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EX-32.2 - EXHIBIT 32.2 - BTHC XV, Inc.v309504_ex32-2.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. 052808

 

BTHC XV, INC.
(Exact name of registrant as specified in its charter)

 

Delaware 20-5456294
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  

 

c/o Underground Grand Canyon

Linyi City, Yishui County, Shandong Province, China 276400
(Address of principal executive offices)

 

(+86) 539-2553919
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common Stock, par value $0.001 per share

 

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

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 (§ 232.405 of this chapter) 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 ¨  Smaller reporting company x
 (Do not check if a smaller reporting company)  

 

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 was not applicable. 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 18,089,660 shares of the registrant’s common stock outstanding as of April 13, 2012.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

   

 
 

   

BTHC XV, INC.

Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2011
 

   

TABLE OF CONTENTS

  

Item 1. Business. 2
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments. 31
Item 2. Properties. 31
Item 3. Legal Proceedings. 32
Item 4. (Removed and Reserved). 32
   
PART II  
   
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 32
Item 6. Selected Financial Data 33
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 40
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 42
 
PART III
 
Item 10. Directors, Executive Officers and Corporate Governance. 42
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 47
Item 13. Certain Relationships and Related Transactions, and Director Independence. 48
Item 14. Principal Accounting Fees and Services. 51
 
PART IV
 
Item 15. Exhibits, Financial Statement Schedules 52

   

 
 

 

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, 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. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to, among others: our ability to overcome competition from local and overseas pharmaceutical enterprises; decrease in the availability, or increase in the cost, of plasma; failure to obtain PRC governmental approval to increase retail prices of certain of our biopharmaceutical products; difficulty in servicing our debt; loss of key members of our senior management; and unexpected changes in the PRC government’s regulation of the biopharmaceutical industry in China, or changes in China’s economic situation and legal environment. Additional disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this report are discussed in Item 1A. “Risk Factors.”

 

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 as otherwise indicated by the context and for the purposes of this report only, references in this report to:

 

·BTHC XV, Inc., or BTHC, a Delaware corporation, which is a publicly traded company;

 

·Long Fortune Valley Tourism International Limited, or Long Fortune, a company organized under the laws of the Cayman Islands and a wholly-owned subsidiary of BTHC;

 

·Rich Valley Capital Holding Limited, or Rich Valley, a company organized under the laws of the British Virgin Islands and a wholly-owned subsidiary of Long Fortune;

 

·Long Fortune Valley Tourism International Limited, or LFHK, a company organized under the laws of Hong Kong and a wholly-owned subsidiary of Rich Valley;

 

·Shandong Longkong Travel Management Co., Ltd., or Longkong, a company organized under the laws of China and a wholly-owned subsidiary of LFHK; and

 

·“PRC” refers to the People’s Republic of China.

 

PART I

 

ITEM 1. BUSINESS.

 

Overview of Our Business

 

We are a tourism development and management company headquartered in Shandong Province, China.  Our business specializes in the development and management of natural, cultural and historic scenic sites and ecotourism projects in China, with particular emphasis on the cave tourism sector of the tourism industry.  Since 2004, we have operated the “Underground Grand Canyon” tourist attraction in Linyi City, Yishui County, Shandong Province, China, pursuant to a development and management agreement with the local Yaodianzi Town Government, whereby we will operate and manage the attraction through 2062.  At 6,100 meters (approximately 3.75 miles), the Yinli underground caves form the longest cave system in northern China and contains several stalactite and stalagmite formations, as well as rivers and streams.  We have invested approximately $12 million to improve the infrastructure and facilities at the attraction, including: the construction of restaurant facilities for our visitors and an office and accommodation for our staff and entertainment attractions; the repair of roads, electrical lines and water pipes leading to the attraction; and the acquisition of new equipment for use at our new entertainment attractions.  We have developed an additional 3,100 meters (approximately 2 miles) into four entertainment attractions, including: an “Underground Water Drifting” attraction; the “Electric Slide Car” attraction; the “Battery Vehicle” attraction; and the “Strop Ropeway” attraction. The Underground Grand Canyon has been awarded “AAAA Level Scenic Spot” and “National Geological Park” designations by the PRC National Tourism Administration and the PRC Ministry of Land and Resources, respectively.   We plan to continue to expand our business and strengthen our brand by acquiring additional tourist destinations within specified geographic regions in China and by obtaining the exclusive rights to manage and operate them.  Our goal is to become China’s leading tourism development and management company.

 

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Visitors to the Underground Grand Canyon are attracted through word of mouth, as well as through our advertising with automobile clubs and domestic travel and touring agencies.  We enter into cooperation agreements each year certain domestic travel agencies throughout China, through which we receive a regular flow of visitors.  We expect that the number of visitors to the attraction will increase as we enter into such agreements with additional travel agencies, as well as through repeat business from existing travel agencies based on the positive experiences of prior visitors.  We also advertise with domestic automobile clubs comprised of individuals with their own vehicles who arrange travel and tourism activities independently or as a group, and on Internet travel websites. The number of visitors to the attraction has increased from approximately 150,000 in 2004 to approximately 680,000 in 2011, which is a compounded annual growth rate of 353%.  During the fiscal year ended December 31, 2011, visitors from travel agencies accounted for approximately 45% of our total number of visitors, while individual families accounted for the remaining 55% of our visitors.    

 

Our sales revenue increased approximately $2.5 million, or approximately 27%, to approximately $11.6 million in the fiscal year ended December 31, 2011 from approximately $9.1 million in the fiscal year ended December 31, 2010.  Our revenue is generated from admission tickets (67% of our 2011 sales revenue), water drifting attraction fees (26% of our 2011 sales revenue), rail car fees (5% of our 2011 sales revenue) and other fees and services (3% of our 2011 sales revenue).  Our net income increased approximately $0.3 million, or approximately 8%, to approximately $4.3 million in the fiscal year ended December 31, 2011 from approximately $4.0 million in the fiscal year ended December 31, 2010.

 

Our principal executive offices are located at Underground Grand Canyon Tourist Attraction, Yishui County, Shandong Province, the People’s Republic of China 271000. Our corporate telephone number is (86) 539-2553769 and our fax number is (86) 539-2553952. We maintain a website at http://www.longur.com that contains information about our operating company, but that information is not part of this report.

 

Our History and Background

 

BTHC was organized on August 16, 2006 as a Delaware corporation to effect the reincorporation of BTHC XV, LLC, a Texas limited liability company, mandated by the plan of reorganization of Ballantrae Healthcare LLC and affiliated limited liability companies including BTHC XV, LLC (collectively “Ballantrae”) discussed below.  Prior to the acquisition of Long Fortune, discussed below, we were a “shell” company with our primary purpose of identifying a privately-held operating company for a business combination or other acquisition transaction.  After the acquisition of Long Fortune, we were no longer a “shell” company and our primary operations now consist of the business and operations of Long Fortune and its indirect operating subsidiary, Longkong, which are conducted in Linyi City, Yishui County, Shandong Province, China. 

 

Ballantrae Bankruptcy Reorganization

 

In September 1999, Ballantrae was organized for the purpose of operating nursing homes throughout the United States but by March, 2003, Ballantrae was out of cash and unable to meet its payroll obligations. On March 28, 2003, Ballantrae filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”).  On November 29, 2004, the bankruptcy court approved the First Amended Joint Plan of Reorganization (the “Plan”), as presented by Ballantrae, its affiliates and their creditors.  On August 16, 2006, pursuant to the Plan, BTHC XV, LLC was merged into BTHC XV, Inc., a Delaware corporation.

 

Halter Financial Group, Inc. (“HFG”) participated with Ballantrae and their creditors in structuring the Plan.  As part of the Plan, HFG provided $76,500 to be used to pay professional fees associated with the Plan confirmation process.  HFG was granted an option to be repaid through the issuance of equity securities in 17 of the reorganized Ballantrae entities, including the Company.  HFG exercised the option, and as provided in the Plan, 70% of our outstanding common stock, or 350,000 shares, were issued to HFG, in satisfaction of HFG’s administrative claims.  The remaining 30% of our outstanding common stock, or 150,000 shares, were issued to 497 holders of administrative and tax claims and unsecured debt.  The 500,000 shares (“Plan Shares”) were issued pursuant to Section 1145 of the Bankruptcy Code. Effective August 16, 2006, HFG transferred its 350,000 Plan Shares to Halter Financial Investments L.P. (“HFI”), a Texas limited partnership controlled by Timothy P. Halter.  Mr. Halter also served as our sole officer from our formation on August 16, 2006 until the closing of the share exchange transaction with Long Fortune, and also as our sole director from our formation until the regulatory effective date.

 

We remained subject to the jurisdiction of the bankruptcy court until we filed a certificate of compliance with the bankruptcy court showing that, as a result of the closing of the transactions contemplated by the share exchange agreement, we had met the requirements of the Plan were met. Upon receipt of this certificate, we were granted a discharge from bankruptcy and our confirmation order is now effective.

 

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Acquisition of Long Fortune

 

Prior to October 2010, we were a shell company and had no operations. On October 18, 2010, we completed an acquisition through a share exchange with Long Fortune, whereby we issued the sole shareholder of Long Fortune, 17,185,177 shares of our common stock, par value $0.001, representing 95% of our issued and outstanding shares of common stock at the time, for 100% of the issued and outstanding capital stock of Long Fortune. Long Fortune thereby became our wholly-owned subsidiary and its subsidiaries, including its operating subsidiary, Longkong, became our indirect subsidiaries. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations,” the Company recorded this merger using the recapitalization method which consolidated the Company, Long Fortune and Long Fortune’s subsidiaries and treated the Company as a shell at the time of the merger. According to ASC 805-10-55-13, “the acquirer usually is the combining entity whose relative size (measured in, for example, assets, revenues, or earnings), is significantly larger than that of the other.” Since the Company was a shell at the time of the merger while Long Fortune had operations and was significantly larger than the Company was, under ASC 805, Long Fortune was considered the acquirer.

 

Upon the closing of the acquisition on October 18, 2010, Mr. Timothy P. Halter, our sole officer and director at the time, resigned from his position as sole officer, effective immediately, and from his position as a director of the Company, effective upon the tenth day following the mailing of an information statement on Schedule 14f-1 to the Company’s stockholders advising them of the change of control. On the same day, our Board of Directors appointed Mr. Zhang Shanjiu to serve as our new Chief Executive Officer, effective immediately. Also upon the closing of the acquisition, our Board of Directors appointed Mr. Zhang to serve as a director, effective immediately.

