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EX-21 - EXHIBIT 21 - PHOENIX ENERGY RESOURCE CORPexhibit21.htm
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EX-32.2 - EXHIBIT 32.2 - PHOENIX ENERGY RESOURCE CORPexhibit32-2.htm
EX-31.1 - EXHIBIT 31.1 - PHOENIX ENERGY RESOURCE CORPexhibit31-1.htm
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EX-32.1 - EXHIBIT 32.1 - PHOENIX ENERGY RESOURCE CORPexhibit32-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2011

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File No. 000-52843

SILVAN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Nevada 20-5408832
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  

Jun Yue Hua Ting, Building A
3rd Floor, Unit -1
#58 Xin Hua Road
Guiyang, Guizhou Province 550002
People’s Republic of China

(Address of principal executive offices)

(+86) 851-552-0951
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes [_]    No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes [_]    No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]    No [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes [X]    No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [_] Accelerated Filer [_]
Non-Accelerated Filer [_] (Do not check if a smaller reporting company) Smaller reporting company [X]

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act)    Yes [_]    No [X]


As of June 30, 2011 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of the registrant’s common stock held by non-affiliates (based upon the closing price of such shares as quoted on the OTCQB Marketplace) was approximately $65.9 million. Shares of the registrant’s common stock held by each executive officer and director and each by each person who owns 10% or more of the outstanding common stock have been excluded from the calculation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

There were a total of 30,020,000 shares of the registrant’s common stock outstanding as of April 12, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

None.



 SILVAN INDUSTRIES, INC. 
 
 Annual Report on Form 10-K 
 Year Ended December 31, 2011 
     
 TABLE OF CONTENTS 
     
 PART I 
     
Item 1. Business. 2
Item 1A. Risk Factors. 14
Item 1B. Unresolved Staff Comments. 26
Item 2. Properties. 26
Item 3. Legal Proceedings. 28
Item 4. Mine Safety Disclosures. 28
     
 PART II 
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 29
Item 6. Selected Financial Data 30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 41
Item 8. Financial Statements and Supplementary Data. 41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 41
Item 9A. Controls and Procedures. 41
Item 9B. Other Information. 43
     
 PART III 
     
Item 10. Directors, Executive Officers and Corporate Governance. 44
Item 11. Executive Compensation. 47
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 48
Item 13. Certain Relationships and Related Transactions, and Director Independence. 49
Item 14. Principal Accounting Fees and Services. 50
     
 PART IV 
     
Item 15. Exhibits, Financial Statement Schedules. 51


Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included herein, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except where the context otherwise requires and for the purposes of this report only:

  • the “Company,” “we,” “us,” and “our” refer to the combined business of Silvan Industries and its subsidiaries, Bingwu Forestry, Aosen Forestry, Silvan Flooring and Silvan Touch;

  • “Silvan Industries” refers to Silvan Industries, Inc., a Nevada corporation;

  • “Bingwu Forestry” refers to China Bingwu Forestry Group Limited, a Hong Kong company;

  • “Aosen Forestry” refers to Qian Xi Nan Aosen Forestry Company, Limited, a PRC company;

  • “Silvan Flooring” refers to Qian Xi Nan Silvan Flooring Company, Limited, a PRC company;

  • “Silvan Touch” refers to Guiyang Silvan Touch Flooring Co., Limited, a PRC company

  • “Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China;

  • “PRC” and “China” refer to the People's Republic of China;

  • “SEC” refers to the Securities and Exchange Commission;

  • “Exchange Act” refers the Securities Exchange Act of 1934, as amended;

  • “Securities Act” refers to the Securities Act of 1933, as amended;

  • “Renminbi” and “RMB” refer to the legal currency of China; and

  • “U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States.

1


PART I

ITEM 1. BUSINESS.

Business Overview

Through our wholly-owned PRC operating subsidiaries, we produce and sell floor materials and related products to residential and commercial customers in China. Our product lines include laminate flooring and fiber floor boards that are manufactured in a variety of colors, dimensions and designs.

The primary raw material used in our products is wood, which we currently procure from third party suppliers. We expect that commencing in late 2015 or early 2016 we will be able to procure approximately 20% of our wood from our 2,250 hectares (approximately, 22.5 km2) of fir forest in Guizhou Province.

Our manufacturing facility in Qianxinan, Guizhou Province has an annual production capacity of six million square meters of laminate flooring and 75,000 cubic meters of industrial fiber boards. We are constructing two new manufacturing facilities next to our current facility to expand our laminate flooring production line and industrial fiber board production line. We expect this expansion will increase our overall capacity to 200,000 cubic meters of fiber boards and 12 million square meters of laminate floor. We have obtained the land use rights for this new facility in 2011 and, based on our current production schedule, we expect the manufacturing facility for laminate flooring and industrial fiber boards to be completed by late-2012 and late-2013, respectively.

We market and sell our products through seven branch offices and approximately several hundred specialty retail flooring stores, concentrated mostly in southwestern China. We also sell some of our products through eight retail stores which we refer to as “flagship” stores because they are generally larger and better equipped with samples, promotional material and product inventory, as compared to regular retail stores, and as a result, they are better promote our image and the quality of our products. We are also seeking commercial arrangements for the sale of our products through home supply stores, such as our recent agreement to sell our products at Red Star Macalline Furniture Mall’s Guiyang store. Red Star Macalline Furniture Mall is a large home products supply store chain in China, similar to Home Depot and Lowe’s in the U.S., with over 30 malls and stores across China. We believe that home supply stores are an important channel for the sale of building/home renovation materials and we plan to increase our efforts to work with more home supply stores in the future.

Our principal executive offices are located at Jun Yue Hua Ting, Building A, 3rd Floor, Unit -1, #58 Xin Hua Road, Guiyang, Guizhou 550002, People’s Republic of China. The telephone number at our principal executive office is +86 851-552-0951.

Our Corporate History and Background

We were organized under the laws of the State of Nevada on June 3, 2005, as Exotacar, Inc. On June 25, 2008, we changed our business focus to the development of energy resources, and changed our name to Phoenix Energy Resource Corporation. From June 25, 2008 through to the date of our reverse acquisition, discussed below, we were a shell company with minimal operations.

On January 7, 2011, we changed our name to “China Forestry Industry Group, Inc.” to more accurately reflect our new business operations following the reverse acquisition.

On October 3, 2011, we changed our name to “Silvan Industries, Inc.” to more accurately reflect our marketing and branding strategy.

Reverse Acquisition of Bingwu Forestry

On November 1, 2010, we completed a reverse acquisition transaction with Bingwu Forestry, and Ms. Ren Ping Tu, its sole shareholder and the wife of Mr. Yulu Bai, the founder of Bingwu Forestry’s PRC subsidiary, pursuant to which we acquired 100% of the issued and outstanding capital stock of Bingwu Forestry in exchange for 20,500,000 shares of our common stock, which constituted 68.33% of our issued and outstanding capital stock on a fully-diluted basis, as of and immediately after the consummation of the reverse acquisition. As a result of the reverse acquisition, Bingwu Forestry became our wholly-owned subsidiary and Ms. Tu became our controlling stockholder. For accounting purposes, the reverse acquisition transaction with Bingwu Forestry was treated as a reverse acquisition, with Bingwu Forestry as the acquirer and Silvan Industries as the acquired party.

2


As a result of the reverse acquisition, our business operations became the business and operations of Bingwu Forestry and its PRC subsidiaries. Bingwu Forestry serves as a holding company that owns 100% of Aosen Forestry, which in turn owns 100% of Silvan Flooring.

Background and History of Subsidiaries

Bingwu Forestry was incorporated in Hong Kong as a private limited company on April 9, 2010 by Ms. Ren Ping Tu, Mr. Bai’s wife and a Canadian citizen. As a PRC citizen, Mr. Bai would have been prohibited under PRC law from incorporating Bingwu Forestry in Hong Kong, acquiring Aosen Forestry and establishing Bingwu Forestry as a foreign holding company over Aosen Forestry. Bingwu Forestry has no active business operations or assets other than its 100% ownership of Aosen Forestry.

On May 17, 2010, Mr. Bai entered into an option agreement with Ms. Ren Ping Tu, pursuant to which Mr. Bai was granted an option to acquire Ms. Tu’s shares in Bingwu Forestry, including any shares delivered to Ms. Tu in exchange for her ordinary shares, in a future merger, reorganization, consolidation, sale or other disposition of the Bingwu Forestry’s securities, for an exercise price of $2,500,000. Mr. Bai exercised this option in whole on September 6, 2011 and acquired all of the shares of common stock owned by Ms. Tu. As a result, he became our largest stockholder.

Aosen Forestry was established in the PRC on November 22, 2004 for the primary purpose of engaging in the manufacturing and sale of fiber boards. On May 18, 2010, pursuant to a restructuring plan intended to ensure compliance with regulatory requirements of the PRC, the original shareholders of Aosen Forestry, including our Chairman and CEO, Mr. Bai, entered into an equity transfer agreement with Bingwu Forestry, pursuant to which the shareholders transferred all of their equity interests in Aosen Forestry to Bingwu Forestry for a purchase price of $2,488,471. As a result, Aosen Forestry became the 100% owner of Bingwu Forestry.

On October 22, 2007, Aosen Forestry established Silvan Flooring as a 55% majority-owned joint venture with Guizhou Silvan Touch Wooden Co., Limited, or GST, the 45% minority holder, which was 94.3% owned and controlled at the time by Mr. Yulu Bai, our Chief Executive Officer and Aosen Forestry’s General Manager at the time. Silvan Flooring was established for the purpose of engaging in the manufacturing and sale of wood flooring, furniture and decorations. On May 8, 2009, Aosen Forestry acquired GST’s minority interest in Silvan Flooring from GST and Silvan Flooring thereby became Aosen Forestry’s wholly-owned subsidiary. GST no longer holds any equity interest in Silvan Flooring. On May 28, 2010, Mr. Bai sold his entire ownership interest in GST and no longer holds any equity interest in GST.

In connection with the acquisition of Silvan Flooring, Silvan Flooring and GST entered into a trademark transfer agreement and a trademark licensing agreement, on November 18, 2009 and November 19, 2009, respectively. Pursuant to these two agreements, GST transferred its “Silvan Touch” trademark (registered trademark number 1182064) to Silvan Flooring which then licensed it back to GST to be used in connection with its distribution of our “Silvan Touch” products. There was no consideration paid in connection with the transfer and licensing. The assignment of the trademark has received government approval. As a result of the acquisition of 100% equity interests in Aosen Froestry by Bingwu Forestry on May 18, 2010, we own the “Silvan Trouch” trademark.

On March 24, 2011, Aosen Forestry established Silvan Touch in the PRC in order to expand our sales channels. Silvan Touch’s principal activity is the wholesaling of wood flooring, furniture and decorations.

Our Corporate Structure

All of our business operations are conducted through our Chinese operating subsidiaries, Aosen Forestry, Silvan Flooring and Silvan Touch. The chart below presents our current corporate structure.

3


Our Growth Strategy

We believe that China’s growing urban residential housing market creates a significant growth opportunity on which we intend to capitalize by utilizing the following strategies:

  • significantly expand our flagship stores and our sales network during the next two years;
  • enhance brand awareness through strategic marketing campaigns, initially focusing in southwestern China;
  • increase fiber board production capacity of our current facility from 75,000 cubic meters to 200,000 cubic meters in the next 21 months and double our laminate floor production capacity to 12 million square meters in the next 9 months;
  • cultivate timberland resources in Guizhou province to provide sufficient raw material for our growth plans throughout the next five years; and
  • acquire forestry assets and leading regional flooring companies in key regions in China to establish a nation-wide presence.

Our Products

Laminate Flooring - We produce laminate flooring products in a variety of types, designs, and colors and often with antiskid, patterned, designer, and paint polished features. We sell those products to wholesalers, retailers and contractors. We also provide installation services.

Fiber Boards - We manufacture high density industrial fiber boards and plywood overlays which sell mainly to industrial customers. Our fiber board products come in a variety of wood and designs as shown below

4


For the year ended December 31, 2011, 84% of our revenue was from the sale of laminated flooring products and 16% from the sale of fiber boards.

We believe that consumers choose our products based on quality, service, convenience and brand recognition. Based on our internal research on consumers’ product selection behaviors and available information from publicly traded competitors such as PowerDekor Group Ltd., or PowerDekor, and Shengda Forestry (Group) Co., Ltd., or SDF, we believe that our “Silvan Touch” brand is one of the top flooring brands in Guizhou province and ranks among the widely recognized brands in Southwestern China.

We also intend to develop a business segment focused on other forest-based products such as wood furniture, decorative wood products, and environmentally-friendly wood cabins that are intended to be used within natural reserves as a premium alternative to traditional camping equipment.

Production

We produce flooring products at our manufacturing facility which is located in Qianxinan, Guizhou province and has annual production capacity of six million square meters of laminate flooring and 75,000 cubic meters of industrial fiber boards. We are constructing new manufacturing facility that we expect will increase our overall capacity to 200,000 cubic meters of fiber boards and 12 million square meters of laminate floor. We have obtained the land use rights for this new facility and, based on our current production schedule, we expect the manufacturing facility for laminate flooring and industrial fiber boards to be completed by late 2012 and late 2013, respectively.

Production of our fiber boards involves the following multistep process: raw material sourcing, wood chipping and waxing, hot abrasion and adhesives application, air drying, weight and density testing, molding, cooling, hot pressing, transporting to processing stations, cutting, pressing, polishing, trimming, quality examinations and delivery.

Production of our laminate flooring involves the following process: sourcing fiber board, raw material cutting and drying, glue application, hot pressing, cooling, transporting to processing stations, cutting, pressing, polishing, weathering, surface material selection and application, trimming, quality examinations and delivery.

We strive to maintain high product standards and enforce strict quality controls in our production facility. Our products are tested individually, segmented into different quality tiers and priced according to the tiers. We use a combination of ISO and China National Standards to manage our business. We have used the ISO-2001 system since January 2008 to manage our production flow and we recently upgraded to the ISO-2009 system for a number of production procedures. We conduct standard quality testing on all of our products prior to sales.

We hold several international product quality certifications, including: the European Union CE Certification, the International Production Standard Certification. In addition, we hold the ISO14001:2004 (International Environmental Management System), ISO10012:2003 (International Measurement Management System), ISO 9001:2000 (International Quality Management System) certifications. We are also a Standing Member of the National Forestry Industry Association, Flooring Committee, and of the Director of China Timber Distribution Association, Flooring Committee.

We strive to minimize waste of natural resources and use by-products, such as branches and other wood scraps, in our manufacturing operations. We also work continuously on improving energy efficiency in our production process. For example, we recently improved our thermal oil furnace to virtually eliminate dust and sulphur dioxide emission, and keep dust and sulphur dioxide emission below the GB13271-2001 emission standard requirements during abnormal operation conditions, which are operating conditions when the machinery does not operate fully as designed or when raw material quality does not fully satisfy requirements.

5


GB13271—2001 is China’s national “Boiler Gas Emission Standard” issued on November 12, 2001 by the Ministry of Environmental Protection and the General Administration of Quality Supervision, Inspection and Quarantine, and effective since January 1, 2002. This standard sets the maximum allowable emission limits of flue dust, flue gas blackness and SO2 of coal-fueled boilers with capacity <0.7MW(1t/h) and the maximum allowable emission limits of flue dust, flue gas blackness, SO2 and NOx of oil-burning and gas-burning boilers. We satisfy the requirements from requirements from section type II of GB13271—2001, which limits powder level <200 mg / cubic meter, SO2 level <900 mg / cubic meter. During abnormal operating conditions, our production system keeps the powder level <188 mg / cubic meter and SO2 level < 800 mg / cubic meter, both within the requirement of GB13271—2001.

Raw Materials and Suppliers

The major raw materials for our laminate flooring and fiber boards are hardwood lumber, branches, and other wood byproducts. We also purchase significant amounts of packaging materials, resins, stains, veneers and chemicals, and consume significant amounts of electricity, natural gas and water.

We currently purchase raw materials essential to our business from numerous suppliers, but in the future, we expect to utilize raw materials from our 2,250 hectares (approximately, 22.5 km2) of fir trees for which we hold land use rights. See “Properties” below for a description of our land use rights. We acquired a land use right over this piece of land with the fir trees that had already planted on it. We expect to start harvesting these trees in the fourth quarter of 2012. After harvesting these fir trees, we plan to cultivate eucalyptus trees on this piece of land. The general process for cultivating and harvesting the fir trees and eucalyptus trees includes planting, initial watering, general inspections, pest control, fertilization, protection against theft and vandals, and harvesting.

Pursuant to the joint management agreements discussed below, we intend to plant trees on a land of 43.2 km2 for our future raw materials use. Due to cash flow constraints, we have decided to reinvest our 2012 cash inflow into our daily operation and halt our capital expenditure in developing the forest land. In the meantime, we will discuss with government, forest developers and companies which may have interest in planting trees with us to encourage them to invest in the forest land development. Depending on our cash flow situation, we expect to resume our forest land development and planting in 2013. Our long-term goal is to ultimately develop and have access to raw materials from approximately 333.5 km2 of forestry land using this joint-management approach.

We procure most of our production chemicals, such as paraffin, formaldehyde and accelerant, from Guizhou Shuanghe Industrial & Trading Co., Ltd.

In general, adequate supplies of raw materials are available from numerous suppliers and we are not dependent on any single supplier. Availability can change based on environmental conditions, laws and regulations, shifts in demand, transportation disruption and other events that affect us and our suppliers which often are outside of our control.

Customers

We sell our flooring products primarily to private residential customers and various commercial, educational and government entities. Our residential sales are primarily through specialty stores and our flagship stores. Our commercial sales of industrial fiber boards and flooring products are usually through our direct sales force. We are also seeking commercial arrangements for the sale of our products through home supply stores, such as our recent agreement to sell our products at Red Star Macalline Furniture Mall’s Guiyang store. We believe that home supply stores are an important channel for the sale of building/home renovation materials and we plan to increase our efforts to work with more home supply stores in the future.

Below is a list of our top customers for the year ended December 31, 2011:

  Company Region % of Revenue
1 Guizhou Shuanghe Industrial & Trading Co., Ltd Guizhou 74.5%
2 Kunming Xing Hong Building Kunming 14.0%

6


For the year ended December 31, 2011, sales generated from Guizhou Shuanghe Industrial & Trading Co., Ltd (“Guizhou Shuanghe”) and Kunming Xing Hong Building Materials Co., Ltd amounted to 88.5% of total revenue, and sales to Guizhou Shuanghe, our largest single customer, amounted to 74.5% of total revenue during the period. We did not enter into long-term contracts with these customers and therefore cannot be certain that sales to these customers will continue. The loss of our largest customers would likely have a material negative impact on our revenue and business.

Competition

Competition in the flooring industry is based primarily on product quality, pricing, and perceived brand quality. Currently, the flooring market is very fragmented with dozens of companies of various sizes. We believe that no single company in China holds more than 15% of the market share in the flooring industry. Competition tends to be regionally concentrated due to high transportation and distribution costs. Our primary competition comes from domestic companies such as PowerDekor, SDF, and Der International Flooring Ltd, or Der.

The quality of our products is similar to most of our competitors, however, some of our competitors charge higher prices due to a higher perceived brand value. Other competitors focus more heavily to consumers and are present in larger numbers of distribution outlets.

We believe that having our own regenerative source of raw materials will afford us a competitive advantage in terms of securing long-term raw materials, maintaining reasonable margins, and ensuring continued production. A key business risk in the wood-based flooring industry is the continued availability of reasonably priced raw materials without which flooring companies could experience business interruptions. As a result, we believe that our control of a significant portion of our own future raw material supply via our land use rights to forestry land is a key advantage in our future operations and growth. In addition, we will practice reforestation by planting of fast growing eucalyptus trees on our forest land to replenish raw material sources, which we expect will lead to constant forest regeneration. These rapid growth trees could be harvested 5 years after the initial planting by cutting the trunks and leaving the roots in place. The trees usually grow again from the roots and may be harvested within another 5 years. With this method we will be able to plant such trees at 10-year intervals and harvest twice during each 10-year period. Due to cash flow constraints, our original tree-planting schedule on our own regenerative forest land has been delayed to date, but we expect to commence planting during 2013. Barring any unforeseen difficulties with the growth rate of our crop, we expect to commence harvesting raw materials from this land by late 2017 or early 2018. We expect to procure approximately 20% of our raw materials needs during the first quarter of harvesting from our regenerative forest land.

