Attached files
file | filename |
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EX-2.1 - TEEN EDUCATION GROUP, INC. | v208786_ex2-1.htm |
EX-10.1 - TEEN EDUCATION GROUP, INC. | v208786_ex10-1.htm |
EX-99.3 - TEEN EDUCATION GROUP, INC. | v208786_ex99-3.htm |
EX-10.9 - TEEN EDUCATION GROUP, INC. | v208786_ex10-9.htm |
EX-10.3 - TEEN EDUCATION GROUP, INC. | v208786_ex10-3.htm |
EX-10.4 - TEEN EDUCATION GROUP, INC. | v208786_ex10-4.htm |
EX-16.1 - TEEN EDUCATION GROUP, INC. | v208786_ex16-1.htm |
EX-10.5 - TEEN EDUCATION GROUP, INC. | v208786_ex10-5.htm |
EX-10.6 - TEEN EDUCATION GROUP, INC. | v208786_ex10-6.htm |
EX-10.8 - TEEN EDUCATION GROUP, INC. | v208786_ex10-8.htm |
EX-10.2 - TEEN EDUCATION GROUP, INC. | v208786_ex10-2.htm |
EX-99.4 - TEEN EDUCATION GROUP, INC. | v208786_ex99-4.htm |
EX-99.2 - TEEN EDUCATION GROUP, INC. | v208786_ex99-2.htm |
EX-99.1 - TEEN EDUCATION GROUP, INC. | v208786_ex99-1.htm |
EX-10.7 - TEEN EDUCATION GROUP, INC. | v208786_ex10-7.htm |
EX-14.1 - TEEN EDUCATION GROUP, INC. | v208786_ex14-1.htm |
EX-10.10 - TEEN EDUCATION GROUP, INC. | v208786_ex10-10.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K/A
Amendment
No. 1
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
report (Date of earliest event reported): November 12 , 2010
TEEN
EDUCATION GROUP, INC.
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
333-147045
|
26-032648
|
||
(State
or other jurisdiction
of
incorporation)
|
(Commission
File Number)
|
(I.R.S.
Employer
Identification
No.)
|
NO.
288 Maodian Road
Liantang
Industrial Park, Qingpu District
Shanghai,
PRC
|
(Address
of principal executive
offices)
|
+86
21-39252120
|
(Registrant’s
telephone number,
including
area code)
|
6767
W. Tropicana Ave., Suite 207
|
Las
Vegas, NV 89103
|
(Former
name or former address,
if
changed since last
report)
|
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
¨
Written communications pursuant to Rule 425
under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12
under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to
Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to
Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This
Current Report on Form 8-K contains forward looking statements that involve
risks and uncertainties, principally in the sections entitled “Description of
Business,” “Risk Factors,” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and those discussed in other
documents we file with the U.S. Securities and Exchange Commission that are
incorporated into this Current Report on Form 8-K by reference. All statements
other than statements of historical fact contained in this Current Report on
Form 8-K, including statements regarding future events, our future financial
performance, business strategy, and plans and objectives of management for
future operations, are forward-looking statements. We have attempted to identify
forward-looking statements by terminology including “anticipates,” “believes,”
“can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,”
“potential,” “predicts,” “should,” or “will” or the negative of these terms or
other comparable terminology. We have based these forward-looking statements
largely on our current expectations and projections about future events and
financial trends that we believe may affect our financial condition, results of
operations, business strategy, short term and long term business operations, and
financial needs. Although we do not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under “Risk
Factors” or elsewhere in this Current Report on Form 8-K, which may cause our or
our industry’s actual results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. Moreover, we operate
in a very competitive and rapidly changing environment. New risks emerge from
time to time and it is not possible for us to predict all risk factors, nor can
we address the impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause our actual results to differ
materially from those contained in any forward-looking statements.
You
should not place undue reliance on any forward-looking statement, each of which
applies only as of the date of this Current Report on Form 8-K. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in the section entitled “Risk Factors” and elsewhere in this
Current Report on Form 8-K could negatively affect our business, operating
results, financial condition and stock price. Except as required by law, we
undertake no obligation to update or revise publicly any of the forward-looking
statements after the date of this Current Report on Form 8-K to conform our
statements to actual results or changed expectations.
EXPLANATORY
NOTE
This
Amendment No. 1 on Form 8-K/A (the “8-K/A”) amends and restates in its entirety
the Current Report on Form 8-K for Teen Education Group, Inc. (the “Company”)
dated and filed with the Securities and Exchange Commission on November 12, 2010
(the “Original 8-K”) to amend certain disclosures and to include updated
financial information of Hongkong Charter International Group, Limited, which
the Company recently acquired through a reverse merger transaction, for the
quarter ended September 30, 2010 and the parent-only financial statements as a
supplement to the unaudited condensed consolidated financial statements.
Item
1.01 Entry into a Material Definitive Agreement.
As more
fully described in Item 2.01 below, Teen Education Group, Inc. (“we,” “us,”
“our,” “Teen Education” or the “Company”), a Delaware corporation, acquired an
automotive parts distribution company in accordance with a share exchange
agreement, dated November 12, 2010 (the “Exchange Agreement”), by and among the
Company, Robert L. Wilson, the majority shareholder of the Company (the
“Majority Shareholder”), Hongkong Charter International Group Limited, a
Hongkong company (“Hongkong Limited”), and the sole shareholder of Hongkong
Limited (the “Hongkong Limited Shareholder”). Hongkong Limited was incorporated
in Hongkong on August 21, 2009 and owns 100% of the issued and outstanding
capital stock of Shanghai Vomart Auto Parts Co., Ltd. (“Vomart”), which was
incorporated as a People’s Republic of China (“PRC” or “China”) limited
liability company on January 4, 2008, and became a wholly foreign owned
enterprise under the laws of the PRC on May 12, 2010. A copy of the Exchange
Agreement is included as Exhibit 2.1 to this Current Report on Form 8-K/A and is
hereby incorporated by reference. All references to the Exchange Agreement and
other exhibits to this Current Report on Form 8-K are qualified, in their
entirety, by the text of such exhibits.
The
closing of the transaction (the “Closing”) took place on November 12, 2010 (the
“Closing Date”). On the Closing Date, pursuant to the terms of the Exchange
Agreement, the Company acquired all of the outstanding shares of Hongkong
Limited from the Hongkong Limited Shareholder (the “Hongkong Limited Shares”).
In exchange, we issued to the Hongkong Limited Shareholder, their designees or
assigns, 2,250,000 shares of the Company’s
common stock (the “Exchange Shares”). The Exchange Shares represent
90% of the issued and outstanding shares of the Company’s common stock on a
fully diluted basis as of and immediately after the Closing (the “Share
Exchange”). In addition, Hongkong Limited agreed to pay $350,000 in cash to the Majority
Shareholder.
Pursuant
to the terms of the Exchange Agreement, the Majority Shareholder canceled a
total of 2,000,000 shares of the Company’s common stock, which represents 100%
of his security interests in the Company.
Pursuant
to the Exchange Agreement, Hongkong Limited became a wholly owned subsidiary of
the Company. The sole director of the Company approved the Exchange Agreement
and the transactions contemplated under the Exchange Agreement. The directors of
Hongkong Limited approved the Exchange Agreement and the transactions
contemplated under the Exchange Agreement.
As a
further condition of the Share Exchange, on the Closing Date, Robert L. Wilson
resigned as the sole director of the Company, effective on such date that is ten
(10) calendar days after the Company mails an Information Statement to the
Company’s shareholders prepared pursuant to Rule 14f-1 under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), relating to the Exchange
Agreement, and further, appointed Qun Hu to the Company’s board of directors
(the “Board”). Mr. Wilson also resigned on the Closing Date as the sole officer
of the Company, effective as of the Closing Date, and the following persons were
appointed as officers of our Company: Mr. Zhoufeng Shen was appointed as the
Company’s President and Chief Executive Officer and Ms. Xiaomei Wang was
appointed as the Company’s Chief Financial Officer.
Item 2.01
Completion of Acquisition or Disposition of Assets.
On the
Closing Date, the Company completed an acquisition of Hongkong Limited pursuant
to the Exchange Agreement. The acquisition was accounted for as a
recapitalization effected by a share exchange, wherein, Hongkong Limited is
considered the acquirer for accounting and financial reporting purposes. The
assets and liabilities of the acquired entity have been brought forward at their
book value and no goodwill has been recognized.
2
FORM
10 DISCLOSURE
As
disclosed throughout this Current Report on Form 8-K, on the Closing Date, the
Company acquired Hongkong Limited in a reverse acquisition transaction. Item
2.01(f) of Form 8-K states that if the registrant was a shell company
immediately before the reverse acquisition transaction disclosed under Item
2.01, then the registrant must disclose the information that would be required
if the registrant were filing a general form for registration of securities on
Form 10.
Since
Teen Education Group, Inc. was a shell company immediately before the reverse
acquisition transaction disclosed under Item 2.01, we are providing below the
information that would be included in a Form 10 if we were to file a Form 10.
Please note that the information provided below relates to the combined
enterprises after the acquisition of Teen Education Group, Inc., except that
information relating to periods prior to the date of the reverse acquisition
only relate to Hongkong Limited and its consolidated subsidiaries unless
otherwise specifically indicated.
Our
Corporate History and Background
We were
organized under the laws of the State of Delaware on April 16, 2007. From
inception until the Closing Date, we were primarily engaged in the business
of providing a financial literacy and money
management educational program for teenagers on a fee for service
offered basis.
Acquisition
of Hongkong Limited
On the
Closing Date, we acquired Hongkong Limited, which is in the business of
automotive parts distribution in the PRC. On the Closing Date,
pursuant to the terms of the Exchange Agreement, we acquired all of the Hongkong
Limited Shares from the Hongkong Limited Shareholder, and the Hongkong Limited
Shareholder transferred and contributed all of the Hongkong Limited Shares to
us. In exchange, we issued the Exchange Shares to the Hongkong Limited
Shareholder, their designees or assigns.
Pursuant
to the terms of the Exchange Agreement, the Majority Shareholder canceled
2,000,000 shares of common stock of our Company, which constituted 100% of his
security interests in the Company. Following the Share Exchange, there are
2,500,000 shares of common stock issued and outstanding, 2,250,000 of which are
restricted and issued to the Hongkong Limited Shareholder, their designees or
assigns.
We have
relocated our principal executive offices to NO. 288 Maodian Road, Liantang
Industrial Park, Qingpu District, Shanghai, PRC, and our new telephone number is
+86 21-39252120.
DESCRIPTION
OF BUSINESS
Business
Overview
We are
one of the largest distributors of automotive replacement parts and accessories
in the PRC based on the number of stores we own and the geographic areas where
we have presence. We began our operations in 2008 and currently own
thirty-seven (37) stores in nine (9) provinces and municipalities, namely
Jiangsu, Zhejiang, Hebei, Anhui, Fujian, Shanxi, Shanghai, Beijing, and
Tianjin. In comparison, other large auto parts distributors in China
own fewer stores and/or their stores are located in fewer provinces or
municipalities. For example, Shandong Youpei Auto Parts owns
twenty-four stores of which eighteen are located in Shangdong
Province. Jiangsu Youpei Auto Parts owns seventeen
stores of which sixteen are located in Jiangsu Province. Putong Auto
Service owns fifteen stores in thirteen different provinces and
municipalities. We distribute a broad selection of international
brand name (such as Philips, Mahle, Denso, Bosch and Osr) and private label
(such as Olande, Vanik, Mikef and Shengf) automotive replacement parts, such as,
accessories and maintenance items for cars, minivans, vans, sport utility
vehicles, light trucks, and heavy-duty trucks. Our typical products include
batteries, brake pads, filters, storage batteries, and transmission
fluid.
Historical
Sales & Income Summary
(Amounts expressed in USD)
|
Three month Period Ended
September 30,
|
Fiscal Year Ended
June 30,
|
||||||||||||||||||||||
|
2010
|
2009
|
%
Growth
|
2010
|
2009
|
%
Growth
|
||||||||||||||||||
Revenue
|
$ | 2,762,293 | $ | 1,029,888 | 168.2 | % | $ | 4,782,754 | $ | 1,282,918 | 272.8 | % | ||||||||||||
Gross
Profit
|
529,680 | 275,879 | 92.0 | % | 1,245,800 | 365,589 | 240.8 | % | ||||||||||||||||
Net
Income
|
$ | 24,228 | $ | 15,650 | 54.8 | % | $ | 38,514 | $ | 79,890 | (51.8 | )% |
3
Corporate
Organization
After the
Share Exchange, we have approximately 80 shareholders of our
common stock. Our organizational structure was developed to allow
foreign capital infusion under the laws of the PRC and maintain an efficient tax
structure, as well as maintain internal organizational efficiencies. Our
organizational structure after the consummation of the Share Exchange is
illustrated in the table below:
Business
Strategy
Our
indirect wholly-owned subsidiary, Vomart, was incorporated in the PRC on January
4, 2008, and become a wholly-owned foreign enterprise under the laws of the PRC
on May 12, 2010.
We are
committed to providing customers with superior service, value, and quality
automotive parts and products at conveniently located, well-designed, and
unified stores. We intend to be one of China’s leading and largest national
chain auto parts distributor within the next five (5) years by, among other
things, providing a highly efficient distribution network integrating upstream
suppliers and downstream end users, growing organically through aggressively
marketing our existing stores (each of which we wholly own), opening new stores,
and strategic acquisitions of regional vendors that meet our quality
standards. By 2015, we plan to expand our distribution network to
cover two thirds (2/3) of China, covering 27 different provinces and
municipalities. The total number of automotive vehicles in China continues to
grow at a rapid pace, which directly relates to the need for an increase of
aftermarket auto parts.
In order
to boost the Company’s market share, we intend to:
|
·
|
Achieve a national scale and
penetrate the auto parts market by growing the number of wholly owned
stores to over 250 stores and the number of franchise stores to 300
franchise stores within five years. As a terminal market distributor, our
market strategy is to cover the market as fast as possible. Depending on
the gross domestic product (“GDP”) and the market capacity of different
areas, we plan to open 1-2 wholly-owned stores in the prefecture-level
cities and 2-5 wholly-owned stores in the capital cities. At the same
time, we will grow our market share by opening franchise stores in the
county level cities and less developed
areas;
|
|
·
|
Build an efficient first-class
distribution and logistics system that is effectively managed by
constantly improving our Enterprise Resource Planning (as defined herein)
software;
|
|
·
|
Provide a broad selection of
brand name replacement parts and a complete line of private-label
products; and
|
|
·
|
Build a national and well-known
brand name in the China automotive replacement market through intensive
marketing campaigns.
|
Therefore,
our strategies are to capitalize on our competitive advantages, expand our
current market penetration, and benefit from the anticipated rapid growth in
China’s automotive replacement market.
4
Industry
and Market Analysis
Fast
Growing China Automotive Market
China has
experienced rapid economic growth in the last 20 years and is currently the
world’s second largest economy after the United States. In 2009, China achieved
a GDP of USD $5.2 trillion. According to the China State Statistics Bureau, by
2013, China’s automotive market is expected to comprise over ten percent (10%)
of global automotive sales.
Today,
all of the world’s major automakers are present in China, including but not
limited to, Ford, General Motors, Volkswagen, Toyota, Honda, and Chrysler.
China’s automotive industry has shown double-digit growth in terms of percentage
growth in recent years and such robust growth is expected to continue. There are
several key drivers that fuel China’s future growth, such as government policy,
higher disposable income of urban residents, infrastructure improvement, and
rapid proliferation of car models.
China
Automotive Replacement Market
The China
automotive replacement market is experiencing significant growth alongside the
rapid growth of China’s automotive market. Some of the key growth drivers
include:
|
·
|
Increase
in Vehicle Population – According to the Xinhua News
Agency, the vehicle population grew to over 76.19
million vehicles as of the end of 2009, and is forecasted to rise to 200
million vehicles by 2020 at an average annual growth rate of approximately
20%;
|
|
·
|
Increase
in the Number of Cars that are Between Four and Seven Years
Old – As a result of
the large sales in the last decade, the vehicles in China are relatively
new, but more and more vehicles are owned in the PRC between four and
seven years. We expect to see more repairs and maintenance needed as
vehicles grow older, leading to the generation of more replacement sales;
and
|
|
·
|
Breadth
of Automotive Parts Needed – For a replacement market
distributor/retailer to serve the largest possible market, it has to have
the scale and the capacity to carry an extensive line of products. We see
American, Japanese, Korean and other foreign original equipment
manufacturers (OEMs) bring a great variety of vehicle technologies and car
models into China. This complicates and challenges the young and immature
China automotive replacement market. We are able to serve the largest
possible market, and have the scale and capacity to carry an extensive
line of products.
|
Growth
Strategy
We
believe that we are positioned to be a leading national distributor of
automotive replacement parts in China. We plan to first build store networks by
opening wholly-owned stores in capital cities throughout China, such as
Shanghai, Beijing, Hangzhou, Nanjing, Shijiazhuang, Hefei, and Fuzhou that will
provide middle-to-high end brand name products as well as a wide selection of
private label products.
We
believe that automotive parts chain stores like us which have multiple locations
have competitive advantages in customer service, product offerings, marketing,
and distribution, as compared to independent retailers. This allows
us to address and effectively respond to the following trends:
|
·
|
The need for the ability to
provide a broad selection of brands and replacement/maintenance
items;
|
|
·
|
The phase out of the prevailing
brand dealership as the primary distribution channel for automotive
replacement parts; and
|
|
·
|
The need for an automotive
replacement parts chain operation to consolidate and regulate the market
disorganization and fragmentation of the China automotive
aftermarket.
|
Aggressively
Open New Stores in New Markets
We intend
to aggressively open new stores and acquire/consolidate with, regional
distributors to achieve penetration in more geographic locations. As a result,
we plan to open approximately 40 stores by the end of 2010 and 250
stores by 2014.
Our
selection process begins by targeting provincial capitals/large markets for
expansion of our store networks. Such current target markets
include Shanghai City and Jinan City in Shandong Province, Guangzhou City
in Guangdong Province, Chengdu City in Sichuan Province and Zhengzhou City in
Henan Province. While we have faced, and expect to continue to face,
aggressive competition in the more densely populated markets, we believe that we
have competed effectively in certain developed coastal areas in China, such as
Shanghai City, Zhejiang, and Jiangsu Provinces, and that we are well
positioned to continue to compete effectively in such markets. Once we have a
well-established presence in our selected capital cities (Hangzhou, Fuzhou,
Shijiazhuang, and Hefei), we will start to penetrate into second tier cities
such as Qingdao, Weifang, and Yantai in Shandong Province, and
Shenzhen, Dongguan, and Foshan in Guangdong Province.
5
To date,
we have been successful in locating suitable sites for the construction of new
stores. We typically open new stores by constructing the store at a site we
lease. Then, according to our Company’s inventory control (IC) system,
we stock the new store with furniture and inventory and hire and train
employees to complete the opening of our new stores.
We choose
store sites that are strategically located in clusters within geographic areas
that complement our distribution system in order to achieve economies of scale
in management, advertising, and distribution costs. Other key factors we
consider in the site selection process include:
|
·
|
projected future
profitability;
|
|
·
|
cost of real
estate;
|
|
·
|
population density and growth
patterns;
|
|
·
|
administrative level of the
city;
|
|
·
|
transportation
infrastructure;
|
|
·
|
local GDP and “R ratio” (vehicle
price/per capita GDP);
|
|
·
|
demographics such as age and per
capita income;
|
|
·
|
vehicle counts and vehicle
profiles;
|
|
·
|
the number and type of existing
automotive repair
facilities;
|
|
·
|
the number and type of customers
(such as automotive repair facilities) to be served;
and
|
|
·
|
the number of other retail auto
parts competitors within a pre-determined radius and the operational
strength of such
competitors.
|
Same
Store Sales Growth
We will
constantly improve our service and product mix to achieve higher sales and
profitability in our existing stores. We believe that superior customer service
generates customer satisfaction, which ultimately generates increased sales. To
increase our profitability, we will constantly seek to add more profitable
private label products to our existing product lines.