 

Long Fortune is a Cayman Islands company that was established on December 9, 2009.  Since inception, Long Fortune has not conducted any substantive operations of its own, except to serve as a holding company that owns 100% of the equity of Rich Valley. Rich Valley is a British Virgin Islands company that was established by Long Fortune on December 9, 2009 as a wholly-owned subsidiary.  Since its inception, Rich Valley has not conducted any substantive operations of its own, except to serve as a holding company that owns 100% of the equity of LFHK. LFHK is a Hong Kong company that was established by Rich Valley on December 22, 2009 as a wholly owned subsidiary.  Since inception, LFHK has not conducted any substantive operations of its own, except to serve as a holding company that owns 100% of the equity of Longkong.  Longkong is a limited liability company that was organized in the PRC on March 15, 2004 as Shandong Underground Grand Canyon Travel Development Co., Ltd. (“Shandong Grand Canyon”) with an initial registered capital of approximately $2.4 million. Longkong was 79.2% owned by Zhang Shanjiu, a PRC national, and 20.8% owned by Zhang Qian, his daughter.  On August 25, 2004, the registered capital of Shandong Grand Canyon was increased to approximately $3.8 million by the addition of 13 new shareholder.  After the increase in registered capital, Zhang, his daughter, Chen Rongxia, his wife, and Yu Xinbo owned 56.60%, 15.72%, 6.92% and 5.66% of the company, respectively, while the remaining eleven shareholders owned 15.10% of Shandong Grand Canyon.

 

Until September 2004, Shandong Grand Canyon invested in the Yishui Underground Fluorescent Lake Travel Development Co., Ltd., Shandong Shanjun Bronze Craft Co., Ltd. and Yishui Yimong Mountain Travel Service Co., Ltd., thereby becoming the parent entity of each company and forming a PRC enterprise group of tourism companies under the name Shandong Long Kong Tourism Group Co. Ltd., or Long Kong Tourism Group. In September 2007, the shareholders of Long Kong Tourism Group entered into several equity transfer transactions that resulted in the reduction of shareholders from fifteen to six.  After the equity transfers, Zhang, his daughter, his wife and Yu owned 21.26%, 59.87%, 1.13% and 2.52% of Long Kong Tourism Group, respectively, while the remaining two shareholders owned 15.22% of the company. On October 10, 2007, the shareholders agreed to a decrease in Long Kong Tourism Group’s registered capital to approximately $3.2 million and the cash out of Zhang’s daughter and Li Hongwei (one of the 2 minority shareholders).  After the decrease in registered capital, Zhang Shanjiu, Chen Rongxia and Yu Xinbo owned 84.5%, 4.5% and 10% of Long Kong Tourism Group, respectively, while the remaining shareholder owned 1% of Long Kong Tourism Group.

 

On December 17, 2007, the holders of Long Kong Tourism Group decided to sell the company’s majority interest in its three subsidiaries to the minority shareholders in each company in order to focus on its core business.  They sold its interest in Yishui Underground Fluorescent Lake Travel Development Co. Ltd to Zhang’s daughter for approximately $1.8 million, its interest in Shandong Shanjun Bronze Craft Co., Ltd. was sold to Li Hongwei for approximately $274,000, and its interest in Yishui Yimong Mountain Travel Service Co., Ltd. Zhang’s brother, Zhang Shanshuang, for approximately $27,000. Following this divestiture, the company changed its name to Longkong’s current name.  On March 10, 2008, the four remaining shareholders of Longkong transferred their shares in the company to Longong Travel Limited, or Longong, a United Kingdom company ultimately controlled by Zhang, for approximately $2.0 million. On November 12, 2008, Longong transferred all its equity interest in Longkong for a nominal amount to Long Fortune Valley Limited, a Gibraltar company owned and controlled by him and established for that purpose, and n December 29, 2009, our subsidiary, LFHK, acquired all the equity interests in Longkong from Long Fortune Valley Limited for a nominal amount.

 

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Longkong owns a less than 1% interest in Yishui Rural Credit Cooperative, or Yishui Credit, a financial institution located in Yishui County, Shandong Province.  As of December 31, 2011, Yishui Credit has extended 3 loans to us with an aggregate balance due of $.4.3 million.  The interest rates on the loans are between 10.46% and 13.88%, with a weighted average interest rate of 12.28%.  The loans are due between January 10, 2012 and August 15, 2012.

 

Corporate Structure

 

The following chart reflects our current corporate organizational structure:

 

 

Our Growth Strategy

 

We believe we have the experience and expertise to implement our growth strategy toward our goal of becoming China’s leading tourism development and management company.  Furthermore, we believe that we are well positioned to capitalize on future industry growth.  Our growth strategy is comprised of the following initiatives:

   

·Acquisition and management of additional natural, cultural and historic scenic sites and ecotourism projects in an effort to build a tourism chain operator.  We are seeking to locate one or more sites as acquisition and/or management opportunities.  No definitive agreements have been executed, nor have there been any preliminary agreements, discussions or negotiations, with respect to any of these opportunities and there can be no assurances that we will execute any such agreements or enter into discussions or negotiations with respect to any potential sites.

 

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·Enhancement of existing entertainment attractions within the “Underground Grand Canyon” and development of new attractions both in and around the “Underground Grand Canyon” cave.  We continue to further improve our existing entertainment attractions within the Underground Grand Canyon and seek to develop new attractions both in and around the Underground Grand Canyon.  We plan to develop an additional 1,800 meters (approximately 1.1 miles) of the Underground Grand Canyon to include additional entertainment attractions.  In late January 2011, we completed the development of the “Treasure Hunting Cave” entertainment attraction, which consists of eight entertainment attractions suitable for teenagers and young adults encompassing more than 3,000 square meters (approximately 32,300 square feet), including a man-made rock hill for climbing, a maze and amusement park type rides.  The total cost to develop the Treasure Hunting Cave was approximately $3.1 million and it took approximately seven to eight months to complete.  The Treasure Hunting Cave entertainment attraction first opened to visitors in early February 2011.  We believe these new projects will increase the attraction points to the Underground Grand Canyon and ultimately the number of visitors we host, but there can be no assurance that we will be successful in completing these new projects or that, if completed, the new projects will lead to an increase in the number of visitors.

 

·Expansion of services and products offered to our visitors.  To enhance our visitors’ experience, we recently completed the development of catering facilities, which include restaurant facilities for our visitors, as well as the services to host and cater large-scale events, and gift shop facilities.  Our goal is to provide a menu suitable to the largest percentage of our visitors at an affordable price.  Although we did not receive any fees for use of our these facilities in 2011, our catering and restaurant facilities can be outsourced to third party food vendors who would pay us a nominal fee to use our facilities. In addition, our gift shops contain goods with special features connecting our visitors to the unique scenic images they enjoy while visiting the Underground Grand Canyon.  The total cost to develop the catering and gift shop facilities was approximately $1.2 million and it took approximately two years to complete.  Although we developed these facilities to enhance our visitors’ experience, there can be no assurance that we will be successful in doing so.

 

·Promotion of our scenery and brand by effective advertisements.  We will continue to build close relationships with domestic PRC travel agencies, self-driver clubs and Internet travel websites.  In addition, an effective advertising campaign that promotes our scenery, brand and enterprise culture to new and larger population and income bases, will continue to be an important initiative in our growth strategy.

Our Services

 

As a cave tourism development and management company, we are in the services business and do not produce or manufacture any products.  We currently operate the “Underground Grand Canyon” tourist destination located in Linyi City, Yishui County, Shandong Province.  The Underground Grand Canyon was discovered in 1974 by a local farmer drilling a well.  However, for technical and financial reasons, it was not developed until 2000.  In 2003, the Underground Grand Canyon tourist destination officially opened to visitors.  In 2004, we entered into a development and management agreement with the Yaodianzi Town Government, Linyi City, Yishui County, Shandong Province to operate and manage the Underground Grand Canyon tourist destination from 2004 through 2062. The Underground Grand Canyon has been awarded “AAAA Level Scenic Spot” and “National Geological Park” designations by the National Tourism Administration of the PRC and the Ministry of Land and Resources of the PRC, respectively.

 

 

The Underground Grand Canyon tourist destination is one of the largest karst caves in China and is currently the longest karst cave in northern China at 6,100 meters (approximately 3.75 miles). Karst is a landscape or terrain that results from the chemical corrosion of carbonate rocks that are soluble in water. Carbonate rocks were made through sedimentation between 230 million and 66 million years ago. Because of the calcium carbonate (CaCO3), which is soluble in water, carbonate rocks dissolve in water and consequently let it through. Permeability is considerable because of chemically induced corrosion causing cracks, which enable the water to run through the rock. The dissolving and corrosion process takes many years. The temperature inside the cave stays between 17 and 18 degrees Celsius (62.6 to 64.4 degrees Fahrenheit) year round. The cave is a typical karst topography, the shape of which is gradually formed from large karst fissures occurring 65 million years ago. It is located in the middle of the famous regional geological faults, the Tanlu Faults.

  

The cave contains more than 100 landscapes, such as an underground river, stalactite springs, stalactite palaces, stalactite waterfalls and stalactite canyons.  In addition to the natural scenery, we have developed an additional 3,100 meters (approximately 2 miles) of the cave into the “Underground Water Drifting” attraction, the “Electric Slide Car” attraction, the “Battery Vehicle” attraction, and the “Strop Ropeway” attraction.

 

 

Underground Water Drifting. The “Underground Water Drifting” attraction was placed into operation in April 2003 and is the only underground river drifting site in China. Presently, the drift channel is 1,000 meters long (approximately 0.6 miles). Already the longest underground cave drift in China according to Great World DSJJNS, plans are drawn to expand to 2,500 meters (approximately 1.5 miles) in the second phase of development. Visitors take a special rubber boat down the river, enjoying extraordinary views of the valley scenery around both sides and the top of the cave. This attraction has been recognized as a “China Top Ten Rafting Resort” and was named as the major tourist adventure project by the Shandong Provincial Government.

 

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Electric Slide Car. The “Electric Slide Car” attraction was placed into operation in February 2006 and is one of the longest natural tourism entertainment projects in China.  The slide car has a total length of 2,800 meters (approximately 1.7 miles) (with a drop of more than 50 meters (approximately 165 feet)), which starts at the peak of the mountain and slides along the mountain directly to the access point of the cave in the mountainside.  Our visitors are free to control the speed of the car with a designed speed of up to 15 kilometers per hour (approximately 9 mph).