We have entered into joint management agreements with 11 villages representing a total of 408 local farmers to look after and maintain the forest land covered under these agreements. All pieces of the land are located at Zhenfeng County, Guizhou Province. According to the agreements, which have a 30-year term, the villages continue to hold the land use rights and have the obligations to maintain the forest land, including planting, cultivation, pest control, fertilization and other maintenance activities. Under the joint management agreements, the first stage of cultivation of the land includes planting trees on a piece of land of 43.2 km2. Due to plans of reinvesting our cash flow into daily operation, we will halt capital investment in the forest land development in 2012, this cultivation has been delayed to date, but we expect to commence planting in 2013, and to harvest trees from this land by early 2016. In exchange, we agree to provide the villages with technological guidance, as well as with the funding to purchase young trees and fertilizers as necessary for maintaining and reforesting the land, and to cover expenses related to harvesting, transportation, taxes and other costs of sale. In addition, we will receive 80% of the profits generated from the forest land and the villages will retain the remaining 20%. Either party may sue the other party for breach of contract if the other party fails to fulfill its obligations according to the agreements. The agreements are not required to be registered with any PRC governmental authority. Since we have not yet planted or harvested from this forest land, only minimal costs have been incurred by, and no revenue has resulted from, these agreements. For the year ended December 31, 2011, no such expenses were incurred.. We plan to record 100% of the revenue generated from the sale of raw materials procured from such land upon the sale of such raw materials. Expenses related to plantation, management and harvesting, and the 20% pro-rata share of the profits deliverable to our local partners pursuant to the agreements would be recorded as the cost of goods sold.

We believe that the quality of our product and service offerings and our access to regenerative forests distinguish us from many of our competitors and provide us with a competitive edge in the market for wood flooring. In addition, we ensure the highest level of service and customer satisfaction by providing customers with our own professionally trained installers instead of third-party contractors. We believe that our focus on quality and service also positions us to successfully bid on commercial, governmental, and residential projects.

7


Sales and Marketing

We market our products at seven branch offices and eight flagship stores, and through 583 contracted flooring specialty retail stores that are concentrated mostly in southwestern China. Of the stores, 303 are located in Guizhou province,64 in Yunnan province, 52 in the Guangxi Zhuang Autonomous Region, 10 in Chengdu province, 70 in Chongqing, 41 in Hainan province and 43 in Shanghai province. All of our branch offices have been registered with appropriated local government authorities. We plan to gradually expand our presence beyond southwest China and are working to develop the central China (Henan province) and northwestern China (Shaanxi province) markets. We are also evaluating the Southeast Asian, Australian, and North American markets for future expansion opportunities.

We are also in process of negotiating commercial arrangements with home supply stores to market our products. For instance, we have entered into an agreement to sell our products at Red Star Macalline Furniture Mall’s Guiyang store, a large home products supply store chain in China with over 30 malls and stores across China. Large home supply stores, similar to Home Depot and Lowe’s in the US, are an important channel for building/home renovation material sales. We plan to increase our efforts to work with more home supply stores in the future but cannot assure you that our negotiations will result in any revenue generating agreement.

Over 70% of our total flooring sales are made through distributors who are critical to our overall success. To encourage this trend, we have created a standardized approach to quickly recruit and train distributors on how to effectively sell our products. In addition, we provide ongoing training sessions to continuously develop our distributors’ capabilities to ensure long term success.

Furthermore, we have established a comprehensive reward system in which distributors can earn monetary incentives if they achieve and exceed sales targets. We also provide marketing funds to distributors to help generate consumer interest and promote brand awareness. All marketing activities are monitored regionally to optimize marketing fund allocation and avoid redundancy in coverage. Due to our targeted focus on distributor support, we believe that we have one of the lower distributor turnover ratios in the industry at 5% a year.

Research and Development

We do not have a research and development center or a dedicated research and development team. Approximately 10% of our employees are members of our technical staff, who focus on maintaining and improving the production procedures and develop new products.

Intellectual Property

Aosen Forestry currently holds the following utility model patents from in China:

Description Patent Number Authorization Date
An environment friendly base molding ZL 2009 2 0314290.1 August 4, 2010
A type of laminate flooring ZL 2009 2 0314294.X August 4, 2010
A type of anti-skid laminate flooring ZL 2009 2 0314289.9 August 4, 2010

In connection with the acquisition of Silvan Flooring, Aosen Forestry and GST entered into a licensing and distribution agreement, dated November 18, 2009, pursuant to which GST transferred its “Silvan Touch” trademark (registered trademark number 1182064) to Aosen Forestry which then licensed it back to GST to be used in connection with its distribution of our “Silvan Touch” products. The assignment of the trademark has received government approval.

We rely on trade secret protection and non-disclosure agreements to protect our proprietary information and know-how. Our management and key members of our technical staff have entered into non-disclosure agreements in which they acknowledge that all inventions, designs, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership rights that they may claim in those works. It may be possible for third parties to obtain and use, without our consent, intellectual property that we own or are licensed to use.

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Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business. See Item 1A “Risk factors—Risks Related to Our Business—Our inability to protect our intellectual property may prevent us from successfully marketing our products and competing effectively.”

Employees

As of December 31, 2011, we employed a total of 298 employees. The following table sets forth the number of our employees by function.

Function Number of Employees
Management, Financial, and Administrative Office 54
Production 137
Sales and Marketing 77
Technical Staff 12
Security* 2
Cafeteria 4
Logistics 9
Housing Management 3
Total 298

*We store certain amounts of raw materials, such as wood and wood byproducts, along with work-in-progress, in both indoor and outdoor warehouses. Such stored raw materials and work-in-progress require round-the-clock security to guard against hazards such as fire. We also provide round-the-clock security at our employee dormitories for the safety of our resident employees. The foregoing uses of security personnel are usual and customary in our industry in China.

We maintain a satisfactory working relationship with our employees, and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations. None of our employees is represented by a labor union.

We are required by Chinese law to make monthly contributions to a state pension plan organized by Chinese municipal and provincial governments to cover employees in China with various types of social insurance. We have purchased such social insurance for some of our employees and for those whom we have not purchased social insurance, the premium has been added into their salary so that they can purchase social insurance in their individual capacity at the location of their recorded residences. Failure to make such social security contribution is subject to a late payment fee equal to 2% of the unpaid amount each day and we may be subject to a fine of up to RMB 10,000. We believe that we are in material compliance with the relevant PRC laws.

Environmental Compliance

As we conduct our manufacturing activities in China, we are subject to the requirements of PRC environmental laws and regulations on air emission, waste water discharge, solid waste and noise. We aim to comply with environmental laws and regulations. The local environmental protection authority issued to us a “Pollutant Discharge Permit” and requested that the company conduct an annual audit of its compliance with the national standards. We are not subject to any admonitions, penalties, investigations or inquiries imposed by the environmental regulators, nor are we subject to any claims or legal proceedings to which we are named as defendant for violation of any environmental law or regulation. We do not have any reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial condition or results of operations.

PRC Government Regulations

General Regulation of Business

Because our primary operating subsidiaries are located in China, we are subject to China’s national and local laws. This section summarizes the major PRC regulations relating to our business.

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Among others, we are subject to regulations related to a foreign invested enterprise, or FIE, which refers to an enterprise whose equity interest is held by a non-PRC shareholder. There are three main PRC regulations governing FIEs in China: the Laws of China-Foreign Equity Joint Ventures, the Laws of China-Foreign Cooperative Joint Ventures and the Laws of Wholly Foreign Owned Enterprises. As Aosen Forestry is the wholly owned subsidiary of Bingwu Forestry, only the Laws of Wholly Foreign Owned Enterprises, or the WFOE Law, applies to our business. To comply with the WFOE Law, Aosen Forestry needs to (a) obtain an approval certificate from the local Ministry of Commerce, or MOFCOM, in addition to a business license, (b) make a capital contribution in accordance with the MOFCOM approved schedule, and (c) register with the PRC local foreign exchange bureau and open a foreign exchange account. It will also need to obtain approvals and make filings for transferring funds in and out of China. On June 18, 2010, Aosen Forestry obtained the “Certificate of Approval with Foreign, Taiwan, Hong Kong, and Macau Investment” issued by the Guizhou Province MOFCOM and a new business license was issued to Aosen Forestry on July 12, 2010. Aosen Forestry has a registered capital of RMB 100 million. The acquisition price of RMB 16,963,000 (approximately $2.48 million) was all paid. The Company also opened a foreign exchange account with the approval of the PRC local foreign exchange bureau on August 4, 2010. We believe that we have been in compliance with these requirements.

Permits and Certificates

We operate in an industry with mature regulatory standards. In order to continue our operations, we are required to maintain the following manufacturing and operational licenses and certifications:


Permit/Certification

Issuing Authority
Permit/Certification
Holder

Effective Date

Expiration/Term
National Industrial Product Production Permit PRC State Administration for Quality Supervision and Inspection and Quarantine Aosen Forestry and Silvan Flooring September 29, 2007 (Aosen Forestry) and September 8, 2010 (Silvan Flooring) Expires on September 28, 2012 (Aosen Forestry) and September 7, 2015 (Silvan Flooring)
Quality Management System Authentication Certificate (consistency with ISO9001:2000 and GB/T19001-2000) China Quality Authentication Center Aosen Forestry March 18, 2008 Expires on May 30, 2014
Measurement Management System Authentication Certificate (consistency with GB/T19022-2003 and ISO10012-2003) Zhongqi Measurement System Authentication Center Aosen Forestry July 8, 2008 Expires on July 7, 2012

Environmental Regulations

The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution. We hold the following environmental licenses and certifications:

Permit/Certification
Issuing Authority
Permit/Certification
Holder
Effective Date
Expiration/Term
Environment Management System Authentication Certificate China Quality Authentication Center (consistency with the standards of ISO14001:2004 and GB/T24001-2004) Aosen Forestry April 3, 2008 Expires on May 22, 2014
Emission Certification Guizhou Dingxiao Economic Development District Environment Protection Agency (EPA) Aosen Forestry May 24, 2010 May 24, 2013
Radiation Safety Certification Environment Protection Agency (EPA) of Guizhou Province Aosen Forestry January 8, 2007 Renewal pending

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Patent Protection in China

The PRC’s intellectual property protection regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also a signatory to most of the world's major intellectual property conventions, including:

  • Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);

  • Paris Convention for the Protection of Industrial Property (March 19, 1985);

  • Patent Cooperation Treaty (January 1, 1994); and

  • The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).

Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 2001 and 2003, respectively.

The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).

Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other developed countries. See Item 1A “Risk Factors—Risks Related to Our Business—Our inability to protect our intellectual property may prevent us from successfully marketing our products and competing effectively.”

Taxation

On March 16, 2007, the National People's Congress of China passed a new Enterprise Income Tax Law, or EIT Law, and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008.

Before the implementation of the EIT Law, FIEs established in the PRC, unless granted preferential tax treatments by the PRC government, were generally subject to an earned income tax, or EIT, rate of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The EIT Law and its implementing rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Despite these changes, the EIT Law gives FIEs established before March 16, 2007, or Old FIEs, a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under the original EIT law will be subject to gradually increased EIT rates over a 5-year period until their tax rate reaches 25%. In addition, the Old FIEs that are eligible for other preferential tax treatments by the PRC government under the original EIT law are allowed to continue enjoying their preference until these preferential treatment periods expire. The discontinuation of any such special or preferential tax treatment or other incentives would have an adverse effect on any organization's business, fiscal condition and current operations in China.

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In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization's global income will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see Item 1A “Risk Factors—Risks Related to Doing Business in China—Under the New 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 stockholders.”

In addition, the EIT Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises' shareholder has a tax treaty with China that provides for a different withholding arrangement. Aosen Forestry and Silvan Flooring are considered FIEs and are directly held by our subsidiary in Hong Kong. According to a 2006 tax treaty between the Mainland and Hong Kong, dividends payable by an FIE in China to the company in Hong Kong who directly holds at least 25% of the equity interests in the FIE will be subject to a no more than 5% withholding tax. We expect that such 5% withholding tax will apply to dividends paid to Bingwu Forestry by Aosen Forestry and Silvan Flooring, but this treatment will depend on our status as a nonresident enterprise.

Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay value added tax, or VAT, at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods, the exporter is entitled to some or all of the refund of VAT that it has already paid or borne.

Foreign Currency Exchange

All of our sales revenue and expenses are denominated in RMB. Under the PRC foreign currency exchange regulations applicable to us, RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, employee salaries (even if employees are based outside of China), and payment for equipment purchases outside of China, without the approval of the State Administration of Foreign Exchange of the People’s Republic of China, or SAFE, by complying with certain procedural requirements. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including MOFCOM, or their respective local branches. These limitations could affect our PRC operating subsidiaries’ ability to obtain foreign exchange through debt or equity financing. In the event of a liquidation of our PRC subsidiaries, SAFE approval is required before the remaining proceeds can be expatriated from China.

Dividend Distributions

Substantially all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes, such as setting off the accumulated losses, enterprise expansion or increasing the registered capital and are not distributable as cash dividends.

During 2011 and 2010, we reinvested our available capital on the development of the Company and did not distribute any dividends to shareholders during this period. We plan to keep reinvesting any available capital in the Company for the foreseeable future. As a result, we did not allocate the required 10% of our after-tax profit to the statutory general reserve fund during 2010 or prior years and did not hold shareholder meetings to distribute this fund. As of December 31, 2011, we funded the statutory general reserve fund by catching up the balance from previous years and for 2011.

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Circular 75

In October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligation.

In the case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed. Failure to comply with the requirements of Circular 75 may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.

As we stated under Item 1A “Risk factors—Risks Related to Doing Business in China—Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into PRC subsidiaries, limit our PRC subsidiary's ability to distribute profits to us or otherwise materially adversely affect us,” we have asked our stockholders, who are PRC residents as defined in Circular 75, to register with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, many of the terms and provisions in Circular 75 remain unclear and implementation by central SAFE and local SAFE branches of Circular 75 have been inconsistent since their adoption. Therefore, we cannot predict how Circular 75 will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries' ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders.

Mergers and Acquisitions

On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A Rule, which became effective on September 8, 2006, and was amended in 2009. According to the 2006 M&A Rule, a “Round-trip Investment” is defined as having taken place when a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). Under the 2006 M&A Rule, any Round-trip Investment must be approved by MOFCOM and any indirect arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of PRC law.

On May 17, 2010, our Chairman and CEO, Mr. Yulu Bai, entered into an option agreement with Ms. Ren Ping Tu, pursuant to which Mr. Bai was granted an option to acquire 20,500,000 shares our common stock currently owned by Ms. Tu, for an exercise price of $2,500,000. On September 6, 2011, Mr. Bai exercised this option and became our largest stockholder. His acquisition of our equity interest is required to be registered with the AIC in Beijing. Mr. Bai will also be required to make filings with the Beijing SAFE, to register the Company and its non-PRC subsidiaries to qualify them as SPVs, pursuant to Circular 75. Mr. Bai is in the process of registering his acquisition with the AIC and SAFE.

We were advised by our PRC counsel that our acquisition of Aosen Forestry does not constitute a Round-trip Investment. The opinion of our PRC counsel, however, was based on the express, but not detailed language of the 2006 PRC Provisions on the Acquisition of Domestic Enterprises by Foreign Investors, also known as Circular 10, which deal with round trip investments in Article 11. That Article requires that approvals from the national-level MOFCOM be obtained in situations where a PRC person or company acquires, in the name of a foreign company established or controlled by it, a domestic PRC company with which it is connected. Article 11 also contains a general warning against “circumventing” this requirement by use of a foreign invested entity established in the PRC “or other means.”

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In this case our PRC counsel was of the opinion that the explicit language of Article 11 was satisfied because Bingwu Forestry, the non-PRC “foreign company” in this situation, was established by Ms. Tu, an individual holding a Canadian passport and holding no equity or management position with Aosen Forestry. Bingwu Forestry was still wholly owned and controlled by Ms. Tu at the time of its acquisition of Aosen Forestry, our PRC operating entity. Our PRC counsel therefore was of the opinion that Bingwu Forestry was not established by a PRC person and not controlled by a PRC person at the time of the acquisition. It therefore was not necessary to reach the question of whether Ms. Tu was “connected with” Aosen Forestry; but if it had been, the conclusion of our PRC counsel was that she was not so “connected” for purposes of Article 11. As we have disclosed, Ms. Tu is the wife of Mr. Bai, a principal shareholder of Aosen Forestry at the time of its transfer to Bingwu Forestry. We appreciate that US authorities might view this relationship as giving Mr. Bai indirect ownership or control over his wife’s company. However, we have been advised that there is no administrative or judicial guidance in the PRC which would suggest this result. Nor is there any such guidance as to what the phrase “other means” in Article 11 is intended to encompass. Finally, as a general interpretive principle in China, what the law does not prohibit is taken to be permitted. For all these reasons, our PRC counsel concluded that the acquisition of Aosen Forestry by Bingwu Forestry was not captured by Article 11.

As we stated below under Item 1A “Risk factors—Risks Related to Doing Business in China—Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Aosen Forestry constitutes a Round-trip Investment without MOFCOM approval,” although we have been advised by competent counsel that the acquisition of Aosen Forestry by Bingwu Forestry complied with the requirements of Circular 10, the law and the regulations in China are not well settled, and it is at least possible that the PRC authorities could reach a conclusion contrary to the one reached by our PRC counsel.

Insurance

We do not have any business liability, interruption or litigation insurance coverage for our operations in China. Insurance companies in China offer limited business insurance products. While business interruption insurance is available to a limited extent in China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, we are subject to business and product liability exposure. See Item 1A “Risk Factors—Risks Related to Our Business—We have limited insurance coverage in China.”

ITEM 1A. RISK FACTORS.

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should read the section entitled “Special Note Regarding Forward Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this report.

RISKS RELATED TO OUR BUSINESS

We depend upon commercial relationships with two major customers for a significant portion of our revenue, and we cannot be certain that sales to these customers will continue. If sales to these customers do not continue, then our sales may decline and our business may be negatively impacted.

We currently supply our wood flooring products to two major customers in the Chinese domestic market. For the year ended December 31, 2011, sales generated from Guizhou Shuanghe and Kunming Xing Hong Building Materials Co., Ltd. amounted to 88.5% of total revenue, and sales to Guizhou Shuanghe, our largest single customer, amounted to 74.5% of total revenue during the period. We do not enter into long-term contracts with these customers and therefore cannot be certain that sales to these customers will continue. The loss of our largest customers would likely have a material negative impact on our revenue and business.

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In order to grow at the pace expected by management, we will require additional capital to support our long-term growth strategies. If we are unable to obtain additional capital in future years, we may be unable to proceed with our plans and we may be forced to curtail our operations.

Our working capital requirements and the cash flow provided by future operating activities, if any, will vary greatly from quarter to quarter, depending on the volume of business during the period and payment terms with our customers. We will require additional working capital to support our long-term growth strategies, which includes identifying suitable targets for horizontal or vertical mergers or acquisitions so as to enhance the overall productivity and benefit from economies of scale. However, due to the uncertainty arising out of domestic and global economic conditions and the ongoing tightening of domestic credit markets, we may not be able to generate adequate cash flows or obtain adequate levels of additional financing, whether through equity financing, debt financing or other sources. Even if we are able to obtain additional financing, it may not be on terms that are favorable to the Company. Furthermore, additional financings could result in significant dilution to our earnings per share or the issuance of securities with rights superior to our current outstanding securities, including registration rights. If we are unable to raise additional financing, we may be unable to implement our long-term growth strategies, develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures on a timely basis, if at all. In addition, a lack of additional financing could force us to substantially curtail operations.

Our business could be adversely affected by reduced levels of cash, whether from operations or from borrowings.

Historically, our principal sources of funds have been cash flows from operations and borrowings from banks and other institutions. Our commercial short term bank loans totaled $16,198,789 as of December 31, 2011. Under our credit agreements with the banks, we are subject to typical commercial loan covenants, such as using the funds in a way set forth in the credit agreements, paying loan interests timely and not using company assets to provide guarantee to a third party without the creditor’s prior consent. Our operating and financial performance may generate less cash and result in our failing to comply with our credit agreement covenants. We were in compliance with these covenants during the 2011 fiscal year, however, our ability to remain compliant in the future will depend on our future financial performance and may be affected by events beyond our control. There can be no assurance that we will generate sufficient earnings and cash flow to remain in compliance with the credit agreement or that we will be able to obtain future amendments to the credit agreement to avoid a default. In the event of a default, there can be no assurance that we could negotiate a new credit agreement or that we could obtain a new credit agreement with satisfactory terms and conditions within a reasonable time period.

Our business and operations will suffer if end-customers prove to be not creditworthy.

In our industry, companies such as ours enter into large industrial commercial sub-contracts with prime contractors in addition to consumer retail sales. While our retail customers generally pay the entire amount at time of purchase but we sometimes do not receive full payment on a project from our industrial customers until they are paid by the end-customer. Consequently, we extend credit to some of our industrial customers while generally requiring no collateral. We perform ongoing credit evaluations of our customers' financial condition and generally have no difficulties in collecting our payments. However, if we encounter future problems collecting amounts due from our clients or if we experience delays in the collection of amounts due from our clients, our liquidity could be negatively affected. In order to reduce collection risks, we have turned down some opportunities that we believed carried unfavorable payment terms.

Environmental regulations impose substantial costs and limitations on our operations.

We are subject to various national and local environmental laws and regulations in China concerning issues such as air emissions, wastewater discharges, and solid waste management and disposal. These laws and regulations can restrict or limit our operations and expose us to liability and penalties for non-compliance. While we believe that our facilities are in material compliance with all applicable environmental laws and regulations, the risks of substantial unanticipated costs and liabilities related to compliance with these laws and regulations are an inherent part of our business. It is possible that future conditions may develop, arise or be discovered that create new environmental compliance or remediation liabilities and costs. While we believe that we can comply with existing environmental legislation and regulatory requirements and that the costs of compliance have been included within budgeted cost estimates, compliance may prove to be more limiting and costly than anticipated.