Selectively
Develop Franchise Stores
We
believe that national chains operate more efficiently than smaller independent
operators. When our brand image is well accepted by the market, we will
selectively develop franchise stores in smaller cities to rapidly penetrate the
market and strengthen our position as a leading automotive replacement parts
distributor.
Store
Network
Current
Store Locations
Our
business plan divides the China market into the six geographic regions listed
below. Each geographic region is led by a regional (subsidiary) manager, who
reports directly to our headquarters. Our regional managers currently oversee
seven to ten stores. The following table describes the six sales
regions:
6
Regions
|
Provinces
and Municipalities Covered
|
|
East
China
|
Fujian,
Shanghai, Zhejiang, Jiangsu, Anhui, Shandong
|
|
North
China
|
Hebei,
Henan, Shanxi, Beijing, Tianjin, Shanxi
|
|
North-East
China
|
Inner
Mongolia, Jilin, Liaoning, Heilongjiang
|
|
North-West
China
|
Ningxia,
Xinjiang
|
|
South-West
China
|
Sichuan,
Yunnan, Guizhou, Chongqing, Chengdu
|
|
South
China
|
|
Guangdong,
Hubei, Hunan,
Jiangxi
|
On
average, our stores carry approximately 19,000 individual stock units and cover
approximately 1039 square feet. As of September 30, 2010, we operate an
aggregate of approximately 38,441 square feet in our 37 stores. Our stores are
served primarily by the nearest regional distribution center, but they also have
access to the larger selection of inventory available at the applicable master
distribution store. Our East China master distribution center covers
approximately 53,820 square feet. Two of our regional distribution centers,
Nanjing and Hangzhou, cover approximately 2,150 square feet and 3,230 square
feet, respectively.
The
following table lists the geographic location of our 37 stores:
Regions
|
Provinces
|
No. of Stores
|
Store locations
|
|||
East
China
|
Shanghai
|
6
|
Qingpu,
Putuo, Fengxian, Longhua, Pudong, Xuhuihuaji
|
|||
Zhejiang
|
9
|
Jintong,
Yiwu, Jinhua, Jiaxing, Ningbo (2), Taizhou, Wenzhou,
Shaoxing
|
||||
Anhui
|
2
|
Hefei
and Wuhu
|
||||
Jiangsu
|
9
|
Nanjing
Ningnan, Nanjing Xinyi, Nantong, Wuxi, Suzhou, Yangzhou, Kunshan, Xuzhou
and Changzhou
|
||||
Fujian
|
1
|
Fuzhou
|
||||
North
China
|
Hebei
|
5
|
Shijiazhuang,
Jiyuan, Shijiazhuang Donglian, Tangshan, Baoding Handan
|
|||
Beijing
|
1
|
Beijing
|
||||
Tianjin
|
2
|
Tianjin,
Tanggu
|
||||
|
Shanxi
|
|
2
|
|
Taiyuan,
Datong
|
We use a
uniform and consistent corporate visual image in terms of store layout and
merchandise presentation. Merchandise is arranged to satisfy our “14 Rules for
Merchandise Presentation” to provide easy customer access, maximum selling
space, and to prominently display high-turnover products and accessories to
customers. The “14 Rules for Merchandise Presentation” require (i) the products
should be displayed in the right place where the customers can easily see them;
(ii) we put as many products as we can on the storage racks; (iii) the products
should be displayed in vertical centralized; (iv) we put heavy products downside
and light products upside; (v) we make sure there
are complete range of products displayed; (vi) the storage racks should be fully
displayed (vii) the display should be designed dynamic and full of originality;
(viii) key products should be given a prominent position on the display; (ix)
make sure the products on the racks are easy to reach for the customer; (x) the
display should be unified and integrated; (xi) the products should be displayed
in a tidy and neat condition; (xii) first in first out (FIFO) rotation of
display units; (xiii) the minimum reserve principle; and (xiv) the products
stack base should be regular.
Store
Automation
To manage
store operations and enhance customer service, we use computers and Ufida
Enterprise Resource Planning systems in all of our stores. Our system is linked
with the computers located in each of our distribution centers and our
headquarters. This system reduces a customer’s checkout time, facilitates
customer management, and enhances services and customer loyalty. It also
collects detailed sales information, which assists in store and financial
management, internal communications, strategic planning, inventory control, and
distribution efficiency.
7
Target
Customers
We target
two groups of customers: (i) second tier wholesalers and (ii) professional
installers, such as repair shops, automobile cosmetics shops and 4S shops
(automobile dealers) in China. Commercial sales are the foundation of our
business because, in the past in China, private vehicle owners usually rely on
professionals for repair and maintenance. The Do-It-Yourself (DIY) market, which
is comprised of consumers who typically repair and maintain their vehicles
themselves, is currently very limited. Therefore, we are focused on commercial
sales at this time.
Second
Tier Wholesalers
We define
second tier wholesalers as automotive replacement parts wholesalers in the
provinces, provincial capitals, and second tier cities. Provincial wholesalers
sell in the large provinces, provincial capital wholesalers sell in the capital
cities of the provinces, and second tier city wholesalers sell in large cities
that are not as well known as first tier cities (such as Beijing and Shanghai
and Shenzhen). The second tier wholesalers’ distribution network typically
covers most of the small retailers and repair shops in the provinces, provincial
cities, and second tier cities, as applicable. Their purchasing volume is large,
but their returns
are low. As of
September 30, 2010, we had 225 wholesaler customers.
Professional
Installers
The
demand of professional installer customers is typically smaller, but generally
steady. Such professional installer customers purchase a variety of products and
represent a majority of our customer list. There are some
professional installers responsible for a significant amount of our sales, but
the loss of such professional installers won’t have a material adverse effect on
our financial condition and results of operation because the gross profits from
sales to professional installers only constitutes approximately 1% of our
current gross profits. We seek to develop long-term strategic
relationships with these customers. The category of professional installer can
be divided into three groups:
|
·
|
Repair
shops : Repair shops provide regular
vehicle maintenance and repair services. Repair shops are sales terminals
with small purchasing quantity, but high margin contribution. We consider
repair shops as our priority customers. While domestic and foreign chain
shops are emerging in China, we believe that this business type will
become the dominant channel for vehicle owners to get services/parts upon
expiration of their OEM warranty. According to Auto China, as of 2003,
there were over 300,000 automotive service providers in China, of which
approximately 220,000 were professional installer repair shops that are
accredited to perform classified services. The remaining 80,000 did not
have proper accreditation. We attract these repair shop customers with our
full line of products, on time delivery, inventory management, and
professional solutions;
|
|
·
|
Cosmetics
shops : Cosmetics
shops provide simple regular vehicle maintenance services on the exterior
of vehicles. Cosmetics shops are also sales terminals with small
purchasing quantities, but high margin contribution;
and
|
|
·
|
4S
and OEM authorized shops : These professional installers
are automobile dealers that provide related after-sale maintenance and
repair services. 4S shops are considered sales terminals with uncertain
purchasing quantity, but high margin contribution. Many vehicle
owners prefer these shops for major repairs and genuine
parts.
|
There are
also small, independently owned repair garages that sometimes use substitute and
counterfeit parts. These types of shops are not our priority customers. We
believe in the long run, most of these repair shops will eventually be
eliminated from the market.
Major
Suppliers
We select
brand name global and local automotive parts manufacturers as our suppliers. We
will purchase collectively and directly from manufacturers so as to eliminate
the middle layers of distributors/wholesalers and gain large order discounts,
enabling us to offer more competitive prices.
There
were approximately 2,000 auto parts manufacturers in China at the end of 2005.
Among those are about 500 joint ventures/wholly-owned foreign enterprises,
including such enterprises as Bosch, Delphi, Visteon, Denso, Siemens, and
Halla. These manufacturers seek reliable and competent distributors
to market their brand name products and protect their intellectual property from
the attacks of counterfeiters. These are our priority suppliers because they can
help us reinforce our brand name and enhance our product image.
8
The
approximately 1,500 local parts producers are relatively small and still in
their early growth stage with respect to the replacement market, though a
significant number of them are able to produce good quality
parts. Some of these smaller producers have supplied the foreign
replacement market for years. We plan on leveraging our distribution/retail
network and buyer’s bargaining power to source private label products from these
manufacturers to increase our profit margins.
As of
September 30, 2010, we had 52 suppliers. Our largest supplier, YBM Group Co.,
Ltd., accounted for 27.97% of our total purchase dollars and our top five
suppliers combined accounted for approximately 73.56%of our total
purchases. We have no long-term contractual purchase commitments with
any of our suppliers and our supplier contracts usually have a term of one year.
We believe that alternative supply sources exist, at similar cost, for most
types of products sold. The following table sets forth the names of our major
suppliers.
Brand
|
Products
|
Supplier
Name
|
||
YBM
|
Filter
|
Shanghai
YBM Filter Co. Ltd
|
||
Olande
|
Filter
|
Shanghai
YBM Filter Co. Ltd
|
||
YBM
|
Belt
|
Jiangsu
YBM Rubber Co. Ltd
|
||
Senlite
|
Belt
|
Jiangsu
YBM Rubber Co. Ltd
|
||
MAHLE
|
Filter
|
Mahle
Trade (Shanghai) Co. Ltd
|
||
PHILIPS
|
Light
bulb
|
Philips
(China) Co. Ltd
|
||
Narva
|
Light
bulb
|
Philips
(China) Co. Ltd
|
||
DENSO
|
Sparkplug
|
Beijing
Zhongqi United Auto Parts Chain Co. Ltd
|
||
DENSO
|
Windshield
wiper
|
Beijing
Zhongqi United Auto Parts Chain Co. Ltd
|
||
ELF
|
Oil
and Transmission Fluid
|
Elf
Lubricant (Guangzhou) Co. Ltd
|
||
BOSCH
|
Windshield
wiper
|
Bosch
Trade (Shanghai) Co. Ltd
|
||
BOSCH
|
Sparkplug
|
Bosch
Trade (Shanghai) Co. Ltd
|
||
BOSCH
|
Filter
|
Bosch
Trade (Shanghai) Co. Ltd
|
||
BOSCH
|
Brake
pads
|
Bosch
Trade (Shanghai) Co. Ltd
|
||
OP
|
Belt
|
OP
(China) Co. Ltd
|
||
7CF
|
Maintenance
items
|
Shenzhen
Rainbow Fine Chemicals Co. Ltd
|
||
Osram
|
|
Light
bulb
|
|
Osram
(China) Lighting Co.
Ltd
|
Competitive
Strengths
Under the
current circumstances, we believe the following strengths allow us to compete
effectively in the automotive aftermarket in China:
Fast
decision-making and execution
Unlike
some other chain retailers in the industry, which developed their network
through acquiring the majority shares of independently-owned stores and thus
have uncoordinated interests, we have only one direct parent and one indirect
parent at the top of our capital structure and all of our stores are wholly
owned, enabling us to make and execute decisions quickly. Moreover, our flat and
lean organizational structure allows us to have efficient
execution.
Extensive
industry experiences and resources
Key
members of our senior management team have, on average, six (6) years of
experience in the China automotive aftermarket industry. We have developed deep
relationships and connections with local industry players and accumulated
extensive local knowledge that will serve as critical building blocks for our
success. As a result, we have a clear understanding of the local customers’
preferences and needs, and are able to cater our products to those local
characteristics. Our supporting management and workforce are well trained and
motivated.
Broad
selection of brands represented
In less
than one year, we entered into dealership contracts with eight brands: Philips,
Bosch, Denso, Mahle, Osram, 7CF, Lihua, and Elf. We have confidence that with
the strengths we possess in our brand name, store location, marketing
assistance, product mix, inventory/logistics, and management, we will be able to
attract more brands to our store. We believe that under existing market
conditions, with dozens of car makes and models, our ability to carry a great
variety of name brand products is a key component to acquiring customers and a
crucial element to chain store success.
9
Products
and Services
Products
We offer
a broad selection of national brand name and private label automotive
aftermarket products for domestic and imported vehicles. Our products include
automotive replacement parts, maintenance items, and accessories. We mainly
serve the professional installers and second tier wholesalers.
Our
merchandise generally consists of nationally recognized and well-advertised
brand names with big market influence products, such as Philips, Bosch,
Denso, Mahle, Osram, 7CF, and Elf. In addition to our brand name products, our
stores carry a variety of high-quality private label products. Because most of
our private label products are produced by carefully selected manufacturers and
meet or exceed original equipment manufacturer specifications, we believe that
our private label products are generally of equal quality with comparable brand
name products carried in our stores, but at equal or lower prices. These factors
play key roles in influencing our customers’ purchasing behaviors. Currently,
our private label products include, but are not limited to, brake pads, filters,
transmission belts, and refrigerants.
Our
products are grouped into two categories:
|
·
|
Dealer
products - Products
sold under dealership agreement in defined regions;
and
|
|
·
|
OEM
products - Private
label proprietary name
products.
|
The items
below are examples of the typical products we keep in our stores:
—
Batteries
|
—
Filters
|
|
— Brake
pads
|
— Windshield
wipers
|
|
— Spark
plugs
|
—
Refrigerants
|
|
—
Horns
|
—
Bulbs
|
|
— Oil &
transmission fluids
|
|
— Maintenance
items
|
The
following table sets forth our top 10 best selling products in
2010:
Model
|
Product
|
Units sold
|
||||
1
|
f8dcor
|
Bosch
Sparkplug
|
226341
|
|||
2
|
12499
|
Philips
Light bulb
|
174442
|
|||
3
|
w7dc
|
Bosch
Sparkplug
|
161099
|
|||
4
|
12498
|
Philips
Light bulb
|
112537
|
|||
5
|
ac247
|
7CF
Cleaning agent
|
93660
|
|||
6
|
12754
|
Philips
Light bulb
|
76049
|
|||
7
|
510038
|
YBM
Filter
|
17930
|
|||
8
|
512005
|
YBM
Filter
|
15163
|
|||
9
|
oc488
|
MahleFilter
|
12762
|
|||
10
|
514002
|
YBM
Filter
|
10044
|
The
following table sets forth the percentage sales by product types in
2010:
Products
|
Percent
of sales
|
|||
Brake
systems
|
4
|
%
|
||
Filters
|
10
|
%
|
||
Transmission
belts
|
2
|
%
|
||
Oil
& transmission fluids
|
26
|
%
|
||
Spark
plugs
|
12
|
%
|
||
Lighting
|
30
|
%
|
||
Windshield
wipers
|
4
|
%
|
||
Storage
battery cells
|
5
|
%
|
||
Maintenance
items
|
7
|
%
|
||
Total
|
100
|
%
|
10
Product
pricing is generally established to compete with the pricing policies of
competitors in the same market area. We seek to optimize profitability while
maintaining competitiveness. Most products that we sell are priced based on a
combination of internal gross margin targets of 18% and the prices of our
competitors. Additional savings are available to our customers through volume
discounts and special promotional pricing. Consistent with our low price
guarantee, each of our stores will match any verifiable price on any in-stock
product of the same or comparable quality offered by our
competitors.
Services
We are
constantly working to understand our customers’ needs and wants in order to
better serve them and build long-lasting, loyal relationships .
Warranty
We only
distribute products to wholesalers/repair shops which provide services related
thereto. Our parts suppliers are responsible for all warranties related to the
parts. Repair shops are responsible for their after sales
services.
Customer
Service
We seek
to attract new professional installer customers and to retain existing customers
by offering superior customer service, the key elements of which
include:
|
·
|
Superior in-store point of sale
service from highly-motivated, professional, and technically proficient
store personnel;
|
|
·
|
Extensive selection and
availability of products;
|
|
·
|
Attractive stores in convenient
locations; and
|
|
·
|
Competitive pricing that is
supported by a “good, better, best” product assortment designed to meet
all of our customers’ quality and value
preferences.
|
We
believe that the satisfaction of professional installer customers is
substantially dependent upon our ability to provide, in a timely fashion, the
specific automotive products requested. We continuously refine the inventory
levels and product mix carried in our stores based, in large part, on the sales
movement tracked by (i) our IC system, (ii) market vehicle registration data and
(iii) management’s assessment of the changes and trends in the
marketplace.
Distribution
and Logistics
We employ
a policy of centralized procurement and de-centralized sales. By implementing
this policy, we seek to assure product availability while lowering our inventory
carrying costs and controlling our inventory. We use the Ufida ERP system
(version U8.72) to manage our inventory and warehousing. By centralizing the
procurement function, we gain strong bargaining power from our suppliers.
Further, centralized procurement equips us with better credit terms and better
services.
We
currently operate three distribution centers (Hangzhou, Nanjing, Shijiazhuang)
covering an aggregate of approximately 59,200 square feet. Our distribution
centers are equipped with forklifts and hydraulic power trailers, which expedite
the loading and unloading of our inventory. The distribution centers utilize
technology to electronically receive orders from computers located in each of
our stores. Each of our stores is connected through secured data transmission
technology to our distribution centers and corporate headquarters.
We have a
three-tier warehousing and distribution system to optimize inventory and
logistics management. Under this system, we have (i) master distribution
centers, (ii) regional distribution centers, and (iii) store
inventories.
The first
tier, the master distribution center, is able to supply dealer products,
distribution products, and OEM products. It accepts orders directly from stores
and delivers the merchandise. The master distribution centers have two important
functions: (i) retail sales to professional installers by stocking a complete
line of parts for different vehicle models/makes to assure product availability
and (ii) wholesales of dealer products by assuring prompt action to competition
and market demand.
11
The
second tier is the regional distribution center, such as our Nanjing regional
distribution center and Hangzhou regional distribution center, which is further
categorized into two subcategories: (i) the circulation distribution center and
(ii) the supply distribution center. The circulation distribution center manages
all dealer products while the supply distribution center is setup for
transitional inventory.
The third
tier is the store inventories, which assure the store’s daily operation and is
only responsible for the store’s everyday sales. The store inventories are
determined based on sales numbers. Currently, the number of inventory is
determined by the average inventory level to sales ratio. The average
inventory level is determined by the (i) sum of the (A) storage during the early
part of a month and (B) storage at the end of the month, divided by
2.
Most of
our merchandise flows from our distribution centers to our stores by third-party
transportation companies. Currently, the distribution centers typically carry an
inventory of 40%-50% of our average monthly sales. We believe that with our
growing scale, we will be able to have more orders shipped directly from
suppliers to our distribution centers to reduce the warehousing and
transportation costs. Each of our stores and distribution centers have at least
one van or truck for merchandise delivery to satisfy customer
needs.
Sales and
Marketing
Our sales
team’s salary is performance based. We have formulated specific performance
evaluation standards for each sales position.
Sales
to the Professional Installer
We have
139 full-time sales managers and sales representatives strategically located
across our primary market areas of Shanghai, Nanjing,
Hangzhou, Shijiazhuang, Beijing, and Tianjin. Each sales representative is
dedicated solely to selling to, keeping communication with, and supporting the
professional installers. Marketing materials, such as brochures, flyers,
catalogs, and complementary items are distributed on a continuous basis to
professional installer customers. We attract customers mainly through
competitive pricing, our full line of products, timely delivery, and good
customer service. We also seek to develop mutually beneficial strategic
relationships with repair shops, cosmetic shops, and 4S shops. One of our
strategic alliances is with Automobile Repair Chain, which has 40 shops and has
entered into joint collaborations with us on selected products.
Sales
to Second Tier Wholesalers
Currently,
approximately 235 second tier wholesalers purchase automotive replacement
products from us. Our subsidiaries’ managers are
responsible for developing and managing wholesale customers in their region.