  

 

  

Strop Ropeway. The “Strop Ropeway” attraction was placed into operation in October 2007 and has a length of 400 meters (approximately 0.25 miles).  We built up the ropeway by utilizing the natural topography from the top of the mountain to the entrance of the cave.  To ride on the ropeway, visitors are required to wear a harness that attaches to the ropeway and leaves them suspended from the ropeway using the natural topography of the mountain and gravity to slide down the ropeway similar to a zip line.

  

Battery Vehicle. The “Battery Vehicle” attraction was placed into operation in February 2005.  Visitors can take the battery vehicle for nearly 2 kilometers (approximately 1.2 miles).

 

As a cave tourism development and management company, our daily focus is to provide the best experience possible to our visitors.  In addition to the acquisition and development of additional tourist destinations, we aim to improve and add to the existing entertainment attractions at the Underground Grand Canyon, with our primary focus being the enhancement of our quality of service.   We employ knowledgeable and friendly guides at the Underground Grand Canyon, to provide information and any additional services to visitors.  Our guides are required to follow our strict service guidelines as well as follow established procedures to ensure the safety and enhance the experience of our visitors.  We expect to have the same level of service at any additional sites that we acquire, develop and/or manage.

  

Our Competitive Strengths

 

Our Underground Grand Canyon has been designated an “AAAA Level Scenic Spot” and a “National Geological Park.”  Scenic site designations are awarded by the National Tourism Administration of the PRC to tourist destinations based on a combination of factors, including service quality, quality of the tourist destination environment and experience, scenic quality and tourist opinion of the destination.  The highest designation awarded is “AAAAA” level scenic site.  In awarding the level of designations, the National Tourism Administration performs an annual on-site independent analysis of the tourist destination.  Upon the completion of this annual analysis, the National Tourism Administration will either indicate that the level previously awarded remains the same or that the level will be increased or decreased according to whether the tourist destination meets the criteria for the various levels.

 

We contribute our success to date and potential for future growth to a combination of strengths, including the following:

 

·Our Underground Grand Canyon has achieved national and international merit.  The Underground Grand Canyon has attained national and international recognized merits of scenic achievement, such as “AAAA Level Scenic Spot,” “National Geological Park” and “Shandong’s Top Ten Beautiful Scenery.”  The achievement of these high degrees of recognition is a testament to our management expertise and our corporate culture.

 

·We benefit from favorable geography.  Our business is located in Linyi City, Yishui County, which is the southern gateway to Shandong Province and is situated between Beijing and Shanghai, which are two main population centers in China.  In addition, Linyi City is accessible by air, ground and water, with easy access to airports, major highways and waterways.

 

·We are located in a main population center in China as well as in a tourism corridor..  Linyi City has approximately 10 million residents, and along with Qingdao, Weihai and Yantai are located along the famed Golden Coast region of Shandong Province.  In addition, Linyi City is the second largest wholesale market in China, which attracts a high volume of high income people.  Within a radius of 200 kilometers (approximately 125 miles) of Linyi City, there are approximately 170 million residents.  Further, within a radius of 500 kilometers (approximately 300 miles) of Linyi City, the number of residents is approximately 400 million. This region, by itself, is a destination for tourists in China.  Further, Shandong Province is recognized as the hometown of Confucian and Mencius culture and culture of Taishan Mount.  As a result, many tourists from outside of Shandong Province use it as a gathering place.

 

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·We benefit from favorable government support.  We benefit from favorable government support, such as the supply of tourism land.  In addition, recent local government initiatives include the improvement of our local tourism environment, including the establishment of a tourism bureau to differentiate the tourism industry from the services industry and mandated regulatory compliance by companies in the tourism industry.

 

·We have a proven business model.  Our Underground Grand Canyon, judged by the merits achieved, increased number of visitors, visitor satisfaction rates, and significant profit margin, evidences our proven business model.  As we seek to acquire new tourist destinations and continue to improve our existing entertainment attractions in and around the Underground Grand Canyon, we will continue to build up and strengthen our business model.  We believe our business model is portable to the tourism industry beyond the cave tourism business and seek to operate a national tourism development and management company with a brand recognized for its quality.

 

·We have a high visitor satisfaction rate.  Being in the tourism business, we aim to provide the highest quality experience for our visitors.  From the design of our entertainment attractions to the delivery and presentation of our product on a daily basis, we emphasize visitor satisfaction.  In recent years, we have initiated an overall quality policy of “Emphasis on tourist travel experience to meet maximum demand” and launched an annual mission for our staff, the most recent of which was “Staff are also attractions,” which was designed to improve our service quality, including an emphasis on the appearance, knowledge and professionalism of our staff.  Each of our visitors is asked to complete a visitor satisfaction survey, which includes a variety of questions regarding the visitors’ experience at the Underground Grand Canyon, including, among others, the amount spent by the visitor, whether the visitor is satisfied with the facilities and entertainment attractions, whether the visitor is satisfied with the service provided by our staff and overall visitor satisfaction.  More than 99% of our visitors indicate that they are “very satisfied” with their experience at the Underground Grand Canyon.  We attribute that rate to our emphasis on visitor service quality.

 

Sales and Marketing

 

We have established multi-layered and comprehensive marketing channels including travel agencies, self-driver clubs, Internet travel websites, hotel promotion and advertisements.

 

·We enter into cooperation agreements with numerous domestic travel agencies throughout China, through which we anticipate a regular flow of visitors.  As of December 31, 2011, we have entered into cooperation agreements with approximately 1540 travel agencies.  Terms of these agreements generally include a discounted admission ticket price to the Underground Grand Canyon, as well as discounted prices to our entertainment attractions in and around the Underground Grand Canyon so long as the travel agency brings a certain number of visitors, generally 10 or more, at any one time.  In addition to the discounted prices offered to the visitors from a travel agency, commencing on January 1, 2010, we also began to offer a return to the travel agency based on the number of total tourists the travel agency brings to the Underground Grand Canyon over the term of the agreement (generally one year).  The return is accumulated over the term of the agreement and paid to the travel agencies at the end of the term.  Of the 1540 travel agencies with which we enter into cooperation agreements, we expect that only approximately 19 travel agencies will bring enough tourists to the Underground Grand Canyon to qualify for a return under the cooperation agreement.  The travel agents do not guarantee to us a certain number of visitors per year nor a certain amount of revenue to be generated from their visitors.  Similarly, we do not guarantee a certain amount of return to the travel agencies.  The cooperation agreements typically have a one-year term and are renewed annually.  A cooperation agreement with a one-year term will run from January 1 through December 31 regardless of when in the year the agreement is entered into or renewed.  As of December 31, 2011, approximately $109,508 in return was due the approximately 12 travel agencies expected to qualify for a return under the cooperation agreements.  Payments to travel agencies were made in January and February 2012 for 2011.  We believe we can increase the number of visitors by both entering into cooperation agreements with additional travel agencies, as well as through repeat business based on the visitor experience.  We plan to continue to expand the number of travel agencies we cooperate with, particularly in the major cities of developed provinces in China, such as Zhejiang, Jiangsu and Shanghai, which we believe have a higher percentage of higher net income residents.  Relationships with travel agencies are managed by our sales team and we plan to rely on our sales team to continue to cultivate our existing relationships and to foster new relationships with travel agencies.

 

·We promote the Underground Grand Canyon and the entertainment attractions, as well as our brand, through traditional media outlets, including television, radio and print media.  Print media, such as newspapers, magazines, express advertisements, outdoor advertisements, scenery signposts and advertisements on buses, continues to be the main focus of our advertising campaign.  We have implemented an effective plan for our advertising campaign, while maintaining a relatively high degree of exposure and increasing consumer awareness within our target markets, such as Shandong Province.

 

·We have built close relationships with many domestic automobile clubs that organize tourism activities to the Underground Grand Canyon.  Automobile club members tend to use their own vehicles to get to the attraction and tend to arrange travel and tourism activities as a group.

 

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·We have built close relationships with several Internet travel websites, which advertise and promote the Underground Grand Canyon and our brand.

 

·We cooperate with the Shandong provincial government and tourism association to sponsor public activities in order to promote the Underground Grand Canyon and our brand, including sponsorship of the China (Yishui) Festival of Underground Drifting.

 

·The Underground Grand Canyon also is promoted through the attainment of national and international recognized merits of scenic achievement, such as “AAAA Level Scenic Spot,” “National Geological Park” and “Shandong’s Top Ten Beautiful Scenery.”  By achieving these high degrees of recognition, the Underground Grand Canyon becomes visible on a grander scale, which we believe draws more visitors to our tourist destination.

  

Pricing

 

We charge an initial admission ticket price to our Underground Grand Canyon and an additional fee for each of our entertainment attractions in and around the Underground Grand Canyon.  We do not offer weekly, monthly or other annual or season type passes to the Underground Grand Canyon, but discounted admission ticket prices and fees are available to visitors from travel agencies with which we enter into cooperation agreements.

 

According to PRC regulations, price increases must be approved by the local Administration for Commodity Prices.  In order to obtain this approval, we must prepare and submit a written application for review.  The Administration’s review of the application generally takes one to two months, including a public hearing to discuss the suggested price increase, after which a formal approval or denial document will be provided.  Any price increase that is approved, which can occur once every 3 years, is limited to a specified increase based on the unadjusted admission ticket price.  For example, if the unadjusted admission ticket price is between RMB 50 (approximately $7.30) and RMB 100 (approximately $14.60) the increase may not exceed 30% of the former price.  Further, the adjusted admission ticket price may not take effect until after 6 months’ notice has been provided to the public.  The last time a price increase was approved was in April 2008.  See “Government Regulation” below for additional information regarding the regulations and procedures governing price increases.

 

Admission ticket prices and entertainment attraction fees are set, pending Administration approval, based on the following factors:

   

·Prices charged by tourism companies offering similar attractions;

 

·China’s economic growth and the growth of per capita disposable income;

 

·China’s consumer price index (“CPI”) level and growth rate, which indicates overall price movement for commodities;

 

·Enhancements to our existing entertainment attractions and the development of new attractions in and around the Underground Grand Canyon;

 

·Our overall service quality and visitor satisfaction rates; and

 

·Feedback received from our visitors regarding whether it is suitable to increase our prices.

   

Research and Development

 

As a cave tourism development and management company, we do not have significant research and development activities.  In the past two fiscal years, in addition to focusing on development of additional entertainment attractions for our Underground Grand Canyon and services to enhance our visitors’ experience, such as the catering and restaurant facilities and souvenir shops, our research and development activities have focused on analyzing market trends and developing methods of increasing our number of visitors.