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Our success relies on our management’s ability to understand the wood flooring industry. We may not be able to maintain or improve our competitive position in the wood flooring industries, and we expect this competition to continue to be intense.

We target the highly fragmented and competitive wood flooring market in China for our products and services. China’s wood flooring industries are large and established and rapidly evolving. As such, it is critical that our management is able to understand industry trends and make good strategic business decisions. If our management is unable to identify industry trends and act in response to such trends in a way that is beneficial to us, our business will suffer.

Our primary competition comes from domestic companies such as SDF and PowerDekor. These entities may be able to respond more quickly to changing market conditions by developing new products and services that meet customer requirements or are otherwise superior to our products and services, and may be able to more effectively market their products than we can because they have significantly greater financial, technical and marketing resources than we do. They may also be able to devote greater resources than we can to the development of their products. Increased competition could require us to reduce our prices, resulting in our receiving fewer customer orders and in our loss of market share. We cannot assure you that we will be able to distinguish ourselves in a competitive market. To the extent that we are unable to successfully compete against existing and future competitors, our business, operating results and financial condition could be materially adversely affected.

Future government regulations or other standards could have an adverse effect on our operations.

Our operations are subject to a variety of laws, regulations and licensing requirements of national and local authorities in the PRC. We are required to obtain licenses or permits from the PRC central government and from Guizhou province, where we operate, and to meet certain standards in the conduct of our business. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have an adverse effect on us. In the event that these laws, regulations and/or licensing requirements change, we may be required to modify our operations or to utilize resources to maintain compliance with such rules and regulations. In addition, new regulations may be enacted that could have an adverse effect on us.

Our business and reputation as a provider of wood flooring products may be adversely affected by product defects or performance.

We believe that we offer high quality products that are reliable and competitively priced. If our products do not perform to specifications, we might be required to redesign or recall those products or pay substantial damages. Such an event could result in significant expenses, disrupt sales and affect our reputation and that of our products. In addition, product defects could result in substantial product liability. We do not have product liability insurance. If we face significant liability claims, our business, financial condition, and results of operations would be adversely affected.

If our suppliers fail to perform their contractual obligations, our ability to provide services and products to our customers, as well as our ability to obtain future business, may be harmed.

Many of our products include machines and raw materials procured from other companies upon which we rely to provide a portion of the products that we provide to our customers. There is a risk that we may have disputes with our suppliers, including disputes regarding the quality and timeliness of parts and raw materials provided by these suppliers. A failure by one or more of our suppliers to satisfy the agreed-upon contracts may materially and adversely impact our ability to perform our obligations to our customers, could expose us to liability, and could have a material adverse effect on our ability to compete for future contracts and orders.

Our expansion plans may not be successful.

Our manufacturing facility in Qianxinan, Guizhou province, has an established annual production capacity of 6 million square meters of laminate flooring and 75,000 cubic meters of industrial fiber boards. We have begun construction of new manufacturing facility that we expect will increase our overall capacity to 200,000 cubic meters of fiber boards and 12 million square meters of laminate floor. We expect to complete the new facility for laminate flooring and industrial fiber boards by late 2012 and late 2013, respectively. We expect to incur significant costs in connection with the expansion of our business, and any failure to successfully implement our expansion plans may materially and adversely affect our business, financial condition and results of operations.

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Our production capacity might not be able to meet with growing market demand or changing market conditions.

We cannot give assurance that our production capacity will be able to meet our obligations and the growing market demand for our products in the future. Furthermore, we may not be able to expand our production capacity in response to changing market conditions. If we fail to meet demand from our customers, we may lose our market share.

We may not be able to develop new products or expand into new markets.

We intend to develop and produce new flooring products. The launch and development of new products involve considerable time and commitment which may exert a substantial strain on our ability to manage our existing business and operations. We cannot ensure that our research and development capacity and capability is sufficient to develop any marketable new products or that any income will be generated from such new products. If we are not able to develop and introduce new products successfully, or if our new products fail to generate sufficient revenue to offset our research and development costs, such failure could lead to wasted resources and our business, financial condition and operating results could be adversely affected. An element of our strategy for growth also envisages us selling existing or new products into new markets. There is no guarantee that we will be successful in executing our strategy for growth and our failure to execute our growth strategy successfully may have a material and adverse effect on our future revenue and profitability.

We rely on distributors for the vast majority of our sales, particularly one distributor that accounted for approximately 75% and 48% of our revenue for 2011 and 2010. Our business will suffer if distributors discontinue doing business with us at historical levels and cannot be replaced.

Over 70% of our sales are made to distributors that resell our products to various end-consumers. Our largest distributor, Guizhou Shuanghe, accounted for approximately 74.5% and 47.95% of our revenue in the years ended December 31, 2011 and 2010.

We intend to expand distribution of our products by entering into distribution arrangements with regional distributors or other direct store delivery distributors having established sales, marketing and distribution organizations. However, many distributors are affiliated with and manufacture and/or distribute other flooring products, and in many cases, such products compete directly with our products.

The marketing efforts of our distributors are critical for our success. If we fail to attract additional distributors, and our existing distributors do not promote our products at the same or at a greater level than the products of our competitors, our business, financial condition and results of operations could be adversely affected.

We manufacture our products in a single location, and any material disruption of our operations could adversely affect our business.

Our operations are subject to uncertainties and contingencies beyond our control that could result in material disruptions in our operations and adversely affect our business. These include industrial accidents, fires, floods, droughts, storms, earthquakes, natural disasters and other catastrophes, equipment failures or other operational problems, strikes or other labor difficulties.

All of our products were manufactured in our production facilities in Qianxinan, the PRC. If there is any damage to our production facilities, we may not be able to remedy such situations in a timely and proper manner, and our production could be materially and adversely affected. Any breakdown or malfunction of any of our equipment could cause a material disruption of our operations. Any such disruption in our operations could cause us to reduce or halt our production, prevent us from meeting customer orders, adversely affect our business reputation, increase our costs of production or require us to make unplanned capital expenditures, any one of which could materially and adversely affect our business, financial condition and results of operations.

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The costs for labor may increase.

The manufacturing industry is labor intensive. Labor costs in the PRC have been increasing over the past few years, and we cannot assure you that the cost of labor in the PRC will not continue to increase in the future or that we will be able to increase the prices of our products to offset such increases. If we are unable to identify and employ other appropriate means to reduce our costs of production or to pass on the increased labor and other costs of production to our customers, our business, financial condition, results of operations and prospects could be materially and adversely affected.

If we are unable to attract and retain senior management and qualified technical and sales personnel, our operations, financial condition and prospects will be materially adversely affected.

Our future success depends in part on the contributions of our management team and key technical and sales personnel and on our ability to attract and retain qualified new personnel. In particular, our success depends on the continuing employment of our Chief Executive Officer, Mr. Yulu Bai; our Chief Financial Officer, Mr. Jiyong He; our Chief Operating Officer, Mr. Fangping Peng; and our Chief Marketing Officer, Mr. Dongsheng Tan. There is significant competition in our industry for qualified managerial, technical and sales personnel and we cannot assure you that we will be able to retain our key senior managerial, technical and sales personnel or that we will be able to attract, integrate and retain other such personnel that we may require in the future. If we are unable to attract and retain key personnel in the future, our business, operations, financial condition, results of operations and prospects could be materially adversely affected.

We have limited insurance coverage in China.

Operation of our facilities involves many risks, including equipment failures, natural disasters, industrial accidents, power outages, labor disturbances and other business interruptions. Furthermore, if any of our products are faulty, then we may become subject to product liability claims or we may have to engage in a product recall. We do not carry any business interruption insurance, product recall or third-party liability insurance for our production facilities or with respect to our products to cover claims pertaining to personal injury or property or environmental damage arising from defects in our products, product recalls, accidents on our property or damage relating to our operations. While business interruption insurance and other types of insurance are available to a limited extent in China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, our existing insurance coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.

Our inability to protect our intellectual property may prevent us from successfully marketing our products and competing effectively.

Failure to protect our intellectual property could harm our brands and our reputation, and adversely affect our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our trademarks, patents, copyrights and trade secrets, could result in the expenditure of significant financial and managerial resources. We regard our intellectual property, particularly our patents and trade secrets, to be of considerable value and importance to our business and our success. This is particularly important for us because almost all of our operations are based in China, which has not traditionally enforced intellectual property protection to the same extent as in the United States. We rely on a combination of trademark, patent, and trade secrecy laws, and contractual provisions to protect our intellectual property rights. There can be no assurance that the steps taken by us to protect these proprietary rights will be adequate or that third parties will not infringe or misappropriate our trademarks, trade secrets (including our flavor concentrate trade secrets) or similar proprietary rights. Litigation may be necessary to enforce our intellectual property rights and the outcome of any such litigation may not be in our favor. Given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee that we would be able to halt the unauthorized use of our intellectual property through litigation in a timely manner. In addition, there can be no assurance that other parties will not assert infringement claims against us, and we may have to pursue litigation against other parties to assert our rights. Any such claim or litigation could be costly and we may lack the resources required to defend against such claims. In addition, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could have a material adverse affect on our ability to market or sell our brands, and profitably exploit our products.

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One of our existing stockholders has substantial influence over our company, and his interests may not be aligned with the interests of our other stockholders.

Our largest stockholder, YuLu Bai, owns approximately 33.76% of our outstanding voting securities and has significant influence over our business, including decisions regarding mergers, consolidations, the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may also have the effect of discouraging, delaying or preventing a future change of control, which could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our Company and may reduce the price of our shares.

We have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential stockholders could lose confidence in our financial statements, which would harm the trading price of our common stock.

Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated filers or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies are not required to include an attestation report of their auditors in annual reports.

A report of our management is included under Item 9A “Controls and Procedures” of this report. We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in this annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive a positive attestation from our independent auditors.

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2011, management identified a material weakness relating to our need to increase our qualified accounting personnel and enhance the supervision, monitoring and reviewing of financial statements preparation processes. We are undertaking remedial measures, which measures will take time to implement and test, to address this material weakness. There can be no assurance that such measures will be sufficient to remedy the material weakness identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. See Item 9A “Controls and Procedures” for more information.

RISKS RELATED TO DOING BUSINESS IN CHINA

Changes in China's political or economic situation could harm us and our operating results.

Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability. Some of the things that could have this effect are:

  • level of government involvement in the economy;

  • control of foreign exchange;

  • methods of allocating resources;

  • balance of payments position;

  • international trade restrictions; and

  • international conflict.

The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. For example, state-owned enterprises still constitute a large portion of the Chinese economy, and weak corporate governance and the lack of a flexible currency exchange policy still prevail in China. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy was similar to those of the OECD member countries.

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Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our subsidiaries in the PRC. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, all of our executive officers and all of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.

You may have difficulty enforcing judgments against us.

Most of our assets are located outside of the United States and all of our current operations are conducted in the PRC. In addition, all of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

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If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed companies with substantial PRC operations, we may have to expend significant resources to investigate and resolve any negative allegations resulting from such scrutiny which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such allegations cannot be addressed and resolved favorably.

Recently, U.S. public companies that have substantially all of their operations in China, particularly companies such as ours that have completed reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around a lack of effective internal controls over financial accounting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed PRC companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now conducting internal and external investigations into the allegations, and in the interim are subject to shareholder lawsuits and SEC enforcement actions. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely impacted and your investment in our stock could be rendered worthless.

Future inflation in China may inhibit our ability to conduct business in China.

In recent years, the PRC 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.

Restrictions on currency exchange may limit our ability to receive and use our sales effectively.

The majority of our sales will be settled in RMB and U.S. dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

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Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.

Substantially all of our sales are earned by our PRC subsidiaries. However, as discussed more fully under Item 1 “Business—PRC Government Regulations—Dividend Distributions,” PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into PRC subsidiaries, limit our PRC subsidiary's ability to distribute profits to us or otherwise materially adversely affect us.

In October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75. Circular 75 requires PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an SPV for the purpose of engaging in an equity financing outside of China. See Item 1 “Business—PRC Government Regulations—Circular 75” for a detailed discussion of Circular 75 and its implementation.

We expect to ask our stockholders, who are PRC residents as defined in Circular 75, to register with the relevant branch of SAFE as currently required in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiary. However, we cannot provide any assurances that they can obtain the above SAFE registrations required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries' ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders.

In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with Circular 75, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries' ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Aosen Forestry constitutes a Round-trip Investment without MOFCOM approval.

On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, referred to as the 2006 M&A Rule, which regulate “Round-trip Investments,” defined as having taken place when a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). See Item 1 “Business—PRC Government Regulations—Mergers and Acquisitions” for a detailed discussion of the 2006 M&A Rule.

The PRC regulatory authorities may take the view that Mr. Bai’s acquisition of our equity interest following the exercise of his option on September 6, 2011, or the Acquisition, and the reverse acquisition of Bingwu Forestry, are part of an overall series of arrangements constituting a Round-trip Investment because immediately after these transactions, Mr. Bai would become the majority owner and effective controlling party of a foreign entity that acquired ownership of our Chinese subsidiaries. The PRC regulatory authorities may also take the view that the registration of the Acquisition with the relevant AIC in Beijing and the filings with the Beijing SAFE may not be evidence that the Acquisition has been properly approved because the relevant parties did not fully disclose to the AIC, SAFE or MOFCOM the overall restructuring arrangements, the existence of the reverse acquisition and its link with the Acquisition. If the PRC regulatory authorities take the view that the Acquisition constitutes a Round-trip Investment under the 2006 M&A Rule, we cannot assure you we may be able to obtain the approval required from MOFCOM.

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In the opinion of our PRC counsel, the Acquisition does not constitute a Round-trip Investment because Ms. Ren Ping Tu, the sole shareholder of Bingwu Forestry, is neither a PRC citizen, a shareholder of Aosen Forestry, nor a member of Aosen Forestry’s management. Furthermore, our counsel does not believe that the existence of the option agreement defeats the status of the acquisition. However, if the PRC regulatory authorities take the view that the Acquisition constitutes a Round-trip Investment without MOFCOM approval, they could invalidate our acquisition and ownership of our Chinese subsidiaries. Additionally, the PRC regulatory authorities may take the view that the Acquisition constitutes a transaction which requires the prior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is obtained. We believe that if this takes place, we may be able to find a way to re-establish control of our Chinese subsidiaries’ business operations through a series of contractual arrangements rather than an outright purchase of our Chinese subsidiaries, but we cannot assure you that such contractual arrangements will be protected by PRC law or that we can receive as complete or effective economic benefit and overall control of our Chinese subsidiaries’ business as if the Company had direct ownership of our Chinese subsidiaries. In addition, we cannot assure you that such contractual arrangements can be successfully effected under PRC law. If we cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory authorities to do so, and if we cannot put in place or enforce relevant contractual arrangements as an alternative and equivalent means of control of our Chinese subsidiaries, our business and financial performance will be materially adversely affected.

Under the New 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 stockholders.

The EIT Law and its implementing rules became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiary would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2012 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.

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If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.

We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Nonresident Enterprises' Share Transfer that was released in December 2009 with retroactive effect from January 1, 2008.

The Chinese State Administration of Taxation, or SAT, released a circular on December 15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes. There is uncertainty as to the application of Circular 698. For example, while the term “indirectly transfer” is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to balance if our Company complies with the Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.

We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

We have not received formal land use rights to the land where our manufacturing facility is located.

We hold 20,128 square meters of land in Xingyi, Guizhou province which houses, plants, warehousing and packaging facilities, dormitory space, administrative offices, and maintenance facilities. Our use of this land was authorized by the authorities of the Dingxiao Economic Development Zone, Guizhou province, and since that time our application for the formal land use right was forwarded to the Guizhou Province Land Resources authority for approval. However, due to differences in the planning of the Economic Development Zone and the Land Resources authorities, we have still not obtained formal land use rights for such land. The Economic Development Zone has been actively working to obtain formal approval, which they expect to receive in June 2012. Since our company was a key invitee to the Dingxiao Economic Development Zone and they are actively helping us with the land use rights application process. As a result, we do not expect our operations to be jeopardized while we await such land use rights.

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RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY

Our common stock is quoted on the OTCQB market which may have an unfavorable impact on our stock price and liquidity.

Our common stock is quoted on the OTCQB market maintained by The OTC Markets, LLC. The OTCQB market is a significantly more limited market than exchanges such as the New York Stock Exchange and NASDAQ. The quotation of our shares on the OTCQB market may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future. We plan to list our common stock on a stock exchange as soon as practicable, however, we cannot assure you that we will be able to meet the initial listing standards of any stock exchange, or that we will be able to maintain any such listing.

The market price of our common stock is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.

The market price of our common stock is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include:

  • our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;

  • changes in financial estimates by us or by any securities analysts who might cover our stock;

  • speculation about our business in the press or the investment community;

  • significant developments relating to our relationships with our customers or suppliers;

  • stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in our industry;

  • customer demand for our products;

  • investor perceptions of our industry in general and our company in particular;

  • the operating and stock performance of comparable companies;

  • general economic conditions and trends;

  • major catastrophic events;

  • announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;

  • changes in accounting standards, policies, guidance, interpretation or principles;

  • loss of external funding sources;

  • sales of our common stock, including sales by our directors, officers or significant stockholders; and

  • additions or departures of key personnel.

Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.

Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, in July 2008, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share prices since September 2001. These market fluctuations may adversely affect the price of our common stock and other interests in our company at a time when you want to sell your interest in us.

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We may be subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.

The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock may become a “penny stock” and be subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.

We do not intend to pay dividends for the foreseeable future.

For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.

Certain provisions of our Articles of Incorporation may make it more difficult for a third party to effect a change-of-control.

Our Articles of Incorporation authorize our board of directors to issue up to 5,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our board of directors without further action by the stockholders. These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

There is no private ownership of land in China and all urban land ownership is held by the government of the PRC, its agencies and collectives. Land use rights can be obtained from the government for a period of up to 50 years for industrial usage, 40 years for commercial usage and 70 years for residential usage, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of the PRC (State Land Administration Bureau) upon payment of the required land transfer fee.

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We have purchased the following forestry land use rights for a total of $5,856,515 (RMB 40,000,000):

    Area    
Certificate Number Locality (square kilometers) Date of Issuance Expiration Date
B520802335298 Liping County, Guizhou Province 17.34 January 8, 2010 October, 2041
B5208022556795 Liping County, Guizhou Province 5.17 January 8, 2010 October, 2041

Our corporate headquarters are located in Guiyang, Guizhou Province. We hold 20,128 square meters of land which houses plants, warehousing and packaging facilities, dormitory space, administrative offices, and maintenance facilities. Our construction on this land was authorized in 2004 by the authorities of the Dingxiao Economic Development Zone, or DEDZ, and at that time, our application for formal land use rights was forwarded to the Guizhou Land and Resources Department, or Guizhou LRD, for approval. We have been advised by the Guizhou LRD that, due to DEDZ planning changes, the Guizhou LRD had suspended the issuance of any land use rights to DEDZ residents, including us, until it could approve such planning changes. However, we understand that the Guizhou LRD has now agreed to the DEDZ planning changes and the DEDZ has been actively working to obtain formal approval for the Company, which they expect to receive in June 2012. Since our Company was a key invitee to the DEDZ and they have been actively assisting us with the land use rights application process, we do not expect our operations to be jeopardized while we await such land use rights. If we are denied land use rights or other approvals for all uses of this property, it may be resumed by the state without compensation, along with all buildings, fixtures, structures and improvements on such land. If this were to happen, our financial condition would be materially and adversely affected.

Our production facility is located over an hour’s drive away from the nearest city residential area. In order to reduce the burden of commuting and provide better benefits for our employees, we built housing for our employees’ use on the same tract of land where our production facilities are located. As of December 31, 2011, 100 employees were taking advantage of such housing. Our employee housing averages 12 square meters per apartment. Each apartment has its own bathroom, water heater, desks, chairs, beds, bedding and other basic living facilities and is usually shared by 2 employees. We have a total of 63 such apartments. As we disclosed above, since we are still in the process of applying for land use rights over the land which houses our production facilities and dormitory space, we have not received the applicable government housing permits for such housing. According to relevant Chinese laws, we are not allowed to obtain government housing permits without the land use right over the land where our employee apartments are located. We employ 3 staff members to safeguard our employee housing and our executive office buildings.

We also hold the land use rights for 3,723 square meters of office space.