These customers are typically parts wholesalers and maintenance item wholesalers
in provincial capitals, as well as parts wholesalers in smaller cities. We
develop relationships with wholesaler customers by providing them volume
discounts, promotional assistance, marketing and sales support.
Marketing
of Vomart Brand
We will
launch marketing campaigns to promote the Vomart brand name to suppliers,
customers, and the general public. In the first phase of our marketing strategy,
we will support our marketing through print advertising, in-store promotional
displays, promotional gifts, and other direct communications with the
marketplace. The print advertising will consist of color circulars, flyers,
brochures, and newspaper advertisements. In the second phase, we will advertise
in selected industry journals, Internet websites, and trade shows to reinforce
our image and name recognition. We will then analyze and measure the results of
each marketing campaign and identify different customer segments and
corresponding needs to enhance our future marketing success rate in attracting
new customers.
Competition
The sale
of automotive parts, accessories, and maintenance items is highly competitive in
the China market. We operate mainly in the commercial sale (professional
installers) markets of the automotive replacement industry. Our primary
competitors are (i) regional retail chains of automotive parts stores, (ii)
wholesale stores and stores that purchase large quantities of goods, but
resell merchandise to merchants rather than to the end user customers
(“jobbers”) and (iii) independent retailers. We believe that chains of
automotive parts stores like us that have multiple locations in one or more
markets have competitive advantages in the assortment of products, customer
service, inventory selection, marketing, purchasing, and distribution as
compared to independent retailers and “jobbers” that are not part of a chain. We
are able to compete primarily through product selection and availability,
quality and price, store location and store layout, name recognition, and
customer service.
12
For chain
operators, we identified the following domestic competitors: Youpei Auto Parts,
Putong Auto Service, Longfeng Auto Parts, and Andesen Auto Parts. We also
identified several foreign competitors such as Lanba Auto Supermarket. We
believe that compared with our foreign peers, we have a deeper understanding of
the local market and flexibility/efficiency in our decision making.
Properties
As of
September 30, 2010 and June 30, 2010, the detail of property, plant and
equipment was as follows:
As
of September
30,
2010
|
As
of June
30,
2010
|
|||||||
Office
equipment
|
$
|
107,456
|
$
|
129,981
|
||||
Furniture
and fixture
|
79,710
|
44,414
|
||||||
Automobiles
|
280,068
|
217,148
|
||||||
Sub-total
|
467,234
|
391,543
|
||||||
Less:
accumulated depreciation
|
(96,620
|
)
|
(81,263
|
)
|
||||
Property,
plant and equipment, net
|
$
|
370,614
|
$
|
310,280
|
Intellectual
Property
We regard
our trademarks, trade secrets, patents, and similar intellectual property as
critical factors to our success. We rely on patent, trademark, and trade secret
law, as well as confidentiality and license agreements with certain of our
employees, customers, and others to protect our proprietary rights.
We
currently use the trademark “VOMART” which is owned by YBM Group China Co., Ltd.
(“YBM”), an affiliated company. We are exclusively licensed to use
the “VOMART” trademark without consideration pursuant to the Letter of
Undertaking issued by YBM, dated July 30, 2010. On September 1, 2010,
YBM filed an application with the Trademark Office of the State Administration
for Industry & Commerce of the PRC (“Trademark Office”) to transfer the
trademark “VOMART” to us. Such transfer application has been accepted and is
currently under review by the Trademark Office. For details about our
relationship with YBM, please refer to the Related Party Transactions
section.
We have
also submitted the application for trademark “WOT” and which is under review by
the Trademark Office.
Set forth
below is a detailed description of the trademarks we currently use:
Trademark
|
Registration
/Application No.
|
Class
|
Effective Date
|
Expiration Date
|
Owner/Applicant
|
|||||
6454234
|
12
|
March
14, 2010
|
March
13, 2020
|
YBM
Group
China
Co., Ltd.
|
||||||
8248870
|
9
|
Registration
Application Accepted on
May
20, 2010
|
Hongkong
Charter
International
Group
Limited
|
Currently
we do not own any patent or copyright since we concentrate on distribution of
automotive replacement parts and accessories rather than manufacture of
those. The use of the patents or copyrights involved in our
distribution business shall be in accordance with particular agreements with the
owners of intellectual property rights in question, and relative laws and
regulations.
Employees
As of
September 30, 2010, we employed approximately 290 full-time employees who work
at the store level, in distribution centers, and in support functions at our
corporate office.
13
We
believe that capable management and well-trained employees are the most
important success factors for our business. Each of our stores typically employs
between five and six persons, including a store manager. A majority of our
employees have prior automotive industry experience. In addition to on-the-job
training, we provide formal training programs by providing rotations, weekly
training sessions on products and technology, standardized training manuals, and
specialized programs.
Store
managers and sales representatives are incentivized through performance-based
bonuses. In addition, our growth has provided opportunities for the promotion of
qualified employees. We believe that these opportunities are important to
attract, motivate, and retain high quality people. We have never experienced any
material labor disruption. We believe we are efficient in retaining talented
employees and team building.
Government
Regulations
Below is
a list of PRC governmental agencies which may have a jurisdiction over our
business:
Agency
|
Functions
|
|
Stated
Administration of Industry and Commerce (“SAIC”)
|
Maintaining
market order and protecting the legitimate rights and interests of
businesses and consumers by carrying out regulations in the fields of
enterprise registration, competition, consumer protection, trademark
protection and combating economic illegalities.
|
|
Ministry
of Science and Technology (“MST”)
|
Lay
out science and technology development plans and policies; draft relevant
regulations and rules and guarantee implementation of regulations and
rules
|
|
State
Administration of Taxation (“SAT”)
|
Draft
tax regulations and implementation rules and propose tax
policies.
|
|
State
Administration of Foreign Exchange (“SAFE”)
|
Make
regulations and policies governing foreign exchange market activities and
manage state foreign exchange
reserves.
|
The PRC
government imposes extensive regulations over the automotive
industries. The following provides a brief description of the PRC
laws or government regulations that materially influence our business and their
expected impact on our business:
PRC
Product Quality Law
On
February 22, 1993, the Standing Committee of the National People's Congress
passed Product Quality Law of the People's Republic of China, which was amended
on July 8, 2000. This Law is enacted with a view to strengthen the
supervision and control over product quality, to define the liability for
product quality, to protect the legitimate rights and interests of users and
consumers. Manufacturers and distributors of products are subject to this
Law.
We sell
automotive replacement parts and accessories as a distributor instead of
manufacturing products by ourselves. We offer a broad selection of national
brand name and private label automotive aftermarket products for domestic and
imported vehicles. No matter which kind of products we sell, as a seller, we are
responsible for the quality of the products we distribute by all prudent manners
and are responsible for repair, replacement or return and compensation for the
damages done to end-users or consumers in accordance with PRC Product Quality
Law.
It is
harmful, as well as prohibited for us, to sell any products that are
unqualified, counterfeit or expired. If unqualified products were
sold to customers, the seller might face damage claims from
customer. If relevant authority found that we did not comply with PRC
Product Quality Law, we would be ordered to stop selling unqualified products
and pay a fine. The gain as a result of our sale of unqualified products may be
confiscated. Our business license may be revoked. If this kind of violation were
very serious, it would be deemed a crime.
PRC
Standardization Law
On
December 29, 1988, the Standing Committee of the National People's Congress
passed Standardization Law of the People's Republic of China This Law
stipulates the formulation and implementation of standards on industrial
products with the purpose of promoting technical progress, proving product
quality and increasing social and economic interest. Manufacturers of different
automotive replacement parts and accessories are subject to PRC Standardization
Law.
14
When we
purchase brand name as well as private label automotive replacement parts for
distribution, we must ensure those products are in compliance with the relevant
production standards under this law. If relevant authority found that the
products we distribute do not conform to the applicable standards, we may be
ordered to discontinue our sale of such products. The gains as a result of our
sale of such products may be confiscated. We may also be fined by the relevant
authorities.
PRC
Trademark Law
On August
23, 1982, the Standing Committee of the National People's Congress passed
Trademark Law of the People's Republic of China, which was amended on February
22, 1993 and on October 27, 2001. This Law is enacted for the
purposes of improving the administration of trademarks, protecting the exclusive
right to use a trademark, and encouraging producers to guarantee the quality of
their goods and maintain the reputation of their trademarks, with a view to
protecting consumers' interests.
As an
auto parts distributor, our business involves the registration, assignment and
protection of the trademark. The trademark "VOMART" we are authorized to
exclusively and freely use is owned by YBM Group China Co., Ltd. and is in the
process of being transferred to us. We have also submitted the application for
trademark "WOT" which is under review by the Trademark Office.
We are in
compliance with this Trademark Law. If we commit any acts prohibited
by the law, we may be ordered to make rectification within a certain time frame,
subject to a fine and the registered trademark in question may be revoked by the
Trademark Office of the PRC.
Regulation
on the Administration of Commercial Franchises
On
January 31, 2007, the State Council of PRC passed Regulation on the
Administration of Commercial Franchises. This regulation is
formulated for the purpose of regulating commercial franchises, promoting the
healthy and orderly development of the commercial franchise industry and
maintaining the market order.
Since we
operate business by establishing franchise chains, we are required by this
Regulation to file our commercial franchises contract with governmental
authority, ensure the product and service quality, disclose information to
licensees and so on.
We are in
compliance with this Regulation. If we violate the provisions of this
regulation, we may be subject to a fine. If any of our earnings are
deemed illegal, they may be confiscated by the relevant
authorities.
PRC
Law on Import and Export Commodity Inspection
On
February 21, 1989 the Standing Committee of the National People's Congress
passed the Law of the People's Republic of China on Import and Export Commodity
Inspection, which was amended on April 28, 2002. This Law is enacted
with a view to strengthen the inspection and ensure the quality of import and
export goods, and to protect the legitimate rights and interests of the parties
involved in foreign trade. This law has a material influence on us since we are
engaged in the business of imports and exports of auto parts, motorcycle
accessories, machinery parts, instrument, meter, hardware and electrical
products. We are in compliance with this law. Any failure to comply
with the law will subject us to a fine. The goods in question may be
confiscated and we may be subject to criminal investigations if the violation
constitutes a crime.
Research
and Development
We did
not incur any research and development expenses as of September 30, 2010, June
30, 2010 and 2009, and do not anticipate incurring such expenses in the
future.
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this Current Report before making an investment
decision with regard to our securities. The statements contained in
or incorporated herein that are forward-looking statements 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, you may lose all or part of your
investment.
15
RISKS RELATING TO OUR
BUSINESS
WE
FACE RISKS RELATED TO GENERAL DOMESTIC AND GLOBAL ECONOMIC CONDITIONS AND TO THE
RECENT CREDIT CRISIS.
We
currently generate sufficient operating cash flows, which combined with access
to the credit markets, provide us with significant discretionary funding
capacity.
However,
the current uncertainty arising out of domestic and global economic conditions,
including the recent disruption in credit markets, poses a risk to the economies
in which we operate that has affected demand for our products and services, and
may affect our ability to manage normal relationships with our customers,
suppliers, and creditors. If the current situation deteriorates significantly,
our business could be materially negatively affected, including such areas as
reduced demand for our products and services from a slow-down in the general
economy, or supplier or customer disruptions resulting from tighter credit
markets. In addition, terrorist activities may cause unpredictable or
unfavorable economic conditions and could have a material adverse effect on the
Company’s operating results and financial condition.
WE
PLAN TO RAPIDLY GROW OUR BUSINESS AND MAY NOT BE ABLE TO MANAGE OUR GROWTH IF WE
EXPAND TOO QUICKLY, WHICH COULD HURT OUR RELATIONSHIPS WITH OUR CURRENT AND
FUTURE CUSTOMERS AND ULTIMATELY OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
We plan
to open approximately 40 new stores in 2010 and 250 new stores by 2014 in order
to, among other things, achieve market penetration in more geographic
locations. Our period of rapid growth will place a significant strain
on our senior management team, especially at our headquarters, and our financial
and other resources. Our rapid growth may require us to incur
additional expenses before experiencing an increase in revenue, which increase
pressure on our management to ramp up sales as quickly as possible. Any
expansion may expose us to increased competition, greater overhead, marketing
and support costs and other risks associated with the expansion of a business.
Our ability to manage rapid growth effectively will require us to continue to
improve our operations, improve our financial and management information systems
(e.g., account receivables, cash management, asset allocation, etc.) and to
train, motivate and manage our employees. Our current personnel,
systems, procedures and controls will likely not adequately support future
operations. In that event, we will need to expand our finance, administrative,
and operations staff. Difficulties in effectively managing issues
presented by such a rapid expansion may result in a reduction in the quality of
our services and our customer support may deteriorate. This could prompt our
current customers to discontinue their relationships with us and hurt our
business results.
AS
WE OPEN NEW STORES AND GROW IN SCALE, WE WILL NEED TO STOCK MORE INVENTORY TO
PROVIDE PRODUCT AVAILABILITY WHILE AT THE SAME TIME ACHIEVING COST REDUCTION AND
EFFICIENCY TO BE COMPETITIVE. IF WE ARE UNABLE TO OVERCOME THE
CHALLENGES, OUR BUSINESS WILL SUFFER.
The
number of new stores that we plan to open will require us to significantly
increase our inventory. We will have to adjust our systems in order to meet the
challenges presented by the expansion impact on procurement, inventory and
logistics. We may not be able to do so to be profitable within our
timeline or at all. We may not be able to acquire the additional
inventory needed to implement our business plan. If we are unable to
acquire auto parts or there is a significant delay in providing the parts, our
customers may look to our competitors to provide such parts, which will decrease
our market share and damage our reputation for our prompt service.
OUR
GROWTH STRATEGY DEPENDS ON OUR ABILITY TO OPEN NEW STORES AND OPERATE THEM
PROFITABLY.
A key
element of our growth strategy is to open additional stores in locations that we
believe will provide attractive returns. Our ability to open new stores on a
timely and cost-effective basis is dependent on a number of factors, many of
which are beyond our control, including our ability to: find quality locations;
reach acceptable agreements regarding the lease or purchase of locations; comply
with applicable zoning, land use and environmental regulations; raise or have
available an adequate amount of money for construction and opening costs; timely
hire, train and retain the skilled management and other employees necessary to
meet staffing needs; and -efficiently manage the amount of time and money used
to build and open each new store. If we succeed in opening new stores on a
timely and cost-effective basis, we may nonetheless be unable to attract enough
customers to new stores because potential customers may be unfamiliar with our
stores or atmosphere. We cannot provide any assurance that our new stores will
meet or exceed the performance of our existing stores or meet or exceed our
performance targets. New stores may even operate at a loss, which could have a
significant adverse effect on our overall operating results. Opening a new store
in an existing market could reduce the revenue at our existing stores in that
market. In addition, historically, new stores experience a drop in revenues
after their first year of operation. Typically, this drop has been temporary and
has been followed by increases in comparable store revenue in line with the rest
of our comparable store base, but there can be no assurance that this will be
the case in the future or that a new store will succeed in the long
term.
16
WE
RELY ON INFORMATION TECHNOLOGY IN CRITICAL AREAS OF OUR AUTO PARTS BUSINESS
OPERATIONS, AND A DISRUPTION RELATING TO SUCH TECHNOLOGY COULD HARM OUR
BUSINESS.
We use
information technology systems for the management of our inventories, processing
costs and customer sales. If the providers of these systems terminate their
relationships with us, or if we decide to switch providers or to implement our
own systems, we may suffer disruptions, which could have a material adverse
effect on our results of operations and financial condition. In addition, we may
underestimate the costs and expenses of switching providers or developing and
implementing our own systems.
OUR
PLANS TO EXPAND OUR PRODUCT LINES AND TO IMPROVE AND UPGRADE OUR INTERNAL
CONTROL AND MANAGEMENT SYSTEM WILL REQUIRE CAPITAL EXPENDITURES IN
2011.
Our plans
to expand our product lines and to improve and upgrade our internal control and
management system will require capital expenditures in 2011. We may also need
further funding for working capital, investments, potential acquisitions and
other corporate requirements. We cannot assure you that cash generated from our
operations will be sufficient to fund these development plans, or that our
actual capital expenditures and investments will not significantly exceed our
current planned amounts. If either of these conditions arises, we may have to
seek external financing to satisfy our capital needs. Our ability to obtain
external financing at reasonable costs is subject to a variety of uncertainties.
Failure to obtain sufficient external funds for our development plans could
adversely affect our business, financial condition and operating
performance.
OUR
PLANNED EXPANSION COULD BE DELAYED OR ADVERSELY AFFECTED BY, AMONG OTHER THINGS,
DIFFICULTIES IN OBTAINING SUFFICIENT FINANCING, TECHNICAL DIFFICULTIES OR HUMAN
OR OTHER RESOURCE CONSTRAINTS.
Our
planned expansion could be delayed or adversely affected by, among other things,
difficulties in obtaining sufficient financing, technical difficulties, or human
or other resource constraints. Moreover, the costs involved in these projects
may exceed those originally contemplated. Costs savings and other economic
benefits expected from these projects may not materialize as a result of any
such project delays, cost overruns or changes in market circumstances. Failure
to obtain intended economic benefits from these projects could adversely affect
our business, financial condition, and operating performances.
WE
NEED TO MANAGE GROWTH IN OPERATIONS TO MAXIMIZE OUR POTENTIAL GROWTH AND ACHIEVE
OUR EXPECTED REVENUES. OUR FAILURE TO MANAGE GROWTH WILL CAUSE A DISRUPTION OF
OUR OPERATIONS, RESULTING IN THE FAILURE TO GENERATE REVENUES AT LEVELS THAT WE
EXPECT.
In order
to maximize potential growth in our current and potential markets, we believe
that we must expand our producing operations. This expansion will place a
significant strain on our management and our operational, accounting, and
information systems. We expect that we will need to continue to improve our
financial controls, operating procedures, and management information systems. We
will also need to effectively train, motivate, and manage our employees. Our
failure to manage our growth could disrupt our operations and ultimately prevent
us from generating the revenues we expect.
WE
CANNOT ASSURE YOU THAT OUR GROWTH STRATEGY WILL BE SUCCESSFUL, WHICH MAY RESULT
IN A NEGATIVE IMPACT ON OUR GROWTH, FINANCIAL CONDITION, RESULTS OF OPERATIONS
AND CASH FLOW.
One of
our strategies is to grow through increasing our product lines. However, there
are many obstacles to successfully expanding our product lines. Therefore, we
cannot assure you that we will be able to successfully overcome such obstacles
and establish our products in any additional markets. Our inability to implement
this organic growth strategy successfully may have a negative impact on our
growth, future financial condition, results of operations or cash
flows.
IF
WE NEED ADDITIONAL CAPITAL TO FUND OUR GROWING OPERATIONS, WE MAY NOT BE ABLE TO
OBTAIN SUFFICIENT CAPITAL AND MAY BE FORCED TO LIMIT THE SCOPE OF OUR
OPERATIONS.
If
adequate additional financing is not available on reasonable terms, we may have
to modify our growth strategy accordingly. There is no assurance that additional
financing will be available to us.
In
connection with our growth strategies, we may experience increased capital needs
and accordingly, we may not have sufficient capital to fund our future
operations without additional capital investments. Our capital needs will depend
on numerous factors, including (i) our profitability; (ii) the release of
competitive products by our competition; and (iii) the amount of our capital
expenditures, including acquisitions. We cannot assure you that we will be able
to obtain capital in the future to meet our needs.
If we
cannot obtain additional funding, we may be required to: (i) limit our
expansion; (ii) limit our marketing efforts; and (iii) decrease or eliminate
capital expenditures. Such reductions could materially adversely affect our
business and our ability to compete.
17
Even if
we do find a source of additional capital, we may not be able to negotiate terms
and conditions for receiving the additional capital that are favorable to us.
