revenue producing activities. Four
basic criteria 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 management's judgments regarding the fixed
nature of the selling prices of the products and services delivered and the
collectability of those amounts.
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 Company’s 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.
The
construction time of the Company plots is generally less than one year, although
some plot areas may take more than one year to complete. Revenues and cost of
revenues from these plot sales are recorded at the time each plot is delivered
and title and possession are transferred to the buyer.
For
standard plots, land, land development and related costs, incurred and estimated
to be incurred in the future, are amortized to the cost of plots closed based
upon the total number of plots to be constructed in each area. Any changes
resulting from a change in the estimated number of plots to be constructed or in
the estimated costs subsequent to the commencement of delivery of plots are
allocated to the remaining undelivered plots in the area. Plot construction and
related costs are charged to the cost of plots closed under the specific
identification method. The estimated land, common area development and related
costs of a cemetery area, including the cost of the surrounding grounds, net of
their estimated residual value, are allocated to individual cemetery plot areas
within the cemetery on a relative sales value basis. Any changes resulting from
a change in the estimated number of plots to be constructed or in
the estimated costs are allocated to the remaining plot sites in each of
the area of overall cemetery.
Any
changes resulting from a change in the estimated total costs or revenues of the
project are allocated to the remaining units to be delivered.
Sales
Incentives: In order to promote sales of the Company’s plots,
the Company grants cemetery plot buyers sales incentives from time-to-time.
These incentives will vary by type of incentive and by amount on cemetery
area-by-area and plot-by-plot basis. Incentives that impact the value of the
plot or the sales price paid, such as special or additional options are
generally reflected as a reduction in sales revenues. Incentives that we pay to
an outside sales representative are recorded as an additional cost of
revenues. Incentives are recognized at the time the plot is delivered to the
plot buyer and we receive the sales proceeds.
Advertising
Advertising
is expensed as incurred. Advertising expenses were included in selling
expenses. Advertising expense amounted to $135,199 and $81,341 for
the periods ended September 30, 2010 and 2009,
respectively.
69
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Foreign currency
translation
As of
September 30, 2010 and March 31, 2010, 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.
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 periods ended September 30, 2010 and 2009.
Cash
flow from the Company's 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).
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
Company’s 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 on the Consolidated Statements of
Income and Comprehensive Income.
Reclassifications
Certain
prior year items have been reclassified to conform to the current year
presentation. These reclassifications had no impact on the Company’s
consolidation financial statements.
NOTE
4 – INVENTORY
Cemetery
plots and other inventories, net of reserves, at September 30, 2010 and March
31, 2010, consists of the following:
|
|
Six Months
Ended 9/30/10
|
Year Ended
3/31/10
|
|
||||
Basic
plots
|
$
|
1,001,841
|
981,764
|
|||||
Standard
plots
|
7,152,878
|
6,842,800
|
||||||
Deluxe
plots
|
1,943,349
|
1,929,406
|
||||||
Artist
plots
|
3,108,230
|
1,437,490
|
||||||
Supplies
|
3,572
|
3,445
|
||||||
Total
|
$
|
13,209,870
|
$
|
11,194,905
|
70
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
NOTE
5 – WORK IN PROGRESS – CEMETERY PROPERTY
Work
in progress – cemetery property at September 30, 2010 and March 31, 2010,
consists of the following:
|
|
Six Months
Ended 9/30/10
|
Year Ended
3/31/10
|
|
||||
Work
in progress – cemetery property
|
$
|
11,832,041
|
$
|
-
|
During
the second quarter of 2010, the Company’s management modified the strategy for
the development and construction of cemetery plots. Historically, the
cemetery plots were developed in batches of approximately 500 plots, which were
completed on a monthly basis. The walls, roads, and other
infrastructure were only built where necessary for the individual
batch. The Company is now developing approximately 7,000 cemetery
plots simultaneously, along with the related infrastructure.
Details
of the project are as follows:
|
·
|
The term of the contract is
from May 20, 2010 to January 29, 2011 (250
days).
|
|
·
|
The estimated total cost is
approximately $19.6M.
|
·
|
The Company is required to pay
up to 80% of the project cost, as it is being developed on a monthly
basis.
|
|
·
|
The Company will pay an
additional 15% of the project cost when
completed.
|
·
|
The Company will pay an
additional 2% of the project funds until inspection of the
project.
|
|
·
|
The Company will hold back 3%
as a warranty fee for 2 years (no interest accrued) as a warranty, upon
expiration of warranty period the balance of $589,349 recorded
as long-term other payables will be paid under the contract terms to the
developer.
|
Upon
final completion of the project, all costs associated with developing walls,
roads, and other infrastructure will be moved into inventory.