We sell some of our products through eight retail stores which we refer to as “flagship” stores because they are generally larger and better equipped with samples, promotional material and product inventory, as compared to regular retail stores, and as a result, they better promote our image and the quality of our products. These flagship stores are leased from third parties and we do not have ownership of or land use rights over any of them. Currently, five of these eight stores are leased by GST or its affiliates. As we discussed above, Aosen Forestry and GST jointly formed Silvan Flooring on October 22, 2007. This joint venture arrangement has now been terminated and Aosen Forestry now owns 100% of Silvan Flooring. As a result, GST is gradually assigning these leases to us. The other three stores are leased by non GST distributors, but we have supported these three stores with funds for advertisement, decoration, samples and various promotions, and placed standard requirements on these three flagship stores. The aggregate monthly payments under these leases total $18,000, as set forth on the table below:


Store

Location

Lessor

Lessee
Space
(sq.m.)
Monthly
Rent

Expiration Date
Zhong Xin Guizhou Guizhou Military Region Logistic Dept Property Mgmt Office GST, Guizhou Subsidiary 128 (store); 700 (warehouse) $1,288 (store); $2,972 (warehouse) December 31, 2013
Red Star Macalline Guizhou Guizhou Fuyuanmei Furniture Investment Development Co., Ltd GST, Guizhou Subsidiary 191 $1,757 Renewal pending
Xinfa Guizhou Guiyang Xinfa Large Decoration Material Market Huaneng Guo (individual, GST affiliate) 81 $652 Renewal pending
Jinyang Guizhou Guizhou Southwest International Decoration Showcase City Co., Ltd Yi Ran (individual) 198 $823 April 1, 2011 - March 21, 2012 March 31, 2012
Xingyi Guizhou Dalin Tan (individual) Minggang Liu (individual) 150 (store); 190 (warehouse) $8,650 Renewal pending
Huqiu Guangxi Nanning Xungui Trading Co., Ltd GST, Guangxi Subsidiary 222 $$594 (store); $402 (warehouse) August 31, 2013
Daguanlou Yunnan Kunming Daguan Building and Wood Material Market Xu Li (individual, GST affiliate) 260 $484 August 25, 2014
Nanchong Sichuan Nanchong Guangcai Properties Management Co., Ltd Mingxing Wu (individual) 187 $529 in year 2; $88 in year 3 February 9, 2013

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We have engaged in verbal commercial arrangements with GST and the three third-party distributors for marketing and distributing our products. They purchase products from us and resell them to consumers. However, we do not have written agreements with them.

We believe that all leased space is in good condition.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is quoted on the OTCQB Market and trades under the symbol “SLVA.” Historically, there has not been an active trading market for our common stock. The first trade in our stock did not occur until October 21, 2009 and from that time until the third quarter of 2010, our common stock was traded on a very sporadic basis.

The following table sets forth, for the periods indicated, the high and low closing prices of our common stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

    Closing Bid Prices(1)  
    High     Low  
Year Ended December 31, 2011            
1st Quarter $  3.00   $  1.75  
2nd Quarter   7.00     1.12  
3rd Quarter   7.50     3.00  
4th Quarter   4.55     3.00  
             
Year Ended December 31, 2010            
1st Quarter   1.01     0.70  
2nd Quarter   1.01     0.20  
3rd Quarter   0.25     0.12  
4th Quarter   0.25     0.04  

(1)

The above table sets forth the range of high and low closing bid prices per share of our common stock as reported by www.quotemedia.com for the periods indicated.

Holders

As of April 12, 2012, there were approximately 97 stockholders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.

Dividends

Any decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our stockholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

Securities Authorized for Issuance under Equity Compensation Plans

We do not have any compensation plans in effect under which our equity securities are authorized for issuance.

Recent Sales of Unregistered Securities

We have not sold any equity securities during the fiscal year ended December 31, 2011 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the 2011 fiscal year.

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Purchases of Equity Securities

No repurchases of our common stock were made during the fourth quarter of 2011.

ITEM 6. SELECTED FINANCIAL DATA.

Not Applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements. Our financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP.

Overview

Through our wholly-owned PRC operating subsidiaries, we produce and sell floor materials and related products to residential and commercial customers in China. Our product lines include laminate flooring and fiber floor boards that are manufactured in a variety of colors, dimensions and designs.

We market and sell our products through seven branch offices and approximately several hundred specialty retail flooring stores, concentrated mostly in southwestern China. We also sell some of our products through eight retail stores which we refer to as “flagship” stores because they are generally larger and better equipped with samples, promotional material and product inventory, as compared to regular retail stores, and as a result, they are better promote our image and the quality of our products. We are also seeking commercial arrangements for the sale of our products through home supply stores, such as our recent agreement to sell our products at Red Star Macalline Furniture Mall’s Guiyang store. Red Star Macalline Furniture Mall is a large home products supply store chain in China, similar to Home Depot and Lowe’s in the U.S., with over 30 malls and stores across China. We believe that home supply stores are an important channel for the sale of building/home renovation materials and we plan to increase our efforts to work with more home supply stores in the future.

The primary raw material used in our products is wood, which we currently procure from third party suppliers. We expect that commencing in late 2015 or early 2016 we will be able to procure approximately 20% of our wood from our 2,250 hectares (approximately, 22.5 km2) of fir forest in Guizhou Province.

Our manufacturing facility in Qianxinan, Guizhou Province has an annual production capacity of six million square meters of laminate flooring and 75,000 cubic meters of industrial fiber boards. We are constructing two new manufacturing facilities next to our current facility to expand our laminate flooring production line and industrial fiber board production line. We expect this expansion will increase our overall capacity to 200,000 cubic meters of fiber boards and 12 million square meters of laminate floor. We have obtained the land use rights for this new facility and, based on our current production schedule, we expect the manufacturing facility for laminate flooring and industrial fiber boards to be completed by late-2012 and late-2013, respectively.

2011 Financial Performance Highlights

The following summarizes certain key financial information for the 2011 fiscal year.

  • Revenue: Our revenue was $36.7 million for the 2011 fiscal year, a decrease of $0.3 million, or 1%, from $37.0 million for fiscal year 2010.

  • Gross profit and margin: Gross profit was 13.2 million for the 2011 fiscal year as compared to $11.7 million for fiscal year 2010. Gross margin was 36.0% for the 2011 fiscal year as compared to 31.7% for fiscal year 2010.

  • Net income: Net income was $5.8 million for the 2011 fiscal year, a decrease of $3.5 million, or approximately 37.7%, from $9.3 million for fiscal year 2010.

  • Fully diluted net income per share: Fully diluted net income per share was $0.19 for the 2011 fiscal year, as compared to $0.42 for fiscal year 2010.

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Principal Factors Affecting Our Financial Performance

The overall performance of the flooring industry and our business is influenced by consumer confidence, spending for durable goods, interest rates, turnover in housing, the condition of the residential and commercial construction industries and the overall strength of the economy. Demand for our flooring products in the PRC heavily depends on many other economic factors and government policies designed to drive growth in the construction and real estate development sectors of the PRC economy, including the following:

  • Urbanization. Over the last twenty years, China has experienced rapid urbanization due to the increasingly limited capacity of rural areas to provide adequate economic support for a large agrarian population, the increasing disparity in disposable incomes between rural and urban dwellers and the easing of restrictions which historically limited rural to urban migration from rural areas to towns and cities. The development of an industrial base and service sector in urban areas has also driven large labor pools with a broad range of skills to urban areas. It is estimated that China's urban population will expand from 572 million in 2005 to 926 million in 2025 and hit the one billion mark by 2030. As a result of the urbanization trend and the associated need to expand an underdeveloped infrastructure to accommodate and house such growth, we believe that commercial and residential construction will expand measurably in future years thereby creating additional demand for our flooring products.

  • Government policies. Despite the Chinese Government’s adoption of unfavorable policies and regulation to control growth in the real estate market in China, we believe these policies will not have a negative impact on our sales. The policies are intended to control unbounded escalations in the price of real estate. We believe that the desire to purchase or renovate real estate will increase with the suppression of housing prices. From this perspective, we expect that policies to regulate housing prices will have a positive impact on the sales of our flooring products.

  • Growth of China’s laminate flooring industry. According to “Investment Analysis and Forecast Report for China's wood processing industry between 2011-2015,” available at www.ocn.com.cn, at present, China is the world's largest exporter of processed wood and wood products manufacturing base. In addition, China is also one of the largest timber buyers in the world. China's annual production of fiber boards, furniture, and flooring is highly ranked in the world. In recent years, China's timber industry showing positive trend of expansion in scale due largely to three industry-wide changes: (i) transition from using natural forests to plantation-based suppliers for materials; (ii) the evolution of the business model from being focused solely on expanding production scale to one that combines scale expansion and resource conservation; and (iii) the sourcing of raw materials from both domestic and foreign markets for resources.

    The demand for wood and its products in China is expected to increase along with the economic growth. On the international landscape, China’s flooring export has been increasing over 40% annually in recent years. For example, the demand for building materials in the U.S. market is 8 times of China’s; therefore, there is significant opportunities exist for flooring export to international markets. According to prediction from UN Food and Agriculture Organization, the world demand for timber in the future will have growth in the Asia-Pacific region, especially in Asia which is in apparent economic growth.

  • Expansion of our production capacity. We expect to increase our overall capacity from 75,000 to 200,000 cubic meters of fiber boards and from 6 million to 12 million square meters of laminate floor. We expect to complete this new facility in next 21 months. We expect to incur significant costs in connection with the expansion of our business, and any failure to successfully implement our expansion plans may materially and adversely affect our business, financial condition and results of operations.

As a result of the urbanization trend and the associated need to expand an underdeveloped infrastructure to accommodate and house such growth, we believe that commercial and residential construction will expand measurably in future years thereby creating additional demand for our flooring products. We expect to focus on our five-pronged growth plan that involves the expansion of sales through our retail stores and distribution networks, brand building efforts, production capacity expansion for the fiber board and laminate flooring segment, raw material resource cultivation and expansion of forestry assets through maintenance and upstream acquisitions, and horizontal acquisitions of regional market leading flooring companies in key growth regions in China. We believe that while the capacity for fiber board production is expected to meet customer demand in the coming quarters, current production capacity of laminate flooring may only suffice to cover customer orders for a short period due to anticipated demand growth. As a result, we will continue our efforts to expand our production capacity within the next three years.

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Taxation

We are subject to United States tax at a tax rate of 34%. No provision for income taxes in the United States has been made as we have no income taxable in the United States.

Bingwu Forestry was incorporated in Hong Kong and under the current laws of Hong Kong, is subject to Profits Tax of 16.5% . No provision for Hong Kong Profits Tax has been made as Bingwu Forestry has no taxable income.

Under the EIT Law, Aosen Forestry, Silvan Flooring and Silvan Touch were subject to an earned income tax of 25.0% for 2011 and 2010. See Item 1 “Business—PRC Government Regulations—Taxation” for a detailed description of the EIT Law and tax regulations applicable to our Chinese subsidiaries.

Results of Operations

Comparison of Years Ended December 31, 2011 and December 31, 2010

The following table sets forth key components of our results of operations during the fiscal years ended December 31, 2011 and 2010, both in dollars and as a percentage of our revenue.

    Year Ended December 31,     Year Ended December 31,  
    2011     2010  
          % of           % of  
    Dollars     Revenue     Dollars     Revenue  
Revenue $  36,684,715     100.0%   $  37,042,160     100.0%  
Cost of revenue   23,482,698     64.0%     25,296,696     68.3%  
Gross profit   13,202,017     36.0%     11,745,464     31.7%  
Operating expenses                        
     Selling expenses   (1,373,990 )   (3.8% )   (252,042 )   (0.7% )
     General and administrative expenses   (2,316,195 )   (6.3% )   (1,446,629 )   (3.9% )
Total operating expenses   (3,690,185 )   (10.1% )   (1,698,671 )   (4.6% )
Income from operations   9,511,832     25.9%     10,046,793     27.1%  
Other income (expenses)                        
     Interest income   36,391     0.1%     -     -  
     Interest expense   (1,590,274 )   (4.3% )   (289,408 )   (0.8% )
     Other (expenses) income   (220,690 )   (0.6% )   103,411     0.3%  
     Value added tax refund   -     -     2,110,792     5.7%  
     Government grant   208,385     0.6%              
Total other income (expenses)   (1,566,188 )   (4.2% )   1,924,795     5.2%  
Income before income taxes   7,945,644     21.7%     11,971,588     32.3%  
Income tax expense   (2,157,255 )   (5.9% )   (2,680,096 )   (7.2% )
Net income $  5,788,389     15.8%   $  9,291,492     25.1%  

Revenue. We generate revenue from the sales of industrial fiber boards, laminate flooring, wooden flooring, and related flooring products. Our revenue decreased slightly to $36.7 million in the year ended December 31, 2011, from $37.0 million in the year ended December 31, 2010, representing a 1.0% decrease. The decrease in revenue was mainly due to a decrease in revenue  generated by our fiber board product line as a result of decreased sales volume. The decrease in sales volume was mainly caused by the Chinese government’s policies to regulate the housing market. As a result, real property purchases and investments in real estate slowed and related industries, such as ours, were also negatively affected. The decrease in fiber board revenue was partially offset by the revenue increase in our laminate flooring line due to the expansion of our sales and distribution network. During 2011, we sold approximately 3.6 million square meters of laminate flooring products and approximately 1.9 million pieces of fiber boards, as compared to approximately 3.2 million square meters of laminate flooring products and approximately 2.8 million pieces of fiber boards during 2010. In addition, we started selling hard wood flooring products in the first quarter of 2011 and sold approximately 0.05 million square meters of hard wood flooring products in 2011. Our respective sales of laminate flooring products and fiber board products accounted for approximately 83.3% and 16.7% of our revenue for 2011, as compared to 69.4% and 30.6% for 2010.

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We had increasing revenue concentration of sales with one customer, Guizhou Shuanghe in 2011. Sales to this customer accounted for 74.5% and 48.0% of our revenue for the year ended December 31, 2011 and 2010, respectively. Guizhou Shuanghe is our primary distributor in the Guizhou region. We do not expect this trend to continue. We established a distribution focused subsidiary, Silvan Touch, in March 2011. We expect Silvan Touch to gradually replace this customer to distribute our products in this region.

Cost of revenue. Our cost of revenue is primarily comprised of the costs of our raw materials, labor and overhead. Our cost of revenue decreased by $1.8 million, or 7.2%, to $23.5 million in the year ended December 31, 2011, from $25.3 million in the year ended December 31, 2010. The decrease was generally in line with the decrease in sales volume. Cost of revenue as a percentage of revenue remain relatively consistent as we had a slight decrease from 68.3% for 2010 to 64% for 2011, primarily attributable to our fiber board product line. As a percentage of revenue, cost of revenue for our fiber board product line was 76.6% for 2010, as compared to 71.5% for 2011. The decrease was due to the fact that the percentage increase in the unit selling price of fiber boards outpaced the percentage increase in the raw material cost. The unit cost of major raw materials increased by 3.4% while the unit selling price of fiber boards increased by 10.8% . To minimize the impact of continuing rise in raw material cost, we intend to improve our manufacturing technology of this product line through our research and development efforts which we expect to result in a lower consumption of raw materials.

Gross profit and gross margin. Our gross profit is equal to the difference between our revenue and our cost of revenue. Our gross profit increased by $1.5 million, or 12.4%, to $13.2 million in the year ended December 31, 2011, from $11.7 million in the year ended December 31, 2010. Such increase in overall gross profit was mainly due to an approximately 14.8% increase in gross profit generated from sales of laminate flooring products, which more than offset an approximately 8% decrease of gross profit from sales of fiber boards. This increase in gross profit from sales of laminate flooring products is mainly attributable to its increased sales volume. Gross profit as a percentage of net revenue (gross margin) was 36% and 31.7% for the years ended December 31, 2011 and 2010, respectively. The slight increase in gross margin was primarily driven by the increased gross margin of fiber board products. Gross margins for our laminate flooring products and fiber board products were 28.6% and 28.5%, respectively, for 2011, as compared to 28.3% and 23.4%, respectively, for 2010. The improved gross margin of fiber board product line was due to the decrease in cost of revenue as noted above. The relatively stable gross margin of laminate flooring products was mainly attributable to the increase in their unit sales price and unit cost by approximately the same magnitude.

Selling expenses. Our selling expenses are comprised primarily of sales commissions, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, travel expense, consulting fees and other sales related costs. Our selling expenses increased by $1.1 million, or 445.1%, to $1.4 million in the year ended December 31, 2011, from $252,000 in the year ended December 31, 2010. The increase was primarily a result of the expansion of our sales network which caused an increase in salary, travel expense, consultation fee, advertisement and exhibition expenses. Our salary expenses for 2011 increased to $707,000 as we have hired additional staff in 2011. Our advertisement and exhibition expenses for 2011 amounted to $364,000, compared to $141,000 for 2010. Due to continued efforts to promote our brand and marketing in China, we also incurred more travel and consultation expenses. Our travel expenses for 2011 amounted to $42,000, compared to $6,000 for 2010. Our consultation expenses for 2011 amounted to $111,000, compared to $0 for 2010, primarily relating to consultation on sales planning and strategy consultation.

General and administrative expenses. Our general and administrative expenses consist primarily of compensation and benefits to our management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Our general and administrative expenses increased by $0.87 million , or 60.1%, to $2.3 million in year 2011, from $1.4 million in year 2010. This increase was mainly due to increases of staff related welfare expense, insurance expense, office expenses, depreciation expense and guarantee fees for our bank loans. The increases of staff related welfare expenses, insurance expenses, union fee and the office expenses were mainly due to the increase of insurance premiums and rentals in 2011. In addition, we had more staff in 2011 compared to 2010. The increase in depreciation expenses and amortization expenses was mainly due to the purchase of fixed assets, land use rights and software in 2011. In addition, we incurred $229,000 guarantee fee for our bank loans in 2011 as we borrowed additional loans from the banks to support our business expansion.

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Other income (expense). We had $1. 6 million of net other expenses in the year ended December 31, 2011, as compared to net other income of $1.9 million in the year ended December 31, 2010. The $3.5 million decrease in other income was primarily due to value added tax refund of $2.1 million received in 2010 coupled with the higher interest expense of $1.3 million resulting from increased bank borrowings during 2011, as compared to $0.3 million interest expense for 2010.

Income taxes. Our income taxes decreased by $523,000, or 19.5%, to $2.2 million in the year ended December 31, 2011, from $2.7 million in the year ended December 31, 2010. The decrease was due to the decrease in our taxable income.

Net income. As a result of the cumulative effect of the foregoing factors, we generated a net income of $5.8 million in the year ended December 31, 2011, a decrease of approximately $3.5 million, or 37.7%, from $9.3 million in the year ended December 31, 2010.

Liquidity and Capital Resources

As of December 31, 2011, we had cash and cash equivalents of $159,000. The following table sets forth a summary of our cash flows for the years indicated:

Cash Flows

    Year Ended December 31,  
    2011     2010  
Net cash (used in) operating activities $  (1,874,535 ) $  (1,793,366 )
Net cash (used in) investing activities   (10,784,126 )   (1,986,787 )
Net cash provided by financing activities   12,450,306     2,389,363  
Effects of exchange rate change in cash   4,958     1,015,009  
Net decrease in cash and cash equivalents   (203,397 )   (375,781 )
Cash and cash equivalent at beginning of the year   362,810     738,591  
Cash and cash equivalent at end of the year   159,413     362,810  

Operating activities

Net cash used in operating activities was $1.9 million for the year ended December 31, 2011, as compared to $1.8 million net cash used in operating activities for the year ended December 31, 2010. The slight increase in net cash used in operating activities in 2011 was primarily due to a decrease of $3.5 million in net income, approximately $9.1 million cash outflow in inventory purchases which was partially offset by a corresponding increase in bills payable of $5.0 million to pay our suppliers for raw material purchases, a $6.8 million outflow in deposits and prepaid expenses primarily for deposits paid to suppliers of raw materials and goods supplies. In addition, as a result of increase in our bills payable, our cash outflow for the restricted cash balance, which serves as collaterals for bills payable, increased by $1.9 million. The significant increase in inventory during 2011 was attributable to increased purchases of inventory and raw materials in anticipation of the development of our sales network in some selected markets in China, as evidenced by our $16.4 million inventory balance as of December 31, 2011 and our $11.8 million sales order backlog.

Investing activities

Net cash used in investing activities for the year ended December 31, 2011 was $10.8 million; as compared to $2.0 million net cash used in investing activities for the year ended December 31, 2010. The increase in net cash used in investing activities was primarily due to our purchase of land use rights for approximately $2.5 million during 2011. In addition, we paid approximately $8.2 million for properties and equipment purchase for the expansion of our facilities.

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Financing activities

Net cash provided by financing activities for the year ended December 31, 2011 was $12.5 million, as compared to $2.4 million net cash provided by financing activities for the year ended December 21, 2010. The increase in net cash provided by financing activities was primarily due to increased bank borrowings of $20.0 million to fund our business expansion. Such increase was offset by repayment of two short term bank loans totaled $4.6 million that matured in 2011. In addition, we paid off $2.9 million payable to Mr. Yulu Bai for the purchase cost of the forestry land use right that Mr. Bai had paid on behalf of the Company.