Any future capital investments could dilute or otherwise materially and
adversely affect the holdings or rights of our existing
shareholders. We cannot give you any assurance that any additional
financing will be available to us, or if available, will be on terms favorable
to us.
WE
WILL NEED TO ENGAGE ADDITIONAL QUALIFIED EMPLOYEES, WHO MAY BE IN SHORT SUPPLY
OR IN HIGH DEMAND.
Our
future success also depends upon our continuing ability to attract and retain
highly qualified personnel. Expansion of our business and operations will
require additional managers and employees with industry experience, and our
success will be highly dependent on our ability to attract and retain skilled
management personnel and other employees. There can be no assurance that we will
be able to attract or retain highly qualified personnel. Competition for skilled
personnel in the automotive industry is significant. This competition may make
it more difficult and expensive to attract, hire and retain qualified managers
and employees.
THE
LOSS OF THE SERVICES OF OUR KEY EMPLOYEES, PARTICULARLY THE SERVICES RENDERED BY
QUN HU, OUR CHAIRMAN OF THE BOARD, ZHOUFENG SHEN, OUR PRESIDENT AND CHIEF
EXECUTIVE OFFICER AND XIAOMEI WANG, OUR CHIEF FINANCIAL OFFICER, COULD HARM OUR
BUSINESS.
Our
success depends to a significant degree on the services rendered to us by our
key employees. If we fail to attract, train, and retain sufficient
numbers of these qualified people, our prospects, business, financial condition
and results of operations will be materially and adversely affected. In
particular, we are heavily dependent on the continued services of Zhoufeng Shen,
our President, Chief Executive Officer, Qun Hu, our Chairman of the Board, and
Xiaomei Wang, our Chief Financial Officer. The loss of any key employees,
including members of our senior management team and our inability to attract
highly skilled personnel with sufficient experience in our industry could harm
our business.
OUR
LIMITED OPERATING HISTORY MAY NOT SERVE AS AN ADEQUATE BASIS TO JUDGE OUR FUTURE
PROSPECTS AND RESULTS OF OPERATIONS.
Our
limited operating history in the automotive industry may not provide a
meaningful basis for evaluating our business. Vomart entered into its current
line of business in 2008. Although our revenues have grown since our inception,
we cannot guaranty that we will maintain profitability or that we will not incur
net losses in the future. We will continue to encounter risks and difficulties
that companies at a similar stage of development frequently experience,
including the potential failure to:
|
·
|
obtain sufficient working capital
to support our expansion;
|
|
·
|
expand our product offerings and
maintain the high quality of our
products;
|
|
·
|
manage our expanding operations
and continue to fill customers’ orders on
time;
|
|
·
|
maintain adequate control of our
expenses allowing us to realize anticipated income
growth;
|
|
·
|
implement our product sales and
acquisition strategies and subsequently adapt and modify them as
needed;
|
|
·
|
successfully integrate any future
acquisitions; and
|
|
·
|
anticipate and adapt to changing
conditions in the auto parts industry resulting from changes in
government regulations, mergers and acquisitions involving our
competitors, technological developments, and other significant competitive
and market dynamics.
|
WE
ENCOUNTER SUBSTANTIAL COMPETITION IN OUR BUSINESS AND ANY FAILURE TO COMPETE
EFFECTIVELY COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
As
described in the products section, for every product we sell, we encounter
strong competitors. We anticipate that our competitors will continue to expand
and seek to obtain additional market share with competitive price and
performance characteristics. Aggressive expansion of our competitors or the
entrance of new competitors into our markets could have a material adverse
effect on our business, results of operations, and financial
condition.
If we are
not successful in addressing any or all of the foregoing risks, our business may
be materially and adversely affected.
18
OUR
MANAGEMENT HAS NO EXPERIENCE IN MANAGING AND OPERATING A PUBLIC COMPANY. ANY
FAILURE TO COMPLY OR ADEQUATELY COMPLY WITH FEDERAL SECURITIES LAWS, RULES OR
REGULATIONS COULD SUBJECT US TO FINES OR REGULATORY ACTIONS, WHICH MAY
MATERIALLY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
Our
current management has no experience managing and operating a public company and
relies in many instances on the professional experience and advice of third
parties including its attorneys and accountants. Failure to comply or adequately
comply with any laws, rules, or regulations applicable to our business may
result in fines or regulatory actions, which may materially adversely affect our
business, results of operation, or financial condition and could result in
delays in the development of an active and liquid trading market for our
stock.
WE
WILL INCUR SIGNIFICANT COSTS TO ENSURE COMPLIANCE WITH UNITED STATES CORPORATE
GOVERNANCE AND ACCOUNTING REQUIREMENTS.
We will
incur significant costs associated with our public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the United States Securities and Exchange Commission.
We expect all of these applicable rules and regulations to significantly
increase our legal and financial compliance costs and to make some
activities more time consuming and costly. We also expect that these applicable
rules and regulations may make it more difficult and more expensive for us to
obtain director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our board of directors or
as executive officers. We are currently evaluating and monitoring developments
with respect to these newly applicable rules, and we cannot predict or estimate
the amount of additional costs we may incur or the timing of such
costs.
IF
WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL OVER FINANCIAL
REPORTING, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL
RESULTS. AS A RESULT, CURRENT AND POTENTIAL INVESTORS COULD LOSE
CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH COULD HARM OUR BUSINESS AND HAVE AN
ADVERSE EFFECT ON OUR STOCK PRICE.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to annually
furnish a report by our management on our internal control over financial
reporting. Such report must contain, among other matters, an assessment by our
principal executive officer and our principal financial officer on the
effectiveness of our internal control over financial reporting, including a
statement as to whether or not our internal control over financial reporting is
effective as of the end of our fiscal year. This assessment must include
disclosure of any material weakness in our internal control over financial
reporting identified by management. Performing the system and process
documentation and evaluation needed to comply with Section 404 is both costly
and challenging. During the course of our testing we may identify deficiencies
which we may not be able to remediate in time to meet the deadline imposed by
the Sarbanes-Oxley Act of 2002 for compliance with the requirements of Section
404. In addition, if we fail to maintain the adequacy of our internal
controls, as such standards are modified, supplemented or amended from time to
time, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal controls over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002, which may cause investors to lose
confidence in our reported financial information and have a material adverse
effect on the price of our common stock.
THE
TRANSACTION INVOLVES A REVERSE MERGER OF A FOREIGN COMPANY INTO A DOMESTIC SHELL
COMPANY, SO THERE IS NO HISTORY OF COMPLIANCE WITH UNITED STATES SECURITIES LAWS
AND ACCOUNTING RULES.
In order
to be able to comply with United States securities laws, we prepared
our financial statements for the first time under U.S. generally accepted
accounting principles and recently had its initial audit of its financial
statements in accordance with Public Company Accounting Oversight Board
(United States). As the Company does not have a long term
familiarity with U.S. generally accepted accounting principles, it may be more
difficult for it to comply on a timely basis with SEC reporting requirements
than a comparable domestic company.
19
WE
RELY ON YBM TO A LARGE EXTENT AS A MAJOR SUPPLIER, A GUARANTOR OF OUR BANK LOAN
AND A PROVIDER OF CREDIT FACILITY. IF YBM REDUCES THE AMOUNT OF
BUSINESS IT DOES WITH US IN THE FUTURE, OUR REVENUES MAY BE
AFFECTED.
YBM is
one of our major suppliers. For the three months ended September 30,
2010, and in fiscal years 2010 and 2009, our purchase from YBM amounted to
$1,220,457, $540,031, $117,529 or approximately 27.97%, 5.5% and 4.2%
respectively of our total purchase. Pursuant to the Exclusive Distribution
Agreement we entered into with YBM on July 1, 2010, Vomart is the exclusive
first tier distributor of certain of YBM’s products in China. YBM
provided for no consideration a guarantee for a short-term loan in the amount of
$2.24 million (RMB 15,000,000) that we borrowed from China CITIC Bank. YBM also
provided a three-year line of credit amounting to $7.46 million (RMB 50 million)
to us on May 10, 2008. This line of credit is unsecured, non-interest
bearing and due upon demand. As of September 30, 2010, the balance of
borrowings from YBM was $3.31 million. The unused line of credit as
of September 30, 2010 was $4.15 million. There can be no assurance
that YBM will be willing or able to continue to maintain the same volume of
business with us, or that it will not seek to modify or terminate the Exclusive
Distribution Agreement, or it will continue to provide us with credit facilities
or guarantees on similar highly favorable terms in the future. If YBM
reduces the amount of business it does with us in the future or curtails or ends
its lending to us or the guarantee it has provided, our revenues may be
materially adversely affected. Please see Related Party Transactions
section below for a more detailed description of our relationship with
YBM. To mitigate the adverse impact, we are attempting to broaden our
relationships with other suppliers and sources of liquidity.
RISKS RELATING TO OUR
INDUSTRY
CHALLENGES
BY ORIGINAL EQUIPMENT MANUFACTURERS (“OEMS”) TO THE VALIDITY OF THE AFTERMARKET
AUTO PARTS INDUSTRY AND CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
ADVERSELY AFFECT OUR BUSINESS AND THE VIABILITY OF THE AFTERMARKET AUTO PARTS
INDUSTRY.
Original
equipment manufacturers have attempted to use claims of intellectual property
infringement against manufacturers and distributors of aftermarket products to
restrict or eliminate the sale of aftermarket products that are the subject of
the claims. We may in the future receive communications alleging that certain
products we sell infringe the patents, copyrights, trademarks and trade names or
other intellectual property rights of OEMs or other third parties. To the extent
that the OEMs are successful with intellectual property infringement claims, we
could be restricted or prohibited from selling certain aftermarket products,
which could have an adverse effect on our business. Infringement claims could
also result in increased costs of doing business arising from increased legal
expenses, adverse judgments or settlements or changes to our business practices
required to settle such claims or satisfy any judgments. Litigation could result
in interpretations of the law that require us to change our business practices
or otherwise increase our costs and harm our business. We do not maintain
insurance coverage to cover the types of claims that could be asserted. If a
successful claim were brought against us, it could expose us to significant
liability.
IF
WE CANNOT PROFITABLY INCREASE OUR MARKET SHARE IN THE COMMERCIAL AUTO PARTS
BUSINESS, OUR SALES GROWTH MAY BE LIMITED.
Although
we are one of the largest sellers of auto parts in the commercial market based
on the number of stores we own and the geographic areas where we have presence,
to increase commercial sales we must compete against independently owned parts
stores, repair shops and auto dealers. Although we believe we compete
effectively on the basis of customer service, merchandise quality, selection and
availability, price and distribution locations, and the strength of our brand
name, some automotive aftermarket jobbers have been in business for
substantially longer periods of time than we have, have developed long-term
customer relationships and have large available inventories. If we are unable to
profitably develop new commercial customers, our sales growth may be
limited.
WE
FACE INTENSE COMPETITION AND OPERATE IN AN INDUSTRY WITH LIMITED BARRIERS TO
ENTRY, AND SOME OF OUR COMPETITORS MAY HAVE GREATER RESOURCES THAN
US.
The auto
parts industry is competitive and highly fragmented, with products distributed
through multi-tiered and overlapping channels. Many of our current and potential
competitors have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing, technical,
management and other resources than we do. In addition, some of our competitors
have used and may continue to use aggressive pricing tactics and devote
substantially more financial resources to marketing than we do. Increased
competition from any supplier capable of maintaining high sales volumes and
acquiring products at lower prices than us could significantly reduce our market
share and adversely impact our financial results.
THE
INABILITY FOR US, OUR CUSTOMERS AND/OR OUR SUPPLIERS TO OBTAIN AND MAINTAIN
SUFFICIENT DEBT FINANCING, INCLUDING WORKING CAPITAL LINES, AND CREDIT INSURANCE
MAY ADVERSELY AFFECT OUR, OUR CUSTOMERS’ AND OUR SUPPLIERS’ LIQUIDITY AND
FINANCIAL CONDITION.
Our
working capital requirements can vary significantly, depending in part on the
level, variability and timing of our customers’ worldwide vehicle production and
the payment terms with our customers and suppliers. Our liquidity could also be
adversely impacted if our suppliers were to suspend normal trade credit terms
and require payment in advance or payment on delivery. If our available cash
flows from operations are not sufficient to fund our ongoing cash needs, we
would be required to look to our cash balances and availability for borrowings
under our credit facilities to satisfy those needs, as well as potential sources
of additional capital, which may not be available on satisfactory terms and in
adequate amounts, if at all. Capital markets conditions have made it difficult
for companies to raise and maintain the liquidity necessary to operate. While we
believe that we have sufficient liquidity to operate, there can be no assurance
that we, our customers and our suppliers will continue to have such ability.
This may increase the risk that we cannot produce our products or will have to
pay higher prices for our inputs. These higher prices may not be recovered in
our selling prices. If we were to experience liquidity issues, our suppliers may
not be able to obtain credit insurance. Our failure to receive such terms from
our suppliers could have a material adverse effect on our
liquidity.
20
RISKS RELATING TO THE
PEOPLE ’
S REPUBLIC OF
CHINA
WE
DERIVE ALL OF OUR REVENUES FROM SALES IN THE PRC AND ANY DOWNTURN IN THE CHINESE
ECONOMY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL
CONDITION.
All of
our revenues are generated from sales in the PRC. We anticipate that revenues
from sales of our products in the PRC will continue to represent the substantial
portion of our total revenues in the near future. Our success is
influenced by a number of economic factors that affect disposable consumer
income, such as employment levels, business conditions, interest rates, oil and
gas prices and taxation rates. Adverse changes in these economic factors, among
others, may restrict consumer spending, thereby negatively affecting our sales
and profitability.
CERTAIN
POLITICAL AND ECONOMIC CONSIDERATIONS RELATING TO THE PRC COULD ADVERSELY AFFECT
OUR COMPANY.
The PRC
is transitioning from a planned economy to a market economy. While the PRC
government has pursued economic reforms since its adoption of the open-door
policy in 1978, a large portion of the PRC economy is still operating under
five-year plans and annual state plans. Through these plans and other economic
measures, such as control on foreign exchange, taxation and restrictions on
foreign participation in the domestic market of various industries, the PRC
government exerts considerable direct and indirect influence on the economy.
Many of the economic reforms carried out by the PRC government are unprecedented
or experimental, and are expected to be refined and improved. Other political,
economic and social factors can also lead to further readjustment of such
reforms. This refining and readjustment process may not necessarily have a
positive effect on our operations or future business development. Our operating
results may be adversely affected by changes in the PRC’s economic and social
conditions as well as by changes in the policies of the PRC government, such as
changes in laws and regulations (or the official interpretation thereof),
measures which may be introduced to control inflation, changes in the interest
rate or method of taxation, and the imposition of restrictions on currency
conversion in addition to those described below.
WE
MAY NOT BE ABLE TO SUCCESSFULLY EXECUTE OUR STRATEGY OF EXPANDING INTO NEW
GEOGRAPHICAL MARKETS IN CHINA, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS AND RESULTS OF OPERATIONS.
We plan
to continue to expand our business into new geographical areas in China. Since
China is a large and diverse market, consumer trends and demands may vary
significantly by region and our experience in the markets in which we currently
operate may not be applicable in other parts of China. As a result, we may not
be able to leverage our experience to expand into other parts of China. When we
enter new markets, we may face intense competition from companies with greater
experience or an established presence in the targeted geographical areas or from
other companies with similar expansion targets. Therefore, we may not be able to
grow our sales in the new cities we enter due intense competitive pressures and
or the substantial costs involved.
THE
RECENT NATURE AND UNCERTAIN APPLICATION OF MANY PRC LAWS APPLICABLE TO US CREATE
AN UNCERTAIN ENVIRONMENT FOR BUSINESS OPERATIONS AND COULD HAVE A NEGATIVE
EFFECT ON US.
The PRC
legal system is a civil law system. Unlike the common law system, the civil law
system is based on written statutes in which decided legal cases have little
value as precedents. In 1979, the PRC began to promulgate a comprehensive system
of laws and has since introduced many laws and regulations to provide general
guidance on economic and business practices in the PRC and to regulate foreign
investment. Progress has been made in the promulgation of laws and regulations
dealing with economic matters such as corporate organization and governance,
foreign investment, commerce, taxation and trade. The promulgation of new laws,
changes of existing laws and the abrogation of local regulations by national
laws could have a negative impact on our business and business
prospects.
21
OUR
FAILURE TO COMPLY WITH INCREASINGLY STRINGENT ENVIRONMENTAL REGULATIONS AND
RELATED LITIGATION COULD RESULT IN SIGNIFICANT PENALTIES, DAMAGES AND ADVERSE
PUBLICITY FOR OUR BUSINESS.
In recent
years, the government of China has become increasingly concerned with the
degradation of China’s environment that has accompanied the country’s rapid
economic growth. In the future, we expect that our operations and
properties will be subject to extensive and increasingly stringent laws and
regulations pertaining to, among other things, the discharge of materials into
the environment and the handling and disposition of wastes (including solid and
hazardous wastes) or otherwise relating to protection of the environment.
Failure to comply with any laws and regulations and future changes to them may
result in significant consequences to us, including civil and criminal
penalties, liability for damages and negative publicity. We cannot
assure you that additional environmental issues will not require currently
unanticipated investigations, assessments or expenditures, or that requirements
applicable to us will not be altered in ways that will require us to incur
significant additional costs.
CURRENCY
CONVERSION COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The PRC
government imposes control over the conversion of Renminbi into foreign
currencies. Under the current unified floating exchange rate system, the
People’s Bank of China publishes an exchange rate, which we refer to as the PBOC
exchange rate, based on the previous day’s dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.
Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control, conversion
of Renminbi into foreign exchange by Foreign Investment Enterprises, or FIE’s,
for use on current account items, including the distribution of dividends and
profits to foreign investors, is permissible. FIE’s are permitted to convert
their after-tax dividends and profits to foreign exchange and remit such foreign
exchange to their foreign exchange bank accounts in the PRC. Conversion of
Renminbi into foreign currencies for capital account items, including direct
investment, loans, and security investment, is still under certain restrictions.
On January 14, 1997, the State Council amended the Foreign Exchange Control
Regulations and added, among other things, an important provision, which
provides that the PRC government shall not impose restrictions on recurring
international payments and transfers under current account items.
Enterprises
in the PRC (including FIE’s) which require foreign exchange for transactions
relating to current account items, may, without approval of the State
Administration of Foreign Exchange, or SAFE, effect payment from their foreign
exchange account or convert and pay at the designated foreign exchange banks by
providing valid receipts and proofs.
Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE or its relevant branches must be
sought.
Furthermore,
the Renminbi is not freely convertible into foreign currencies nor can it be
freely remitted abroad. Under the PRC’s Foreign Exchange Control Regulations and
the Administration of Settlement, Sales and Payment of Foreign Exchange
Regulations, Foreign Invested Enterprises are permitted either to repatriate or
distribute its profits or dividends in foreign currencies out of its foreign
exchange accounts, or exchange Renminbi for foreign currencies through banks
authorized to conduct foreign exchange business. The conversion of Renminbi into
foreign exchange by Foreign Invested Enterprises for recurring items, including
the distribution of dividends to foreign investors, is permissible. The
conversion of Reminbi into foreign currencies for capital items, such as direct
investment, loans and security investment, is subject, however, to more
stringent controls.
Our
operating company is a FIE to which the Foreign Exchange Control Regulations are
applicable. Accordingly, we will have to maintain sufficient foreign exchange to
pay dividends and/or satisfy other foreign exchange requirements.