NOTE
6 – PREPAID LEASE EXPENSE
Prepaid
lease expense consists of the following as of:
|
|
Six Months
Ended 9/30/10
|
Year Ended
3/31/10
|
|
||||
Prepaid
Lease expenses
|
$
|
784,232
|
$
|
787,412
|
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
$840,000. 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
September 30, 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.
71
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
NOTE
7 – RELATED PARTY RECEIVABLE
Related
party receivable consists of the following as of:
|
|
Six Months
Ended 9/30/10
|
Year Ended
3/31/10
|
|
||||
Prepayments
on contracts on behalf of related party
|
$
|
1,437,120
|
$
|
1,408,320
|
On
January 28, 2008, Foguang entered into a long term manufacturing contract
with Chongqing Kun Yu Stone Co., Ltd. (“Kun Yu”), a related party.. In April
2008, Foguang made an advance to Kun Yu in the amount of $1,437,120 to use as a
down payment by Kun Yu to purchase headstones from an unrelated third-party
vendor. The headstones will be received and sold by Kun
Yu. Foguang may refer its customers to Kun Yu to purchase headstones
but will not take possession of or sell these headstones. Kun Yu will
repay the advance down payment to Foguang and is responsible to pay the balance
of the invoice to the vendor of the headstones. As of November 2010, the entire
advance has been repaid by Kun Yu to Foguang.
NOTE
8 - COSTS INCURRED WITH REAL ESTATE PROJECTS IN PROGRESS
Real
estate projects in progress consists of the following as of:
|
|
Six Months
Ended 9/30/10
|
Year Ended
3/31/10
|
|
||||
Costs
incurred with real estate projects in progress
|
$
|
8,682,600
|
$
|
10,122,300
|
In
February 2009, Foguang recorded a prepayment related to a contract in the amount
of $4,101,970 (7% of the contract), for the construction of entertainment boats
in connection with a project to develop a park near the Longqiao Lake as a way
to attract tourism in the Changshou area near Guiyuan II. The scope of the
project contemplated the construction of 10 to 20 entertainment boats, a welcome
center, a large sailboat and nine docks. On February 27, 2009,
Foguang executed a contract with Chongqing Bo Gao Tourism Company (“Bo Gao”), an
unrelated third party, to jointly develop such project. In September 2009,
Foguang took over as the sole developer on this project. As
of September 30, 2010, the project has been temporarily halted by Foguang due to
funds being used to focus on Foguang’s cemetery development
projects. Foguang plans to resume the project at a later time. Foguang
expects delivery of some of the boats by December 2010 and the remaining boats
in fiscal year 2012.
As of
September 30, 2010, the Company’s total prepayment for this project is
$8,682,600.The total price of the contract is approximately $64,000,000. The
Company plans to fund this project through its free cash flows as well as
through financing transactions. Foguang is currently in discussions with banks
to secure loans for the balance, as well as possibly raising more money through
the private placement of the Company’s equity securities.
NOTE
9 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following as of:
|
|
Six Months
Ended 9/30/10
|
Year Ended
3/31/10
|
|
||||
Buildings
and structures
|
$
|
8,216,808
|
$
|
8,052,142
|
||||
Machinery
and equipment
|
876,086
|
858,529
|
||||||
Office
equipment
|
6,397
|
6,269
|
||||||
Less:
accumulated depreciation
|
(1,927,604
|
)
|
(1,675,766
|
) | ||||
Total
Property and equipment
|
$
|
7,171,687
|
$
|
7,241,174
|
Depreciation
expense for the six months ended September 30, 2010 and 2009 was $178,720 and
$161,465, respectively.
72
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
NOTE
10 –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 $13.6 million as determined by management after
consultation with PRC counsel and consultants. The land use rights
include the Company’s cemetery site located in Changshou. Under PRC regulations,
all land in the PRC is state-owned. The Company’s management
determined the fair market value of the land use rights based upon the actual
square meters of useable land underlying the land use rights. The Company
expects approximately 210,000 plots can be developed and sold from the 339,444
square meters of land.
Intangible
assets consist of the following as of:
|
|
Six Months
Ended 9/30/10
|
Year Ended
3/31/10
|
|
||||
Land
use rights
|
$
|
13,618,209
|
$
|
13,345,299
|
||||
Less:
Accumulated units of production costs
|
1,859,664
|
1,557,396
|
||||||
Total
|
$
|
11,758,545
|
$
|
11,787,903
|
At
September 30, 2010, 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 six months ended
September 30, 2010 the Company expensed $266,119 and year ended March 31, 2010,
the Company expensed $640,484, which was included in the capitalized cost of
inventory.
NOTE
11 – ACCRUED EXPENSES AND OTHER PAYABLES
Accrued
expenses and other payables consist of the following as of:
|
|
Six Months
Ended 9/30/10
|
Year Ended
3/31/10
|
|
||||
Welfare
payable
|
$
|
99,049
|
$
|
97,064
|
||||
Taxes
payable
|
1,655,381
|
1,441,490
|
||||||
Other
accrued payables
|
68,370
|
76,507
|
||||||
Total
|
$
|
1,822,800
|
$
|
1,615,061
|
These
expenses are accrued by the Company over time and paid to the PRC
government.