Loan Commitments

As of December 31, 2011, the amount, maturity date and term of each of our bank loans were as follows:

(all amounts in U.S. Dollars)

Bank   Amount*     Interest Rate     Maturity Date     Duration  
China Merchant Bank $ 3,931,745     8.484%     March 7, 2012     1 year  
Xingyi City Rural Cooperative Bank   3,774,475     8.715%     April 29, 2012     1 year  
Bank of Chongqing   3,145,396     7.572%     June 28, 2012     1 year  
Xingyi City Rural Cooperative Bank   786,349     9.567%     August 2, 2012     1 year  
Guiyang City Nanming Rural Credit Cooperative Bank   3,931,745     8.775%     November 18, 2012     22 months  
Bank of Guiyang   629,079     10.496%     October 14, 2012     1 year  
Guiyang City Nanming Rural Credit Cooperative Bank   4,089,015     8.775%     January 18, 2013     2 years  
Total $ 20,287,804                    

* Calculated based on the exchange rate of $1 = RMB6.3585

We are not aware of any material trend, event or capital commitment, which would potentially adversely affect liquidity. In the event a material trend develops, we believe that our cash on hand and cash flow from operations will meet part of our present cash needs and we will require additional cash resources, including loans, to meet our expected capital expenditure and working capital for the next 12 months. In the future we may also require additional cash resources due to changed business conditions or acquisitions that we may decide to pursue. In addition, because substantially all of our revenues are generated from our indirect PRC subsidiaries, the ability of our PRC subsidiaries to make dividends and other payments to us is subject to the PRC dividend restrictions. Current PRC law permits payments of dividend by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to the statutory reserve fund can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. As we disclosed above, as of December 31, 2010, our PRC subsidiaries did not allocate their after-tax profits to the statutory general reserve fund pursuant to the PRC regulations. As of December 31, 2011, we funded our statutory general reserve for the prior years’ balance as well as for the year 2011 and allocated an aggregate of RMB14,737,000 (approximately $2,279,858 million) to our fund.

If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

Obligations under Other Material Contracts

In addition to the loan obligations disclosed above, we have the following material contractual obligations:

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  • On February 2, 2010, we entered into a financial advisory agreement to appoint Asia Regal Financial Capital Group Co., Ltd. and Shenzhen Junwei Investment and Development Co., Ltd., as financial advisors. Pursuant to the agreement, we are obligated to issue to the financial advisors 100,000 shares of common stock at $0.10 per share prior to December 31 of every year within 5 years from the quotation of our stock in the OTC markets. The agreement contains an exclusivity provision whereby we have agreed to engage them as our sole financial advisors for a 2-year period following such stock quotation and contains a $1 million liquidated damages provision for breach of such exclusivity.

  • In November 2011, we entered into a settlement agreement with CCG Investor Relations (“CCG”) to terminate the service agreement with CCG. In accordance with the settlement agreement, we issued 20,000 shares of common stock and agreed to pay $40,000 in cash to CCG. We issued the 20,000 shares of common stock to CCG on December 14, 2011. As of December 31, 2011, the $40,000 was recorded in Other Payables and Accrued Expenses.

  • At December 31, 2011, we have paid approximately $6.2 million of the total estimated contract cost of approximately $58.6 million to complete a new wood fiber sheet production line. The remaining $52.4 million (RMB333.2 million) will be paid after the planning of production line is finalized.

  • At December 31, 2011, we have paid approximately $0.3 million of the total estimated contract cost of approximately $23.8 million to complete a wooden floor production line. As per our agreement,the remaining $23.5 million (RMB150.0 million) will be paid after the planning of production line is finalized.

  • At December 31, 2011, the total cost to purchase a real estate property is approximately $9.8 million of which we have paid approximately $6.7 million. The property serves as the Guizhou office of the Company. On December 17, 2011, Aosen Forestry and Silvan Touch entered into an agreement with the property developer to assign the obligation to pay the remaining contract cost of $3.1 million (RMB20.2 million) from Aosen Forestry to Silvan Touch and Silvan Touch agreed to provide wooden flooring to this property developer in lieu of the payment of $3.1 million.

Seasonality

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introduction.

Inflation

Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor the price change in our industry and continually maintain effective cost control in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:

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Basis of presentation

The consolidated financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of our subsidiaries in the PRC, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the consolidated financial statements in accordance with US GAAP.

Principle of consolidation

The consolidated financial statements include the accounts of SLVA, CBF, QAF, QSTF and GSTF. All significant intercompany balances and transactions have been eliminated in the consolidation. The consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission.

Use of estimates

In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates.

Significant Estimates

These financial statements include some amounts that are based on management's best estimates and judgments. The most significant estimates relate to depreciation of property, plant and equipment, amortization of intangible assets, allowance for uncollectible accounts, and impairment testing of long-lived assets. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.

Revenue recognition

The Company’s revenue recognition policies are in compliance with ASC 605 “Revenue Recognition”. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer, including the distributor and the end user. No return allowance is made as products returns are insignificant based on historical experience.

The Company recognizes revenue upon shipment. Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT liability may be offset by the VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.

Foreign currency translation

Assets and liabilities of the Company with a functional currency other than US$ are translated into US$ using period end exchange rates. Income and expense items are translated at the average exchange rates in effect during the period. Foreign currency translation differences are included as a component of Accumulated Other Comprehensive Income in Stockholders’ Equity.

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The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the financial statements were as follows:

  12/31/2011 12/31/2010
Year end RMB : USD exchange rate 6.36 6.59
Average yearly RMB : USD exchange rate 6.46 6.76

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

Accumulated comprehensive income in the consolidated statements of stockholders’ equity amounted to $3,516,571 as of December 31, 2011 and $2,291,124 as of December 31, 2010.

Credit risk

The Company may be exposed to credit risk from its cash at bank. An allowance has been considered for estimated irrecoverable amounts determined by reference to past default experience and the current economic environment. No allowance is considered necessary for the period.

Accounts receivable

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

The standard credit period for most of the Company’s clients is three months. Management evaluates the collectability of the receivables at least quarterly. Allowance for doubtful accounts as of December 31, 2011 and December 31, 2010 are $0 and $27,252, respectively.

Inventory

Inventory is valued at the lower of cost (determined on a weighted average method) and net realizable value.

Costs incurred in bringing each product to its location and conditions are accounted for as follows:

Raw materials – purchase cost on a weighted average basis;

Manufactured finished goods and work-in-progress – cost of direct materials and labor and a portion of manufacturing overhead based on normal operating capacity but excluding borrowing costs; and

Retail and wholesale merchandise finished goods – purchase cost on a weighted average basis.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.

The Company changed the estimated maximum useful life of the machinery and equipment from 30 years to 15 years and that of furniture and fixtures from 30 years to 5 years.

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets.

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Assets Classifications Estimated Useful Lives
Buildings 30 years
Machinery and equipment 3 to 15 years
Motor vehicles 5 to 10 years
Office equipment 3 to 10 years
Furniture and fixtures 4 to 5 years

An item of property and equipment is removed from the accounts upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statements of income in the period the item is disposed. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset. To date, no such impairment losses have been recorded.

Construction in progress

Construction in progress represents the direct cost of construction and cost of plant and machinery installed as well as acquisition cost and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction in progress is completed and the asset is ready for its intended use.

Interest is capitalized as part of the historical cost during the construction period for qualified assets. Interest is capitalized until the asset is ready for service. Capitalized interest is determined based upon the Company’s weighted-average borrowing cost on debt for the average amount of qualifying costs incurred. Once an asset subject to interest capitalization is completed and placed in service, the associated capitalized interest is expensed through depreciation or impairment, along with other capitalized costs related to that asset. Interest that is qualified for capitalization is insignificant for the years ended December 31, 2011 and 2010, as such; no capitalized interest was recorded for the aforementioned periods.

Intangible assets

Intangible assets consist of land use rights which represent acquisition of land use rights of agriculture land from farmers and are amortized on the straight line basis over their respective lease periods. The lease period of agriculture land ranges from 30 years to 50 years.

Impairment of long – lived assets and intangible assets

In accordance with ASC 360, “Property, Plant and Equipment”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of December 31, 2011 and December 31, 2010, the Company determined no impairment charges were necessary.

Income taxes

The Company accounts for income taxes under the provisions of ASC 740 "Accounting for Income Taxes". Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date.

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Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.

Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

ASC 740 also prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded in tax expense.

Trade and other payables

Trade payables and other payables are carried at cost and represent liabilities for goods and services provided to the Company prior to the end of the period that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services. Trade payables are non-interest bearing and are normally settled on 7 to 60 day terms.

Bills receivable and Bills payable

The Company utilizes banker’s acceptances in the form of bills receivable and bills payable. The Company accepts customer payment for the Company’s products by bills receivable. Bills receivable represent short-term notes receivable issued either by the customer or by the customer and an accepting bank that entitles the Company to receive the full face amount from the customer or the accepting bank at maturity, which is generally six months from the date of issuance.

Bills payable represent bills issued by an accepting bank in favor of the Company’s suppliers. The Company’s suppliers receive payments from the accepting bank directly upon maturity of the bills, and the Company is obliged to repay the face value of the bills to the accepting bank. These bills are interest free and generally mature six months from the date of issuance. To secure the banks’ undertakings, the Company is required to maintain deposits with such banks amounts equal to 50% to 100% of the bills’ amounts issued, such deposits are presented as restricted cash as of December 31, 2011 and December 31, 2010. Upon maturity of the bills payable, the banks deduct the bills payable amount from the restricted cash account.

Product warranties

Substantially all of the Company’s products are covered by a standard warranty of 1 year for products. In the event of a failure of products covered by this warranty, the Company must repair or replace the products or, if those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company provides warranty reserve for product warranties to reflect estimated material and labor costs of maintenance for potential or actual product issues but for which the Company expects to incur an obligation. Based on historically insignificant amount of warranty expense, management determined that no product warranty reserve was necessary as of December 31, 2011 and December 31, 2010.

Related parties

Parties are considered to be related to the Company if the related party has the ability, directly or indirectly, to control the party, or exercise significant influence over the party in making financial and operating decisions, or where the Company and the party are subject to common control. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities which are under the significant influence of related parties of the Company.

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Comprehensive income

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.

Accumulated other comprehensive income

ASC Topic 220 “Comprehensive Income” establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation adjustments.

Earnings per share (EPS)

Earnings per share is calculated in accordance with ASC 260-10 “Earnings per Share”, which requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss) per share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

Statutory Surplus Reserve

In accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company, SLVA’s subsidiaries in the PRC are required to allocate 10% of their net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to the statutory surplus reserve, on an annual basis. When the balance of such reserve reaches 50% of the respective registered capital of the subsidiaries, any further allocation is optional.

The statutory surplus reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balances of the reserve after such conversion is not less than 25% of registered capital. The statutory surplus reserve is non-distributable.

Recent Accounting Pronouncements

See Note 2 to our audited consolidated financial statements included elsewhere in this report

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The full text of our audited consolidated financial statements as of December 31, 2011 and 2010 begins on page F-1 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer, Mr. Yulu Bai, and our Chief Financial Officer, Mr. Jiyong He, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011. Based on that evaluation, Mr. Bai and Mr. He determined that, as of December 31, 2011, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, because of the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective.

Notwithstanding management’s assessment that our internal control over financial reporting was ineffective as of December 31, 2011 due to the material weakness described below, we believe that the consolidated financial statements included in this Annual Report on Form 10-K correctly present our financial condition, results of operations and cash flows for the fiscal years covered thereby in all material respects.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:

  (1)

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

     
  (2)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and

     
  (3)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2011 because of the material weaknesses in our internal control over financial reporting described below.

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2011, management concluded that we need to increase our qualified accounting personnel and enhance the supervision, monitoring and reviewing of financial statements preparation processes. We have already taken measures to remediate these material weaknesses by seeking an additional financial reporting and accounting staff member. We are currently seeking additional seasoned finance and accounting professionals and experienced financial reporting personnel with relevant knowledge in the preparation of financial statements in accordance with U.S. GAAP and financial reporting disclosure requirements under SEC rules to strengthen the accounting department. In addition, we are actively seeking a new CFO who is knowledgeable and experienced in US GAAP and SEC reporting matters. We have been interviewing potential candidates to seek for these qualified accounting staff and CFO.

In the meantime, we have hired AuditPrep Limited to assist with the preparation of US GAAP financial statements and assisting with the preparation of periodic reports under the Exchange Act. AuditPrep Limited’s professionals consist of managers and partners that are either AICPA or trained and experienced in US GAAP and SEC reporting matters.

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Because the Company is a smaller reporting company, this annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm.

Changes in Internal Controls over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

Other than in connection with the implementation of the remedial measures described above, there have been no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

We have no information to disclose that was required to be disclosed in a report on Form 8-K during fourth quarter of fiscal year 2011, but was not reported.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Directors and Executive Officers

The following sets forth information about our directors and executive officers as of the date of this report:

Name Age Position
Yulu Bai 47 Chairman and Chief Executive Officer
Jiyong He 28 Chief Financial Officer
Fangping Peng 48 Chief Operating Officer
Dongsheng Tan 36 Chief Marketing Officer
Yudong Ji 57 Director
Yi Zeng 42 Director

Mr. Yulu Bai. Mr. Bai became our Chairman and Chief Executive Officer on November 1, 2010 and has served as the General Manager of Aosen Forestry since 2004. Mr. Bai is the vice chairman of Guizhou Forestry Industry Association and vice chairman of Guizhou Small and Medium Size Private Business Credit Promotion Association. Mr. Bai holds a Bachelor’s Degree in fiber boards from Nanjing Forestry University (now called Northeastern Forestry University).

Mr. Jiyong He. Mr. He became our Chief Financial Officer on November 1, 2010, and has served as a senior finance manager at our company since September 2007. Mr. He graduated from Guizhou College of Finance and Economics in July 2007 and holds a Bachelor of Science Degree in Accounting. Mr. He lacks US GAAP experience. We are actively seeking for a CFO candidate with sufficient US GAAP experience.

Mr. Fangping Peng. Mr. Peng became our Chief Operating Officer on November 1, 2010 and has served as the Chairman of Silvan Flooring since 2004. Prior to joining us, Mr. Peng worked as a director at Chongqing Comprehensive Wood Company, from 1986 to 2004. Mr. Peng holds a Bachelor’s Degree in Artificial Boards from Nanjing Forestry University.

Mr. Dongsheng Tan. Mr. Tan became our Chief Marketing Officer on November 1, 2010 and has served as Aosen Forestry’s Director of Marketing since May 2009. Prior to joining us, Mr. Tan served as an officer at Shenzhen Zhongxu Corporate Citizenship in Action, from 2007 to 2009. Mr. Tan worked at Foshan Shunde KDS Electronics Col, Ltd as a regional sales manager from 2004 to 2006. Mr. Tan holds a Bachelor’s Degree in Marketing from Xiangtan University.

Mr. Yudong Ji. Mr. Ji became a member of our Board of Directors on November 28, 2010 and has served since July 1993 as a principal of Guizhou Huacheng Group, a company engaged in various real estate development projects. Mr. Ji was a member of the Guiyang 9th Committee of People’s Political Consulting Conference in 2004, and a member of the Guiyang 12th People’s Congress in 2007. Mr. Ji holds a Bachelor’s Degree in general management from Guizhou University of Ethnicities.

Mr. Yi Zeng. Mr. Zeng became a member of our Board of Directors on November 28, 2010. Since 1996, he has served as the general manager at Zhong Ruixin Investment Guarantee Co., Ltd., a company engaged in credit guarantee services, investment management and consulting. Mr. Zeng also serves as the vice president of Guizhou Entrepreneur Association and vice president at Guizhou Small and Medium Size Private Business Credit Promotion Association. Mr. Zeng holds Bachelor Degree’s in business management from Guizhou University in 1998.

Directors are elected until their successors are duly elected and qualified.

Except as set forth in our discussion below in Item 13 “Certain Relationships and Related Transactions, and Director Independence—Transactions with Related Persons,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

There are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.

44


Director Qualifications

Directors are responsible for overseeing our business consistent with their fiduciary duty to stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The Board believes that there are general requirements for service on our Board of Directors that are applicable to all directors and that there are other skills and experience that should be represented on the Board as a whole, but not necessarily by each director. The Board considers the qualifications of directors and director candidates individually and in the broader context of the Board’s overall composition and our current and future needs.

Qualifications for All Directors

In its assessment of each potential candidate, including those recommended by stockholders, the Board considers the nominee’s judgment, integrity, experience, independence, understanding of our business or other related industries and such other factors the Board determines are pertinent in light of the current needs of the Board. The Board also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.

The Board requires that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board assesses intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.

The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership. Diversity is important because a variety of points of view contribute to a more effective decision-making process.

Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole

The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the Board as a whole, in light of our current needs and business priorities. We are a U.S. public company that produces and sells floor materials and related products to residential and commercial customers in China. Therefore, the Board believes that a diversity of professional experiences in the flooring industry in China, specific knowledge of key geographic growth areas, and knowledge of U.S. capital markets and U.S. accounting and financial reporting standards should be represented on the Board.

Summary of Qualifications of Directors

Set forth below is a narrative disclosure that summarizes some of the specific qualifications, attributes, skills and experiences of our directors. For more detailed information, please refer to the biographical information for each director set forth above.

Mr. Yulu Bai. Mr. Bai is a founder of the Company and brings more than 15 years of experience in the forestry industry, in particular in the production of fiber boards. His historical knowledge of the Company and his knowledge of the forestry industry makes him qualified to serve as a Board member.

Mr. Yudong Ji. Mr. Ji has over 10 years of experience as a real estate developer. We believe his knowledge of the domestic real estate market makes him qualified to serve as a Board member.

Mr. Yi Zeng. Mr. Zeng has extensive experience in the domestic financial services industry and capital markets, especially in Guizhou province, which we believe qualifies him to serve as a member of our Board.

Family Relationships

There are no family relationships among any of our officers or directors.

45


Involvement in Certain Legal Proceedings

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

  • been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

  • 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;

  • 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;

  • 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;

  • 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

  • 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.

Section 16(A) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities to file with the SEC statements of ownership and changes in ownership. The same persons are required to furnish us with copies of all Section 16(a) forms they file. In fiscal year 2011, other than a Form 4 was filed late by Mr. Yulu Bai, due to administrative oversight, all of such forms were timely filed.

In making these statements, we have relied upon examination of the copies of all Section 16(a) forms provided to us and the written representations of our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities.

Code of Ethics

We have not adopted a code ethics. However, we intend to adopt a code of ethics in the future. We envision that the code of ethics will apply to all of our employees, officers and directors.

Material Changes to Director Nomination Procedures

There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since such procedures were last disclosed.

46


Audit Committee and Audit Committee Financial Expert

We do not have an audit committee or an audit committee financial expert serving on the audit committee. Our entire Board of Directors currently is responsible for the functions that would otherwise be handled by an audit committee. However, we intend to establish an audit committee of the Board of Directors in the near future. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls. Upon the establishment of an audit committee, the Board will determine whether any of the directors qualify as an audit committee financial expert.

ITEM 11. EXECUTIVE COMPENSATION.

Summary Compensation Table — Fiscal Years Ended December 31, 2011 and 2010

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officer received total annual salary and bonus compensation in excess of $100,000.



Name and Principal Position

Fiscal
Year

Salary
($)

Bonus
($)
All Other
Compensation
($)

Total
($)
Yulu Bai,
Chairman and CEO
2011 9,436 - - 9,436
2010 5,621 - - 5,621

On November 1, 2010, we acquired Bingwu Forestry in a reverse acquisition transaction that was structured as a share exchange and in connection with that transaction, Mr. Bai became our Chairman and Chief Executive Officer, effective immediately. Prior to the effective date of the reverse acquisition, Mr. Bai served as the General Manager of Aosen Forestry. The annual, long term and other compensation shown in this table include the amount Mr. Bai received from Aosen Forestry prior to the consummation of the reverse acquisition.

Employment Agreements

On May 5, 2010, we entered into a three-year employment agreement with Mr. Bai, our Chief Executive Officer pursuant to which we are obligated to pay him an annual salary of $8,800.

On March 27, 2009, we entered into a three-year employment agreement with Mr. He, our Chief Financial Officer, pursuant to which we are obligated to pay him an annual salary of $6,300.

On March 16, 2009, we entered into a three-year employment agreement with Mr. Peng, our Chief Operating Officer, pursuant to which we are obligated to pay him an annual salary of $7,400.

On May 5, 2010, we entered into a three-year employment agreement with Mr. Tan to serve as our Chief Marketing Officer, pursuant to which we obligated to pay him an annual salary of $6,200.

Other than the salary and necessary social benefits required by the government, which are defined in the employment agreement, we currently do not provide other benefits to our officers at this time. Our executive officers are not entitled to severance payments upon the termination of their employment agreements or following a change in control.

Outstanding Equity Awards at Fiscal Year End

For the year ended December 31, 2011, no director or executive officer has received compensation from us pursuant to any compensatory or benefit plan. There is no plan or understanding, express or implied, to pay any compensation to any director or executive officer pursuant to any compensatory or benefit plan.

Compensation of Directors

No member of our board of directors received any compensation for his services as a director during the year ended December 31, 2011.

47


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding beneficial ownership of our common stock as of April 12, 2012 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, Jun Yue Hua Ting, Building A, 3rd Floor, Unit -1, #58 Xin Hua Road, Guiyang, Guizhou Province 550002, People’s Republic of China.