 

Intellectual Property

 

We have either obtained or are in the process of applying for exclusive use of certain trademarks in China indicated in the table below from the Trademark Office of the PRC State Administration for Industry and Commerce (SAIC) :

 

Trademark   Owner   Expiration Date
沂蒙地下奇観” (English translation – Yimeng Underground Wonder)  

Shandong Underground Canyon Tourist Development Co., Ltd

 

  7/13/2017
红嫂” (English translation – Hong Sao)   Shandong Underground Canyon Tourist Development Co., Ltd   Trademark Application
地下大峡谷” (English translation – Underground Ground Canyon)   Shandong Shanjun Bronze Craft Co., Ltd.*   2/27/2014
“LONGON”   Shandong Long gang Tourist Management Co., Ltd   2/27/2021
地下河漂流” (English translation – Underground Water Drifting)       Pending
溶洞第一漂” (English translation – No 1 Cave Drifting)       Pending
龙岗” (English translation – Long Gang)       Pending
“LONGONTOUR”       Pending

  

 

* Pursuant to a Trademark Agreement, dated September 28, 2010, between Longkong and Shandong Shanjun Bronze Craft Co., Ltd. (“Bronze Craft”), Longkong is authorized to use this trademark at no cost. The siblings of our Chairman and CEO, Mr. Zhang Shanjiu, hold a 21.3% equity interest in Bronze Craft.  

 

We regard our intellectual property, particularly our trademarks, to be of considerable value and importance to our business and our success.  For trademarks in Chinese, the English translation of the Chinese language trademark is not included in the official certificate filed with, and approved by, the Trademark Office of the State Administration for Industry and Commerce of the PRC.  The English translation of the Chinese trademarks may not be used as trademarks in China unless the English translation is registered as a trademark in China.  Further, unless our trademarks are determined by the Trademark Office of the State Administration of Industry and Commerce of the PRC to be “well-known trademarks,” it may be possible for a third party to trademark the English translation of our Chinese language trademarks and we may not have any injunctive relief against such use.  We currently do not own any patents.

 

We rely on a combination of trademark, 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 or similar proprietary rights.  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 brand, and profitably exploit our services.

 

Our Employees

 

As of March 31, 2012, we employed a total of 156 full-time employees in the following functions:

 

 

Department  

Number of

Employees

Senior Management   4
Human Resources   3
Administration   49
Public Relations   5
Finance and Investment   21
Purchasing   5
Infrastructure Construction    17
Sales & Marketing    15
Operations Management    37
TOTAL   156

 

From time to time, we hire part-time, seasonal staff who work for short periods of time, such as one week.  At any given point in time, the number of seasonal staff varies, however, as of December 31, 2011, we had 287 part-time, seasonal staff.

 

Our employees have established a labor union in accordance with PRC law, but are not covered by a collective bargaining agreement.  We have not experienced any work stoppages.

 

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In compliance with the Employment Contract Law of the PRC, Longkong has written contracts with all of its employees for a term of 3 to 5 years.  The employment agreements include the positions, responsibilities and salaries of the respective employees, as well as the circumstances under which employment may be terminated in compliance with the Employment Contract Law of the PRC.  Longkong considers its relationship with its employees to be good. Under the Employment Contract Law of the PRC, upon the termination of an employment agreement by Longkong without cause or expiration of an employment agreement without an offer to renew, Longkong is obligated to pay the applicable employee compensation equal to one month’s salary for each year the employee has been employed by Longkong, up to a maximum of twelve years (“Compensation”), except where (1) the employee has committed a crime or the employee’s actions or inactions have resulted in a material adverse effect on Longkong; (2) the employee receives pension payments; (3) the employee dies or is declared dead or missing; or (4) Longkong offers to renew the employment agreement with equal or higher consideration and the employee does not accept it.  In these cases, Longkong is not required to pay any Compensation and may terminate an employment agreement without prior notice.  If the employee’s salary is greater than three times the average salary for the last year in Linyi City, the Compensation will be calculated by multiplying such average salary by three, and then multiplying the product obtained by the number of years the employee was employed by Longkong, up to a maximum of twelve years. Longkong may terminate an employment agreement upon 30 days prior written notice or without prior notice upon an extra payment of one month salary and with Compensation payable to such employee, for any of the following reasons: (1) sickness or non-working injury and after medical treatment an employee is not able to do the original work or other assignments designated by Longkong; (2) an employee is unable to perform his job after training or position adjustment and is still unable to perform his job at a suitable level; and (3) the employment cannot be performed due to a fundamental change of circumstances and the employer and employee fail to reach an agreement to change the original employment contract.  If Longkong terminates an employment agreement prior to its expiration for any reason other than as described above, the employee has the right to either enforce the agreement or to terminate the agreement and require Longkong to pay an amount equal to twice the Compensation. An employee may at any time terminate the employee’s employment agreement upon 30 days’ prior written notice.

 

We are also required under PRC law to make contributions to employee benefit plans of 1.2% of our after-tax profit.  In addition, we are required by PRC law to cover employees in China with various types of social insurance.  We believe that we are in material compliance with the relevant PRC employment laws.

 

Property and Land Use Rights

 

Under Chinese law, land is owned by the state or rural collective economic organizations.  The state issues to tenants the rights to use property.  Use rights can be revoked and the tenants forced to vacate at any time when redevelopment of the land is in the public interest.  The public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent.  According to PRC laws and regulations, any individual or organization which needs to use land for non-agricultural construction is required to apply for state owned land, except (i) to build a villager’s house; (ii) to build public facilities, or (iii) for a village/county-owned enterprise’s operation.  However, if a village/county-owned enterprise is merged, acquired or reorganized by other enterprises, the collective land previously possessed by such village/county-owned enterprise can be used by the acquirer for non-agricultural construction.

 

In 2004, we entered into a development and management agreement with the Yaodianzi Town Government, Linyi City, Yishui County, Shandong Province to operate and manage the Underground Grand Canyon tourist destination from 2004 through 2062.  In practice, this agreement operates similar to a business license under which we are authorized to operate our business at the Underground Grand Canyon.  This agreement does not, however, grant to us the right to the use of any land on or around the Underground Grand Canyon to operate our business.  Instead, we rely on a combination of land use rights received directly from the government, as well as leasing agreements entered into with several village committees.

 

Between 2004 and 2008, we entered into 19 leasing or mountain leasing agreements with several village committees to lease land on and around the Underground Grand Canyon.  The leases expire between December 30, 2027 and January 1, 2066.  The leases generally required a one time payment upon execution of the leasing agreement, but several leases require annual payments.  The dollar amount of such payments, whether one time or annual, vary among the leasing agreements.  If the villagers or village committees breach the leasing agreements and do not allow us to use the land, we may not be able to force such villagers or village committees to carry out the leasing agreements, but can only stop paying compensation as provided in the leasing agreements.

 

In 2009, we received one land use rights certificate to use 2,545 square meters of land for tourism purposes in Yishui County, Shandong Province.  The land use rights expire on July 6, 2047.  In 2010, we received one land use rights certificate and property certificate to use 30,372 square meters of land and 835 square meters of building in Junan County, Shandong Province.  As of December 31, 2011, we have paid a total of $0.3 million for our land use rights and property rights in Junan County.

 

We operate our business in approximately 1,700 square meters (approximately 18,300 square feet) of office space located on the premises of the Underground Grand Canyon.  We do not own or lease any other properties or space for the operation of our business or otherwise.

 

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In order to carry out our expansion and acquisition strategy, we will either need to acquire additional land use rights certificates or may need to enter into agreements with village committees and villagers to establish or acquire additional tourist destinations.  There can be no assurances that we will be able to obtain the land use rights or execute leasing agreements with villagers or village committees in order to carry out our expansion and acquisition strategy.

  

Government Regulation

 

The principal regulation governing our business in the PRC is the Foreign Investment Industrial Guidance Catalogue, which became effective as of December 1, 2007.  Under this regulation, the tourism industry belongs to the category of permitted foreign investment industries.  As a result, there is no restriction on foreign investment in this line of business in China, except for the regular business license and other permits that must be possessed by every company conducting the same line of business in China.  Our industry in China is also subject to a number of other laws and regulations, including laws and regulations relating specifically to tourism operations.  In addition, certain laws and regulations of the PRC also affect the rights of our stockholders to receive dividends and other distributions from us.

 

Tourism Specific Regulations

 

The PRC Pricing Law, effective on May 1, 1998, provides that the government shall issue government-set or guided prices for the following merchandise and services if necessary: (i) merchandise that is considered to be of great importance to development of the national economy and people’s livelihood; (ii) merchandise for which there is shortage; (iii) merchandise that is monopolistic in nature; (iv) certain public utilities that are deemed to be important; and (v) certain public welfare services.  In fixing government-set and guided prices, the relevant government price department convenes public hearings to solicit views from consumers, business operators and others to explore the necessity for a government-set and guided price and the feasibility of the suggested price.  The scope and level of the government-set and guided prices are adjusted in light of the operation of the national economy and the recommendations of consumers and business operators, as well as the feedback received at the public hearings.  After the government-set and guided prices are determined, the relevant government price departments announce the prices publicly.

  

On September 19, 2006, the State Council promulgated Regulations on Scenic Spots to strengthen the administration of scenic spots, such as the Underground Grand Canyon tourist destination, and to effectively protect and explore the resources thereof.  The price of the admission ticket to scenic spots must comply with relevant laws and regulations regarding pricing.  In accordance with the regulations, violations of the regulations may be subject to various administrative or monetary penalties, and potentially criminal liability.

 

On January 29, 2007, the National Development and Reform Commission (“NDRC”) issued a Notice on Further Improving Administration of Scenic Spots’ Admission Price (No. FaGaiJiaGe (2007)227).  In accordance with the notice, prices may not be increased more than once every three years.  The range of the price adjustment depends upon the unadjusted admission ticket price.  For example, if the unadjusted admission ticket price is below RMB 50 (approximately $7.30), an increase may not exceed 35% of the former price; if the unadjusted admission ticket price is between RMB 50 (approximately $7.30) and RMB 100 (approximately $14.60), an increase may not exceed 30% of the former price; if the unadjusted admission ticket price is between RMB 100 (approximately $14.60) and RMB 200 (approximately $29.20), an increase may not exceed 25% of the former price; and if the unadjusted admission ticket price is over RMB 200 (approximately $29.20), an increase may not exceed 15% of the former price.