NOTE
12 – 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. For the six
months ended September 30, 2010 and 2009, the Company recorded $340,887 and
$184,712, respectively, as other income.
NOTE
13 – 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.
73
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
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 September 30, 2010 and March 31, 2010, the Company had
short-term notes payable in the amount of $0 and $440,100,
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 $882,000 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
9.612%. As of September 30, 2010 and March 31, 2010, the Company had
a loan payable of $2,076,339 and $2,034,729, 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
September 30, 2010, the Company was in compliance with these
covenants.
For
the six months ending September 30, 2010 and 2009, interest expense was $106,675
and $118,800, respectively.
NOTE
14 – RENTAL INCOME FROM OPERATING LEASE
Rental
income consists of the following as of:
|
Six Months
Ended 9/30/10
|
Three Months
Ended 9/30/09
|
||||||
Rental
income
|
$
|
169,713
|
$
|
83,945
|
||||
Less:
depreciation of building
|
(48,924
|
)
|
(24,462
|
)
|
||||
Net
rental income
|
$
|
120,789
|
$
|
59,483
|
The
Company rents its excess office space in Changshou to an unreleated 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 September 30, 2010 and 2009, the lease called for monthly rental of
approximately $28,000.
NOTE
15 – STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company is authorized to issue 20,000,000 shares of preferred stock, par value
$0.001 per share. At September 30, 2010 and March 31, 2010, 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 September 30, 2010, the Company had 12,672,262
and at March 31, 2010, the Company had 12,402,262 common shares issued and
outstanding, respectively.
During
the period ended September 30, 2010, the Company’s Board of Directors approved
and granted the award of 50,000 shares of restricted stock to each of the
Company’s non-employee members of the board. The restricted stock awards each
vest quarterly in equal amounts over a one year period from the date of grant.
The fair value of the restricted stock at the measurement date was $236,252, of
which $118,126 was expensed for the period ended September 30,
2010.
During
the period ended September 30, 2010, the Company’s Board of Directors approved
and granted the award of 60,000 shares of restricted stock to a consulting
firm. The restricted stock awards each vest quarterly in equal
amounts over a one year period. The fair value of the restricted
stock at the grant date was $165,900 of which $82,950 was expensed for the
period ended September 30, 2010.
During
the period ended September 30, 2010, the Company’s Board of Directors approved
and granted 250,000 shares of restricted stock to a consulting firm to provide
business and financial consulting services. The Company has issued
(60,000 of the restricted shares with a fair value of $728,000 and is to issue
an additional 90,000 restricted shares with a fair value of
$409,500. The restricted share have all been expensed as of the grant
date because there is no specific performance requirement related to the
agreement and the restricted share are fully vested at the time of
grant.
74
CHINA
REDSTONE GROUP, INC.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2010 and 2009
In
accordance with ASC 718 (formerly SFAS 123R), the Company valued the restricted
stock award at fair value as of the grant date and recognizes compensation
expense on a straight-line basis over the vesting period.
Restricted
Stock
The
following table summarizes our restricted stock activity during the three months
ended September 30, 2010 for the above plans:
|
Number
|
Weighted Average
Grant Date Fair
Value
|
||||||
Non-vested
at March 31, 2010
|
-
|
$
|
-
|
|||||
Granted
|
360,000
|
3.27
|
||||||
Vested
|
(215,000
|
)
|
4.32
|
|||||
Forfeited
|
—
|
—
|
||||||
Non-vested
at September 30, 2010
|
145,000
|
4.72
|
The
grant date fair values of restricted stock awards which vested during the period
ended September 30, 2010 was approximately $929,000.
As of
September 30, 2010, there was approximately $611,000 of unrecognized
compensation cost related to unvested outstanding restricted stock. The Company
expects to recognize these costs over a weighted average period of 0.5
year.
NOTE
16 – CONCENTRATION RISK
Suppliers
The
Company obtained approximately 100% of its inventory purchases from two
suppliers for the three months ended September 30, 2010 and year ended March 31,
2010. 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 six months ended September 30, 2010 and
year ended March 31, 2010.
Customers
The
Company did not have concentrations related to any of its customers and revenue
for the six months ended September 30, 2010 and year ended March 31,
2010.
NOTE
17 – 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 Company’s
officers and directors are also management members of Ran Ji and
Foguang:
Mr. Yiyou
Ran, the Company’s 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 Company’s 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 Company’s 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 $1,437,120 in prepayments to a related party receivable as of
September 30, 2010 and $1,408,320 as of March 31, 2010. (See Note
7)
75
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
Company’s 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 Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the 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
76
CHINA
REDSTONE GROUP, INC
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.