Name and Address of Beneficial
Owner


Office, If Any


Title of Class
Amount and Nature
of Beneficial
Ownership(1)

Percent of
Class(2)
 Officers and Directors  
Yulu Bai Chairman and Chief Executive Officer Common Stock 10,133,336 33.76%
Jiyong He Chief Financial Officer Common Stock 0 *
Fangping Peng Chief Operating Officer Common Stock 0 *
Dongsheng Tan Chief Marketing Officer Common Stock 0 *
Yudong Ji Director Common Stock 2,600,000 8.66%
Yi Zeng Director Common Stock 1,600,000 5.33%
All officers and directors as a group (6 persons named above) Common Stock 14,333,336 47.75%
 5% Security Holders  
Yulu Bai   Common Stock 10,133,336 33.76%
Yudong Ji   Common Stock 2,600,000 8.66%
Qin Shi   Common Stock 2,560,000 8.53%
Horoy International Holdings Limited(3) Offshore Chambers P.O. Box 217 Apia, Samoa Common Stock 2,000,000 6.66%
Goldenbridge Investment Holdings Limited(4) P.O.Box 3444 Road Town, Tortola British Virgin Islands Common Stock 2,000,000 6.66%
Yi Zeng   Common Stock 1,600,000 5.33%

* Less than 1%

(1)

Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to our Common Stock. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.

   
(2)

A total of 30,020,000 shares of our Common Stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of April 12, 2012. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.

   
(3)

Lai Hoi Man and Ms. Chan See Ting are the directors of Horoy International Holdings Limited and have voting and investment power over the securities held by it.

   
(4)

Mr. Jiang Yu is the director of Goldenbridge Investment Holdings Limited and has voting and investment power over the securities held by it.

48



Changes in Control

There are no arrangements known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.

Securities Authorized for Issuance Under Equity Compensation Plans

We do not have any compensation plans in effect under which our equity securities are authorized for issuance.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Transactions with Related Persons

The following includes a summary of transactions since the beginning of the 2011 year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”).

  • From time to time, Mr. Bai has loaned funds to the Company to be used as working capital. As of December 31, 2010, we owed Mr. Bai $1,527,080. The amounts were unsecured, interest free and had no fixed term of repayment. On March 23, 2011, we repaid the $1,527,080 due to Mr. Bai.

  • We were obligated to repay Mr. Bai RMB 40 million (approximately, $6 million) in connection with forestry rights for the 2,250 hectares (approximately, 22.5 km2) of a fir tree forest in Guizhou Province valued at RMB 40 million (approximately $6 million), transferred from Mr. Bai to us to secure our long-term raw material needs. We initially intended to repay Mr. Bai for the rights prior to the 2010 year end. Due to the Company’s working capital needs during 2010, we only repaid Mr. Bai RMB 21,097,452 (approximately $3.2 million) during 2010. We repaid Mr. Bai the remaining RMB18,902,548 (approximately, $2.8 million) in March 2011. We did not enter into a written agreement with Mr. Bai in connection with the forestry rights transfer and repayment obligation, and there is no interest or late payment penalty in connection with the obligation.

  • We have entered several loan agreements with various banks in China with an aggregate principal amount of approximately $20 million. Some loans are guaranteed by Guizhou Huacheng Group and Guizhou Dingshengxing Guarantee & Investment Co., Ltd. Our director, Yudong Ji is the Chairman of Guizhou Huacheng Group.

  • In September 2010, our subsidiary Bingwu Forestry entered into a $2.4 million convertible promissory note agreement with Goldenbridge Investment Holdings Limited. Among $2.4 million of proceeds, approximately $1.96 million was wired to Mr. Bai’s personal bank account instead of Bingwu Forestry’s account because we owed Mr. Bai about $6 million for acquiring forestry rights for the 2,250 hectares of a tree forest in Guizhou Province from him in December 2009. Because approximately $0.4 million of general and administrative expenses incurred by Bingwu Forestry was later paid by Mr. Bai, we recorded approximately $1.56 million as due from Mr. Bai. In March 31, 2011, there was approximately $0.1 million of repayment from Mr. Bai to us, resulted in approximately $1.46 million due from Mr. Bai. We had a verbal agreement with Mr. Bai under which Mr. Bai agreed to repay us $1.4 million by December 31, 2011, which repayment was not made. Mr. Bai now verbally agreed to make the repayment by June 30, 2012.

  • In March 2011, we extended a loan to our director Mr. Yudong Ji for approximately $148,000 (RMB 940,000). The loan matures on June 30, 2012. Due from Mr. Ji totaled approximately $148,000 as of December 31, 2011. In consultation with our Securities Counsel, Mr. Ji intends to repay the loan as soon as possible.

49


Except as set forth in our discussion above, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

Director Independence

We currently do not have any independent directors, as the term “independent” is defined by the rules of the Nasdaq Stock Market.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Independent Auditors’ Fees

The following is a summary of the fees billed to the Company for professional services rendered for the fiscal years ended December 31, 2011 and 2010:

    Year Ended December 31,  
    2011     2010  
Audit Fees $  80,000   $  21,302  
Audit-Related Fees   -     1,982  
Tax Fees   -     -  
All Other Fees   -     67,729  
TOTAL $  80,000   $  91,013  

“Audit Fees” consisted of fees billed for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-K and 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.

“Audit-Related Fees” consisted of fees billed for assurance and related services by the principal accountant that were reasonably related to the performance of the audit or review of our financial statements and are not reported under the paragraph captioned “Audit Fees” above.

“Tax Fees” consisted of fees billed for professional services rendered by the principal accountant for tax returns preparation.

"All Other Fees" consisted of fees billed for products and services provided by the principal accountant, other than the services reported above under other captions of this Item 14.

Pre-Approval Policies and Procedures

Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our board of directors to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our board of directors pre-approved the audit service performed by Madsen & Associates CPA’s, Inc. for our financial statements as of and for the year ended December 31, 2011.

50


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. Financial Statements and Schedules

The financial statements are set forth under Item 8 of this annual report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

Exhibit List

The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference.

51


SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: April 16, 2012

SILVAN INDUSTRIES, INC.

By: /s/ Yulu Bai                               
       Yulu Bai 
       Chief Executive Officer

By: /s/ Jiyong He                            
       Jiyong He 
       Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature   Title Date
       
/s/ Yulu Bai   Chairman and Chief Executive Officer April 16, 2012
Yulu Bai   (Principal Executive Officer)  
       
/s/ Jiyong He   Chief Financial Officer April 16, 2012
Jiyong He   (Principal Financial and Accounting Officer)  
       
/s/ Yudong Ji   Director April 16, 2012
Yudong Ji      
       
/s/ Yi Zeng   Director April 16, 2012
Yi Zeng      



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

Financial Statements Page(s)
   
                 Report of Independent Registered Public Accounting Firm F-1
                 Consolidated Balance Sheets F-2
                 Consolidated Statements of Income and Comprehensive Income F-3
                 Consolidated Statements of Stockholders’ Equity F-4
                 Consolidated Statements of Cash Flows F-5
                 Notes to Consolidated Financial Statements F-6



Madsen & Associates CPAs, Inc.
   
     
684 East Vine Street #3, Murray, UT 84107 PHONE: (801) 268-2632 FAX: (801) 268-3978

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

To the Board of Directors and Stockholders
Silvan Industries, Inc. and subsidiaries

We have audited the accompanying consolidated balance sheets of Silvan Industries, Inc. and subsidiaries (the Company) as of December 31, 2011 and December 31, 2010 and the consolidated statements of income and other comprehensive income, stockholders’ equity and cash flows for each of the years in the two year period ended December 31, 2011 and December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (“PCAOB”). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used, significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, these consolidated financial statements referred to above present fairly, in all material aspects, the financial position of the Company as of December 31, 2011 and 2010, and the consolidated results of its operations and cash flows for each of the years in the two year period ended December 31, 2011 and December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

/s/ Madsen & Associates CPA’s, Inc.             
Madsen & Associates CPA’s, Inc.
 
 
Salt Lake City, Utah
April 10, 2012

F-1



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

  December 31,     December 31,  

 

  2011     2010  

 ASSETS  

 

Current assets

           

Cash

$  159,413   $  362,810  

Restricted cash

  3,931,745     1,972,100  

Accounts receivable, net of allowance

  5,986,397     5,423,123  

Inventory

  16,424,906     6,949,679  

Deposits and prepaid expenses

  17,802,694     10,557,660  

Other receivables

  982,308     777,236  

Due from related party

  1,420,065     -  

Taxes recoverable

  632,786     2,452,407  

Deferred tax assets

  137,221     -  

 

           

Total current assets

  47,477,535     28,495,015  

 

           

Property, plant and equipment, net

  16,227,013     6,352,289  

Intangible assets, net

  9,216,213     6,666,591  

Construction in progress

  5,443,862     5,304,348  

Prepayment for property, plant and equipment

  207,779     1,833,096  

 

           

Total assets

$  78,572,402   $  48,651,339  

 

           

 

           

 LIABILITIES AND STOCKHOLDERS’ EQUITY  

 

Current liabilities

 

 

 

 

 

 

Short term borrowings

$

 16,198,789

 

$

 4,535,830

 

Accounts payable

 

662,490

 

 

658,206

 

Bills payable

 

7,863,490

 

 

2,730,600

 

Customer deposits

 

4,001,348

 

 

1,936,733

 

Other payables and accrued expenses

 

1,417,245

 

 

1,829,363

 

Due to related party

 

-

 

 

1,527,080

 

Income tax payable

 

4,302,891

 

 

2,501,229

 

 

 

 

 

 

 

 

Total current liabilities

 

34,446,253

 

 

15,719,041

 

 

 

 

 

 

 

 

Long term debt

 

4,089,015

 

 

-

 

 

 

 

 

 

 

 

Total liabilities

 

38,535,268

 

 

15,719,041

 

 

 

 

 

 

 

 

Commitment and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Preferred stock: 5,000,000 shares authorized of $0.001 par value none issued and
outstanding

 


-

 

 


-

 

Common stock: 100,000,000 shares authorized of $0.001 par value 30,020,000 and
30,000,000 shares issued and outstanding as of December 31, 2011 and 2010,
respectively

 



30,020

 

 



30,000

 

Additional paid-in-capital

 

18,079,785

 

 

17,988,805

 

Accumulated other comprehensive income

 

3,516,571

 

 

2,291,124

 

Retained earnings

 

16,130,900

 

 

12,622,369

 

Statutory reserve

 

2,279,858

 

 

-

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

40,037,134

 

 

32,932,298

 

Total liabilities and stockholders’ equity

$

 78,572,402

 

$

 48,651,339

 

The accompanying notes are an integral part of the consolidated financial statements]

F-2



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

    Years ended  
    December 31,  
    2011     2010  
Revenue $  36,684,715   $  37,042,160  
             
Cost of revenue   23,482,698     25,296,696  
             
Gross profit   13,202,017     11,745,464  
             
Operating expenses            
Selling expenses   1,373,990     252,042  
General and administrative expenses   2,316,195     1,446,629  
             
Total operating expenses   3,690,185     1,698,671  
             
Income from operations   9,511,832     10,046,793  
             
Other income (expenses)            
Interest income   36,391     -  
Interest expense   (1,590,274 )   (289,408 )
Other income   4,609     103,411  
Other expenses   (225,299 )   -  
Value added tax refund   -     2,110,792  
Government grant   208,385     -  
             
Total other (expenses) income   (1,566,188 )   1,924,795  
             
Income before income taxes   7,945,644     11,971,588  
             
Less: Provision for income taxes   2,157,255     2,680,096  
             
Net income   5,788,389     9,291,492  
             
Other comprehensive income            
Foreign currency translation gain   1,225,447     1,027,837  
             
Total comprehensive income $  7,013,836   $  10,319,329  
             
Earnings per share            
- Basic $  0.19   $  0.42  
- Diluted $  0.19   $  0.42  
             
Weighted average shares outstanding            
- Basic   30,000,932     22,083,333  
- Diluted   30,000,932     22,085,833  

The accompanying notes are an integral part of the consolidated financial statements

F-3



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010

 

                    Accumulated                    

 

              Additional     Other                 Total  

 

  Common Stock     Paid-in     Comprehensive     Retained     Statutory     Stockholders’  

 

  Shares     Amount     Capital     Income     Earnings     Reserve     Equity  

Balance as at January 1, 2010

  20,500,000    $ 20,500   $ 13,048,135    1,263,287    $ 3,330,877    -   $ 17,662,799  

 

                                         

Issue of common stock for settlement of convertible notes of CBF

  4,000,000     4,000     396,000     -     -     -     400,000  

 

                                         

Gain on extinguishment of debt related to reverse acquisition

  -     -     4,400,000     -     -     -     4,400,000  

 

                                         

Common stock issued for services rendered related to reverse acquisition

  3,309,956     3,310     327,690     -    
-
    -     331,000  

 

                                         

Stock offering costs - reverse acquisition

  -     -     (331,000 )   -     -     -     (331,000 )

 

                                         

Common stock issued for services rendered

  100,000     100     15,070     -     -     -     15,170  

 

                                         

Recapitalization - reverse merger acquisition of CNFI

  2,090,044     2,090     (2,090 )   -     -     -     -  

 

                                         

Issuance of warrant

  -     -     135,000     -     -     -     135,000  

 

                                         

Net income for the year

  -     -     -     -     9,291,492     -     9,291,492  

 

                                         

Foreign currency translation gain

  -     -     -     1,027,837     -     -     1,027,837  

 

                                         

Balance at December 31, 2010

  30,000,000     30,000     17,988,805     2,291,124     12,622,369     -     32,932,298  

Net income for the year

  -     -     -     -     5,788,389     -     5,788,389  

Foreign currency translation gain

  -     -     -     1,225,447     -     -     1,225,447  

Issuance of common stock

  20,000     20     90,980     -     -     -     91,000  

Transfer to statutory reserve

  -     -     -     -     (2,279,858 )   2,279,858     -  

 

                                         

Balance at December 31, 2011

  30,020,000    $ 30,020    $ 18,079,785    $ 3,516,571    $ 16,130,900    $  2,279,858    $ 40,037,134  

The accompanying notes are an integral part of the consolidated financial statements

F-4



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

    Years ended  
    December 31,  
    2011     2010  

Cash flows from operating activities

           

Net income

$  5,788,389    $ 9,291,492  

Adjustments to reconcile net income to net cash provided by operating activities:

           

Depreciation

  477,477     284,335  

Amortization

  274,615     218,802  

Settlement expense through issuance of common stock

  91,000     -  

Stock based compensation

  -     150,170  

 

           

Changes in operating assets and liabilities:

           

 

           

Restricted cash

  (1,856,436 )   (1,183,520 )

Accounts receivable

  (358,215 )   (3,405,879 )

Inventory

  (9,069,582 )   3,840,606  

Deposits and prepaid expenses

  (6,770,799 )   (4,386,052 )

Other receivables

  (173,677 )   (87,338 )

Taxes recoverable

  1,878,495     (2,260,103 )

Deferred tax assets

  (134,981 )   -  

Bills payable

  4,950,495     1,183,520  

Accounts payable

  (19,558 )   (7,292,572 )

Customer deposits

  1,960,970     1,095,425  

Other payables and accrued expenses

  (594,649 )   (1,365,154 )

Income tax payable

  1,681,921     2,122,902  

 

           

Net cash used in operating activities

  (1,874,535 )   (1,793,366 )

 

           

Cash flows from investing activities

           

Acquisition of property, plant and equipment and construction in progress

  (8,242,276 )   (1,986,787 )

Acquisition of intangible assets

  (2,541,850 )   -  

 

           

Net cash used in investing activities

  (10,784,126 )   (1,986,787 )

 

           

Cash flows from financing activities

           

Net proceeds from issuance of convertible notes

  -     2,835,907  

Repayment of short term and long term loans

  (4,625,619 )   (743,330 )

Proceeds from short term and long term loans

  19,956,683     3,777,330  

Repayment of due to related party

  (2,880,758 )   (3,480,544 )

 

           

Net cash provided by financing activities

  12,450,306     2,389,363  

 

           

Effect of exchange rate changes in cash and cash equivalents

  4,958     1,015,009  

 

           

Net decrease in cash and cash equivalents

  (203,397 )   (375,781 )

 

           

Cash and cash equivalents, beginning of year

  362,810     738,591  

 

           

Cash and cash equivalents, end of year

$  159,413   $ 362,810  

 

           

Supplemental Disclosures:

           

 

           

Cash paid during the year for:

           

 

           

Interest

  $ 1,590,274      $289,408  

 

           

Income taxes

  $ 603,359     $ 2,058,251  

 

           

Non-cash transactions:

           

 

           

Common stock issued for payment of notes payable

  $ -     $ 400,000  

 

           

Common stock issued for stock offering costs

  $ -     $ 331,000  

 

           

Land use rights transferred from related party

  $ -     $ 5,892,000  

 

           

Proceeds from issuance of convertible notes received by related party

  $ -     $ 1,964,093  

The accompanying notes are an integral part of the consolidated financial statements

F-5



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF BUSINESS

Silvan Industries, Inc. (formerly known as Exotacar, Inc., Phoenix Energy Resource Corporation (“PNXE”) and China Forestry Industry Group, Inc.) ( “the Company”, “we”, “us”, “our” or “SLVA”) was incorporated on June 3, 2005 in the State of Nevada. On June 25, 2008, the Company changed its business focus from the development of online exotic car sales and entered into the oil and natural gas industry towards identifying and pursuing options regarding the development of energy resources, and changed its name from Exotacar, Inc. to Phoenix Energy Resource Corporation. From June 25, 2008 through to the date of the reverse acquisition, the Company was a designated shell company with minimal operations. On January 7, 2011, the Company changed its name from Phoenix Energy Resource Corporation to China Forestry Industry Group, Inc. to more accurately reflect the new business operations. On October 3, 2011, the Company filed a Certificate of Amendment to the Articles of Incorporation of the Company with the Nevada secretary of State to change its name from China Forestry Industry Group, Inc. to Silvan Industries, Inc.

On November 1, 2010, the Company completed a reverse acquisition transaction pursuant to a share exchange agreement among the Company, China Bingwu Forestry Group Limited (“CBF”) and CBF’s sole stockholder, Ms. RenPing Tu, whereby the Company acquired 100% of the issued and outstanding capital stock of CBF in exchange for 20,500,000 shares of the Company’s stock, which constituted 68.33% of the Company’s issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the reverse acquisition. As a result of the acquisition of CBF, the Company now owns all of the issued and outstanding capital stock of CBF, which in turn owns Qianxinan Aosen Forestry Co., Limited (“QAF”) and Qianxinan Silvan Touch Flooring Co., Limited (“QSTF”). For accounting purposes, the share exchange transaction with CBF was treated as a reverse acquisition and recapitalization of SLVA, with CBF as the acquirer and SLVA as the acquired party. Upon completion of the exchange, CBF, QAF and QSTF became wholly owned subsidiaries of SLVA.

China Bingwu Forestry Group Limited (“CBF”) was incorporated under the Companies laws of the Hong Kong Special Administrative Region of the People’s Republic of China on April 9, 2010. It was principally established to serve as an investment holding company and its operations are carried out in Hong Kong.

On May 18, 2010, CBF entered into an Equity Ownership Transfer Agreement (the “Transfer Agreement”) with the existing stockholders of QAF, namely Mr. YuLu Bai, to acquire 100% equity interest of QAF for $2,488,471. This business combination was accounted for as entities under common control because the majority shareholders of CBF and QAF are the same people.

QAF is a private corporation, incorporated under the laws of the People’s Republic of China (“PRC”) on November 22, 2004. QAF’s principal activities are manufacturing and wholesaling of fiber boards, wood flooring, carpentry boards, wood products, furniture, and timber.

F-6



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF BUSINESS - CONTINUED

On October 22, 2007, QAF formed Qianxinan Silvan Touch Flooring Co., Limited (“QSTF”) of which QAF owned a 55% equity interest. On May 8, 2009, QAF acquired the remaining 45% equity interest in QSTF from the existing stockholder and QSTF became 100% wholly owned by QAF. QSTF’s principal activities are manufacturing and wholesaling of wood flooring, furniture and decorations.

On March 29, 2011, QAF further invested $6,088,187 (RMB40,000,000) in QSTF. The registered capital of QSTF increased to $9,132,281 (RMB60,000,000). QSTF is 100% wholly owned by QAF.

As a result of the reverse acquisition of CBF, the Company entered into a new business. Through its Chinese subsidiaries, the Company is now engaged in the business of manufacturing and wholesaling of fiber boards, wood flooring, carpentry boards, wood products, furniture, timber and decorations.

On March 24, 2011, QSTF formed a wholly owned subsidiary, Guiyang Silvan Touch Flooring Co., Limited (“GSTF”) in the PRC. The total paid-in capital of GSTF was $3,044,094 (RMB 20 million). GSTF’s principal activity is the wholesaling of wood flooring, furniture and decorations.

The Company is headquartered in the PRC, and the principal location of operation of the Company is at Hexing Village, Dingxiao Economic Development Zone, Xingyi City, Qianxinan, Guizhou Province, the People’s Republic of China.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The consolidated financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of our subsidiaries in the PRC, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the consolidated financial statements in accordance with US GAAP.

Principle of consolidation

The consolidated financial statements include the accounts of SLVA, CBF, QAF, QSTF and GSTF. All significant intercompany balances and transactions have been eliminated in the consolidation. The consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission.

Reclassification

Restricted cash – Restricted cash accounts totaled $1,972,100 that serves as collateral for bills payable as of December 31, 2010 has been reclassified from cash to restricted cash on the consolidated balance sheet to conform to current presentation.

