ORGANIZATION AND PRINCIPAL ACTIVITIES
SGB International Holdings Inc. (“SGB” or the “Company”) was incorporated in British Columbia, Canada on November 6, 1997. Through its subsidiary, the Company is engaged in coal production and sales by exploring, developing, and mining coal properties.
On May 11, 2011, the Company completed the acquisition of Dragon International Resources Group Co., Limited (“Dragon International”), a Hong Kong corporation incorporated on October 5, 2010, and its wholly-owned subsidiary through a share exchange which resulted in the former shareholders of Dragon International acquiring the control of SGB. This transaction was accounted for as a reverse takeover transaction (“RTO”) for accounting purpose, as Dragon International was deemed to be the acquirer, and these consolidated financial statements are a continuation of the consolidated financial statements of Dragon International. The carrying amounts of SGB’s assets and liabilities are included in these consolidated financial statements.
Prior to the above noted RTO, and on February 21, 2011, pursuant to a share transfer agreement, Dragon International completed the acquisition of Fujinan Huilong Coal Mine Co., Ltd. (“Fujian Huilong”) (formerly known as Yongding Shangzhai Coal Mine Co., Ltd.), a People’s Republic of China corporation and was incorporated on August 4 2005. Upon the completion of the acquisition, Fujian Huilong has become the wholly-owned subsidiary of Dragon International and the control in substance was not changed. For accounting purposes, the acquisition has been accounted for using the continuity of interest method, which recognizes Fujian Huilong as the successor. The net assets of Dragon International prior to the acquisition has been accounted as recapitalization as at the date of acquisition.
In connection with the above acquisitions, the consolidated financial statements included the operations of SGB, Dragon International and Fujian Huilong for the periods from May 12, 2011 to December 31, 2011, periods from February 21, 2011 to December 31, 2011 and for the year ended December 31, 2011, respectively. The 2010 comparative figures are those of Fujian Huilong. The Company and its subsidiaries are considered to be operating in one segment based on its organizational structure and strategic decision making method.
These financial statements have been prepared in accordance with U.S. generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As at December 31, 2011 and 2010, the Company had working capital deficiency of $3,909,559 and $2,819,129, respectively, and requires additional funds to maintain its operations. In view of the working capital deficiency, the management has reviewed the cash position as at the balance sheet date and the cash flow forecast for the next twelve months and taken into factors that (i) the major and controlling shareholder has undertaken that payment on the amounts due to him of $3,019,409 as at December 31, 2011 will only be made if the Company has surplus cash after paying for the operations and capital expenditure; (ii) the successful debt restructuring on the interest bearing loans (the "Loans") that was settled with the Company for the share capital of the Company pursuant to a debt-to-equity settlement agreement (Note 12); (iii) No material interest liability is expected for the next twelve months after the settlement of the aforesaid Loans; (iv) stable client base and strong coal demands in Fujian Province ensure revenue can be continue to generate from the existing coal mine operation; and (v)to raise equity financing as required; and(vi) to obtain the principle shareholder’s support in funding the required working capital. After taking the above circumstances and facts into consideration, the management of the Company is satisfied that the Company will have sufficient funds to complete the current development and to meet in full its financial obligation and operations or capital expenditure as they fall due for the foreseeable future.