EXCHANGE
RATE VOLATILITY COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Since
1994, the exchange rate for Renminbi against the United States dollar has
remained relatively stable, most of the time in the region of approximately
RMB8.28 to $1.00. However, in 2005, the Chinese government announced that it
would begin pegging the exchange rate of the Chinese Renminbi against a number
of currencies, rather than just the U.S. dollar and, the exchange rate for the
Renminbi against the U.S. dollar became RMB 6.8 to $1.00 as of September 30,
2010. If we decide to convert Chinese Renminbi into United States dollars for
other business purposes and the United States dollar appreciates against this
currency, the United States dollar equivalent of the Chinese Renminbi we convert
would be reduced. There can be no assurance that future movements in the
exchange rate of Renminbi and other currencies will not have an adverse effect
on our financial condition.
SUBSTANTIALLY ALL
OF OUR BUSINESS,
ASSETS
AND
OPERATIONS ARE LOCATED IN
THE PRC .
Substantially
all of our business, assets and operations are located in the PRC. The economy
of PRC differs from the economies of most developed countries in many respects.
The economy of PRC has been transitioning from a planned economy to a
market-oriented economy. Although in recent years the PRC government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in PRC is still owned by the PRC
government. In addition, the PRC government continues to play a significant role
in regulating industry by imposing industrial policies. It also exercises
significant control over the PRC’s economic growth through the allocation of
resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies. Some of these measures benefit the overall economy of
PRC, but may have a negative effect on us.
22
DUE
TO VARIOUS RESTRICTIONS UNDER PRC LAWS ON THE DISTRIBUTION OF DIVIDENDS BY OUR
PRC OPERATING COMPANIES, WE MAY NOT BE ABLE TO PAY DIVIDENDS TO OUR
STOCKHOLDERS.
The
Wholly-Foreign Owned Enterprise Law (1986), as amended and The Wholly-Foreign
Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law
of the PRC (2006) contain the principal regulations governing dividend
distributions by wholly foreign owned enterprises. Under these regulations,
wholly foreign owned enterprises may pay dividends only out of their accumulated
profits, if any, determined in accordance with PRC accounting standards and
regulations. Additionally, such companies are required to set aside a certain
amount of their accumulated profits each year, if any, to fund certain reserve
funds. These reserves are not distributable as cash dividends except in the
event of liquidation and cannot be used for working capital purposes. The PRC
government also imposes controls on the conversion of RMB into foreign
currencies and the remittance of currencies out of the PRC. We may experience
difficulties in completing the administrative procedures necessary to obtain and
remit foreign currency for the payment of dividends from the Company’s
profits.
Furthermore,
if our subsidiaries in China incur debt on their own in the future, the
instruments governing the debt may restrict its ability to pay dividends or make
other payments. If we or our subsidiaries are unable to receive all of the
revenues from our operations through these contractual or dividend arrangements,
we may be unable to pay dividends on our common stock.
SINCE
OUR ASSETS ARE LOCATED IN THE PRC, ANY DIVIDENDS OF PROCEEDS FROM LIQUIDATION
ARE SUBJECT TO THE APPROVAL OF THE RELEVANT CHINESE GOVERNMENT
AGENCIES.
Our
operating assets are located inside the PRC. Under the laws governing Foreign
Invested Enterprises in the PRC, dividend distribution and liquidation are
allowed but subject to special procedures under the relevant laws and rules. Any
dividend payment will be subject to the decision of the board of directors and
subject to foreign exchange rules governing such repatriation. Any liquidation
is subject to the relevant government agency’s approval and supervision as well
as the foreign exchange control. This may generate additional risk for our
investors in case of dividend payment and liquidation.
IT
MAY BE DIFFICULT TO AFFECT SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL JUDGMENTS
UPON OUR COMPANY AND OUR OFFICERS AND DIRECTORS BECAUSE THEY RESIDE OUTSIDE THE
UNITED STATES.
As our
operations are presently based in the PRC and our director and officer resides
in the PRC, service of process on our company and such director and officer may
be difficult to effect within the United States. Also, our main assets are
located in the PRC and any judgment obtained in the United States against us may
not be enforceable outside the United States.
OUR
BUSINESS AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY A SEVERE AND
PROLONGED GLOBAL ECONOMIC DOWNTURN AND THE CORRESPONDING SLOWDOWN OF THE CHINESE
ECONOMY.
Recent
global market and economic conditions have been unprecedented and challenging
with recession in most major economies persisting in 2009 and significant market
volatility in 2010. Continued concerns about the systemic impact of a
potentially long-term and widespread recession, energy costs, geopolitical
issues, and the availability and cost of credit have contributed to increased
market volatility and diminished expectations for economic growth around the
world. The difficult economic outlook has negatively affected business and
consumer confidence and contributed to volatility of unprecedented levels. The
Chinese economy also faces challenges. The stimulus plans and other measures
implemented by the Chinese government may not work effectively or quickly enough
to maintain economic growth in China or avert a severe economic downturn. Since
we derive all of our revenues from our location-based solutions in China, any
prolonged slowdown in the Chinese economy may have a negative impact on our
business and results of operations. Our revenues depend on end-user spending,
which in turn depend on the end-users’ level of disposable income, perceived
future earnings and willingness to spend. As there are still substantial
uncertainties in the current and future conditions in the global and Chinese
economies, consumers may avoid purchasing new automobiles and reduce their
spending on discretionary items. Moreover, to the extent we offer credit to any
customer and such customer experiences financial difficulties due to the
economic slowdown, we could have difficulty collecting payments from such
customers. Further disruptions of the financial markets could also significantly
restrict our ability to obtain financing in the capital markets or from
financial institutions.
23
FUTURE
INFLATION IN CHINA MAY INHIBIT OUR ABILITY TO CONDUCT BUSINESS IN
CHINA.
In recent
years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 5.9% and as low as -0.8%. These factors have led to
the adoption by the Chinese government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and
contain inflation. High inflation may in the future cause the Chinese government
to impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market for our products
and our company.
IF
WE FAIL TO ACCURATELY PROJECT MARKET DEMAND FOR OUR PRODUCTS, OUR BUSINESS
EXPANSION PLAN COULD BE JEOPARDIZED AND OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS WILL SUFFER.
If actual
customer orders are less than our projected market demand, we will likely suffer
overcapacity problems and may have to leave capacity idle, which may reduce our
overall profitability and hurt our financial condition and results of
operations. We derive most of our sales revenue from sales of our products in
China. The continued development of our business depends, in large part, on
continued growth in the automotive industry, especially in China. Although
China’s automotive industry has grown rapidly in the past, it may not continue
to grow at the same growth rate in the future or at all. However, the
developments in our industry are, to a large extent, outside of our control and
any reduced demand for automotive parts products and services, any other
downturn or other adverse changes in China’s automotive industry could severely
harm our business.
UNDER
THE ENTERPRISE INCOME TAX LAW, WE MAY BE CLASSIFIED AS A “RESIDENT ENTERPRISE”
OF CHINA. SUCH CLASSIFICATION WILL LIKELY RESULT IN UNFAVORABLE TAX CONSEQUENCES
TO US AND OUR NON-PRC SHAREHOLDERS.
On March
16, 2007, the National People’s Congress of China passed a new Enterprise Income
Tax Law, or the new EIT Law, and the PRC State Council issued the implementation
regulations for the EIT Law on December 6, 2007, both of which became effective
on January 1, 2008. Under the new EIT Law, enterprises are divided
into resident enterprises and non-resident enterprises. Resident enterprises
defined under the new EIT are generally subject to the uniform 25% enterprise
income tax rate as to their worldwide income. The term “resident
enterprises” refers to enterprises that are set up in China in accordance with
the law, or that are established outside of China with “de facto management
bodies” within China. The implementing rules define the term “de facto
management body” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” Meanwhile, non-resident enterprises are
generally subject to 10% enterprise income tax as to the portion of their income
generated from inside China.
Vomart,
or our WFOE is a limited liability company incorporated in China and therefore
shall be subject to 25% enterprise income tax rate. As for this public company
and our direct subsidiary Hongkong Limited, no official explanation has come to
our attention that we can presently see if these two companies will be treated
as those companies established outside of China with “de facto management
bodies” within China. Since substantially all of our operational management is
currently based in the PRC, it is unclear whether PRC tax authorities would
treat us as a PRC resident enterprise. If the PRC tax authorities subsequently
determine that this public company or our existing or future subsidiary outside
china should be classified as a resident enterprise, then the organization’s
global income will be subject to PRC income tax of 25%. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC
stockholders.
RISKS RELATED TO OUR
SECURITIES
IN
ORDER TO RAISE SUFFICIENT FUNDS TO EXPAND OUR OPERATIONS, WE MAY HAVE TO ISSUE
ADDITIONAL SECURITIES AT PRICES THAT MAY RESULT IN SUBSTANTIAL DILUTION TO OUR
SHAREHOLDERS.
If we
raise additional funds through the sale of equity or convertible debt, our
current stockholders’ percentage ownership will be reduced. In addition, these
transactions may dilute the value of our common shares outstanding. We may have
to issue securities that may have rights, preferences and privileges senior to
our common stock. We cannot provide assurance that we will be able to raise
additional funds on terms acceptable to us, if at all. If future financing is
not available or is not available on acceptable terms, we may not be able to
fund our future needs, which would have a material adverse effect on our
business plans, prospects, results of operations and financial
condition.
OUR
CERTIFICATE OF INCORPORATION PROVIDES FOR THE INDEMNIFICATION OF OFFICERS AND
DIRECTORS AT OUR EXPENSE AND LIMIT THEIR LIABILITY, WHICH MAY RESULT IN A MAJOR
COST TO US AND HURT THE INTERESTS OF OUR STOCKHOLDERS BECAUSE CORPORATE
RESOURCES MAY BE EXPENDED FOR THE BENEFIT OF OUR OFFICERS AND/OR
DIRECTORS.
Our
certificate of incorporation and applicable state law provide for the
indemnification of our directors, officers, employees, and agents, under certain
circumstances, against attorney’s fees and other expenses incurred by them in
any litigation to which they become a party arising from their association with
or activities on our behalf. We will also bear the expenses of such litigation
for any of our directors, officers, employees, or agents, upon such person’s
written promise to repay us if it is ultimately determined that any such person
shall not have been entitled to indemnification. This indemnification policy
could result in substantial expenditures by us, which we will be unable to
recoup.
24
We have
been advised that, in the opinion of the SEC, indemnification for liabilities
arising under federal securities laws is against public policy as expressed in
the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the
event that a claim for indemnification for liabilities arising under
federal securities laws, other than the payment by us of expenses incurred or
paid by a director, officer or controlling person in the successful defense
of any action, suit or proceeding, is asserted by a director, officer or
controlling person in connection with the securities being registered, we will
(unless in the opinion of our counsel, the matter has been settled by
controlling precedent) submit to a court of appropriate jurisdiction, the
question whether indemnification by us is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such issue.
The legal process relating to this matter if it were to occur is likely to be
very costly and may result in us receiving negative publicity, either of which factors is
likely to materially reduce the market and price for our shares, if such a
market ever develops.
CURRENTLY,
THERE IS NO PUBLIC MARKET FOR OUR SECURITIES, AND THERE CAN BE NO ASSURANCE THAT
ANY PUBLIC MARKET WILL EVER DEVELOP OR THAT OUR COMMON STOCK WILL BE QUOTED FOR
TRADING. FURTHER, EVEN IF QUOTED, OUR COMMON STOCK IS LIKELY TO BE
SUBJECT TO SIGNIFICANT PRICE FLUCTUATIONS.
We have a
trading symbol for our common stock, “TEDG,” which permits our shares to be
quoted on the over-the-counter bulletin board (the “OTCBB”). However, our stock
has been thinly traded since approval of our quotation on the OTCBB by FINRA.
Consequently, there can be no assurances as to whether:
·
|
Any market for our shares will
develop;
|
·
|
The prices at which our common
stock will trade; or
|
·
|
The extent to which investor
interest in us will lead to the development of an active, liquid trading
market.
|
Active
trading markets generally result in lower price volatility and more efficient
execution of buy and sell orders for investors.
In recent
years, the securities markets in the United States have experienced a high level
of price and volume volatility, and the market price of securities of many
companies have experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects of
such companies. For these reasons, our securities can also be expected to be
subject to volatility resulting from purely market forces over which we will
have no control. If we need additional funding we will, most likely, seek such
funding in the United States (although we may be able to obtain funding in the
PRC) and the market fluctuations affect on our stock price could limit our
ability to obtain equity financing.
In
addition, our common stock is unlikely to be followed by any market analysts,
and there may be few institutions acting as market makers for our common stock.
Either of these factors could adversely affect the liquidity and trading price
of our common stock. Until our common stock is fully distributed and an orderly
market develops in our common stock, if ever, the price at which it trades is
likely to fluctuate significantly. Prices for our common stock will be
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for shares of our common stock,
developments affecting our business, including the impact of the factors
referred to elsewhere in these risk factors, investor perception of us and
general economic and market conditions. No assurances can be given that an
orderly or liquid market will ever develop for the shares of our common
stock.
WE
ARE NOT LIKELY TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We
currently intend to retain any future earnings for use in the operation and
expansion of our business. Accordingly, we do not expect to pay any cash
dividends in the foreseeable future, but will review this policy as
circumstances dictate. Should we determine to pay dividends in the future, our
ability to do so will depend upon the receipt of dividends or other payments
from our PRC operating subsidiary may, from time to time, be subject to
restrictions on its ability to make distributions to us, including restrictions
on the conversion of RMB into U.S. dollars or other hard currency and other
regulatory restrictions.
WE
MAY BE SUBJECT TO THE PENNY STOCK RULES, WHICH WILL MAKE OUR SECURITIES MORE
DIFFICULT TO SELL.
We may be
subject to the SEC’s “penny stock” rules if our securities sell below $5.00 per
share. Penny stocks generally are equity securities with a price of less than
$5.00. The penny stock rules require broker-dealers to deliver a standardized
risk disclosure document 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 must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson, 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 completing the transaction and must be
given to the customer in writing before or with the customer’s
confirmation.
25
In
addition, the penny stock rules require that prior to a transaction, 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. The penny stock rules are burdensome and may
reduce purchases of any offerings and reduce the trading activity for our
securities. As long as our securities are subject to the penny stock rules, the
holders of such securities may find it more difficult to sell their
securities.
OUR
CONTROLLING SHAREHOLDERS MAY TAKE ACTIONS THAT CONFLICT WITH YOUR
INTERESTS.
All of
our officers and directors beneficially own 52% of our common stock pursuant to
the terms of the Exchange Agreement. In this case, all of our officers and
directors will be able to exercise control over all matters requiring
shareholder approval, including the election of directors, amendment of our
certificate of incorporation and approval of significant corporate transactions,
and they will have significant control over our management and policies. The
directors elected by these shareholders will be able to significantly
influence decisions affecting our capital structure. This control may have the
effect of delaying or preventing changes in control or changes in management, or
limiting the ability of our other shareholders to approve transactions that they
may deem to be in their best interest. For example, our controlling shareholders
will be able to control the sale or other disposition of our operating
businesses and subsidiaries to another entity.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements in Management’s Discussion and Analysis (“MD&A”), other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives, and expected operating results, and
the assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements generally are
identified by the words “believe,” “project,” “expect,” “anticipate,”
“estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,”
“will be,” “will continue,” “will likely result,” and similar expressions.
Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties, which may cause actual results to
differ materially from the forward-looking statements. A detailed discussion of
risks and uncertainties that could cause actual results and events to differ
materially from such forward-looking statements is included in the section
titled “Risk Factors.” We undertake no obligation to update or revise publicly
any forward-looking statements, whether as a result of new information, future
events, or otherwise.
The
following discussion and analysis of financial condition and results of
operations relates to the operations and financial condition reported in the
consolidated financial statements of Hongkong Limited and its subsidiaries for
the fiscal years ended June 30, 2010 and 2009 and for the three months ended
September 30, 2010 and 2009 and should be read in conjunction with the
consolidated financial statements and related notes, and the other financial
information included in this Report.
Overview
The
Company was incorporated under the laws of the State of Delaware on April 16,
2007, primarily engaged in the business of providing a financial literacy and
money management educational program for teenagers on a fee for service offered
basis.
On
November 12, 2010, the Company entered into a share exchange agreement with
Hongkong Charter International Group Limited, a company incorporated in the Hong
Kong on August 21, 2009, which owns 100% of the issued and outstanding capital
stock of Shanghai Vomart Auto Parts Co., Ltd.
Shanghai
Vomart Auto Parts Co., Ltd. (“Vomart”) was incorporated in Shanghai, People’s
Republic of China in January 2008, with registered capital in amount of RMB
1,000,000 (equivalent to US$144,697). Vomart established its wholly owned
subsidiaries in Nanjing, Shijiazhuang, Ningbo, and Hangzhou in June 2008, August
2008, February 2009 and September 2009, respectively. Currently, the
Company owns thirty-seven (37) stores in nine (9) provinces and
municipalities. Vomart and its subsidiaries are engaged in
distribution of automotive replacement parts in China.
26
Through
Vomart and its subsidiaries, the Company is now engaged in the business
of distribution of automotive replacement parts in
China. The Company temporarily suspended to providing automotive
maintenance services in August 2010. The Company distributes a broad
selection of international brand name and private label automotive replacement
parts, such as, accessories and maintenance items for cars, minivans, vans,
sport utility vehicles, light trucks, and heavy-duty trucks. The typical
products include batteries, brake pads, filters, oils and transmission fluid. We
are one of the largest distributors of automotive replacement parts and
accessories in the PRC based on the number of stores we own and the geographic
areas where we have presence. We currently own thirty-seven stores in
six provinces and three municipalities, namely Jiangsu, Zhejiang, Hebei, Anhui,
Fujian, Shanxi, Shanghai, Beijing, and Tianjin. In comparison, other large auto
parts distributors in China own fewer stores and/or their stores are located in
fewer provinces or municipalities. For example, Shandong Youpei Auto
Parts owns twenty-four stores of which eighteen are located in Shangdong
Province. Jiangsu Youpei Auto Parts owns seventeen stores of which sixteen are
located in Jiangsu Province. Putong Auto Service owns fifteen stores in thirteen
different provinces and municipalities.
Results of Operations for the Three Months Ended September
30, 2010
The
following table presents our summary statements of operations for the three
months ended September 30, 2010 and 2009. Our historical results presented below
are not necessarily indicative of the results for any future
periods.
27
HONGKONG
CHARTER INTERNATIONAL GROUP LIMITED
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For
the three monthts ended
September
30,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
||||||||
Automotive
supplies revenue
|
$ | 2,579,911 | $ | 800,358 | ||||
Automotive
maintenance service
|
182,382 | 229,530 | ||||||
Total
revenues
|
2,762,293 | 1,029,888 | ||||||
Cost
of revenues
|
||||||||
Cost
of supplies
|
2,221,670 | 739,194 | ||||||
Cost
of maintenance service
|
10,943 | 14,816 | ||||||
Total
cost of revenues
|
2,232,613 | 754,010 | ||||||
Gross
profit
|
529,680 | 275,879 | ||||||
Selling,
general and administrative expenses
|
423,556 | 255,422 | ||||||
Operating
income
|
106,124 | 20,456 | ||||||
Other
(income) expenses
|
||||||||
Interest
income
|
(452 | ) | (17 | ) | ||||
Interest
expenses
|
52,607 | 0 | ||||||
Foreign
currency exchange gain
|
(8,560 | ) | 0 | |||||
Other
expenses
|
3,961 | 2,057 | ||||||
Total
other (income) expenses
|
47,556 | 2,040 | ||||||
Income
before income taxes
|
58,568 | 18,416 | ||||||
Provision
for income taxes
|
34,340 | 2,766 | ||||||
Net
income
|
$ | 24,228 | $ | 15,650 | ||||
Other
comprehensive income ( loss)
|
||||||||
Foreign
currency translation gain(loss)
|
11,447 | 113 | ||||||
Comprehensive
income
|
$ | 35,675 | $ | 15,763 | ||||
Basic
and diluted income per common share
|
||||||||
Basic
|
$ | 24.23 | $ | 15.65 | ||||
Diluted
|
$ | 24.23 | $ | 15.65 | ||||
Weighted average common shares outstanding | ||||||||
Basic
|
1,000 | 1,000 | ||||||
Diluted
|
1,000 | 1,000 |
28
Revenues:
Revenues
increased by approximately $1.7 million or 168% to $2.7 million, as compared to
$1 million for the three months ended September 30, 2009. Our sales growth was
driven by expansion of stores. Since September 30, 2009, we had 22 new stores
opened, leading to the increase in net sales from automotive supplies and
maintenance service. Revenue from automotive supplies increased by $1.8 million
or 222% to $2.6 million for the three months ended September 30, 2010 from $0.8
million for the same period of 2009, while revenue from maintenance service
decreased from $0.23 million (representing 21% of total revenue) to $0.18
million (representing 7% of total revenues) for the three months ended September
30, 2010 from the same period of 2009. Such decrease in maintenance service
revenue was because the Company strategically temporarily suspended the
maintenance business in August 2010.