Prepayment for property, plant and equipment – Prepayment for property, plant and equipment of $1,833,096 as of December 31, 2010 has been reclassified from deposits and prepaid expenses to prepayment for property, plant and equipment on the consolidated balance sheet to conform to current presentation.

Due to related party – Amount due to related party of $1,527,080 as of December 31, 2010 has been reclassified from other payables and accrued expenses to due to related party on the consolidated balance sheet to conform to current presentation.

Other taxes payable – Other taxes payable of $789,252 as of December 31, 2010 has been reclassified from income tax payable to other payables and accrued expenses on the consolidated balance sheet to conform to current presentation.

F-7



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Use of estimates

In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates.

Significant Estimates

These financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to depreciation of property, plant and equipment, amortization of intangible assets, allowance for uncollectible accounts, and impairment testing of long-lived assets. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.

Revenue recognition

The Company’s revenue recognition policies are in compliance with ASC 605 “Revenue Recognition”. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer, including the distributor and the end user. No return allowance is made as products returns are insignificant based on historical experience.

The Company recognizes revenue upon shipment. Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT liability may be offset by the VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.

Shipping and handling

Shipping and handling costs are included in cost of revenue and selling expenses which totaled $32,038 and $80,985 for the years ended December 31, 2011 and 2010, respectively.

Advertising

Advertising costs amounted to $264,199 and $141,486 for the years ended December 31, 2011 and 2010, respectively.

Government grants

Government grants may represent local authority grants to the company for industry development and the revenue is recognized on cash basis when the local authority approves the grant to the Company. Government grant income may also consist of certain other reimbursements from the government.

F-8



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Foreign currency translation

The reporting currency of the Company is the United States dollar, the functional currency of the Company is the Chinese Reminbi. Assets and liabilities of the Company with a functional currency other than US$ are translated into US$ using period end exchange rates. Income and expense items are translated at the average exchange rates in effect during the period. Foreign currency translation differences are included as a component of Accumulated Other Comprehensive Income in Stockholders’ Equity.

The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the financial statements were as follows:

  12/31/2011 12/31/2010
Year end RMB : USD exchange rate 6.36 6.59
Average yearly RMB : USD exchange rate 6.46 6.76

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

Accumulated comprehensive income in the consolidated statements of stockholders’ equity amounted to $3,516,571 as of December 31, 2011 and $2,291,124 as of December 31, 2010.

Credit risk

The Company may be exposed to credit risk from its cash at bank. An allowance has been considered for estimated irrecoverable amounts determined by reference to past default experience and the current economic environment. No allowance is considered necessary for the period.

Accounts receivable

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

The standard credit period for most of the Company’s clients is three months. Management evaluates the collectability of the receivables at least quarterly. Allowance for doubtful accounts as of December 31, 2011 and December 31, 2010 are $0 and $27,252, respectively.

Inventory

Inventory is valued at the lower of cost (determined on a weighted average method) and net realizable value.

Costs incurred in bringing each product to its location and conditions are accounted for as follows:

Raw materials – purchase cost on a weighted average basis;

Manufactured finished goods and work-in-progress – cost of direct materials and labor and a portion of manufacturing overhead based on normal operating capacity but excluding borrowing costs; and

Retail and wholesale merchandise finished goods – purchase cost on a weighted average basis.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

F-9



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets.

Assets Classifications Estimated Useful Lives
Buildings 30 years
Machinery and equipment 3 to 15 years
Motor vehicles 5 to 10 years
Office equipment 3 to 10 years
Furniture and fixtures 4 to 5 years

An item of property and equipment is removed from the accounts upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statements of income in the period the item is disposed. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset. To date, no such impairment losses have been recorded.

Construction in progress

Construction in progress represents the direct cost of construction and cost of plant and machinery installed as well as acquisition cost and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction in progress is completed and the asset is ready for its intended use.

Interest is capitalized as part of the historical cost during the construction period for qualified assets. Interest is capitalized until the asset is ready for service. Capitalized interest is determined based upon the Company’s weighted-average borrowing cost on debt for the average amount of qualifying costs incurred. Once an asset subject to interest capitalization is completed and placed in service, the associated capitalized interest is expensed through depreciation or impairment, along with other capitalized costs related to that asset. Interest that is qualified for capitalization is insignificant for the years ended December 31, 2011 and 2010, as such, no capitalized interest was recorded for the aforementioned periods.

Intangible assets

Intangible assets consist of land use rights which represent acquisition of land use rights of agriculture land from farmers and are amortized on the straight line basis over their respective lease periods. The lease period of agriculture land ranges from 30 years to 50 years.

Impairment of long – lived assets and intangible assets

In accordance with ASC 360, “Property, Plant and Equipment”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of December 31, 2011 and December 31, 2010, the Company determined no impairment charges were necessary.

F-10



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Income taxes

The Company accounts for income taxes under the provisions of ASC 740 "Accounting for Income Taxes". Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.

Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

ASC 740 also prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded in tax expense.

Trade and other payables

Trade payables and other payables are carried at cost and represent liabilities for goods and services provided to the Company prior to the end of the period that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services. Trade payables are non-interest bearing and are normally settled on 7 to 60 day terms.

Bills receivable and Bills payable

The Company utilizes banker’s acceptances in the form of bills receivable and bills payable. The Company accepts customer payment for the Company’s products by bills receivable. Bills receivable represent short-term notes receivable issued either by the customer or by the customer and an accepting bank that entitles the Company to receive the full face amount from the customer or the accepting bank at maturity, which is generally six months from the date of issuance.

Bills payable represent bills issued by an accepting bank in favor of the Company’s suppliers. The Company’s suppliers receive payments from the accepting bank directly upon maturity of the bills, and the Company is obliged to repay the face value of the bills to the accepting bank. These bills are interest free and generally mature six months from the date of issuance. To secure the banks’ undertakings, the Company is required to maintain deposits with such banks amounts equal to 50% to 100% of the bills’ amounts issued, such deposits are presented as restricted cash as of December 31, 2011 and December 31, 2010. Upon maturity of the bills payable, the banks deduct the bills payable amount from the restricted cash account.

Product warranties

Substantially all of the Company’s products are covered by a standard warranty of 1 year for products. In the event of a failure of products covered by this warranty, the Company must repair or replace the products or, if those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company provides warranty reserve for product warranties to reflect estimated material and labor costs of maintenance for potential or actual product issues but for which the Company expects to incur an obligation. Based on historically insignificant amount of warranty expense, management determined that no product warranty reserve was necessary as of December 31, 2011 and December 31, 2010.

F-11



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Related parties

Parties are considered to be related to the Company if the related party has the ability, directly or indirectly, to control the party, or exercise significant influence over the party in making financial and operating decisions, or where the Company and the party are subject to common control. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities which are under the significant influence of related parties of the Company.

Comprehensive income

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.

Retirement benefit costs

PRC state managed retirement benefit programs are defined contribution plans and the payments to the plans are charged as expenses when employees have rendered service entitling them to the contribution.

Accumulated other comprehensive income

ASC Topic 220 “Comprehensive Income” establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation adjustments.

Earnings per share (EPS)

Earnings per share is calculated in accordance with ASC 260-10 “Earnings per Share”, which requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss) per share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

Statutory Surplus Reserve

In accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company, SLVA’s subsidiaries in the PRC are required to allocate 10% of their net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to the statutory surplus reserve, on an annual basis. When the balance of such reserve reaches 50% of the respective registered capital of the subsidiaries, any further allocation is optional.

The statutory surplus reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balances of the reserve after such conversion is not less than 25% of registered capital. The statutory surplus reserve is non-distributable.

F-12



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS . The amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about the fair value measurements. The amendments include the following:

  1.

Those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements.

     
  2.

Those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.

The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Nonpublic entities may apply the amendments in this Update early, but no earlier than for interim periods beginning after December 15, 2011.

The Company is currently evaluating the impact, if any, of ASU No. 2011-04 on the Company’s financial position and results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The presentation option under current GAAP to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated.

The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted because compliance with amendments is already permitted.

The Company intends to comply with the presentation on January 1, 2012.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment . The objective of this Update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis of determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company intends to adopt the amendments in this Update effective January 1, 2012.

In December 2011, FASB issued ASU No. 2011-12, Comprehensive Income (ASU 2011-12). Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. Among the new provisions in ASU 2011-05 was a requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements); however this reclassification requirement is indefinitely deferred by ASU 2011-12 and will be further deliberated by the FASB at a future date.

F-13



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. ACCOUNTS RECEIVABLE

The Company has performed an analysis on all of its accounts receivable and determined that all amounts are probable of collection within one year. As such, all trade receivables are reflected as a current asset. Allowance for doubtful accounts as of December 31, 2011 and December 31, 2010 are $0 and $27,252, respectively.

4. INVENTORY

Inventory consists of:

    December 31,     December 31,  
    2011     2010  
             
Raw materials $  13,531,084   $  6,297,151  
Packaging materials and consumable   123,766     96,380  
Finished goods   2,770,056     556,148  
  $  16,424,906   $  6,949,679  

There was no allowance made for obsolete or slow moving inventory as of December 31, 2011 and December 31, 2010.

5. DEPOSITS AND PREPAID EXPENSES

Deposits and prepaid expenses consist of:

    December 31,     December 31,  
    2011     2010  
             
Deposits for            
Raw materials and goods supplies $  17,167,200   $  9,424,358  
Electricity   19,015     113,860  
Shipping and handling   -     129,861  
Prepayment for services   616,479     773,334  
Others   -     116,247  
  $  17,802,694   $  10,557,660  

Trade deposits are paid to suppliers of raw materials and goods supplies, electricity and shipping and handling expense as deposits for inventory purchases and provision for services. The inventory is normally delivered within one to three months after the payments have been made. Prepayments for services were paid for financial advisory services and services in connection with the listing of the Company.

F-14



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. OTHER RECEIVABLES

Other receivables consist of:

    December 31,     December 31,  
    2011     2010  
             
Guarantee deposits $  926,346   $  682,711  
Due from employees   55,196     73,066  
Prepaid promotion and advertising expenses   -     -  
Prepaid professional expenses   -     9,665  
Others   766     11,794  
  $  982,308   $  777,236  

Guarantee deposits are provided to financial institutions in return for issuance of a corporate guarantee to financiers. Due from employees are amounts advanced to employees for business expenses on behalf of the Company and will be reconciled upon the employees submitting the business expenses receipts.

7. TAXES RECOVERABLE

According to a tax refund approval notice issued by the Tax Administration of the Ministry of Finance of the PRC, certain items are qualified for the refund of value added tax (VAT). The tax refund rate is 100% in 2009 and 80% in 2010 of the VAT tax payable amount. The Company’s wood flooring and wooden fiber sheets qualify for the VAT refund. The Company is required to pay the VAT tax payable first, then entitled for the tax refund. No such tax refund approval notice has been issued for 2011.

Taxes recoverable consist of:

    December 31,     December 31,  
    2011     2010  
             
VAT $  632,786   $  2,452,407  

F-15



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net, consist of the following:

    December 31,     December 31,  
    2011     2010  
             
Buildings $  12,939,715   $  2,975,099  
Machinery and equipment   4,232,933     3,968,175  
Motor vehicles   139,864     134,536  
Office equipment   248,880     99,436  
Furniture and fixtures   54,174     46,212  
    17,615,566     7,223,458  
Less: Accumulated depreciation   (1,388,553 )   (871,169 )
  $  16,227,013   $  6,352,289  

During the years ended December 31, 2011, depreciation expense amounted to $477,477, of which $363,826 and $113,651 were recorded as cost of sales and general and administrative expenses, respectively.

During the years ended December 31, 2010, depreciation expense amounted to $284,335, of which $237,072 and $47,263 were recorded as cost of sales and general and administrative expenses, respectively.

F-16



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. INTANGIBLE ASSETS, NET

Net intangible assets at December 31, 2011 were as follows:

          Accumulated        
    At Cost     Amortization     Net Book Value  
                   
Land use rights $  3,156,395   $  110,460   $  3,045,935  
Forest right   6,290,791     405,854     5,884,937  
Software   309,163     23,822     285,341  
  $  9,756,349   $  540,136   $  9,216,213  
                   
Net intangible assets at December 31, 2010 were as follows:                  
                   
          Accumulated        
    At Cost     Amortization     Net Book Value  
                   
Land use rights $  847,752   $  53,421   $  794,331  
Forest right   6,068,000     195,740     5,872,260  
  $  6,915,752   $  249,161   $  6,666,591  

Private ownership of land is not permitted in the PRC. Instead, the Company has leased five lots of land. The cost of the first, second, fourth and fifth lots land use rights acquired in 2007, 2008, 2011 and 2011 were $331,089 (RMB2,105,232), $550,444 (RMB3,500,000), $621,361 (RMB3,950,925) and $1,653,501 (RMB10,513,782), respectively. These lots were located at Hexing Village, Dingxiao Economic Development Zone, Xingyi City, Qianxinan, Guizhou Province, respectively, within the PRC. The cost of the third lot of land which is forest land, acquired in 2010 was $6,290,791 (RMB40,000,000) and was located at Liping County, Qiandongnan, Guizhou Province, the PRC.

Land use rights are amortized on the straight line basis over their respective lease periods. The lease period of agriculture land is 30 to 50 years.

During the years ended December 31, 2011 and 2010, amortization expense amounted to $274,615 and $218,802, respectively which was recorded under general and administrative expenses.

Estimated amortization for the next five years and thereafter is as follows:

2012 $  316,967  
2013   316,967  
2014   316,967  
2015   316,967  
2016   316,967  
Thereafter   7,631,378  
Total $  9,216,213  

10. CONSTRUCTION IN PROGRESS

    December 31,     December 31,  
    2011     2010  

 

           

Wooden fiber manufacturing factory

$  5,443,862   $  5,251,065  

Wooden floor manufacturing factory

  -     53,283  

Total

$  5,443,862   $  5,304,348  

F-17



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. LOANS PAYABLE

(a) Short term borrowings

Short-term borrowings represent the borrowings from commercial banks that are due within one year. These loans consisted of the following:

                Interest     December 31,     December 31,  
Bank   Term     Notes     rate     2011     2010  
                               
Xingyi City Rural
Cooperative Bank
  March 26, 2010 to
March 25, 2011
   

    7.965%    $  -    $  743,330  
Bank of Chongqing
  June 29, 2011 to
June 28, 2012
    (iv)    
7.572%
   
3,145,396
   
3,034,000
 
Xingyi City Rural
Cooperative Bank
  August 3, 2011 to
August 2, 2012
    (ii)     9.567%     786,349     758,500  
China Merchant Bank
  March 8, 2011 to
March 7, 2012
    (iii)    
8.484%
   
3,931,745
   
-
 
Xingyi City Rural
Cooperative Bank
  April 30, 2011 to
April 29, 2012
    (ii)     8.715%    
3,774,475
    -
Guiyang City Nanming
Rural Credit Cooperative Bank
  January 24, 2011 to
November 18, 2012
    (iii)     8.775%     3,931,745     -
Bank of Guiyang
  October 14, 2011 to
October 14, 2012

  (i)
  10.496%
  629,079
  -  
                               
                    $  16,198,789   $  4,535,830  

F-18



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. LOANS PAYABLE - CONTINUED

(b) Long term debt

Long term debt consists of the following:

                Interest     December 31,     December 31,  

Bank

  Term     Notes     rate     2011     2010  
                               
Guiyang City
Nanming Rural Credit Cooperative Bank
  January 19, 2011 to
January 18, 2013
    (iii)     8.775%    $ 4,089,015    $ -  

Notes:

(i) The loan has a corporate guarantee by Guizhou City West Investment Guarantee Co., Ltd. The Company paid a total guarantee fee of $71,241 to Guizhou City West Investment Guarantee Co., Ltd.

(ii) The loan has a corporate guarantee by Zhong Ruixin Investment Guarantee Co., Ltd in which our director, Mr. Yi Zeng also serves as their general manager. The Company paid a total guarantee fee of $229,092 to Zhong Ruixin Investment Guarantee Co., Ltd.

(iii) The loans are secured by the real estate properties of Guizhou Huacheng Group in which our director, Mr. Yudong Ji also serves as their chairman.

(iv) The loan is secured by the real estate properties of Guizhou Huacheng Group in which our director, Mr. Yudong Ji also serves as their chairman and personal guarantee by our directors, Mr. YuLu Bai, Mr. Yudong Ji, Mr. Yi Zeng and our general manager, Mr. Qin Shi.

Interest expense on the loans for the years ended December 31, 2011 and 2010 amounted to $1,590,274 and $289,408, respectively.

12. CUSTOMER DEPOSITS

Customer deposits represent amounts advanced by customers for orders of product. The products normally are shipped within three months after receipt of the advance payment and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of December 31, 2011 and December 31, 2010, customer deposits amounted to $4,001,348 and $1,936,733, respectively.

13. OTHER PAYABLES AND ACCRUED EXPENSES

    December 31,     December 31,  
    2011     2010  
             
Other taxes payable $  284,879   $  789,252  
Due to third parties   880,857     775,187  
Due to employees   9,105     151,700  
Accrued wages   242,404     113,224  
Total $  1,417,245   $  1,829,363  

Other taxes payable include VAT tax, city maintenance and construction levies, stamp duty, education levies and other miscellaneous taxes.

F-19



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. INCOME TAXES

The Company is incorporated in the State of Nevada in the U.S. and is subject to a gradual U.S. federal corporate income tax of 15% to 35%. The State of Nevada does not impose any corporate state income tax.

No Hong Kong profits tax has been provided in the financial statements, as the Company did not have any assessable profits for the years ended December 31, 2011 and 2010.

Beginning January 1, 2008, China unified the corporate income tax rule on foreign invested enterprises and domestic enterprises. The unified corporate income tax rate is 25%.

Under Guizhou Province preferential tax policy, QAF and QSTF are entitled to certain tax exemptions and reductions available to all companies in Guizhou Province, the People’s Republic of China.

Under these “tax holidays”, QAF is entitled to exemption from EIT for 3 years and reduced tax rates for 2 years after that, effective as of 2006 and 2009, respectively. Under Chinese tax law, enterprise income tax is charged and collected first and refunded later.

Provisions for income tax were made at 25% on yearly reported profits less the amounts of income tax refunded for the fiscal years 2010 and 2009. QAF is subject to the uniform corporate income tax rate of 25% beginning in 2011.

Further, QSTF incurred income tax expense during fiscal years 2010 and 2009, but QSTF was entitled to a claim for refund of these payments. Provision for income tax was made at EIT rate of 25% on yearly reported profits less the amounts of income tax refunded for the fiscal years 2010. QSTF is subject to the uniform corporate income tax rate of 25% beginning in 2011.

GSTF is established in 2011 and is subject to the uniform corporate income tax rate of 25%.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31, 2011 and December 31, 2010:

    December 31,     December 31,  
    2011     2010  

 

           

U.S statutory rate

  34.0%     34.0%  

Foreign income not recognized in USA

  -34.0%     -34.0%  

PRC statutory rate

  25.0%     25.0%  

PRC income tax concession

  0.0%     -2.6%  

Permanent difference

  0.8%     0.0%  

Parent company’s expenses not subject to PRC tax

  1.4%     0.0%  

 

           

Hong Kong profits tax rate

  16.5%     16.5%  

Offshore subsidiary income not recognized

  -16.5%     -16.5%  

 

           

Effective tax rate

  27.2%     22.4%  

F-20



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. INCOME TAXES - CONTINUED

Provision for income taxes is as follows:

    December 31,     December 31,  
    2011     2010  
Current:            
Income tax SLVA - U.S. corporate tax $  -   $  -  
CBF - Hong Kong profits tax   -     -  
QAF - China EIT   601,460     1,033,602  
QSTF - China EIT   1,683,976     1,646,494  
GSTF - China EIT   6,800     -  
             
Deferred   (134,981 )   -  
  $  2,157,255   $  2,680,096  

The components of the deferred tax assets are as follows:

    December 31,     December 31,  
    2011     2010  
             

Deferred tax asset for NOL carryforwards - US

$  202,606 $     158,066  

Deferred tax asset for NOL carryforwards - HK

  61,237     10,223  

Warrant and stock option expense

  45,900     45,900  

Temporary difference from intercompany sales profit

  137,221     -  

 

           

 

  446,964     214,189  

Valuation allowance

  (309,743 )   (214,189 )

Total deferred tax assets

$  137,221 $     -  

Deferred income taxes have been classified in the consolidated balance sheets as of December 31, 2011 and 2010 as follows:

    December 31,     December 31,  
    2011     2011  
             
Current assets $  137,221   $  -  
Net deferred tax assets $  137,221   $  -  

The valuation allowance for deferred tax assets as of December 31, 2011 and 2010 was $309,743 and $214,189, respectively. The change in total allowance for the year ended December 31, 2011 and 2010 was an increase of $95,554 and $214,189.