77
CHINA
REDSTONE GROUP, INC.
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.
78
CHINA
REDSTONE GROUP, INC.
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.
79
CHINA
REDSTONE GROUP, INC.
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
|
)
|
||||
Advance
to related party
|
—
|
(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.
80
CHINA REDSTONE GROUP, INC. AND
SUBSIDIARIES
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 Company’s 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 12, 2010, the Share Exchange closed and Gold Industry became the
Company’s wholly-owned subsidiary. On April 6, 2010, in connection with the
Share Exchange, the Company changed its name to “China Redstone Group, Inc.” to
better reflect its business operations.
All of
the Company’s 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
Company’s 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 Company’s issued and outstanding common stock. Through
these contractual arrangements, the Company has the ability to substantially
influence Foguang’s 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 Foguang’s 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 Foguang’s 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 Foguang’s results, assets and liabilities in the accompanying
consolidated financial statements.
81
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 Company’s 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 People’s Republic of China (“China” or the “PRC”) on
December 15, 2009, as a wholly foreign owned enterprise (“WFOE”), with
registered capital of $25,000,000 USD, of which the first $3,000,000 USD has
been contributed and the balance due within two years. Foguang is a PRC limited
liability company established on October 10, 2002 with registered capital
of 100,000,000 RMB. Foguang is engaged in selling death care products, and holds
the licenses and approvals necessary to operate its business in
China.
All of
the Company’s business operations are carried out by Foguang in the PRC. The
Company’s 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 Company’s consolidated financial statements. The
consolidated financial statements and notes are presentations of the Company’s
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 12, 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
Company’s 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 Company’s
functional currency is the Chinese Renminbi ( “RMB”), however, the
accompanying consolidated financial statements have been re-measured, translated
and presented in United States Dollars ($).
82
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 Company’s 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 Foguang’s 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 Company’s 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 entity’s 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 | $ | — |
83
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
Company’s common stock or securities exercisable, convertible or exchangeable
for the Company’s 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 Company’s common stock had not been publicly traded.
Whilst the Company’s common stock began public trading and was quoted on the
OTCBB in February 2010, the fair value of the Company’s common stock as of
February 19, 2010 has been determined based on market price.
As the
Company’s stock only begun public trading effective with the reverse merger
date, historical volatility information is limited and considered not
representative of the expected volatility. In accordance with ASC 718-10-30-2
(formerly SFAS No. 123R, “Accounting for Stock-Based
Compensation”), the Company identified similar public entities for which
share and option price information was available, and considered the historical
volatilities of those public entities’ share prices in calculating the expected
volatility appropriate to the Company (i.e. the calculated value).
The
risk-free rate of return reflects the interest rate for United States Treasury
Note with similar time-to-maturity to that of the warrants.
Allocation of
Proceeds from Private Placement
The
proceeds from the Private Placement were first allocated between the Common
Shares and the warrants issued in connection with the Private Placement based
upon their estimated fair values as of the closing date, resulting in an
aggregate amount of $794,376 being allocated to the Warrants and $3,400,995 to
the common shares.
In
April 2009, the FASB issued the following updates that provide additional
application guidance and enhance disclosures regarding fair value measurements
and impairments of securities: FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, ASC 820-10-65. This
update relates to determining fair values when there is no active market or
where the price inputs being used represent distressed sales. It reaffirms the
need to exercise judgment to ascertain if a formerly active market has become
inactive and in determining fair values when markets have become
inactive.
FSP FAS
115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments, ASC 320-10-65. This update applies to investments in debt
securities for which other-than-temporary impairments may be recorded. If an
entity’s 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.
84
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 Company’s 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
management’s 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 customer’s financial condition,
generally without collateral. Exposure to losses on receivables is principally
dependent on each customer’s 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
Company’s 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 Company’s results of
operations may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, among other things.
In
addition, all of the Company’s 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. Management’s 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
Company’s operating results. If the financial condition of the Company’s
customers were to deteriorate, resulting in an impairment of their ability to
make payments, the Company will write off 100% as bad debt. In management’s
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.
85
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 Company’s long-lived assets by determining whether the
depreciation and amortization of long-lived assets over their remaining lives
can be recovered through projected undiscounted future cash flows. The amount of
long-lived asset impairment if any, is measured based on fair value and is
charged to operations in the period in which long lived assets impairment is
determined by management. At March 31, 2010 and 2009, the Company’s
management believes there was no impairment of the Company’s long lived assets.
There can be no assurance however, that market conditions will not change or
competition will increase or demand for the Company’s 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 PRC’s 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 PRC’s
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. Foguang’s
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.
86
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 PRC’s 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 Company’s revenue producing
activities.