Cost
of Sales and Gross Profit:
During
the three months ended September 30, 2010, we had cost of sales of $2.2
million, as compared to $0.75 million for the same period of 2009, an increase
of $1.48 million or 196% reflecting the increase in net sales.
We
achieved gross profits of $0.53 million for the three months
ended September 30, 2010, compared to $0.28 million for the same period of
2009, representing a 92% period to period increase. Our overall gross
profit margin as a percentage of revenue decreased by 7.60% from 26.78% for
the three months ended September 30, 2009 to 19.18% for the same
period of 2010. This decrease is mainly attributable to the costs
associated with opening new stores and incurring increased operating costs
during the three months ended September 30, 2010. Based on our
experience, as a new store increases its customer base, fixed costs are
typically spread out over an increasing revenue base and that store’s gross
profit margin contribution tends to improve. It usually takes an
average of 2 or 3 years of operation for a store to achieve the average mature
operation, depending on the location. We foresee our gross profit
from new stores will continue to grow as new stores continue to
mature.
Operating
Expenses:
Our
operating expenses, consisting of selling, general and administrative expenses,
increased by approximately 66%, to $0.42 million for the three months
ended September 30, 2010 from $0.25 million for the same period of the
previous period. This 66% increase is mainly attributable to our fast expansions
of 22 new stores in 7 provinces and municipalities, which resulted in
significant increase in pre-opening expenses, payroll and traveling expenses,
store and office leasing expenses, depreciation expenses, transportation
expenses and other expenses relating to our growth in sales. The
overall increase in our operating expenses was in proportion to our increase in
sales.
Income
Tax (Benefit) Provision:
For the
three months ended September 30, 2010, we had a tax provision of $34,340 as
compared to a tax provision of $2,766 for the same period of
2009. This is an increase of $31,574 from period to
period. The increase in the income tax provision was because we had
generated more taxable income for the three months ended September 30, 2010
than the previous period and we under estimated prior period tax.
Net
Income
Net
income for the three months ended September 30, 2010 increased to
$24,228 as compared to $15,650 for the three months ended September 30,
2009.
Liquidity
and Capital Resources
Capital
Resources and Needs
Generally,
since inception of our business in January 2008, we have financed our business
with cash flows from operations, borrowings from related and unrelated parties,
and shareholders’ capital contributions. Our principal liquidity
requirements are for working capital and capital expenditures related to
existing and new stores, and offices and distribution centers. We
generate cash primarily through the sale of automotive services, tires, parts
and accessories. Primary uses of cash are for spending in inventory
purchase to match our store expansion and increased sales.
29
For the three months ended
September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$ | (535,994 | ) | (481,510 | ) | |||
Investing
Activities
|
$ | 1,255,416 | (159,523 | ) | ||||
Financing
Activities
|
$ | (2,634,648 | ) | 698,189 |
Our
anticipated capital needs from 2011 to 2013 are as follows: we expect to incur
(i) approximately RMB 10 million, 40 million and 40 million of costs in
connection with the opening of 10, 40 and 40 new stores in 2011, 2012 and 2013
respectively; (ii) approximately RMB 1.5 million, 6 million and 6 million in
connection with the hiring of additional personnel in 2011, 2012 and 2013
respectively; (iii) approximately RMB 450,000, 1.8 million and 1.8 million
in rental cost in 2011, 2012 and 2013 respectively; and (iv) 1% of our annual
sales income in the marketing and promotion of “Vomart” brand
awareness.
Operating
Activities
Cash used
in operating activities totaled $0.54 million for the three months ended
September 30, 2010 as compared to $0.48 million for the comparable earlier
period. The increase in our cash used in operations was primarily due to the
increased spending on inventory purchases to match our store expansion and
increased sales.
Investing
Cash
provided by investing activities totaled $1.26 million for the three months
ended September 30, 2010 as compared to $0.16 million cash used for the same
period of 2009. Cash provided for the three months ended September
30, 2010 was loan returned from non-related third parties.
Financing
Cash used
by financing activities totaled $2.63 million for the three months ended
September 30, 2010 as compared to $0.70 million cash provided for the same
period in 2009. The change was mainly due to repayments of related
party loan in the current period.
Vomart
entered into a Working Capital Loan Agreement with China Construction Bank,
Shanghai Qingpu Sub-branch on May 31, 2010. The total amount of the loan is
$1.49 million. The loan has a one year term from May 31, 2010 to May 30, 2011 at
a fixed interest rate of 5.31% per year. The loan is guaranteed by a non-related
third party. Please refer to Exhibit 10.1 and 10.2 for details of this Working
Capital Loan Agreement and the Guarantee Contract.
On June
23, 2010, Vomart signed a loan contract with China CITIC Bank. The total amount
of the loan is $2.24 million. The loan has one year term with a variable rate,
which shall increase each quarter by a compound rate of 10% over the initial
annual rate of 5.31%. The purpose of the loan is to fund our working capital.
The loan is guaranteed by YBM, an affiliated company, without any consideration.
Please refer to Exhibit 10.3 and 10.4 for details of this loan agreement with
China CITIC Bank and the guarantee contract between YBM and China CITIC
Bank.
On May
10, 2008, Vomart obtained a three-year line of credit from YBM amounting to
$7.46 million (RMB 50 million). This line of credit is unsecured, non-interest
bearing and due upon demand. As of September 30, 2010, the balance of borrowings
from YBM was $3.31 million. The unused line of credit as of September
30, 2010 was $4.15 million. For details, please refer to Exhibit
10.5. On May 1, 2009, Vomart entered into a loan agreement with
Zhoufeng Shen to borrow RMB 352,823.80 ($51,653). On May 1, 2009,
Vomart entered into a loan agreement with Anming Yu to borrow RMB 477,220
($69,864). Both of these facilities are unsecured and non-interest
bearing. As of September 30, 2010, the Company had payable to Mr.
Shen in the amount of $52,652. The loan the Company borrowed from Mr.
Yu has subsequently been repaid. For details, please refer to Exhibit
10.6 and 10.7.
Our
working capital is used for operational costs, the development of new stores and
other capital expenditures necessary to maintain existing
operations. Our principal source of liquidity includes cash flows
from operations and borrowings from related and unrelated parties. To
the extent that a deficiency exists, we plan to increase indebtedness for
borrowed money. This will depend on the willingness of YBM and our partners to
either make advances to us or guaranty our indebtedness to third party
lenders.
30
We
continue to implement growth and expansion plan. We plan to open a total of ten
new stores in 2011 in Jiangsu, Zhejiang and Shandong provinces. The
initial investment required for each store is estimated to be approximately RMB
1 million in connection with the acquisition of inventory and fixed
assets.
Off-Balance
Sheet Arrangements
We do not
have off-balance sheet arrangements, financings, or other relationships with
unconsolidated entities or other persons, also known as “special purpose
entities.”
Critical
Accounting Policies
While our
significant accounting policies are more fully described in Note 2 to our
financial statements, we believe that the following accounting policies are the
most critical to aid you in fully understanding and evaluating this
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Principle
of Consolidation
The
accompanying consolidated financial statements include the financial statements
of the Company and its wholly-owned subsidiary, Shanghai Vomart and Shanghai
Vomart’s four wholly-owned subsidiaries. All significant inter-company
transactions and balances between the Company and its subsidiaries are
eliminated upon consolidation.
Use
of estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets, the valuation of inventories, allowances
for doubtful accounts and useful lives for property and equipment. Actual
results could differ from those estimates.
Accounts
receivable
Accounts
receivables are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible amounts, as needed.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debt
percentages determined by management based on historical experience as well as
current economic climate are applied to customers’ balances categorized by the
number of months the underlying invoices have remained outstanding. The
valuation allowance balance is adjusted to the amount computed as a result of
the aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate.
Inventories
Inventory
is mainly composed of automotive parts and supplies. Inventories are stated at
the lower of cost or market, as determined on a weighted average basis, or
market. If inventory costs exceed expected market value due to obsolescence or
quantities in excess of expected demand, the Company will record reserves for
the difference between the cost and the market value. These reserves are
recorded based on estimates and reflected in cost of
sales.
31
Impairment
of long-lived assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the assets. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using
the asset’s expected future discounted cash flows or market value, if readily
determinable. No impairment loss is recorded for the three months ended
September 30, 2010 and 2009.
Revenue
recognition
The
Company recognizes revenue when the following fundamental criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the price to the customer is fixed or
determinable and (iv) collection of the resulting receivable is reasonably
assured. Revenue is not recognized until title and risk of loss is
transferred to the customer, which occurs upon delivery of goods, and objective
evidence exists that customer acceptance provisions have been
met. Deposits or advance payments from customers prior to delivery of
goods and passage of title of goods are recorded as advance from
customers.
32
Value
added tax
The
Company is subject to value added tax (“VAT”) at a 17% rate on the amount of
goods sold or maintenance services provided. The amount of VAT liability is
determined by applying the applicable tax rate to the invoiced amount of goods
sold (output VAT) less VAT paid on purchases made with the relevant supporting
invoices (input VAT). Under the commercial practice of the PRC, the Company paid
VAT based on tax invoices issued. The tax invoices may be issued subsequent to
the date on which revenue is recognized, and there may be a considerable delay
between the date on which the revenue is recognized and the date on which the
tax invoice is issued.
The VAT
collected from sales is not revenue of the company, and is recorded as a
liability on the balance sheet until such VAT is paid. The Company reports
revenues net of PRC’s VATfor all periods presented in the consolidated statement
of operations.
Foreign
currency translation
The
Company maintains books and records in its functional currency of the Renminbi
(“RMB”), being the primary currency of the economic environment in which its
operations are conducted.
For
financial reporting purposes, RMB has been translated into United States dollars
(“USD”, “$”) as the reporting currency. Assets and liabilities are translated at
the exchange rate in effect at the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the reporting
period. Translation adjustments arising from the use of different exchange rates
from period to period are included as a component of shareholders’ equity as
“Accumulated other comprehensive income”. Gains and losses resulting from
foreign currency translations are included in accumulated other comprehensive
income. There is no significant fluctuation in exchange rate for the
conversion of RMB to USD after the balance sheet date.
Fair
value of financial instruments
The
Company adopted the provisions of ASC 820, “Fair Value Measurements and
Disclosures”. The Company’s financial instruments include cash and cash
equivalents, accounts receivable, advances to suppliers, other receivables,
accounts payable, accrued expenses, and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature.
33
Concentration
of credit risk
Financial
instruments that potentially subject the Company to concentration of credit risk
consist primarily of accounts receivable and other receivables. The
Company does not require collateral or other security to support these
receivables. The Company conducts periodic reviews of its clients’
financial condition and customer payment practices to minimize collection risk
on accounts receivable.
34
Results
of Operations for the Years Ended June 30, 2010 and 2009
Years
Ended
|
||||||||||||||||
June 30,
|
$
|
$
|
||||||||||||||
2010
|
2009
|
Change
|
Change
|
|||||||||||||
Revenues
|
4,782,754 | 1,282,918 | 3,499,836 | 272.8 | % | |||||||||||
Cost
of Sales
|
$ | (3,536,954 | ) | (917,329 | ) | (2,619,625 | ) | 285.6 | % | |||||||
Gross
Profit
|
$ | 1,245,800 | 365,589 | 880,211 | 240.8 | % | ||||||||||
Operating
Expenses
|
$ | 1,184,267 | 235,637 | 948,629 | 402.6 | % | ||||||||||
Operating
Income
|
$ | 61,533 | 129,952 | (68,419 | ) | (52.6 | )% | |||||||||
Income
Before Income Tax
|
$ | 46,156 | 129,615 | (83,459 | ) | (64.4 | )% | |||||||||
Income
Tax (Benefit) Provision
|
$ | 7,642 | 49,725 | (42,083 | ) | (84.6 | )% | |||||||||
Net
Income
|
$ | 38,514 | 79,890 | (41,376 | ) | (51.8 | )% |
Revenues:
Revenues
for the year ended June 30, 2010 increased by approximately $3,499,836 or 272.8%
to $4,782,754 as compared to $1,282,918 for the year ended June 30, 2009. Our
sales growth was driven by expansion of stores. Typically, the sales
for those stores opened more than one year increased significantly compared with
those opened less than one year. For example, our Jiyuan store opened
in October 2008, its sales income for the first year of opening was only RMB
833,603 (approximately $126.303) but for the second year of opening, the total
sales jumped to RMB 1,790,687 (approximately $271,316), an increase of
61%. Our Tangshan store opened in May 2010, the average monthly sales
at the beginning of opening was only RMB 17,412 (approximately $2,638) but the
most recent monthly sales in December 2010 already increased to RMB 78,658
(approximately $11,918), an increase of almost 351%. We believe that the sales
for the mature stores will continue to grow as our marketing efforts increase
and our reputation is built up.
During
the year ended June 30, 2010, we had 26 new stores opened, leading to the
increase in net sales from automotive supplies and maintenance service. Revenue
from automotive supplies increased by $2,837,893 or 288.2% to $3,822,548 for the
year ended June 30, 2010 from $984,654 for the same period of 2009, while
revenue from maintenance service increased by $661,943 or 221.9% to $960,206 for
the year ended June 30, 2010 from $298, 264 for the same period of
2009.
Cost
of Sales and Gross Profit:
During
the year ended June 30, 2010, we had cost of sales of $3,536,954, as compared to
$917,329 for the same period of 2009, an increase of $2,619,625 or 285.6%
reflecting the increase in net sales.
We
achieved gross profits of $1,245,800 for the year ended June 30, 2010, compared
to $365,589 for the same period of the previous year, representing a 240.8 %
period to period increase. Our overall gross profit margin as a percentage of
revenue decreased by 2.45% from 28.5% for the year ended June 30,
2009 to 26.05% for the same period of 2010, mainly due to most new
stores at immature stage which incurred increasing operating costs during the
year ended June 30, 2010. Based on our experience, as a new store
increases its customer base, fixed costs are typically spread out over an
increasing revenue base and its contribution tends to improve. It
usually takes average 2 or 3 years of operation for a store to achieve the
average mature operation, depending on the locations. We foresee our
gross profit from new stores will continue to grow as these new stores continue
to mature.
Operating
Expenses:
Our
operating expenses, consisting of selling, general and administrative expenses,
increased by approximately $402.6%, to $1,184,267, for the year ended June 30,
2010 from $235,637 for the same period of the previous year. This 402.6 %
increase is mainly attributable to our fast expansions of 26 new stores in 9
provinces and municipalities, which resulted in significant increase in
pre-opening expenses, payroll and traveling expenses, store and office leasing
expenses, depreciation expenses, transportation expenses and other expenses
relating to our growth in sales. The overall increase in our
operating expenses was in proportion to our increase in sales.
Income
Tax (Benefit) Provision:
For the
year ended June 30, 2010, we had tax provision of $7,642, as compared to tax
provision of $49,725 for the same period of 2009. This is a decrease
of $42,083 or 84.6 % from period to period. The decrease in the
income tax provision was largely because we had generated less taxable income
for the year ended June 30, 2010 than the previous year.
35
Net
Income
Net
income for the year ended June 30, 2010 decreased by approximately $41,376 or
51.8% to $38,514 as compared to $79,890 for the year ended June 30, 2009. The
decrease in net income was mainly attributable to our significant increase in
our operating expenses resulting from fast expansion of stores despite the
significant increase in our revenue and gross profit.
Liquidity
and Capital Resources
Generally,
since inception of our business in January 2008, we have financed our business
with cash flows from operations, borrowings from related and unrelated parties,
and shareholders’ capital contributions. Our principal liquidity
requirements are for working capital and capital expenditures related to
existing and new stores, and offices and distribution centers. We
generate cash primarily through the sale of automotive services, tires, parts
and accessories. Primary uses of cash are for spending in inventory
purchase to match our store expansion and increased sales.
Capital
Resources and Needs
Our cash
requirements arise principally from the purchase of inventory, capital
expenditures related to existing and new stores, offices and distribution
centers, debt service and contractual obligations. Cash flows realized through
the sales of automotive services, tires, parts and accessories are our primary
source of liquidity.
For The Years Ended
June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$ | (2,750,512 | ) | (2,284,386 | ) | |||
Investing
Activities
|
$ | (1,544,038 | ) | (137,818 | ) | |||
Financing
Activities
|
$ | 6,964,896 | 2,419,555 |
Operating
Activities
Cash used
in operating activities totaled $2,750,512 for the year ended June 30, 2010 as
compared to $2,284,386 used in the same period of the previous year. The
increase in our cash used in operations was primarily due to the increase
spending in inventory purchase to match our store expansion and increased
sales.
Investing
Cash used
in investing activities totaled $1,544,038 for the year ended June 30, 2010 as
compared to $137,818 in the same period of the previous year. This
increase was mainly due to our loans to outside parties and purchase of fixed
assets in matching our store expansion.
Financing
Cash
provided by financing activities totaled $6,964,896 for the year ended June 30,
2010 as compared to $2,419,555 in the same period of the previous
year. The increase was mainly because we initiated a short-term loans
for working capital purpose during the year ended June 30, 2010 and also
received proceeds from related parties to meet our cash
requirements.
Vomart
entered into a Working Capital Loan Agreement with China Construction Bank,
Shanghai Qingpu Sub-branch on May 31, 2010. The total amount of the loan is
$1.49 million. The loan has a one year term from May 31, 2010 to May 30, 2011 at
a fixed interest rate of 5.31% per year. The loan is guaranteed by a non-related
third party. Please refer to Exhibit 10.1 and 10.2 for details of this Working
Capital Loan Agreement and the Guarantee Contract.
On June
23, 2010, Vomart signed a loan contract with China CITIC Bank. The total amount
of the loan is $2.24 million. The loan has one year term with a variable rate,
which shall increase each quarter by a compound rate of 10% over the initial
annual rate of 5.31%. The purpose of the loan is to fund our working capital.
The loan is guaranteed by YBM, an affiliated company, without any consideration.
Please refer to Exhibit 10.3 and 10.4 for details of this loan agreement with
China CITIC Bank and the guarantee contract between YBM and China CITIC
Bank.
36
On May
10, 2008, Vomart obtained a three-year line of credit from YBM amounting to
$7.46 million (RMB 50 million). This line of credit is unsecured, non-interest
bearing and due upon demand. As of September 30, 2010, the balance of borrowings
from YBM was $3.31 million. The unused line of credit as of September
30, 2010 was $4.15 million. For details, please refer to Exhibit
10.5. On May 1, 2009, Vomart entered into a loan agreement with
Zhoufeng Shen to borrow RMB 352,823.80 ($51,653). On May 1, 2009,
Vomart entered into a loan agreement with Anming Yu to borrow RMB 477,220
($69,864). Both of these facilities are unsecured and non-interest
bearing. As of September 30, 2010, the Company had payable to Mr.
Shen in the amount of $52,652. The loan the Company borrowed from Mr.