 

On April 9, 2008, the NDRC, the Ministry of Finance, the State Land and Resource Ministry and the State Administration of Tourism jointly promulgated a Notice on Regulating the Ticket Price of Scenic Spots (No. FaGaiJiaGe (2008)905).  The notice provides that the admission ticket price of a scenic spot that is based upon a state natural resource or historic resources must apply government-set or guided prices.  As discussed above, the use of or adjustments to government-set or guided prices require a public hearing.  Further, the admission ticket price of well-known scenic spots must be administrated by a provincial-level price department.

 

On December 1, 2009, the State Council promulgated Opinions on Accelerating the Development of Tourism Industry (No. 41 (2009) of the State Council).  In accordance with the opinions, the government is to actively develop the domestic tourism industry and push forward the development of the tourism industry with local characteristics at all places.  In response to expected growth in the tourism industry, the opinions encourage investment (including through acquisitions and reorganizations) in the tourism industry and actively encourage qualified tourism enterprises to obtain capital financing.  In addition, the opinions require that if there is any adjustment to the price of a scenic spot’s admission ticket, 6 months’ advance notice must be provided to the public.

 

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Shandong Provincial Rules on Tourism, which was passed on May 27, 2005 by the 10th Standing Committee of Shandong Provincial People’s Congress and revised on July 30, 2010 by the 11th Standing Committee of Shandong Provincial People’s Congress, require tourism operators to publish their services or products and prices thereof and establish safety responsibility systems with respect to such services or products.  Tourism operators are required to report any accidents involving their visitors to the local tourism administration.  The rules encompass the PRC government level rules discussed above, that is: (i) that the admission ticket price of a scenic spot that is based upon a state natural resource or historic resources must be determined or guided by the government; (ii) adjustments to the admission ticket price must comply with relevant procedures, such as the public hearing process; (iii) an adjustment to the admission ticket price requires 6 months’ advance notice to the public; (iv) adjustments to the admission ticket price may not exceed the limit allowed by law; and (v) an adjustment to the admission ticket price may not occur more than once every 3 years.  Any violation of the rules by the tourism operators may be subject to various actions of the local governmental agencies, including warning and confiscation of income received by violating the rules and payment of fines of one to five times the income received by violating the rules; if there is no such income, there will be imposed a fine of up to approximately $750.

 

On August 31, 2009, the Ministry of Culture and the State Administration of Tourism issued Guidelines on Promoting the Development of the Combination of Culture and Tourism, encouraging companies to take active measures to strengthen the combination of culture and tourism and build a series of brands and cultural tours.

 

Regulations of Special Equipment

 

Regulations on Safety Supervision over Special Equipment, which was promulgated by the State Council on March 11, 2003, provide that before special equipment, such as a passenger cableway or a large entertainment facility, is placed into operation or within 30 days after it has been placed into operation, the operator of the special equipment must file for registration with the department of safety supervision of the municipality directly under the central government or the city where such special equipment is to be used.  Upon registration, the special equipment undergoes periodic safety inspections, which in practice last for one year.  One month prior to the expiration of the safety inspection, the operator of the equipment must file for another inspection with the special equipment inspection and testing institution.  Special equipment that either fails an inspection or is not inspected prior to the expiration date of the safety inspection may no longer be used.  In addition to the registration and inspections, the operator of the special equipment and its relevant management personnel must obtain a certificate for operating or managing the special equipment.  If an operator uses special equipment in violation of these regulations, it could be subject to a monetary fine of up to approximately $3,000 or an administrative penalty by the department of safety supervision, including an order to cease operations of the business.

 

Environmental Regulation

 

The most significant environmental regulations applicable to us include the Environmental Protection Law of the PRC, the Law of the PRC on the Prevention and Control of Water Pollution, Implementation Rules of the Law of the PRC on the Prevention and Control of Water Pollution, the Law of the PRC on the Prevention and Control of Air Pollution, the Law of the PRC on the Prevention and Control of Solid Waste Pollution, and the Law of the PRC on the Prevention and Control of Noise Pollution.  Since 2004, we have incurred approximately $0.8 million in compliance costs in connection with these environmental regulations.  No significant environmental compliance costs are anticipated during the next 12 months.  Compliance activities include primarily the planting of trees on the mountain that houses the Underground Grand Canyon, protecting the plants and soil on the mountain that houses the Underground Grand Canyon, managing polluted waters and waste management.

 

Regulations on Intellectual Property Rights

 

China has adopted comprehensive legislation governing intellectual property rights, including trademarks, patents and copyrights.  The National People’s Congress adopted the Patent Law of the PRC in 1984, and amended it in 1992, 2000 and 2008, respectively.  The Copyright Law of the PRC was adopted in 1990 and amended in 2001 and 2010, respectively.  The Trademark Law of the PRC was adopted in 1982 and amended in 1993 and 2001, respectively.  The Implementation Rules for the Law of the PRC on Trademarks were adopted in 2002.  Infringement of a patent, copyright or trademark’s exclusive right may be subject to administrative penalties, and civil or criminal liabilities, as applicable.

  

Regulations on Labor

 

China adopted the Labor Contract Law and its implementation rules effective on January 1, 2008 and September 18, 2008, respectively.  The labor contract law and its implementation rules impose more stringent requirements on employers with regard to, among other things, minimum wages, severance payments and non-fixed term employment contracts, time limits for probation periods as well as the duration of and the times that an employee can be placed on a fixed term employment contract.  Due to the lack of clarity with respect to the implementation and potential penalties and fines of the labor contract law and its implementation rules, it is uncertain how they will impact our current employment policies and practices.  Our employment policies and practices may violate the labor contract law or its implementation rules and we may be subject to related penalties, fines or legal fees.

 

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Regulations on Foreign Exchange Control and Administration

 

Foreign exchange in China is primarily regulated by the Foreign Currency Administration Regulations (1996), as amended on January 14, 1997 and August 5, 2008, respectively, and the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996) (the “Administration Rules”). Under the Foreign Currency Administration Regulations, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments and trade and service-related foreign exchange transactions.  Conversion of Renminbi into foreign currency for capital account items, such as direct investment, loans, investment in securities and repatriation of investment, however, remains subject to the approval of the State Administration for Foreign Exchange (“SAFE”) or its local counterpart as required by law. Under the Administration Rules, foreign-invested enterprises may buy, sell and remit foreign currencies at banks authorized to conduct foreign exchange transactions for settlement of current account transactions after providing valid commercial documents and, in the case of capital account item transactions, only after obtaining approval from or registration with the SAFE and, as the case may be, other relevant PRC government authorities as required by law.  Capital investments directed outside of China by foreign-invested enterprises are also subject to restrictions, which include approvals by the PRC Ministry of Commerce, the SAFE and the PRC National Reform and Development Commission.

 

Regulations on Foreign Exchange Registration of Offshore Investment by PRC Residents

 

On October 21, 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted through Offshore Special Purpose Companies (“Circular 75”), which became effective as of November 1, 2005.  According to Circular 75:

   

·prior to establishing or assuming control of an offshore company (an “offshore SPV”) for the purposes of financing the offshore SPV with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch;

 

·an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in such offshore SPV upon either (1) the injection of equity interests or assets of an onshore enterprise to such offshore SPV or (2) the completion of any overseas fund raising by such offshore SPV; and

 

·an amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change in the capital of such offshore SPV not related to inbound investment, such as (1) an increase or decrease in its capital, (2) a transfer or swap of shares, (3) a merger or divestiture, (4) a long-term equity or debt investment or (5) the creation of any security interests over the relevant assets located in China.

 

Moreover, Circular 75 applies retroactively.  As a result, PRC residents who have established or acquired control of offshore SPVs that have made onshore investments in the PRC before the issuance of Circular 75 were required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006.  The SAFE subsequently issued relevant guidance, including Notice 106, which became public in June 2007, to its local branches with respect to the operational process for the SAFE registration under Circular 75, which standardized more specific and stringent supervision on the registration relating to Circular 75 and imposed obligations on onshore subsidiaries of offshore SPVs to coordinate with and supervise the beneficial owners of offshore SPVs who are PRC residents to complete the SAFE registration process.  Under the relevant SAFE rules, failure to comply with the registration procedures set forth in Circular 75 may impose restrictions on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents and the onshore company to penalties under PRC foreign exchange administration regulations.

 

We cannot provide any assurances that all of our beneficial owners complied with or continue to comply with requirements required by Circular 75 or other related rules promulgated and amended from time to time.  The failure or inability of our beneficial owners to make any required registrations or comply with other requirements under Circular 75 and other related rules may subject such beneficial owners or our PRC subsidiary to fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans to our PRC subsidiary, limit our PRC subsidiary’s ability to pay dividends or otherwise distribute profits to us, or otherwise adversely affect us.

 

Regulations on Employee Share Options

 

On December 25, 2006, the People’s Bank of China promulgated the Administrative Measures for the Administration of Individual Foreign Exchange.  On January 5, 2007, the SAFE issued the Implementation Regulations of the Administrative Measures for Individual Foreign Exchange (the “Individual Foreign Exchange Rule”), which, among other things, specifies approval requirements for a PRC citizen’s participation in the employee stock holding plans or stock option plans of an overseas publicly-listed company.  On March 28, 2007, the SAFE issued the Processing Guidance on Foreign Exchange Administration of Domestic Individuals Participating in the Employee Stock Holding Plan or Stock Option Plan of Overseas Listed Companies (the “Stock Option Rule”).  According to the Stock Option Rule, if a PRC domestic individual participates in any employee stock holding plan or stock option plan of an overseas listed company, a qualified PRC domestic agent or the PRC subsidiaries of such overseas listed company shall, among other things, file, on behalf of such individual, an application with the SAFE to obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with the stock purchase or stock option exercise as PRC domestic individuals may not directly use overseas funds to purchase stock or exercise stock options.  Such PRC individual’s foreign exchange income received from the sale of stock and dividends distributed by the overseas listed company and any other income shall be fully remitted into a collective foreign currency account in the PRC opened and managed by the PRC subsidiaries of the overseas listed company or the PRC agent before distribution to such individuals.  If and when we adopt a stock incentive plan for our directors, officers and employees, any PRC citizen employees wishing to participate in such plan will be subject to the Stock Option Rule.  If we or our PRC optionees fail to comply with the Individual Foreign Exchange Rule and the Stock Option Rule, we and/or our PRC optionees may be subject to fines and other legal sanctions.

 

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In addition, the State Administration for Taxation has issued certain circulars concerning employee stock options.  Under these circulars, our employees working in the PRC who exercise stock options will be subject to PRC individual income tax.  Our PRC subsidiary has an obligation to file documents related to employee stock options with relevant tax authorities and to withhold individual income taxes with respect to those employees who exercise their stock options.  If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities.