The
requires that four basic criteria that must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery
has occurred with no future other than perfunctory performance obligations;
(3) the selling price is fixed and determinable; and (4) collectability is
reasonably assured. Determination of criteria (3) and (4) is based on
management’s 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 Company’s 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 Company’s 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.
87
Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. Such amounts were not material during each of
the years ended March 31, 2010 and 2009.
Cash flow
from the Company’s 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
Company’s 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 Company’s consolidated financial position, results of operations
or cash flows.
In
October 2009, the FASB issued an Accounting Standards Update regarding the
accounting for own-share lending arrangements in contemplation of convertible
debt issuance or other financing. This ASU requires that at the date of issuance
of the shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for fiscal years
beginning on or after December 15, 2009, and interim periods within those
fiscal years for arrangements outstanding as of the beginning of those fiscal
years. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.
88
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 entity’s 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 entity’s
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 Company’s consolidated financial position,
results of operations or cash flows.
In
January 2010, the FASB issued an Accounting Standards Update regarding the
accounting and reporting for decreases in ownership of a subsidiary — a scope
clarification. The amendments in this ASU affect accounting and reporting by an
entity that experiences a decrease in ownership in a subsidiary that is a
business or nonprofit activity. The amendments also affect accounting and
reporting by an entity that exchanges a group of assets that constitutes a
business or nonprofit activity for an equity interest in another entity. The
amendments in this update are effective beginning in the period that an entity
adopts accounting for “Non-controlling Interests in Consolidated Financial
Statements — An Amendment of ARB No. 51.” The amendments in this update are
effective beginning in the first interim or annual reporting period ending on or
after December 15, 2009. The amendments in this update should be applied
retrospectively to the first period that an entity adopted accounting for
“Non-controlling Interests in Consolidated Financial Statements — An Amendment
of ARB No. 51.” The adoption of this ASU did not have a material impact on
the Company’s 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.
89
In
January 2010, the FASB issued an accounting standard update to address
implementation issues related to the changes in ownership provisions in the
Consolidation—Overall 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 Company’s financial position, results of operations or cash flows.
Other recent accounting pronouncements issued by the FASB, the American
Institute of Certified Public Accountants AICPA, and the Securities and Exchange
Commission did not or are not believed by management to have a material impact
on the Company’s 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 Company’s
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 |
90
During
2009, the Company leased land use rights for an additional 377,634 square meters
from a group of local farmers and villagers for a period of 20 years,
subject to renewals, in exchange for a cash payment of approximately $836,000.
Pursuant to the agreement, the payment was made to the PRC government for the
benefit of the local farmers and villagers. The Company is also obligated to pay
an annual fee of approximately $23,000 for the duration of the lease to the
farmers. (Note 17)
None of
this land area was developed as of March 31, 2010. The Company has
presented this amount as prepaid lease expense on the consolidated balance
sheet. The villagers and farmers were originally located in Longqiao and Qianfo
villages. The cash received by the PRC from the Company is expected to be
redistributed to the local farmers and villagers by the Government as a payment
for relocating them to ChangShou Jiang Nan. The Company also agreed to clear
land for the building of these homes at the relocated site.
Payments
made to the Government for the building of homes and relocation of farmers is
the cost to the Company to lease the land use rights for the development and
sale of the cemetery plots. The Company capitalizes any direct and incremental
costs associated with the development of the project and amortizes over the
estimated future benefit period as cost of the plots. When the plots are sold,
the related carrying costs are charged off to the statement of
income.
The
prepaid expenses are amortized over 20 years per the terms of the contract.
For the years ended March 31, 2010 and 2009, the Company had recorded
approximately $41,000 and $8,000 which was recorded as an operating
expense.
NOTE
5 — RELATED PARTY RECEIVABLE
Related
party receivable consists of the following as of:
Year Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Prepayments
on contracts on behalf of related party
|
$ | 1,408,320 | $ | 1,406,400 |
In
April 2008, Foguang made an advance to Kun Yu, a related party, in the amount of
$1,437,120 to use as a down payment by Kun Yu to purchase headstones from an
unrelated third-party vendor. The headstones will be received and
sold by Kun Yu. Foguang may refer its customers to Kun Yu to purchase
headstones but will not take possession of or sell these
headstones. Kun Yu will repay the advance down payment to Foguang and
is responsible to pay the balance of the invoice to the vendor of the
headstones. As of November 2010, the entire advance has been returned from Kun
Yu to Foguang.
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, Foguang recorded a prepayment related to a contract in the
amount of $4,101,970 (7% of the contract), for the construction of entertainment
boats in connection with a project to develop a park near the Longqiao Lake as a
way to attract tourism in the Changshou area near Guiyuan II. . On February 27,
2009, Foguang executed a contract with Chongqing Bo Gao Tourism Company (“Go
Bao”), an unrelated third party, to jointly develop such project. The scope of
the project contemplated 10 to 20 entertainment boats, a welcome center, a large
sailboat and nine docks. In September 2009, Foguang took over as the sole
developer on this project.