Yu has subsequently been repaid. For details, please refer to Exhibit
10.6 and 10.7.
Our
working capital is used for operational costs, the development of new stores and
other capital expenditures necessary to maintain existing
operations. Our principal source of liquidity includes cash flows
from operations and borrowings from related and unrelated parties. To
the extent that a deficiency exists, we plan to increase indebtedness for
borrowed money. This will depend on the willingness of YBM and our partners to
either make advances to us or guaranty our indebtedness to third party
lenders.
We
continue to implement growth and expansion plan. We plan to open a total of ten
new stores in 2011 in Jiangsu, Zhejiang and Shandong provinces. The
initial investment required for each store is estimated to be approximately RMB
1 million in connection with the acquisition of inventory and fixed
assets.
Off-Balance
Sheet Arrangements
We do not
have off-balance sheet arrangements, financings, or other relationships with
unconsolidated entities or other persons, also known as “special purpose
entities.”
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted I the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amount of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities, On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to the reasonable
under the circumstances, the results of which from 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.
A summary
of significant accounting policies is included in the front part of this
section. Management believes that the application of these policies on a
consistent basis enables us to provide useful and reliable financial information
about our Company’s operating results and financial
condition.
37
MANAGEMENT
Appointment
of New Directors and Officers
On the
Closing Date, Mr. Robert L. Wilson, the Company’s President, Chief Executive
Officer, Treasurer, Chief Financial Officer and Secretary, resigned from all of
his positions and Mr. Zhoufeng Shen was appointed as our President and Chief
Executive Officer and Ms. Xiaomei Wang was appointed as our Chief Financial
Officer, effective immediately on the Closing Date. Further, on the Closing
Date, Mr. Wilson, the Company’s sole director, resigned from his director
position, effective on the date that is ten (10) calendar days after our Company
mails an Information Statement to the Company’s shareholders prepared pursuant
to Rule 14f-1 under the Exchange Act, relating to the Exchange Agreement, and
Mr. Hu was appointed as our Chairman of the Board.
The
following table sets forth the names, ages and positions of our new Chairman of
the Board, President and Chief Executive Officer, and Chief Financial Officer.
Our shareholders elect our directors on an annual basis. Each
director holds his or her office until he or she resigns or is removed by our
Board, and his or her successor is elected and qualified. Our
officers are appointed by our Board and serve at the pleasure of our
Board.
NAME
|
AGE
|
POSITION
|
||
Zhoufeng
Shen
|
38
|
President,
Chief Executive Officer
|
||
Xiaomei
Wang
|
53
|
Chief
Financial Officer
|
||
Qun
Hu
|
26
|
Chairman
of the Board of
Directors
|
38
A brief
biography of each officer and director is more fully described in Item
5.02(c). The information therein is hereby incorporated in this
section by reference.
Audit
Committee Financial Expert
Our Board
currently acts as our audit committee. We currently do not have a member who
qualifies as an “audit committee financial expert,” as defined in Item 401(e) of
Regulation S-K and is “independent,” as the term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act. Our Board is in the process of searching
for a suitable candidate for this position.
Audit
Committee
We have
not yet appointed an audit committee. At the present time, the full Board of
Directors undertakes tasks normally associated with an audit committee, such as
analyzing and evaluating our financial statements and understanding internal
controls and procedures for financial reporting. Mr. Hu, our Chairman
of the Board of Directors, receives his bachelor’s degree from MBA Institute, in
Paris, France in 2006 where he has taken the following financial or accounting
related courses: Debt & Money Markets, Equity & Capital Market. In 2005,
he studied at the University of Florida, in Gainesville, FL, USA where he has
taken the following financial or accounting related courses: Financial Markets,
Corporate Finance and Financial Accounting. In addition, we intend over time to
appoint to our board of directors and to various committees to be established by
our board such persons as are expected to meet the corporate governance
requirements imposed by a national securities exchange.
Employment
Agreements
Pursuant
to a Labor Contract, dated October 21, 2010, Vomart employed Zhoufeng Shen as
its Chief Executive Officer at an annual salary of RMB 96,000, or approximately
$14,000. The term of employment will expire on January 1, 2013. For
details of this Labor Contract, please refer to Exhibit 10.10.
Family
Relationships
There are
no family relationships between any of our directors or executive officers and
any other directors or executive officers.
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, none of our directors or executive officers has, during
the past ten years, (i) been convicted in a criminal proceeding or a named
subject of a pending criminal proceeding, excluding traffic violations or other
minor offenses; (ii) had any bankruptcy petition filed by or against the
business or property of the person, or of any partnership, corporation or
business association of which he was a general partner or executive officer,
either at the time of the bankruptcy filing or within two years prior to that
time; (iii) been subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction or
federal or state authority, permanently or temporarily enjoining, barring,
suspending or otherwise limiting, his involvement in any type of business,
securities, futures, commodities, investment, banking, savings and loan, or
insurance activities, or to be associated with persons engaged in any such
activity; (iv) been found by a court of competent jurisdiction in a civil action
or by the SEC or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated; (v) been the subject of, or a party to, any
federal or state judicial or administrative order, judgment, decree, or finding,
not subsequently reversed, suspended or vacated (not including any settlement of
a civil proceeding among private litigants), relating to an alleged violation of
any federal or state securities or commodities law or regulation, any law or
regulation respecting financial institutions or insurance companies including,
but not limited to, a temporary or permanent injunction, order of disgorgement
or restitution, civil money penalty or temporary or permanent cease-and-desist
order, or removal or prohibition order, or any law or regulation prohibiting
mail or wire fraud or fraud in connection with any business entity; or (vi) been
the subject of, or a party to, any sanction or order, not subsequently reversed,
suspended or vacated, of any self-regulatory organization (as defined in Section
3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as
defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))),
or any equivalent exchange, association, entity or organization that has
disciplinary authority over its members or persons associated with a
member.
Except as
set forth in our discussion below in “Certain Relationships and Related
Transactions,” none of our directors, director nominees or executive officers
has been involved in any transactions with our Company or any of our directors,
executive officers, affiliates or associates which are required to be disclosed
pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission.
39
CODE
OF ETHICS
We have
adopted a code of ethics that applies to our officers, directors and employees,
including our Chief Executive Officer and Chief Financial Officer and other
senior executives. The Code of Ethics is attached as Exhibit 14.1 to
this 8-K/A and is publicly available on our website
http://www.vomart.com/culture.asp.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following summary compensation table sets forth all compensation awarded to,
earned by, or paid by us to the named executive officer during the years ended
December 31, 2009 and 2008 in all capacities for the accounts of our executives,
including our Chief Executive Officer and Chief Financial Officer:
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensa-
tion ($)
|
Change in
Pension
Value and
Nonquali-
fied
Deferred
Compensa-
tion
Earnings
($)
|
All Other
Compensa
-tion
($)
|
Totals
($)
|
|||||||||||||||||||||||||
Robert
L. Wilson
President,
CEO,
CFO,
Treasurer,
Secretary
and Sole
Director
(1)
|
2009
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
2008
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
(1)
|
On the Closing Date, Robert L.
Wilson tendered his resignation from all officer positions held in the
Company, effective immediately, and from his position as sole director,
effective on the date that is ten (10) calendar days after our Company
mails an Information Statement prepared pursuant to Rule 14f-1 under the
Exchange Act, relating to the Exchange
Agreement.
|
Outstanding
Equity awards at Fiscal Year End
There are
no outstanding equity awards as of the date hereof.
Director
Compensation
Our
directors will not receive a fee for attending each board of directors meeting
or meeting of a committee of the board of directors. All directors will be
reimbursed for their reasonable out-of-pocket expenses incurred in connection
with attending board of director and committee meetings.
Option
Grants
We do not
maintain any equity incentive or stock option plan. Accordingly, we
did not grant options to purchase any equity interests to any employees or
officers, and no stock options are issued or outstanding to any
officers. We do, however, anticipate adopting a non-qualified stock
option plan where we will be granting our officers options to purchase our
common stock pursuant to the terms of their employment
agreements. However, no such plan has been finalized or adopted as of
the date of this Current Report.
40
Vomart
Executive Compensation Summary
The table
below sets forth the positions and compensation for each officer and director of
Vomart for the years ended June 30, 2010 and 2009.
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensa-
tion
($)
|
Change in
Pension
Value and
Nonquali-
fied
Deferred
Compensa-
tion
Earnings
($)
|
All Other
Compensa-
tion
($)
|
Totals
($)
|
|||||||||||||||||||||||||
Qun Hu, Chairman
of the Board (1)
|
2010
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
2009
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||
Zhoufeng
Shen, President, Chief Executive Officer (2)
|
2010
|
9,050 | 0 | 0 | 0 | 0 | 0 | 0 | 9,050 | |||||||||||||||||||||||||
2009
|
9,050 | 0 | 0 | 0 | 0 | 0 | 0 | 9,050 | ||||||||||||||||||||||||||
Xiaomei
Wang, Chief Financial Officer (2)
|
2010
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
2009
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
(1)
|
In connection with the Closing of
the Share Exchange, Qun Hu was appointed the Company’s Chairman of the
Board, effective on the date that is ten (10) calendar days after our
Company mails an Information Statement to the Company’s shareholders
prepared pursuant to Rule 14f-1 under the Exchange
Act.
|
(2)
|
In connection with the Closing of
the Share Exchange, Mr. Zhoufeng Shen was appointed the Company’s
President and Chief Executive Officer, Xiaomei Wang was appointed as Chief
Financial Officer, effective immediately on the Closing
Date. Mr.Shen’s $9,050 salary payments in each of 2009 and 2010
was in connection with his acting as a supervisor on our Board of
Supervisors from January 2008 to October 2010. Mr. Anming Yu
served as Vomart’s Chief Executive Officer from January 2008 until October
2010 during which time he did not receive any compensation from
Vomart.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS.
Pre-Share
Exchange
The
following table sets forth certain information regarding the ownership of our
common stock prior to the Closing Date by: (i) each person who is known to us to
be the beneficial owner of more than five percent (5%) of our outstanding common
stock; (ii) each executive officer and director; and (iii) all our current
executive officers and directors of as a group. Except as otherwise
indicated in the footnotes, each person listed has sole voting power with
respect to the shares shown as beneficially owned.
Immediately
prior to the Closing Date, we had 2,250,000 shares of our common stock
outstanding.
Title of Class
|
Name and Address
|
Amount and Nature
of Ownership
|
Percentage of Class
|
|||||||
Common
Stock,
par
value $0.001 per share
|
Robert
L. Wilson
70707
Frank Sinatra Drive, Unit 59
Rancho
Mirage, CA 90067
|
2,000,000 | 89 | % | ||||||
Common
Stock,
par
value $0.001 per share
|
All
officers and directors as a group (one person)
|
2,000,000 | 89 | % |
Post-Share
Exchange
The
following table sets forth certain information regarding the ownership of our
common stock after the Closing Date by: (i) each person who is known to us to be
the beneficial owner of more than five percent (5%) of our outstanding common
stock; (ii) each executive officer and director; and (iii) all our current
executive officers and directors of as a group. Except as otherwise
indicated in the footnotes, each person listed has sole voting power with
respect to the shares shown as beneficially owned.
41
Title of Class
|
Name and Address (2)
|
Amount and Nature
of Ownership (1)
|
Percentage of Class (3)
|
|||||||
Common
Stock,
par
value $0.001 per share
|
Zhoufeng
Shen
|
0 | 0 | % | ||||||
Common
Stock,
par
value $0.001 per share
|
Xiaomei
Wang
|
0 | 0 | % | ||||||
Common
Stock,
par
value $0.001 per share
|
Qun
Hu (4)
|
1,300,000 | 52 | % | ||||||
Common
Stock,
par
value $0.001 per share
|
All
officers and directors as a group (three persons)
|
1,300,000 | 52 | % |
(1) Pursuant
to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of any
securities as to which such person, directly or indirectly, through any
contract, arrangement, undertaking, relationship or otherwise, has or shares
voting power and/or investment power or as to which such person has the right to
acquire such voting and/or investment power within 60 days.
(2) Unless
otherwise stated, the address of such person is c/o the Company, at
NO. 288 Maodian Road, Liantang Industrial Park, Qingpu District
Shanghai, PRC.
(3) Based
on 2,500,000 shares of common stock issued and outstanding as of the date of
this Current Report on Form 8-K/A.
(4)
These 1,300,000 shares of the Company’s common stock are owned directly by
Delight Pride Limited, a British Virgin Islands Company (“Delight
Pride”). Qun Hu is the director and sole shareholder of Delight Pride
and as such, maintains sole dispositive power and discretion as to the voting
and investment decisions of Delight Pride. Qun Hu disclaims
beneficial ownership of the rest of 950,000 shares which constitute 38% of our
issued and outstanding common stock and were issued to his designees and assigns
in connection with the Share Exchange. The individuals owning these
950,000 shares include Mr. Hu’s relatives, employees of Vomart and people who
provided services to Vomart in the past.
DESCRIPTION
OF SECURITIES
Our
Company is authorized to issue 100,000,000 shares of common stock, par value
$0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per
share. As of the date hereof, 2,500,000 shares of common stock and no shares of
preferred stock were issued and outstanding.
Common
Stock
Subject
to preferences that may apply to shares of preferred stock outstanding at the
time, the holders of outstanding shares of our common stock are entitled to
receive dividends out of assets legally available therefore at times and in
amounts as our board of directors may determine. Each stockholder is entitled to
one vote for each share of common stock held on all matters submitted to a vote
of the stockholders. Cumulative voting is not provided for in our amended
certificate of incorporation, which means that the majority of the shares voted
can elect all of the directors then standing for election. Our common stock is
not entitled to preemptive rights and is not subject to conversion or
redemption. Upon the occurrence of a liquidation, dissolution or winding-up, the
holders of shares of our common stock are entitled to share ratably in all
assets remaining after payment of liabilities and satisfaction of preferential
rights of any outstanding preferred stock. There are no sinking fund provisions
applicable to the common stock. The outstanding shares of common stock are fully
paid and non-assessable.
Preferred
Stock
Our board
of directors is empowered to designate and issue from time to time, without need
of shareholder approval, one or more classes or series of preferred stock and to
fix and determine the relative rights, preferences, designations,
qualifications, privileges, options, conversion rights, limitations and other
special or relative rights of each such class or series so authorized. Such
action could adversely affect the voting power and other rights of the holders
of our Company’s capital shares or could have the effect of discouraging or
making difficult any attempt by a person or group to obtain control of the
Company.
42
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock, par value $0.001 per share, has a trading symbol TEDG, but has
been thinly traded on the Over-The-Counter Bulletin Board (“OTCBB”). Our common
stock had been deleted from the OTCBB effective March 26, 2010, due to our
failure to comply with Rule 15c2-11. Our common stock was re-listed on the OTCBB
on June 16, 2010.
The
market price of our common stock is subject to significant fluctuations in
response to variations in our quarterly operating results, general trends in the
market and other factors, over many of which we have little or no control. In
addition, broad market fluctuations, as well as general economic, business and
political conditions, may adversely affect the market for our common stock,
regardless of our actual or projected performance.
Holders
As of the
date hereof, 2,500,000 shares of our common stock are issued and outstanding.
Currently, there are approximately 80 shareholders of our
common stock.
Transfer
Agent and Registrar
The
Transfer Agent for our common stock is Pacific Stock Transfer Company. Pacific
Stock’s telephone number is (702) 361-3033.
Penny
Stock Regulations
The Penny
Stock Act of 1990 requires specific disclosure to be made available in
connection with trades in the stock of companies defined as “penny stocks”. The
Securities and Exchange Commission (SEC) has adopted regulations that generally
define a penny stock to be any equity security that has a market price of less
than $5.00 per share, subject to certain exceptions. If an exception is
unavailable, the regulations require the delivery by broker-dealers, prior to
any transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market.
The penny
stock rules require that a broker-dealer approve a person’s account for
transactions in penny stocks and the broker-dealer receives from the investor a
written agreement to the transaction setting forth the identity and quantity of
the penny stock to be purchased. In order to approve a person’s account
for transactions in penny stocks, the broker or dealer must obtain financial
information and investment experience and objectives of the person and make a
reasonable determination that the transactions in penny stocks are suitable for
that person and that that person has sufficient knowledge and experience in
financial matters to be capable of evaluating the risks of transactions in penny
stocks.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
Because
of these regulations, broker-dealers may not wish to engage in the
above-referenced necessary paperwork and disclosures and/or may encounter
difficulties in their attempt to sell shares of our common stock, which may
affect the ability of selling shareholders or other holders to sell
their shares in any secondary market and have the effect of reducing the
level of trading activity in any secondary market. These additional sales
practice and disclosure requirements could impede the sale of our common stock.
In addition, the liquidity for our common stock may decrease, with a
corresponding decrease in the price of our common stock. Our common stock, in
all probability, will be subject to such penny stock rules for the foreseeable
future and our shareholders will, in all likelihood, find it difficult to sell
their common stock.
Dividend
Policy
Any
future determination as to the declaration and payment of dividends on shares of
our common stock will be made at the discretion of our board of directors out of
funds legally available for such purpose. We are under no contractual
obligations or restrictions to declare or pay dividends on our shares of common
stock. We have never paid any dividends and currently have no plans
to pay such dividends. However, even if we wish to pay dividends,
because our cash flow is dependent on dividend distributions from our affiliated
entities in the PRC, we may be restricted from distributing dividends to our
holders of shares of our common stock in the future if at the time we are unable
to obtain sufficient dividend distributions from our subsidiary Vomart. Our
board of directors currently intends to retain all earnings for use in the
business for the foreseeable future. See “Risk Factors.”
Equity
Compensation Plan Information
None.
43
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons
As we
increase the size of our board of directors and gain independent directors, we
expect to prepare and adopt a written related-person transactions policy that
sets forth our policies and procedures regarding the identification, review,
consideration and approval or ratification of “related-persons transactions.”
For purposes of our policy only, a “related-person transaction” will be a
transaction, arrangement or relationship (or any series of similar transactions,
arrangements or relationships) in which we and any “related person” are
participants involving an amount that exceeds $120,000. Transactions involving
compensation for services provided to us as an employee, director, consultant or
similar capacity by a related person will not be covered by this policy. A
related person will be any executive officer, director or a holder of more than
five percent of our ordinary shares, including any of their immediate family
members and any entity owned or controlled by such persons.
We
anticipate that, where a transaction has been identified as a related-person
transaction, the policy will require management to present information regarding
the proposed related-person transaction to our audit committee (or, where
approval by our audit committee would be inappropriate, to another independent
body of our board of directors) for consideration and approval or ratification.
Management’s presentation will be expected to include a description of, among
other things, the material facts, the direct and indirect interests of the
related persons, the benefits of the transaction to us and whether any
alternative transactions are available.
To
identify related-person transactions in advance, we are expected to rely on
information supplied by our executive officers, directors, and certain
significant shareholders. In considering related-person transactions, our board
of directors will take into account the relevant available facts and
circumstances including, but not limited to:
|
·
|
the risks, costs and benefits to
us;
|
|
·
|
the effect on a director’s
independence in the event the related person is a director, immediate
family member of a director or an entity with which a director is
affiliated;
|
|
·
|
the terms of the
transaction;
|
|
·
|
the availability of other sources
for comparable services or products;
and
|
|
·
|
the terms available to or from,
as the case may be, unrelated third parties or to or from our employees
generally.
|
We also
expect that the policy will require any interested director to excuse himself or
herself from deliberations and approval of the transaction in which the
interested director is involved.
Promoters
and Certain Control Persons
We did
not have any promoters at any time during the past five fiscal
years.
Director
Independence
We
currently do not have any independent directors, as the term “independent” is
defined by the rules of the Nasdaq Stock Market.
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
that arise in the ordinary course of business. Litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business.
44
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
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 such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act.