F-21



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. INCOME TAXES - CONTINUED

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the net operating losses and temporary differences become deductible. Management considered projected future taxable income and tax planning strategies in making this assessment. At December 31, 2011, the Company had net operating loss carry forwards for United States Federal and State income tax purposes of approximately $595,900 (the “NOL carry forwards-US”), which were available to offset future US taxable income, if any, through 2030. At December 31, 2011, the Company had net operating loss carry forwards for Hong Kong profit tax purposes of approximately $371,000 (the “NOL carry forwards-HK”). Based upon the uncertainty of future US and Hong Kong taxable income, management has fully reserved the deferred tax asset associated with the NOL carry forwards and stock option expense for US and Hong Kong income tax purposes.

The Company did not recognize any interest or penalties related to unrecognized tax benefits in the years ended December 31, 2011 and 2010. The Company had no uncertain positions that would necessitate recording of tax related liability. The Company is subject to examination by the respective tax authorities.

15. STOCK OPTIONS AND WARRANTS

The Company accounts for its stock options and warrants in accordance with ASC Topic 718, “Compensation – Stock Compensation” and ASC Topic 505-50 “Equity – Based Payments to Non-Employees” which were adopted by the Company on December 15, 2010. The Company issued a warrant on December 15, 2010 to a third party for the purchase of 60,000 shares of the Company’s common stock at an exercise price of $4.00 per share. The warrant expires on December 15, 2015.

The Company determines the estimated fair value of share-based awards using the Black-Scholes option-pricing model. The Black-Scholes model is affected by the Company’s stock price as well as by assumptions regarding certain complex and subjective variables. These variables include, but are not limited to; the Company’s expected stock price volatility over the term of the awards and the actual and projected option exercise behaviors.

    Number of shares           Remaining  
    entitled to     Exercise     Contractual Life  
    purchase     Price     (years)  
Balance as of December 31, 2010   60,000   $  4.00     4.95  
Warrants exercised   -     -        
Warrants expired   -     -        
Total outstanding as of December 31, 2011   60,000   $  4.00     3.95  

The share based compensation expense for the years ended December 31, 2011 and 2010 was $nil and $135,000, respectively.

On May 17, 2010, our Chairman and CEO, Mr. Yulu Bai, entered into an option agreement with Ms. Ren Ping Tu, his wife, pursuant to which Mr. Bai was granted an option to acquire all of the 20,500,000 shares of the Company’s common stock currently owned by Ms. Tu for an exercise price of $2,500,000. On September 6, 2011, Mr. Bai exercised the option to acquire all 20,500,000 shares of the Company’s common stock. After Mr. Bai exercised this option, he owns 68.33% of the Company’s issued and outstanding common stock and became the controlling stockholder.

On November 1, 2010, the Company issued 3,309,956 shares of common stock to a company who provided services for the benefit of the Company and/or its subsidiaries in connection with the reverse acquisition and recapitalization of the Company. The fair value of the common stock issued is determined using the fair value of the Company’s common stock on the grant date at $0.10 per share. The Company calculated stock based compensation of $331,000 and recorded this amount as stock offering costs in connection with the recapitalization of the Company and have recorded this amount as a reduction of paid in capital.

On November 1, 2010, the Company issued 100,000 shares of common stock to an individual who provided services for the benefit of the Company. The fair value of the common stock issued is determined using the fair value of the Company’s common stock on the grant date at $0.15 per share. There share based compensation expense for the years ended December 31, 2011 and 2010 was $nil and $15,170, respectively.

F-22



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. CONCENTRATION, RISKS, AND UNCERTAINTIES

The Company has the following concentrations of business with customers constituting 10% or greater of the Company’s revenues for the years ended December 31, 2011 and 2010:

    December 31,     December 31,  
    2011     2010  
             
Customer A   74.49%     47.95%  
Customer B   14.03%     25.75%  

As of December 31, 2011, amount due from customer A and customer B were $3,340,402 and $495,929, respectively.

The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties of its major customers.

The Company has the following concentrations of business with suppliers constituting 10% or greater of the Company’s purchases for the years ended December 31, 2011 and 2010:

    December 31,     December 31,  
    2011     2010  
             
Supplier A   59.79%     43.71%  
Supplier B   17.08%     *  
Supplier C   13.78%     *  
Supplier D   *     22.73%  
Supplier E   *     10.35%  

* Constitute less than 10% of the Company’s total purchases.

As of December 31, 2011, amount due to supplier A, B and C were $309,973, $0 and $0, respectively.

F-23



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. ECONOMIC AND POLITICAL RISK

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

18. COMMITMENTS AND CONTINGENCIES

(1) Operating Leases

As of December 31, 2011, the Company entered into six lease agreements for its stores and warehouses at six locations which expire in 2014. The future minimum lease payments as of December 31, 2011 are as follow:

For the year ending December 31,

2012 $  83,471  
2013   62,495  
2014   3,876  
  $  149,842  

During the years ended December 31, 2011 and 2010, rental expenses amounted to $51,913 and $0, respectively which was recorded under general and administrative expenses.

(2) Capital commitment

Production line for wooden fiber sheet

At December 31, 2011, the total estimated contract costs to complete the production line for wooden fiber sheet are approximately $58.6 million (RMB372.4 million) of which the Company has paid for approximately $6.2 million (RMB39.2 million). The project is in the planning stage and the remaining of $52.4 (RMB333.2 million) will be paid upon completion of the production line.

Production line for wooden floor

At December 31, 2011, the total estimated contract costs to complete the production line for wooden floor are approximately $23.8 million (RMB151.6 million) of which the Company has paid for approximately $0.3 million (RMB1.6 million). The project is in the planning stage and the remaining of $23.5 million (RMB150.0 million) will be paid upon completion of the production line.

Purchase of Property

At December 31, 2011, the total estimated contract costs to acquire a property under construction are approximately $9.8 million (RMB62.7 million) of which the Company has paid for approximately $6.7 million (RMB42.5 million). On December 17, 2011, QAF and QSTF entered into an agreement with the constructor to transfer the unpaid balance of $3.1 million (RMB20.2 million) from QAF to QSTF and QSTF will offset this balance by providing wooden floor to the constructor.

F-24



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. COMMITMENTS AND CONTINGENCIES - CONTINUED

(3) Obligations under material contracts

(i)

The Company entered into a financial advisory agreement dated February 2, 2010 to appoint Asia Regal Financial Capital Group Co., Ltd. and Shenzhen Junwei Investment and Development Co., Ltd. as financial advisors. Pursuant to the agreement, the Company is obligated to issue 100,000 of common shares at $0.10 per share to them prior to December 31 of every year within 5 years from the Company listing on OTCBB. The agreement contains an exclusivity provision whereby the Company has agreed to engage them as the Company’s sole financial advisor and its related company within 2 years since the date of the Company’s listed on OTCBB and also contains a $1 million liquidated damages provision for breach of such exclusivity. The Company has not issued the 100,000 shares of common stock for the year ended December 31, 2011. As of the issuance date of the consolidated financial statements, the financial advisor has not requested for the issuance of the shares.

   
(ii)

   

CCG Investor Relations Partners LLC, CCG, an investor relations firm was issued a warrant to purchase up to 60,000 shares of the Company’s stock, at a price of $4.00 per share, pursuant to the terms and conditions of a letter agreement, dated December 15, 2010, between the Company and CCG. The warrant shall have a term of 5 years and expires on December 15, 2015; CCG had not exercised the warrant and had not purchased any shares of the Company’s stock.

19. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including convertible preferred stock, stock options and warrants, in the weighted average number of common shares outstanding for the period, if dilutive. The numerators and denominators used in the computations of basic and dilutive earnings per share are presented in the following table:

    December 31,     December 31,  

 

  2011     2010  

BASIC

           

Numerator for basic earnings per share attributable to the Company’s common stockholders:

           

Net income used in computing basic earnings per share

$  5,788,389   $  9,291,492  

Basic earnings per share

$  0.19   $  0.42  

 

           

Basic weighted average shares outstanding

  30,000,932     22,083,333  

F-25



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. EARNINGS PER SHARE – CONTINUED

    December 31,     December 31,  
    2011     2010  

DILUTED

           

Numerator for diluted earnings per share attributable to the Company’s common stockholders:

       

Net income used in computing diluted earnings per share

$  5, 788,389   $  9,291,492  

Diluted earnings per share

$  0.19   $  0.42  

 

           

 

           

Weighted average outstanding shares of common stock

  30,000,932     22,083,333  

Warrants and contingently issuable shares

  -     2,500  

Options and contingently issuable shares

  -     -  

Diluted weighted average shares outstanding

  30,000,932     22,085,833  

For the year ended December 31, 2011, 60,000 warrants were not included in the diluted earnings per share because the average stock price was lower than the strike price of these warrants.

    December 31,     December 31,  

 

  2011     2010  

 

           

Potential common shares outstanding as of December 31,

           

Warrant outstanding (shares)

  60,000     60,000  

F-26



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. PRODUCT LINE INFORMATION

The Company sells wooden fiber sheets and wooden floors which are used by customers in various industries. The production process, class of customer, selling practice and distribution process are the same for all wooden fiber sheets and wooden floors. The Company’s chief operating decision-makers (i.e. chief executive officer and his direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by product lines for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. The Company considers itself to be operating within one reportable segment. The Company does not have long-lived assets located in foreign countries. The Company’s net revenue from external customers by main product lines is as follows:

    December 31,     December 31,  
    2011     2010  
Domestic sales            
         Wooden fiber sheet $  6,122,677   $  11,325,359  
         Wooden floor   30,562,038     25,716,801  
  $  36,684,715   $  37,042,160  

21. RELATED PARTIES TRANSACTIONS

As of December 31, 2011 and 2010, the Company had the following significant related party transactions:

Name of related party Nature of transactions
   
Mr. YuLu Bai,
Chief Executive Officer                    
Due from Mr. YuLu Bai totaled $1,272,231 and $0 as of December 31, 2011 and 2010, respectively and included in Due from Related Party. Due to Mr. YuLu Bai was $1,527,080 as of December 31, 2010. The amounts are unsecured, interest free and have no fixed term of repayment.
   
The amount due from Mr. Bai relates to proceeds from the share exchange agreement which was deposited to Mr. Bai’s account. At December 31, 2010, the Company recorded a payable to Mr. Bai for forestry rights that Mr. Bai paid on behalf of the Company; therefore, the amount due from Mr. Bai was netted with the amount due to Mr. Bai, resulting in a net due to related party balance of $1,527,080. During the year ended December 31, 2011, the Company paid off the amount due to Mr. Bai, resulting in a net due from related party balance of $1,272,231 as of December 31, 2011. The Company expects to collect the amount due from Mr. Bai by June 30, 2012.
   
Mr. Yudong Ji,
Director
Due from Mr. Ji totaled $147,834 and $0 as of December 31, 2011 and 2010, respectively and included in Due from Related Party. The amount represents a loan to Mr. Ji on March 29, 2011 and matures on June 30, 2012. The loan is unsecured and interest free.

F-27


EXHIBIT INDEX

Exhibit No. Description
2.1

Share Exchange Agreement, dated November 1, 2010, among the Company, China Bingwu Forestry Group Limited and its sole shareholder [incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

3.1

Amended and Restated Articles of Incorporation filed with the Nevada Secretary of State on January 7, 2011 [incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 13, 2011]

3.2

Certificate of Amendment to Articles of Incorporation filed with the Nevada Secretary of State on October 3, 2011 [incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 6, 2011]

3.3

Amended and Restated Bylaws of the Company [incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 9, 2010]

4.1

Common Stock Purchase Warrant, dated December 15, 2010, issued to CCG Investor Relations Partners LLC [incorporated by reference to Exhibit 4.4 to the Company’s Amendment No. 1 to Annual Report on Form 10-K/A filed on December 16, 2011]

4.2

Convertible Note, dated July 23, 2010, payable to Horoy International Holdings Limited [incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

4.3

Convertible Note, dated September 7, 2010, payable to Goldenbridge Investment Holdings Limited [incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

4.4

Note Cancellation Agreement, dated September 9, 2010, among the Company and the holders of certain notes payable signatory thereto [incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.1

Securities Purchase Agreement, dated September 23, 2010, by and among the Company, Helvetic Capital Ventures AG and the accredited investor signatory thereto [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 28, 2010]

10.2

Repurchase Agreement, dated September 23, 2010, by and between the Company and Helvetic Capital Ventures AG [incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 28, 2010]

10.3

Equity Transfer Agreement, dated May 18, 2010, by and between China Bingwu Forestry Group Limited and the shareholders of Qian Xi Nan Aosen Forestry Company, Limited signatory thereto (English Translation) [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.4

Share Transfer Agreement, dated May 8, 2009, by and between Qian Xi Nan Aosen Forestry Company, Limited and Guizhou Silvan Touch Wooden Co., Limited (aka Guizhou Yinyan Wood Co. Limited) (English Translation) [incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.5

Shareholder Investment Agreement, dated October 16, 2007, by and between Qian Xi Nan Aosen Forestry Company, Limited and Guizhou Silvan Touch Wooden Co., Limited (aka Guizhou Yinyan Wood Co. Limited) (English Translation) [incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.6

Wood Purchase and Sales Contract, dated March 14, 2010, by and between Qian Xi Nan Aosen Forestry Company, Limited and Yan Zhiming (English Translation) [incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.7

Purchase and Sales Contract, dated November 16, 2009, between Qian Xi Nan Aosen Forestry Company, Limited and Guizhou Shuanghe Industrial Trade Co., Ltd. (English Translation) [incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on November 5, 2010]




Exhibit No. Description
10.8

Purchase and Sales Contract, dated January 1, 2009, by and between Guizhou Yingye Forestry Ltd. and Qian Xi Nan Aosen Forestry Company, Limited (English Translation) [incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.9

Purchase and Sales Contract, dated January 1, 2009, by and between Chongqing Huyu Forestry Ltd. and Qian Xi Nan Aosen Forestry Company, Limited (English Translation) [incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.10

Purchase and Sales Contract, dated January 1, 2009, by and between Qian Xi Nan Aosen Forestry Company, Limited and Guizhou Shuanghe Industrial Trade Co., Ltd. (English Translation) [incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.11

Exclusive Distribution Contract, dated September 10, 2010, by and between Qian Xi Nan Silvan Flooring Company, Limited and Dang Zhongming (English Translation) [incorporated by reference to Exhibit 10.19 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.12

Exclusive Distribution Contract, dated September 5, 2010, by and between Qian Xi Nan Silvan Flooring Company, Limited and Lin Hongbin (English Translation) [incorporated by reference to Exhibit 10.18 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.13

Exclusive Distribution Contract, dated August 25, 2010, by and between Qian Xi Nan Silvan Flooring Company, Limited and Zeng Tianming (English Translation) [incorporated by reference to Exhibit 10.17 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.14

Exclusive Distribution Contract, dated August 13, 2010, by and between Qian Xi Nan Silvan Flooring Company, Limited and Sui Cheng (English Translation) [incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.15

Loan Contract, dated June 21, 2010, by and between Bank of Chongqing, Guiyang Brach and Qian Xi Nan Aosen Forestry Company, Limited (English Translation) [incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.16

Loan Contract No. 72, dated March 26, 2010, by and between Guizhou Xingyi Rural Cooperative Bank and Qian Xi Nan Aosen Forestry Company, Limited (English Translation) [incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.17

Loan Contract No. 108, dated June July 17, 2009, by and between Guizhou Xingyi Rural Cooperative Bank and Qian Xi Nan Aosen Forestry Company, Limited (English Translation) [incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.18

Forest Right Certificate No. B520802335298, dated December 10, 2009, granted to Qian Xi Nan Aosen Forestry Company, Limited and sealed by the People’s Government of Liping County, People’s Republic of China (English Translation) [incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.19

Forest Right Certificate No. B520802556795, dated December 10, 2009, granted to Qian Xi Nan Aosen Forestry Company, Limited, and sealed by the People’s Government of Liping County, People’s Republic of China (English Translation) [incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.20

Commodity House Sales Contract, Unit 1-2, dated August 25, 2006, by and between Qian Xi Nan Silvan Flooring Company, Limited and Guiyang New Century Real Estate Development Co., Ltd. (English Translation) [incorporated by reference to Exhibit 10.20 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.21

Commodity House Sales Contract, Unit 1-3, dated August 25, 2006, by and between Qian Xi Nan Silvan Flooring Company, Limited and Guiyang New Century Real Estate Development Co., Ltd. (English Translation) [incorporated by reference to Exhibit 10.21 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.22

Financial Advisory Agreement, dated February 2, 2010, by and among Qian Xi Nan Aosen Forestry Company, Limited, Asia Regal Finance Capital Group Co., Ltd and Shenzhen Junwei Investment and Development Co., Ltd. [incorporated by reference to Exhibit 10.27 to the Company’s Amendment No. 1 to Annual Report on Form 10-K/A filed on December 16, 2011]




Exhibit No. Description
10.23

Letter of Engagement, dated December 7, 2010, by and between the Company and CCG Investor Relations Partners LLC. [incorporated by reference to Exhibit 10.28 to the Company’s Amendment No. 1 to Annual Report on Form 10-K/A filed on December 16, 2011]

10.24

Trademark Transfer Agreement, dated November 18, 2009, by and between Guizhou Silvan Touch Wooden Co., Limited (aka Guizhou Yinyan Wood Co. Limited) and Qian Xi Nan Silvan Flooring Company, Limited (English Translation) [incorporated by reference to Exhibit 10.22 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.25

Trademark Licensing Agreement, dated November 19, 2009, between Guizhou Silvan Touch Wooden Co., Limited (aka Guizhou Yinyan Wood Co. Limited) and Qian Xi Nan Silvan Flooring Company, Limited (English Translation) [incorporated by reference to Exhibit 10.28 to the Company’s Amendment No. 6 to Current Report on Form 8-K/A filed on September 16, 2011]

10.26

Labor Contract, dated May 5, 2010, between Qian Xi Nan Aosen Forestry Company, Limited and Yulu Bai (English Translation) [incorporated by reference to Exhibit 10.23 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.27

Labor Contract, dated March 27, 2009, between Qian Xi Nan Aosen Forestry Company, Limited and Jiyong He (English Translation) [incorporated by reference to Exhibit 10.26 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.28

Labor Contract, dated November 21, 2007, between Qian Xi Nan Aosen Forestry Company, Limited and Fangping Peng (English Translation) [incorporated by reference to Exhibit 10.24 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.29

Labor Contract, dated May 5, 2010, between Qian Xi Nan Aosen Forestry Company, Limited and Dongshen Tan (English Translation) [incorporated by reference to Exhibit 10.25 to the Company’s Current Report on Form 8-K filed on November 5, 2010]

10.30

English Translation of Loan Contract, dated February 25, 2011, by and between China Merchant Bank Co., Ltd. Guiyang Branch and Qian Xi Nan Aosen Forestry Company, Limited. [incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]

10.31

English Translation of Working Capital Loan Contract, dated April 30, 2011, by and between Guizhou Xingyi Rural Cooperative Bank and Qian Xi Nan Aosen Forestry Company, Limited. [incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]

10.32

English Translation of Working Capital Loan Contract, dated June 29, 2011, by and between Guiyang Branch, Bank of Chongqing Co., Ltd. and Qian Xi Nan Aosen Forestry Company, Limited. [incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]

10.33

English Translation of Working Capital Loan Contract, dated August 3, 2011, by and between Guizhou Xingyi Rural Cooperative Bank and Qian Xi Nan Aosen Forestry Company, Limited. [incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]

10.34

English Translation of Working Capital Loan Contract, dated January 19, 2011, by and between Guiyang Nanming District Rural Credit Cooperative Bank, Xinhu Lu Branch and Qian Xi Nan Aosen Forestry Company, Limited. [incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]

10.35

English Translation of Working Capital Loan Contract, dated January 19, 2011, by and between Guiyang Nanming District Rural Credit Cooperative Bank, Xinhu Lu Branch and Qian Xi Nan Silvan Flooring Company, Limited. [incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]

10.36

English Translation of Pledge Agreement, dated March 7, 2011, by and between China Merchant Bank Co., Ltd. Guiyang Branch and Guizhou Huacheng Real Estate Co., Ltd. [incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]




Exhibit No. Description
10.37

English Translation of Pledge Agreement, dated June 29, 2011, by and between Guiyang Branch, Bank of Chongqing and Guizhou Huacheng Real Estate Co., Ltd. [incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]

10.38

English Translation of Guarantee Agreement, dated July 4, 2011, by and among Guiyang Branch, Bank of Chongqing, Ji Yudong, Zeng Yi, Bai Yulu and Shi Bei. [incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]

10.39

English Translation of Guarantee Agreement, dated April 30, 2011, by and between Guizhou Xingyi Rural Cooperative Bank and Guizhou Dingshengxin Guarantee & Investment Co., Ltd., Xi’nanzhou Branch. [incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]

10.40

English Translation of Guarantee Agreement, dated August 3, 2011, by and between Guizhou Xingyi Rural Cooperative Bank and Guizhou Dingshengxin Guarantee & Investment Co., Ltd., Xi’nanzhou Branch. [incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q/A filed on February 28, 2012]

21*

Subsidiaries of the Company

31.1*

Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1

Option Agreement, dated May 17, 2010, between Ren Ping Tu and Yulu Bai [incorporated by reference to Exhibit 99.1 to the Company’s Amendment No. 1 to Current Report on Form 8-K/A filed on January 11, 2011]

101*

Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).

*Filed herewith