As of
March 31, 2010, Foguang’s total prepayment for real estate projects in
progress is $10,122,300 of which $8,682,600 is a prepayment for the
construction of boats. ,. The total price of the contract is approximately
$63,961,200. The Company plans to fund this project through its free cash flows
as well as through financing transactions. Foguang is currently in discussions
with banks to get loans for the balance, as well as possibly raising more money
through the private placement of the Company’s equity
securities.
91
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 Company’s cemetery site located in Changshou. Under PRC regulations, all
land in the PRC is state-owned. The Company’s management determined the fair
market value of the land use rights based upon the actual square meters of
useable land underlying the land use rights. The Company expects approximately
210,000 plots can be developed and sold from the 339,444 square meters of
land.
The
Company 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.
92
NOTE
11 — SHORT-TERM NOTES PAYABLE
Short
term notes payable represent amounts due to a bank normally due within one year.
The principal balance of the loans is due at maturity and the loans can be
renewed each year.
Short-term
note payable — Chongqing Rural Commercial Bank, is secured by Chongqing bowling
museum building, is due on demand, bears interest at an annual rate of 8.4% and
matures in March 2011. The company is responsible for all economic disputes
or liabilities related to this property. If any terms of the contract were
breached the company would have to pay a penalty of approximately $37,000. As of
March 31, 2010 and 2009, the Company had short-term notes payable in the
amount of $440,100 and $439,500, respectively. The company paid off the
outstanding loan balance in May 2010.
Short-term
note payable — Chongqing Rural Commercial Bank, is secured by approximately
123,334 square meters of land use rights valued at approximately $882,353 at
inception, is due on demand, bears interest at an annual rate of 9.6% and
matures in March 2011. In the event of default on this short-term notes
payable, the interest rate is calculated at annual rate of 9.6%. As of
March 31, 2010 and 2009, the Company had a loan payable of $2,034,729 and
$2,031,955, respectively. This short-term notes payable contain covenants that
restrict the use of proceeds to developing cemetery plots. If the Company uses
the money in breach of these covenants, the interest rate is calculated at
19.2%. As of March 31, 2010 and 2009, the Company was in compliance with
these covenants.
As of
March 31, 2010 and 2009, interest expense was $235,240 and $235,208,
respectively.
NOTE
12 — RENTAL INCOME FROM OPERATING LEASE
Rental
income consists of the following as of:
Year Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Rental
income
|
$ | 337,859 | $ | 335,969 | ||||
Less
Depreciation of building
|
(76,109 | ) | (75,683 | ) | ||||
Net
rental income
|
$ | 261,750 | $ | 260,286 |
The
Company rents its excess office space in Changshou to an unrelated third party
under a cancellable operating lease that is on a month to month basis. The third
party is responsible for all expenses related to the occupancy of the office
space. As of March 31, 2010 and 2009, the lease called for monthly rental
of approximately $28,000 and $28,000, respectively.
NOTE
13 — STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company is authorized to issue 20,000,000 shares of preferred stock, par value
$0.001 per share. At March 31, 2010 and 2009, no shares were issued and
outstanding.
Common
Stock
The
Company is authorized to issue 100,000,000 shares of common stock, par value
$0.001 per share. At March 31, 2010 and 2009, the Company had 12,402,262
and 8,800,000 common shares issued and outstanding, respectively.
The
Company’s 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 Company’s common
stock and warrants to purchase up to 50,000 shares of common stock at a per
share purchase price of $3.28 per share. At the closing of the transaction on
February 23, 2010, the Company issued 1,402,262 shares of common stock and
701,126 four-year warrants with an exercise price of $4.10 per share. In
addition, the Company issued warrants to purchase up to 70,113 shares of common
stock with an exercise price of $4.10 per share to the placement agent and its
assignees. Offering costs of approximately $404,000 was netted against the
proceeds.
The
Company issued the following warrants at the corresponding exercise price as of
March 31, 2010:
Warrants
|
Exercise Price
|
|||||||
Outstanding
as of March 31, 2009
|
— | $ | — | |||||
Issued
and Vested
|
771,239 | $ | 4.10 | |||||
Cancelled
or expired
|
— | $ | — | |||||
Exercised
|
— | $ | — | |||||
Outstanding
as of March 31, 2010
|
771,239 | $ | 4.10 |
93
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 Company’s
officers and directors are also management members of Ran Ji and Foguang:
Mr. Yiyou
Ran, the Company’s 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 Company’s 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 Company’s 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.
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 |
94
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 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.
95
(c) Economic
Environment
Because
all of the Company’s 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
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among other
things.
The
granting of land use rights is a common practice in China as all land is
state-owned, and, at present, no option to purchase land has ever been granted.