 

Regulation on Dividend Distributions

 

Our PRC subsidiary, Longkong, is a wholly foreign-owned enterprise under the PRC law.  The principal regulations governing the distribution of dividends paid by wholly foreign-owned enterprises include:

 

·The Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000;

 

·The Wholly Foreign-Owned Enterprise Law Implementation Regulations (1990), as amended in 2001; and

 

·The Enterprise Income Tax Law (2007) and its Implementation Regulations (2007).

 

Under these regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations.  In addition, a wholly foreign-owned enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative total reserve funds reach 50% of its registered capital.  The board of directors of a wholly foreign-owned enterprise has the discretion to allocate a portion of its after-tax profits to its employee welfare and bonus funds.  These reserve funds, however, may not be distributed as cash dividends.  Longkong has complied with the 10% set-aside requirement to date, and its cumulative total reserve funds do not exceed 50% of its registered capital.

 

On March 16, 2007, the National People’s Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the State Council issued the Implementation Regulations on the Enterprise Income Tax Law, both of which became effective on January 1, 2008.  Under this new law and its implementation regulations, dividends payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a lower withholding tax rate.

 

M&A Rules and Regulation on Overseas Listings

 

On August 8, 2006, six PRC regulatory authorities, including the Ministry of Commerce (the “MOFCOM”), the State-owned Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the Chinese Securities Regulatory Commission (the “CSRC”), and the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “New M&A Rules”), which became effective on September 8, 2006 and was amended on June 22, 2009.  This regulation, among other things, purports to require that the acquisition of PRC domestic enterprises by affiliated foreign enterprises established or controlled by PRC domestic companies, enterprises or natural persons must be approved by MOFCOM.  In addition, an offshore special purpose vehicle controlled directly or indirectly by PRC companies or individuals and formed for purposes of overseas listing of interests in PRC companies held by such PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.  On September 21, 2006, the CSRC published procedures regarding the approval of overseas listings by such offshore special purpose vehicles.

 

The application of the New M&A Rules is currently unclear.  However, our PRC counsel, HighKing & Partners, provided an opinion that based on its understanding of the current PRC laws, rules and regulations and the New M&A Rules, a prior approval from MOFCOM or the CSRC is not required under the New M&A Rules for the acquisition of Longkong indirectly through BTHC and the listing and trading of our shares on a U.S. stock exchange or quotation medium because BTHC is not a special purpose vehicle as defined thereunder given that none of our beneficial owners was a PRC citizen when Longkong was acquired indirectly by BTHC.  Nonetheless, uncertainties still exist as to how the New M&A Rules will be interpreted and implemented and our present understanding summarized above is subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the New M&A Rules.  If the MOFCOM, the CSRC or another PRC regulatory agency subsequently determines that prior MOFCOM or CSRC approval was required, we may face regulatory actions or other sanctions from the MOFCOM, the CSRC or other PRC regulatory agencies.

 

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Competition

 

Our Underground Grand Canyon tourist destination competes with other national geological parks and with other types of recreational and tourist activities. Our principal competitors include Huanglong Carst Cave in Zhangjiajie City, Shihua Cave in Beijing City and Yiyuan Carst Cave. Many of our competitors may have longer operating histories, greater financial resources, more or more desirable tourist destinations under management and more or more desirable entertainment attractions than we do.  Further, due to the relative unavailability of third party or industry data regarding our competitive position in the industry, we are uncertain how our company’s characteristics compare directly to those of our competitors.  Our business is and will continue to be subject to factors that generally affect the recreation and leisure industries, such as general economic conditions, including relative fuel prices, and changes in consumer preferences and spending habits.  See “Risk Factors.”  The principal factors affecting tourist destination competition include location, price, the uniqueness and perceived quality of the entertainment attractions within a particular tourist destination, the availability and quality of other facilities at the entertainment attraction, such as restaurants or other eateries, and the atmosphere and cleanliness of the tourist destination.

 

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 Relating to Our Business

 

In order to increase our revenues, we believe we must further expand our business operations.  We cannot assure you that our internal growth strategy will be successful which may result in a negative impact on our growth, financial condition, results of operations and cash flow.

 

In order to maximize the potential growth in our current and potential markets, we believe that we must further expand the scope of our services in the tourism industry.  One of our strategies is to grow internally through increasing the customers we target for advertising campaigns and locations where we promote tourism by penetrating existing markets in the PRC and entering new geographic markets in the PRC as well as other parts of Asia and globally.  However, many obstacles to this expansion exist, including, but not limited to, increased competition from similar businesses, international trade and tariff barriers, unexpected costs, costs associated with marketing efforts abroad and maintaining attractive foreign exchange ratios.  We cannot, therefore, assure you that we will be able to successfully overcome such obstacles and establish our services in any additional markets.  Our inability to implement this internal growth strategy successfully may have a negative impact on our growth, future financial condition, results of operations or cash flows.

 

In addition to our internal growth strategy, we may grow through strategic acquisitions.  We cannot assure you that our acquisition growth strategy will be successful resulting in our failure to meet growth and revenue expectations.

 

We also intend to pursue opportunities to acquire businesses in the PRC that are complementary or related in services and business structure to us.  However, we may not be able to locate suitable acquisition candidates at prices that we consider appropriate or to finance acquisitions on terms that are satisfactory to us.  If we do identify an appropriate acquisition candidate, we may not be able to negotiate successfully the terms of an acquisition, or, if the acquisition occurs, integrate the acquired business into our existing business.  Acquisitions of businesses or other material operations may require debt financing or equity financing, resulting in leverage or dilution of ownership.  However, there are no assurances that future funding will be available on favorable terms or at all.  If additional funding is not obtained, we may need to reduce, defer or cancel development programs, planned initiatives or overhead expenditures, to the extent necessary.  The failure to fund our capital requirements would have a material adverse effect on our business, financial condition and results of operations.  Moreover, the identification and completion of these acquisitions may require us to expend significant management time and effort and other resources.  Integration of acquired business operations could also disrupt our business by diverting management away from day-to-day operations.  The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures.

 

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We also may not be able to maintain key employees or customers of an acquired business or realize cost efficiencies or synergies or other benefits we anticipated when selecting our acquisition candidates.  In addition, we may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings.  At times, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition.  In addition to the above, acquisitions in the PRC, including state owned businesses, will be required to comply with laws of the PRC, to the extent applicable.  There can be no assurance that any given proposed acquisition will be able to comply with PRC requirements, rules and/or regulations, or that we will successfully obtain governmental approvals which are necessary to consummate such acquisitions, to the extent required.  If our acquisition strategy is unsuccessful, we will not grow our operations and revenues at the rate that we anticipate.

 

The slow recovery of the global economic crisis could affect the overall availability and cost of external financing for our operations.

 

The slow recovery of the global financial markets from the global economic crisis and turmoil may adversely impact our business, the financial condition of our customers and the business of potential investors from whom we expect to generate our potential sources of capital financing.  Presently it is unclear to what extent the economic stimulus measures and other actions taken or contemplated by the Chinese governments and other governments throughout the world will mitigate the effects of the negative impact caused by the economic turmoil on our industry and other industries that affect our business.  Although these conditions have not presently impaired our ability to access credit markets and finance our operations, the impact of the current crisis on our ability to obtain capital financing in the future, and the cost and terms of same, is unclear.

 

In the event of rapid growth of our business operations, we may experience a significant strain on our management and operational infrastructure.  Our failure to manage growth will cause a disruption of our operations resulting in the failure to generate revenue.

 

If we expand our business through successful implementation of our internal growth strategy and/or acquisition strategy, our management and our operational, accounting, and information infrastructure may experience a significant strain caused by such expansion.  In order to deal with the strain our anticipated business expansion could put on our resources, we will need to continue to improve our financial controls, operating procedures, and management information systems.  We will also need to effectively train, motivate, and manage our employees.  Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.

 

We compete for discretionary spending with many other entertainment alternatives and are subject to factors that generally affect the recreation and leisure industry, including the current economic downturn and the perceived suppression on individual rights in China.

 

Our Underground Grand Canyon tourist destination competes for discretionary spending with other national geological parks and with other types of recreational and tourist activities.  Our business is also subject to factors that generally affect the recreation and leisure industries and are not within our control.  Such factors include, but are not limited to, general economic conditions, including relative fuel prices, and changes in consumer tastes and spending habits.  The current negative economic conditions have affected our guests’ levels of discretionary spending.  Consumers with a lack of disposable income may decide not to vacation or travel to our tourism destination, which would negatively impact our business.  Both attendance and guest per capita spending at our tourist destination are key drivers of our revenues and profitability, and reductions in either can directly and negatively affect revenues and profitability.  Additionally, the perceived suppression of individual rights by the Chinese government may deter tourists from visiting China, which may cause a decline in visitors to our tourist attraction.

 

Bad or extreme weather conditions can adversely impact attendance at our tourist destination, which in turn would reduce our revenues.

 

Attendance at our tourist destination can be adversely affected by continuous bad or extreme weather and by forecasts of bad or mixed weather conditions.  Bad weather and forecasts of bad or mixed weather conditions can reduce the number of people who come to our tourist destination, which negatively affects our revenues.  We currently operate only one tourist destination which increases the effect that adverse weather can have on our financial results.

 

The operating season of our tourist destination is of limited duration, which can magnify the impact of adverse conditions or events occurring within that operating season.

 

Cave tourism is a seasonal business with peak months occurring during periods of warmer weather, when students are on summer vacation and during national holidays in China.  As a result, when conditions or events described as risk factors occur during the peak season, particularly during April, May, July, August and October, there is only a limited period of time during which the impact of those conditions or events can be mitigated.  Accordingly, such conditions or events may have a disproportionately adverse effect upon our revenues.

 

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If our land use rights are revoked, we would have no operational capabilities.