Our
certificate of incorporation provides that we shall indemnify our directors to
the full extent permitted by the provisions of Section 102(b)(7) and Section 145
of the Delaware General Corporation Law (the “DGCL”), as the same may be amended
and supplemented. Notwithstanding the above, our certificate of
incorporation provides that a director shall be liable to the extent provided by
applicable law, (i) for breach of the director’s duty of loyalty to us; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the DGCL, or (iv) for
any transaction from which the director derived an improper personal
benefit.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
provisions described above, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, 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 our payment of expenses incurred or paid by our
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
At
present, there is no pending litigation or proceeding involving any of our
director, officer or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
CHANGES
AND DISAGREEMENTS WITH ACCOUNTANTS
Kyle L.
Tingle, CPA, LLC served as our independent auditor in connection with the audits
of our financial statements for the fiscal years ended December 31, 2009 and
2008. In connection with the Share Exchange, our board of directors
recommended and approved the appointment of Friedman LLP as the independent
auditor for the Company.
During
the fiscal years ended December 31, 2009 and 2008 and through the date hereof,
neither us nor anyone acting on our behalf consulted Friedman LLP with respect to (i) the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements, and neither a written report was provided to us or
oral advice was provided that Friedman LLP concluded was an important factor
considered by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) any matter that was the subject of a
disagreement or reportable events set forth in Item 304(a)(1)(v) of Regulation
S-K.
For a
more detailed discussion of our change in auditor, please refer to Item 4.01
below.
Item 3.02
Unregistered Sales of Equity Securities.
Pursuant
to the Exchange Agreement, on the Closing Date, we issued the Exchange Shares to
the Hongkong Limited Shareholder, their designees or assigns, in exchange for
the Hongkong Limited Shares. Such securities were not registered
under the Securities Act. These securities qualified for exemption
under Section 4(2) of the Securities Act since the issuance securities by us did
not involve a public offering. The offering was not a “public offering” as
defined in Section 4(2) due to the insubstantial number of persons involved in
the deal, size of the offering, manner of the offering and number of securities
offered. We did not undertake an offering in which we sold a high number of
securities to a high number of investors. In addition, these shareholders had
the necessary investment intent as required by Section 4(2) since they agreed to
and received share certificates bearing a legend stating that such securities
are restricted pursuant to Rule 144 of the Securities Act. This restriction
ensures that these securities would not be immediately redistributed into the
market and therefore not be part of a “public offering.” Based on an analysis of
the above factors, we have met the requirements to qualify for exemption under
Section 4(2) of the Securities Act for this transaction.
Item
4.01 Changes in Registrant’s Certifying Accountant.
(a)
|
Dismissal of Previous
Independent Registered Public Accounting
Firm.
|
|
(i)
|
On November 12, 2010, we
dismissed Kyle L. Tingle, CPA, LLC (“KLT”) as our independent registered
public accounting firm. Our board of directors approved such resignation
on November 12, 2010.
|
45
(ii)
|
Our board of directors
participated in and approved the decision to change our independent
registered public accounting
firm.
|
(iii)
|
KLT’s reports on our financial
statements for the years ended December 31, 2009 and 2008 did not contain
an adverse opinion or a disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting
principles.
|
(iv)
|
In connection with the audit and
review of our financial statements through November 12, 2010, there were
no disagreements on any matter of accounting principles or practices,
financial statement disclosures or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with KLT’s opinion to the subject matter
of the disagreement.
|
(v)
|
In connection with our audited
financial statements for the years ended December 31, 2009 and 2008, there
have been no reportable events with our Company as set forth in Item
304(a)(1)(v) of Regulation
S-K.
|
(vi)
|
We provided Gately with a copy of
this Current Report on Form 8-K and requested that KLT furnished it with a
letter addressed to the SEC stating whether or not they agree with
the above statements. We have received the requested letter from KLT,
and a copy of such letter is filed as Exhibit 16.1 to this Current Report
Form 8-K.
|
(b)
|
Engagement of New
Independent Registered Public Accounting
Firm.
|
|
(i)
|
On November 12, 2010, our board
of directors appointed Friedman LLP (“Friedman”) as our new independent
registered public accounting firm. The decision to engage Friedman was
approved by our board of directors on November 12,
2010.
|
(ii)
|
Prior to November 12, 2010, we
did not consult with Friedman regarding (1) the application of
accounting principles to a specified transactions, (2) the type of audit
opinion that might be rendered on our financial statements, (3) written or
oral advice provided by Friedman that would be an important factor
considered by our Company in reaching a decision as to an accounting,
auditing or financial reporting issues or (4) any matter that was the
subject of a disagreement between our Company and our predecessor auditor
as described in Item 304(a)(1)(iv) or a reportable event as described in
Item 304(a)(1)(v) of Regulation
S-K.
|
Item 5.01
Changes in Control of Registrant.
Reference
is made to the disclosure set forth under Item 1.01 of this report, which
disclosure is incorporated herein by reference.
As a
result of the closing of the reverse acquisition with Hongkong Limited, the
former sole shareholder of Hongkong Limited beneficially owns 52% of our total
outstanding common shares.
Accounting
Treatment; Change of Control
The Share
Exchange is being accounted for as a “reverse merger” since the former
stockholders of Hongkong Limited own a majority of the outstanding shares of our
common stock immediately following the Share Exchange. No arrangements or
understandings exist among present or former controlling stockholders with
respect to the election of members of our board of directors and, to our
knowledge, no other arrangements exist that might result in a change of control
in the future . As a
result of the issuance of 2,250,000 shares of our common stock to the Hongkong
Limited Shareholder, their designees or assigns, and a change in the majority of
our directors, a change in control occurred on the date of the consummation of
the Share Exchange . As
of the time immediately following the Closing, we continued to be a “small
business issuer,” as defined under the Exchange Act.
Item 5.02
Departure of Directors or Principal Officers; Election of Directors; Appointment
of Principal Officer.
(a) Resignation
of Directors and Officers
At the
Closing, Robert L. Wilson resigned as the sole member of the Board, effective on
the date that is ten (10) calendar days after we mail an Information Statement
to the Company’s shareholders prepared pursuant to Rule 14f-1 under the Exchange
Act, relating to the Exchange Agreement. Mr. Wilson also resigned as
our President, Chief Executive Officer, Treasurer, Chief Financial Officer and
Secretary, effective immediately. There were no disagreements between Mr. Wilson
and the Company.
46
(b) Appointment
of Directors and Officers
At the
Closing, the following persons were appointed as our new directors and
officers:
NAME
|
AGE
|
POSITION
|
||
Zhoufeng
Shen
|
38
|
President,
Chief Executive Officer
|
||
Xiaomei
Wang
|
53
|
Chief
Financial Officer
|
||
Qun
Hu
|
26
|
Chairman
of the board of directors
|
The
business background descriptions of the newly appointed directors and officers
are as follows:
Qun
Hu, age 26, Chairman of the Board of Directors
Mr. Hu
has been our Chairman of the Board since the Closing Date of the Share Exchange.
Mr. Hu was the Chairman of the Board of Directors of Hongkong Charter
International Group Limited since its inception in August 2009. From
July 2007 to July 2009, Mr.Hu was the general manager of Leiguan Auto Parts Co.
Ltd. From January 2007 to July 2007, he served as sales manager of
Leiguan Auto Parts Co., Ltd. From January 2006 to July 2006, he served in VEF
Sarl as Sales Associate in Paris, France. From May 2005 to August 2005, Mr. Hu
worked for Barney’s as Sales Associate in London, United Kingdom. From May 2004
to August 2004, he worked in KMIG as Import Manager Assistant in Brussels,
Belgium. Mr. Hu received his bachelor’s degree from MBA Institute, in Paris,
France in 2006, where he has taken the following financial or accounting related
courses: Debt & Money Markets, Equity & Capital Market. In 2005, he
studied at the University of Florida, in Gainesville, FL, USA, where he has
taken the following financial or accounting related courses: Financial Markets,
Corporate Finance and Financial Accounting. Mr. Hu is fluent in English,
Chinese, French, and Spanish.
Zhoufeng
Shen, age 38, President, Chief Executive Officer
Zhoufeng
Shen has been our Chief Executive Officer since the Closing Date of the Share
Exchange. Mr. Shen served as Vomart’s Chief Executive Officer from October 2010
to the Closing Date. Prior to that, he served as a supervisor on our Board of
Supervisors from January 2008 to October 2010. From March 2001 to October 2007,
he was the assistant to president in DELIXI Group Co., Ltd. From June 1996 to
October 2000, he was a teacher at Wenzhou University. He got his EMBA from Fudan
University in 2006 and Bachelor and Master’s degrees in Brand
Advertising from China Academy of Arts.
Xiaomei
Wang, age 53, Chief Financial Officer
Ms.
Xiaomei Wang has been our Chief Financial Officer since the Closing Date of the
Share Exchange. Ms. Wang served as Vomart’s Finance Manager from
April 2010 to the Closing Date. From September 2008 to March 2010,
Ms. Wang worked as the Chief Finance Manager in the public company Zhaohua
Technology Co., Ltd. From November 1996 to December 2005, she was the Chief
Finance Manager for Xinjiang Huijia Department Store. From April 1977 to October
1996, Ms. Wang was Chief Accountant and Finance Manager of Xinjiang Auto Factory
Co., Ltd. Ms. Wang graduated from Capital University of Economics and
Business with a
major in corporate management, and is a Certified Public Accountant licensed in
the People’s Republic of China, the IFMA (International Financial
Management Association), and the CTP (Certified Tax Planners).
(c)
Family Relationships
There are
no family relationships between any of the officers or directors of our
Company.
(d)
Employment Agreements of the Executive Officers
Pursuant
to a Labor Contract, dated October 21, 2010, Vomart employed Zhoufeng Shen as
its Chief Executive Officer at an annual salary of RMB 96,000, or approximately
$14,000. The term of employment will expire on January 1, 2013. For
details of this Labor Contract, please refer to Exhibit 10.10.
(e)
Related Party Transactions
Vomart
has a multi-faceted relationship with YBM, an affiliated company that is engaged
in the manufacturing and selling of automotive replacement parts and
accessories.
47
Officer
and Common Control Relationship
Mr.
Anming Yu, who is the father-in-law of Qun Hu, our Chairman of the Board, served
as Vomart’s Chief Executive Officer and director from January 2008 until October
2010. Mr. Yu currently owns 60.32% of the issued and outstanding shares of YBM,
one of our major suppliers. Mr. Yu’s spouse and daughter who is the
spouse of Mr. Hu each owns 25.23% and 14.45% of the issued and outstanding
shares of YBM.
Transfers
of Shares Among Related Parties
When
Vomart was incorporated on January 4, 2008, YBM, Mr. Anming Yu and Mr. Zhoufeng
Shen owned 51%, 29% and 20% of the issued and outstanding shares of Vomart
respectively. On August 10, 2009, YBM transferred its 51% shares to
Mr. Yu in exchange for RMB 510,000. On November 23, 2009, Mr. Yu and
Mr. Shen transferred the 80% and 20% of the Vomart shares each of them owned to
Hongkong Limited whose former sole shareholder before the Share Exchange is Mr.
Hu, our Chairman of the Board, in exchange for $140,618.13 and $35,154.53
respectively.
Intellectual
Property
Vomart
currently is authorized by YBM to exclusively and freely use the “VOMART”
trademark, which is owned by YBM. YBM’s application to transfer the
“VOMART” trademark to Vomart has been accepted and is currently under review by
the Trademark Office.
Major
Supplier
YBM is
one of our major suppliers. For the three months ended September 30,
2010, and in fiscal years 2010 and 2009, our purchase from YBM amounted to
$1,220,457, $540,031, $117,529 or approximately 27.97%, 5.5% and 4.2%
respectively of our total purchase.
We
entered into an Exclusive Distribution Agreement (the “Agreement”) with YBM
which is valid from July 1, 2010 until June 30, 2011. Pursuant to the Agreement,
Vomart is the exclusive first tier distributor of YBM products. For
details of this Agreement, please refer to Exhibit 10.8.
We have
also entered into certain non-exclusive distribution agreements with YBM
pursuant to which we are authorized to sell certain YBM products in our stores
in specified provinces or municipalities.
Management
believes the transactions referenced above were on terms at least as favorable
to us as we could have obtained from unaffiliated parties.
Indebtedness
to Related Parties
We have
borrowed interest-free and unsecured loans from YBM, Mr. Anming Yu, our former
CEO and Mr. Zhoufeng Shen, our current CEO. These related party loans are due
upon demand and are used by the Company as operating capital.
For the
three months ended September 30, 2010, the fiscal years ended June 30, 2010 and
June 30, 2009, the loans that we borrowed from Mr. Shen amounted to $52,652,
$52,028 and $51,653 respectively. For the three months ended
September 30, 2010, we loaned Mr. Yu $26,120. For the fiscal years
ended June 30, 2010 and June 30, 2009, the loans that we borrowed from Mr. Yu
amounted to $72,525 and $69,864 respectively.
YBM, one
of our major suppliers, provided a three-year line of credit amounting to $7.46
million (RMB 50 million) to us on May 10, 2008. This line of credit
is unsecured, non-interest bearing and due upon demand. As of
September 30, 2010, the balance of borrowings from YBM was $3.31
million. The unused line of credit as of September 30, 2010 was $4.15
million. For details, please refer to Exhibit 10.5.
Guarantee
YBM, one
of our major suppliers, provided guarantee for a short-term loan in the amount
of $2.24 million (RMB 15,000,000) that we borrowed from China CITIC Bank. The
purpose of the loan is to fund our working capital. The loan has a one year term
from June 23, 2010 until June 23, 2011.
This
guarantee was provided for no consideration. There can be no assurance that YBM
will be willing or able to continue to provide similar
guarantees
on this basis with respect to future borrowings.
In the
Maximum Amount Guarantee Contract between YBM and China CITIC Bank, dated June
5, 2010, it is provided for the following: if the
borrower
does not repay its loan, the bank may seek the principal and interest of the
loan from the guarantor; the guarantee period is two years from the date the
guaranteed loan is due; the bank must give written notice to the guarantor when
it transfers its right to the loan to a third party; the guarantor indemnifies
the bank for actual damages or losses because of any misrepresentations made by
the guarantor and if the guarantor causes the contract to become
invalid. For details about this guarantee, please refer to Exhibit
10.4.
48
Item
5.03 Amendments to Certificate of Incorporation or Bylaws; Change in Fiscal
Year.
On
November 12, 2010, pursuant to the Exchange Agreement, the Board adopted a
resolution by unanimous written consent changing our name to “Vomart
International Auto Parts, Inc.” to better reflect our business
plan.
On
November 12, 2010, pursuant to the Exchange Agreement, the Board adopted a
resolution by unanimous written consent changing our fiscal year end from
December 31 to June 30. This change was made to be consistent with the fiscal
year of Vomart, which is now our wholly owned subsidiary and the operating
company.
Item
5.06 Change in Shell Company Status.
As
explained more fully in Item 1.01 and 2.01 above, we were a “shell company” (as
such term is defined in Rule 12b-2 under the Exchange Act) immediately before
the Closing of the Share Exchange. As a result of the Share Exchange,
Vomart became our wholly owned subsidiary and became our main operational
business. Consequently, we believe that the Share Exchange has caused
us to cease being a shell company. For information about the Share
Exchange, please see the information set forth above under Item 1.01 and 2.01 of
this Current Report on Form 8-K, which such information is incorporated herein
by reference.
Item 9.01
Financial Statement and Exhibits.
(a)
Financial Statements of Business Acquired.
The
Unaudited Condensed Consolidated Financial Statements of Hongkong
Limited as of September 30, 2010 and 2009 are filed as Exhibit 99.1 to this
Current Report and are incorporated herein by reference.
The
Unaudited Consolidated Financial Statements of Hongkong Limited (parent
only) as of September 30, 2010 are filed as Exhibit 99.2 to this Current
Report and are incorporated herein by reference.
The
audited consolidated financial statements of Hongkong Limited as of
June 30, 2010 and 2009 are filed as Exhibit 99.3 to this Current Report and are
incorporated herein by reference.
(b)
Pro Forma Financial Information.
The
unaudited pro forma consolidated balance sheet as at June 30, 2010 and the
unaudited pro forma consolidated statement of operations for the year ended
December 31, 2009 and for the six months ended June 30, 2010 concerning the
acquisition of the business operations of Hongkong Limited are filed as Exhibit
99.4 to this Current Report and are incorporated herein by
reference.
(c)
Shell Company Transactions.
Reference
is made to Items 9.01(a) and 9.01(b) and the exhibits referred to therein
which are incorporated herein by reference.
(d)
Exhibits.
Exhibit No.
|
Description
|
|
2.1
|
Share
Exchange Agreement by and between the Company and Hongkong Charter
International Group Limited dated November 12, 2010 *
|
|
3.1
|
Certificate
of Incorporation (1)
|
|
3.2
|
By
Laws (1)
|
|
10.1
|
English
Translation of Working Capital Loan Agreement between Shanghai Vomart Auto
Parts Co., Ltd. and China Construction Bank, Shanghai Qingpu Sub-branch,
dated May 31, 2010.
|
|
10.2
|
English
Translation of Guarantee Contract between Shanghai Xin Liantang Economic
Development Co., Ltd. and China Construction Bank, Shanghai Qingpu
Sub-branch, dated May 31, 2010.
|
|
10.3
|
English
Translation of Loan Agreement between Shanghai Vomart Auto Parts Co., Ltd.
and China CITIC Bank, dated June 23, 2010.
|
|
10.4
|
English
Translation of Maximum Amount Guarantee Contract between YBM Group China
Co., Ltd. and China CITIC Bank, dated June 5, 2010.
|
|
10.5
|
English
Translation of Working Capital Loan Agreement between Shanghai Vomart Auto
Parts Co., Ltd. and YBM Group China Co., Ltd., dated May 10,
2008.
|
|
10.6
|
English
Translation of Loan Agreement between Shanghai Vomart Auto Parts Co., Ltd.
and Zhoufeng Shen, dated May 1, 2009.
|
|
10.7
|
English
Translation of Loan Agreement between Shanghai Vomart Auto Parts Co., Ltd.
and Anming Yu, dated May 1, 2009.
|
|
10.8
|
English
Translation of the Exclusive Distribution Agreement between Shanghai
Vomart Auto Parts Co., Ltd. and YBM Group China Co., Ltd., dated July 1,
2010.
|
|
10.9
|
English
Translation of the Letter of Undertaking issued by YBM Group China Co.,
Ltd., dated July 30, 2010.
|
|
10.10
|
English
Translation of Labor Contract between Shanghai Vomart Auto Parts Co., Ltd.
and Zhoufeng Shen, dated October 21, 2010.
|
|
14.1
|
Code
of Ethics
|
|
16.1
|
Letter
from Kyle L. Tingle, CPA, LLC, dated November 12, 2010
*
|
|
99.1
|
The
Unaudited Condensed Consolidated Financial Statements of Hongkong Charter
International Group Limited as of September 30, 2010 and
2009*
|
|
99.2
|
The
Unaudited Financial Statements of Hongkong Charter International Group
Limited (parent only) as of September 30, 2010*
|
|
99.3
|
The
Audited Consolidated Financial Statements of Hongkong Charter
International Group Limited as of June 30, 2010 and
2009*
|
|
99.4
|
The
Unaudited Pro Forma Financial Information of Teen Education Group,
Inc.*
|
* Filed
herewith
(1)
Incorporated herein by reference to a Registration Statement on Form SB-2 filed
on October 31, 2007.
49
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Current Report to be signed on its behalf by the
undersigned hereunto duly authorized.
TEEN
EDUCATION GROUP, INC.
|
||
Dated:
January 24, 2011
|
By:
|
/s/ Zhoufeng Shen |
Zhoufeng
Shen
Chief
Executive
Officer
|
50