However, the Company does have very limited rights in accordance with land use
rights for the cemetery plot development and corresponding sales of the burial
spaces.
(d) Retirement
Plans
The
Company participates in a defined contribution retirement program organized by
the relevant local government authority. Employees of the Company eligible to
participate in the retirement plan are entitled to retirement benefits from the
plan. The local government authority is responsible for the pension liabilities
to retired employees. The Company is required to make monthly contributions to
the retirement plan up to the time of retirement of the eligible employees, at
20% of the local standard basic salaries. As of March 31, 2010 and 2009,
the Company had no significant obligation apart from the contribution as stated
above.
Note
18 — SUBSEQUENT EVENT
During
the quarter ended June 30, 2010, the Company' granted stock award of 12,500
shares of restricted common stock to each of the Company’s four non-employee
directors. Each award vests quarterly in equal amounts over a one year period
from the date of grant. The fair value of the restricted stock at the
measurement date was $236,252, of which $59,063 has been expensed at June 30,
2010.
During
the quarter ended June 30, 2010, the Company issued 60,000 shares of restricted
stock to a consulting firm. The restricted stock awards each vest
quarterly in equal amounts over a one year period. The fair value of the
restricted stock at the grant date was $165,900, and $41,475 was expensed for
the three months ended June 30, 2010.
During
the quarter ended June 30, 2010, the Company issued 250,000 shares of restricted
stock to a consulting firm to provided business and financial consulting
services. The Company has issued 160,000 of the restricted shares with a fair
value of $728,000 and is to issue an additional 90,000 restricted shares
with a fair value of $409,500. The restricted shares have all been
expensed as of the grant date because there is no specific performance
requirement related to the agreement and the restricted shares are fully vested
at the time of grant.
In
accordance with ASC 718 (formerly SFAS 123R), the Company valued the restricted
stock award at fair value as of the grant date and recognizes compensation
expense on a straight-line basis over the vesting period.
The
following table summarizes the activity of the above restricted stock awards
during the three months ended June 30, 2010:
Number
|
Weighted Average
Grant Date Fair
Value
|
|||||||
Non-vested
at March 31, 2010
|
- | $ | - | |||||
Granted
|
360,000 | 3.27 | ||||||
Vested
|
(187,500 | ) | 4.42 | |||||
Forfeited
|
— | — | ||||||
Non-vested
at June 30, 2010
|
172,500 | 4.12 |
The
grant date fair values of restricted stock awards which vested during the three
month ended June 30, 2010 were $828,538.
As of
June 30, 2010, there was $711,338 of unrecognized compensation cost related to
unvested outstanding restricted stock. The Company expects to recognize these
costs over a weighted average period of 0.75 years.
96
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth the costs and expenses, payable by the registrant in
connection with the sale of common stock being
registered.
All amounts are estimates except the SEC registration fee.
Securities
and Exchange Commission registration fee
|
$ | 606.41 | ||
Printing
and engraving expenses
|
0 | |||
Blue
Sky fees and expenses
|
7,585 | * | ||
Legal
fees and expenses
|
50,000 | * | ||
Accounting
fees and expenses
|
20,000 | * | ||
Miscellaneous
|
0 | |||
Total
|
$ | 78,191.41 |
* Estimated
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware
Law
Section 145
of the Delaware General Corporation Law authorizes a court to award, or a
corporation’s 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
person’s 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
person’s conduct was unlawful.
(b) A
corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys’
fees) actually and reasonably incurred by the person in connection with the
defense or settlement of such action or suit if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the 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.
97
(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 person’s 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 person’s 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 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 corporation’s 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.
ITEM
15. Unregistered Sales of Equity Securities
The
following is a summary of our transactions during the last three years involving
sales of our securities that were not registered under the Securities Act of
1933 (the “Act”):
98
On
March 1, 2009, we entered into an agreement with a consultant to provide
investor relations related consulting services for the Company. Under
the terms of the agreement, compensation to the consultant includes an issuance
of 60,000 shares of our common stock, which shares were issued to the consultant
on April 2, 2010. The issuance of these securities was exempt under
Section 4(2) under the Act, as it was a transaction by the Company not involving
any public offering.
On
February 10, 2010, we entered into an agreement with a consultant to provide
public relations related consulting services for the Company. Under
the terms of the agreement, compensation to the consultant was an issuance of
250,000 shares of our common stock, which shares were issued to the consultant
on April 2, 2010. The issuance of these securities was exempt under
Section 4(2) under the Act, as it was a transaction by the Company not involving
any public offering.