 

Under Chinese law, land is owned by the state or rural collective economic organizations.  The state issues to tenants the rights to use property.  Use rights can be revoked and the tenants forced to vacate at any time when redevelopment of the land is in the public interest.  The public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent.  We rely on these land use rights as the cornerstone of our operations, and the loss of such rights would have a material adverse effect on our company.  According to PRC laws and regulations, any individual or organization which needs to use land for non-agricultural construction is required to apply for state owned land, except (i) to build a villager’s house; (ii) to build public facilities, or (iii) for a village/county-owned enterprise’s operation.  However, if a village/county-owned enterprise is merged, acquired or reorganized by other enterprises, the collective land previously possessed by such village/county-owned enterprise can be used by the acquirer for non-agricultural construction.  We have entered into leasing agreements with several village committees that permit us to use such village’s land on and around the Underground Grand Canyon.   If the villagers or village committees breach the leasing agreements and do not allow us to use the land, we may not be able to force such villagers or village committees to carry out the leasing agreements, but can only stop paying compensation as provided in the leasing agreements.  Further, we may need to enter into agreements with village committees and villagers to establish tourist destinations on land presently inhabited by such villages and villagers.  If we are unable to obtain the land use rights for additional tourist destination sites on which we plan to build and develop new sites or if we are unable to obtain the land use rights for tourist destinations we plan to acquire, we will not be able to expand our operations and our business, financial condition and results of operations may suffer.

 

Unanticipated construction delays in completing capital improvement projects at our tourist destination can adversely affect our revenues.

 

A principal competitive factor for a tourist destination is the uniqueness and perceived quality of its attractions in a particular market area.  Accordingly, the regular addition of new attractions is important, and a key element of our revenue growth is strategic capital spending on new attractions.  We are currently in the process of developing new attractions within the Underground Grand Canyon and may undertake additional expansion projects in the future.  We anticipate that we will be required to seek additional financing in the future to fund current and future construction and expansion projects and may not be able to secure such financing on favorable terms, if at all.  If additional financing is not obtained, we may need to  

 

limit, defer, or cancel our expansion plans.  In addition, projects may not be able to be completed on time as a result of natural disasters, weather conditions, delays in obtaining or failure to obtain regulatory approvals, delays in obtaining key materials, labor difficulties, difficulties with partners or potential partners, a decline in the credit strength of counterparties or vendors, or other factors beyond our control.  Even if construction and expansion projects are completed, the total costs of the projects may be higher than anticipated and the performance of our business following the completion of any projects may not meet expectations.  Further, we may not be able to timely and effectively integrate the projects into our operations and such integration may result in unforeseen operating difficulties or unanticipated costs.  Any of these or other factors could adversely affect our ability to realize the anticipated benefits from construction and expansion projects.

 

There is a risk of accidents occurring at tourist destinations, which may reduce attendance and negatively impact our revenues.

 

Our tourist destination features four attractions, boating at the Underground Water Drifting attraction, a slide car at the Electric Slide Car attraction, a battery vehicle at the Battery Vehicle attraction and a zip line at the Strop Ropeway attraction.  Although we are safety conscious, there are inherent risks involved with these attractions, and an accident or a serious injury at any of our attractions may reduce attendance and result in decreased revenue.  In addition, accidents or injuries at tourist destinations operated by our competitors may influence the general attitudes of our visitors and adversely affect attendance at our tourist destination.

 

We may also be sued for substantial damages in the event of an actual or alleged accident.  Although we carry liability insurance to cover this risk, there can be no assurance that our coverage will be adequate to cover liabilities, or that we will be able to afford or obtain adequate coverage should a catastrophic incident occur.

 

We maintain insurance of the type and in amounts that we believe are commercially reasonable and that are available to businesses in our industry.  We maintain a personal accident and injury insurance policy that covers all of our visitors who purchase an admission ticket for the Underground Grand Canyon.  The insurance policy covers our visitors for accidental injury and disability for up to approximately $4,500 and for medical care for up to approximately $1,500.  The insurance policy expires on December 14, 2011We cannot predict the level of the premiums that we may be required to pay for subsequent insurance coverage, the level of any self-insurance retention applicable thereto, the level of aggregate coverage available or the availability of coverage for specific risks.

 

We do not carry any business interruption insurance or third-party liability insurance.

 

Operation of our business and facilities involves many risks, including natural disasters, labor disturbances, business interruptions, property damage, personal injury and death.  We do not carry any business interruption insurance or third-party liability insurance for our business to cover claims in respect of property or environmental damage or relating to our operations.  Therefore, we may not have insurance coverage 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.

 

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Various factors, such as local conditions, events, natural disasters, disturbances and terrorist activities, can adversely impact tourist destination attendance.

 

Lower attendance at our tourist destination may be caused by various local conditions, events, weather or natural disasters.  These factors may result in a decrease in attendance at our tourist destination.  Our ownership of only one tourist destination increases the effects of these types of occurrences on our financial results.

 

Terrorist attacks and threats, escalation of military activity in response to such attacks or acts of war may negatively affect our business, financial condition and results of operations.  Future terrorist attacks, rumors or threats of war, actual conflicts involving China or its allies may materially adversely affect our operations.  Any, or a combination, of these occurrences could have a material adverse effect on our business, financial condition and results of operations.

 

We depend on our key management personnel and the loss of their services could adversely affect our business.

 

We place substantial reliance upon the efforts and abilities of our executive officers, Mr. Zhang Shanjiu, our Chairman and Chief Executive Officer, Mr. Yu Xinbo, our Chief Financial Officer, Mr. Kong Xianghai, our Chief Administrative Officer, and Mr. Chen Rongguang, our Chief Operating Officer.  If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to easily replace them, and we may incur additional expenses to recruit and train new personnel.  The loss of the services of any of our executive officers could have a material adverse effect on our business, operations, revenues or prospects.  We may not be able to attract or retain qualified management on acceptable terms in the future due to the intense competition for qualified personnel in our industry and as a result, our business could be adversely affected.  There can be no assurances that we will be able to attract or retain the key personnel needed to achieve our business objectives.  If we were to lose the services of our key management personnel, our ability to operate would be impaired.  We do not maintain key man life insurance on the lives of these individuals.

 

We may be required to repay obligations under guarantees we have executed in favor of other local entities.

 

From time to time, we provide guarantees of loans and other obligations for other local enterprises. As of December 31, 2011, we had five guarantees of approximately $9.3 million in total principal outstanding with terms up to three years. Our potential liability under such guarantees could include interest, default interest and the obligation to pay costs of collection in addition to principal amounts to which the guarantees relate. Because banks typically require security for loans, such as guarantees, mortgages or pledges, and these enterprises, including our company, have mortgaged and pledged all of our available assets, in order to obtain additional bank loans, the local enterprises often agree to provide guarantees for one another. All the guarantees provided by us are joint liability guarantees, which provide that when the debtor defaults, the bank can request us to pay the total debt outstanding without first enforcing its rights against the debtor. Although we may look to the debtor for repayment of any such amounts paid to the bank on behalf of the debtor, our evaluation of the potential liability may prove to be inaccurate and liabilities may exceed estimates. Changes in the economic environment could leave us exposed for obligations that we have guaranteed which could have a materially negative impact on our ongoing business.

 

Our current debt and other obligations, including amounts we may be liable for under guarantees, may harm our financial condition and results of operations.

 

Our short- and long-term debt as of December 31, 2011 was $10.95 million. Our level of indebtedness could result in the following:

 

¨it could affect our ability to satisfy our outstanding obligations;
   
¨a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;
   
¨it may impair our ability to obtain additional financing in the future;
   
¨it may limit our flexibility in planning for, or reacting to, changes in our business and industry and the markets in which we compete;
   
¨it may make us more vulnerable to downturns in our business, our industry or the economy in general; and
   
¨it may place us at a competitive disadvantage relative to our competitors with less indebtedness.

 

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As of December 31, 2011, we had five guarantees of approximately $9.3 million in total principal outstanding with terms up to three years. Our operations may not generate sufficient cash to enable us to service all of our obligations, including any obligations for which we may become liable pursuant to guarantees we have executed in favor of third parties. In such case, we may be required to raise additional funds through the sale of equity or debt securities or obtain additional credit facilities. The sale of 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. In fact, recently, the PRC government has been reported to be tightening its monetary policies, including increasing interest rates on bank loans and tightening the money supply to control growth in lending. If we fail to make a payment on certain of our obligations, this could cause us to be in default on such obligations and the security interests and mortgages on our assets to secure such obligations may be enforced to repay the underlying outstanding indebtedness, which would adversely affect the operations.

 

Our Chairman, President and Chief Executive Officer owns or controls companies that compete with our company.

 

Zhang Shanjiu, our Chairman, President and Chief Executive Officer, owns or controls companies that compete with our company. As the beneficial owner of 91.8% of our common stock and as our sole director, Zhang Shanjiu controls our board of directors and has the ability to exercise significant influence over matters submitted to a vote of our stockholders. In addition, our company is not presently subject to rules of any national securities exchange that require that we have a majority of independent directors or that we have a standing Audit Committee with responsibility over, among other things, the approval of related party transactions. As of December 31, 2011, we have $18.5 million in related party loans made to companies owned or controlled by Zhang Shanjiu. If Zhang Shanjiu does not cause the related party companies to repay the loans we have made to such companies, we may be unable to repay our short-term indebtedness (which was $10.95 million from unrelated third parties as of December 31, 2011), which would have a material adverse effect on our financial condition. Further, if Zhang Shanjiu decides to focus more on the companies he owns or controls that compete directly or indirectly with our company and less on our company and we continue to make related party loans to these companies, our ability to expand our business and to continue to operate our business will be significantly reduced, which will have a material adverse effect on our financial condition and results of operations. Notwithstanding that many of our related party loans are subject to an agreement, we may not be able to compel repayment of these loans so long as Zhang Shanjiu controls both our company and the companies to which we have made loans.

 

In addition, our revenue sharing arrangement with Fluorescent Lake for bundled passes sold at the Underground Grand Canyon and at the Fluorescent Lake was not negotiated on an arm’s length basis. As a result, if a bundled pass is sold by the Underground Grand Canyon, approximately 88% of the cost of the pass is allocated as revenue to Longkong with the remaining 12% being allocated to Fluorescent Lake and recorded as a liability to a related party on our balance sheet. If a bundled pass is sold at the Fluorescent Lake, approximately 40% of the cost of the pass is allocated as revenue to Longkong and recorded as a receivable from a related party on our balance sheet with the remaining 60% being recorded as revenue by Fluorescent Lake. As of December 31, 2011, there is a net payable to Fluorescent Lake in the amount of approximately $82,239. If Zhang Shanjiu decides to modify the terms of the revenue sharing arrangement to be more beneficial to Fluorescent Lake, our cash flow from operations, financial condition and results of operations may be materially adversely affected.

 

Our Chairman, President and Chief Executive Officer owns or controls many businesses in addition to our company, which may lead to conflicts of interest.