On
February 23, 2010, we sold and issued to 24 investors 1,402,262 shares of
Common Stock (the “Shares”) and Warrants
to purchase 701,126 shares of Common Stock. The Shares and Warrants were issued
to accredited investors in a private placement transaction exempt from
registration under the Act, pursuant to Rule 506 of Regulation D
promulgated thereunder. Neither the Shares nor the Warrants have been registered
under the Securities Act or applicable state securities laws and may not be
offered or sold in the United States absent registration under the Securities
Act and applicable state securities laws or an applicable exemption from
registration requirements. We also issued warrants to purchase up to 70,113
shares of Common Stock to our placement agent for this transaction and its
assignees.
On
February 12, 2010, we issued 8,800,000 shares of our common stock to the
Cayman Shareholder in exchange for 100% of the capital stock of Gold Industry.
The issuance of the common stock to the Cayman Shareholder was exempt from
registration pursuant to Regulation S under the Act. We made this
determination based on the representations of the Cayman Shareholder, which
included, in pertinent part, that such shareholder was not a “U.S. person” as
that term is defined in Rule 902(k) of Regulation S under the Act, and that
such shareholder was acquiring the common stock for investment purposes for its
own account and not as nominee or agent, and not with a view to the resale or
distribution thereof, and that such shareholder understood that the shares of
common stock may not be sold or otherwise disposed of without registration under
the Act or an applicable exemption therefrom.
In
February 2009, we issued 375,000 shares of common stock to an individual at
$0.02 per share. The shares were issued under an exemption from
registration of Section 4(2) of the Act..
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See
“Exhibit Index” below, which follows the signature page to this
registration statement.
ITEM
17. UNDERTAKINGS
(a)
The undersigned registrant hereby undertakes:
(1)
|
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
|
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933 (the “Securities
Act”);
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus file with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the
effective registration statement;
and
|
|
(iii)
|
Include
any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration
statement.
|
(2)
|
For
purposes of determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
|
(3)
|
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
|
99
(4)
|
That,
for the purpose of determining liability under the Securities Act to any
purchaser, if the registrant is subject to Rule 430C, each prospectus
filed pursuant to Rule 424(b) as part of a registration statement relating
to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made
in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to
such first use, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such date of
first use.
|
(5)
|
For
determining liability of the undersigned registrant under the Securities
Act to any purchaser in the initial distribution of the securities, the
undersigned registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to
purchaser, if the securities are offered or sold to such purchaser by
means of any of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer or sell
such securities to such
purchaser:
|
|
(i)
|
any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to
Rule 424;
|
|
(ii)
|
any
free writing prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
|
|
(iii)
|
portion
of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities
provided by or on behalf of the undersigned registrant;
and
|
|
(vi)
|
any
other communication that is an offer in the offering made by the
undersigned registrant to the
purchaser.
|
(b)
|
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such
issue.
|
100
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,
People’s Republic of China, on December 14, 2010.
CHINA
REDSTONE GROUP, INC.
|
|
By:
|
/s/
Yiyou Ran
|
Yiyou
Ran
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
|
By:
|
/s/
Michael Wang
|
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
|
December
14, 2010
|
||
Yiyou
Ran
|
Chief
Executive Officer
|
|||
/s/
Michael Wang
|
Chief
Financial Officer and Director
|
December
14, 2010
|
||
Michael
Wang
|
||||
/s/
Jianquan Chen
|
Director
|
December
14, 2010
|
||
Jianquan
Chen
|
||||
/s/
Tim Hudson
|
Director
|
December
14, 2010
|
||
Tim
Hudson
|
||||
/s/
Michael Rudolph
|
Director
|
December
14, 2010
|
||
Michael
Rudolph
|
||||
/s/
Lihua Zhang
|
Director
|
December
14, 2010
|
||
Lihua
Zhang
|
||||
/s/
Ray Hsu
|
Director
|
December
14, 2010
|
||
Ray
Hsu
|
101
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 Exceedon & Partners Law Firm *
|
|
10.1
|
Consulting
Service Agreement (4)
|
|
10.2
|
Operating
Agreement (4)
|
|
10.3
|
Equity
Pledge Agreement (4)
|
|
10.4
|
Option
Agreement (4)
|
|
10.5
|
Voting
Rights Proxy Agreement (4)
|
|
10.6
|
Rural
Land Lease Agreement (4)
|
|
10.7
|
Jiangbei
Office Lease Agreement (4)
|
|
10.8
|
Nan’an
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 Director’s 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)
|
|
10.15
|
Construction
Agreement dated May 20, 2010*
|
|
10.16
|
Tourism
Development Agreement dated February 28, 2009*
|
|
14.1
|
Code
of Ethics (3)
|
|
21.1
|
List
of
subsidiaries(9)
|
102
23.1
|
Consent
of Richardson & Patel LLP (contained in
Exhibit 5.1)
|
|
23.2
|
Consent
of PMB Helin Donovan, LLP*
|
|
23.3
|
Consent
of Exceedon & Partners Law Firm (contained in Exhibit
5.2)
|
|
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 to
Form of Director’s 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.
|
(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.
|
103