 

Zhang Shanjiu, our Chairman, President and Chief Executive Officer, owns or controls many businesses in addition to our company, some of which are in the travel industry, including the companies we have made loans to (Fluorescent Lake and Yinhe Travel) and other companies that operate hotels and travel agencies. Zhang Shanjiu’s employment agreement requires him to devote substantially all of his business time, attention and energy to performing his duties and responsibilities to us and also contains a non-compete provision prohibiting him from, among other things, owning, controlling or managing any business that competes directly or indirectly with us in any market in which we are operating or considering operating. Both of these provisions, however, are subject either to waiver by the board of directors or are enforceable by the board of directors. Zhang Shanjiu, as our sole director, has waived the non-compete provisions of his employment agreement with respect to the businesses he owned or controlled, directly or indirectly, as of the closing date of the Share Exchange. Because Zhang Shanjiu presently is our sole director and also presently owns or controls companies that compete with us, he may allocate his time to other businesses and activities, thereby causing possible conflicts of interest in his determination as to how much time to devote to the affairs of our company. If other business affairs require Zhang Shanjiu to devote more substantial amounts of time to such affairs, it could limit his ability to devote substantial time to our affairs and could have a negative impact on our ongoing business.

 

Because certain of Zhang Shanjiu’s other businesses compete or may compete with our business, certain opportunities, including acquisition opportunities, that may ultimately complement our business may also complement the business operated by Zhang Shanjiu’s other business interests, which may lead to those opportunities being presented to those businesses instead of our company. Moreover, in light of Zhang Shanjiu’s other business affiliations, he may have fiduciary obligations to present potential investment and business opportunities to those entities in addition to presenting them to our company, which could cause additional conflicts of interest. Although we are seeking to locate one or more sites as acquisition and/or management opportunities, no definitive agreements have been executed, nor have there been any preliminary agreements, discussions or negotiations, with respect to any of these opportunities and there can be no assurances that we will execute any such agreements or enter into discussions or negotiations with respect to any potential sites.

 

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As of December 31, 2011, we have made approximately $18.5 million in loans to entities controlled by Zhang Shanjiu. Although most of the loans are payable on demand, Zhang Shanjiu’s influence over our company and the companies to which we have made loans may cause delays in repayment or modifications to repayment terms that might not otherwise occur in an arms’ length transaction. To the extent Zhang Shanjiu determines that he values the business operated by these other companies more than our company, he may cause us to make additional loans to these businesses, which could have a material adverse effect on our financial condition, particularly if we are unable to repay our short-term indebtedness as a result of Zhang Shanjiu not compelling repayment of the loans we have made to these other companies. Presently, we plan to reduce the level of short-term loans we make to related parties, both in an effort to reduce our overall leverage and to focus on our core business, although there can be no assurance that circumstances will not arise that will lead us to loan funds to related parties in the future. Furthermore, the process of reducing the amount of short-term loans may take a year or more to put in place.

 

There can be no assurances that any conflicts of interest will be resolved in our favor. Any such conflicts that are not resolved in our favor may have a material adverse effect on our business, financial condition and results of operations. In any event, it cannot be predicted with any degree of certainty as to whether or not Zhang Shanjiu will have a conflict of interest with respect to a particular transaction as such determination would be dependent upon the specific facts and circumstances surrounding such transaction at the time.

 

We are not currently subject to any law, rule or regulation requiring that all or any portion of our board of directors include “independent” directors. We intend to appoint such persons and form such committees as are required to meet the corporate governance requirements imposed by a U.S. national securities exchange. Therefore, we intend that a majority of our directors eventually will be independent directors and at least one of our new independent directors will qualify as an “audit committee financial expert.” At that time, we intend to have our Audit Committee or a majority of our independent directors approve all related party transactions, which, we believe, will minimize the number and potential impact of any future conflicts of interest.

 

Our ability to increase our revenues organically may be limited to increasing the number of visitors to our tourist destination because the PRC government has the authority to approve price increases.

 

To organically increase our revenues, we would need either to increase the number of visitors to our tourist destination or maintain the number of visitors year over year and increase the admission ticket price or the fees for our entertainment attractions.  However, price and fee increases are subject to a hearing before, and approval by, the local Development and Reform Committee.  If we are unable to increase the number of visitors to our tourist destination and are unable to compensate for such loss in revenues by increases in our admission ticket price or fees for our entertainment attractions, we may be unable to increase our revenues, which may have a material adverse effect on our financial condition and results of operations.

 

Our business will suffer if it cannot obtain, maintain or renew necessary safety inspections on the special equipment we operate.

 

All operators of special equipment, such as a passenger cableway or a large entertainment facility, are required to file for registration with the department of safety supervision of the municipality directly under the central government or the city where such special equipment is to be used.  Upon registration, the special equipment undergoes periodic safety inspections, which in practice last for one year.  One month prior to the expiration of the safety inspection, the operator of the equipment must file for another inspection with the special equipment inspection and testing institution.  Special equipment that either fails an inspection or is not inspected prior to the expiration date of the safety inspection may no longer be used.  If an operator uses special equipment in violation of these regulations, it could be subject to a monetary fine of up to approximately $3,000 or an administrative penalty by the department of safety supervision, including an order to cease operations of the business.  The standards and rules applicable to safety inspections of special equipment may from time to time be subject to change.  We intend to apply for renewal of such inspections when required by applicable laws and believe we can obtain these safety inspections in the ordinary course of our business, however, there can be no assurances that we can obtain renewal safety inspections in a timely manner.  Any changes in compliance standards, or any new laws or regulations that may prohibit or render it more restrictive for us to conduct our business or increase our compliance costs may adversely affect our operations or profitability.  Any failure by us to obtain renewal safety inspections may have a material adverse effect on the operation of our business.  In addition, we may not be able to carry on business without such renewal safety inspections.

  

If we fail to maintain an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected and investor confidence and the market price of our common stock may be adversely impacted.

 

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 10-K.  In addition, the independent registered public accounting firm auditing a company’s financial statements must also, in many cases, attest to and report on the effectiveness of the company’s internal controls over financial reporting.  Under current SEC rules, we will be required to include a management report beginning with our annual report for the fiscal year ending December 31, 2011.

 

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The PRC historically has been deficient in western style management and financial reporting concepts and practices, as well as in modern banking and other control systems.  We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC and we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards.  It may be difficult to design and implement effective internal control over financial reporting for combined operations following the Share Exchange and perhaps other businesses which may be acquired in the future.  In addition, differences in existing controls of acquired businesses may result in weaknesses that require remediation when internal controls over financial reporting are combined.

 

If we fail to maintain an effective system of internal control, we may be unable to produce reliable financial reports or prevent fraud.  In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner, we will be unable to assert that our internal control over financial reporting is effective.  In such event, investors and others may lose confidence in our ability to operate in compliance with existing internal control rules and regulations, which could in any such instance result in a decline in our share price.

 

Our employees who have primary responsibilities of preparing and supervising the preparation of our financial statements under U.S. GAAP do not have knowledge of and professional experience with U.S. GAAP and SEC rules and regulations, thus we may be unable to prepare financial statements in accordance with or convert our books and records to U.S. GAAP and it may take us longer and cost more to prepare our financial statements than other companies with accounting staff who have such knowledge and professional experience.

 

Our Chief Financial Officer, financial manager and financial controller are involved in preparing our financial statements for SEC reporting.  Our Chief Financial Officer is responsible for supervising the preparation of our financial statements.  Our financial manager is responsible for our funds and capital.  Our financial controller is responsible for our taxes, cash flow and other accounts of the company.  Each is a Certified Public Accountant in China who does not have prior experience in the preparation of financial statements that comply with the SEC’s accounting rules as well as U.S. GAAP, but each studies U.S. GAAP and receives updates regarding changes to or developments in U.S. GAAP by our independent certified public accountants on a regular basis and otherwise.  In addition, each regularly attends accounting and auditing seminars on topics such as the differences among U.S. GAAP and China Accounting Standards.  Nonetheless, none of our Chief Financial Officer, financial manager or financial controller has any formal training in U.S. GAAP or possesses professional designations in U.S. GAAP.  This lack of formal training, designations and prior experience may inhibit our ability to prepare financial statements in accordance with or convert our books and records to U.S. GAAP or may result in an increase in audit workload and audit fees, which would increase our expenses and reduce our profitability.  Also, it may take us longer to prepare our financial statements, which may cause delays in the timely filing of our periodic reports with the SEC.  These possible delays and costs stem from the fact that we are required to convert our books and records, which are maintained in accordance with China Accounting Standards, to U.S. GAAP.  Such lack of formal training, designations and prior experience also creates a risk that our internal control over financial reporting may not be effective in the future.

 

Past company activities prior to the Share Exchange may lead to future liability for the company.

 

Prior to the closing of the Share Exchange on October 18, 2010, we were engaged in a business that is unrelated to our current operations.  Although our principal shareholder prior to the Share Exchange has provided certain indemnification against losses, subject to certain limitations, arising out of or based on breaches of representations and warranties made in connection with the Share Exchange Agreement, any liabilities relating to such prior business against which we are not completely indemnified may have a material adverse effect on our financial condition and results of operations.

  

We may have difficulty raising necessary capital to fund operations as a result of market price volatility for our shares of common stock.

 

In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies.  For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control.  If our business development plans are successful, we may require equity financing to continue to develop and exploit existing and new opportunities related to our industry and to expand into new markets.  The exploitation of our services may, therefore, be dependent upon our ability to obtain financing through debt and equity or other means, and we cannot be certain that we will be able to obtain such financing.

 

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Risks Relating to Doing Business in China

 

Substantially all of our operating assets are located in China and substantially all of our revenue will be derived from our operations in China so our business, results of operations and prospects are subject to the economic, political and legal policies, developments and conditions in China.

 

Substantially all of our assets are located in the PRC and all of our revenue is generated in domestic PRC markets.  We anticipate that revenue generated in China will continue to represent all of our revenue in the foreseeable future.  Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in the PRC.  The PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, the level of development, the growth rate, the control of foreign exchange and the allocation of resources.

  

Our operations and results could be materially affected by a number of factors, including, but not limited to:

  

·changes in policies by the Chinese government resulting in changes in laws or regulations or the interpretation of laws or regulations;

 

·changes in taxation;

 

·changes in employment restrictions; and
   
·currency revaluation.

 

While the PRC’s economy has experienced significant growth in the past twenty years, such growth has been uneven, both geographically and among various sectors of the economy.  The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources.  Some of these measures benefit the overall economy of the PRC, but they may also have a negative effect on us.  For example, our operating results and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations.  We cannot assure you that such growth will continue.

 

The economy of the PRC has also been changing from a planned economy to a more market-oriented economy.  In recent years, the PRC government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets, and the establishment of corporate governance in business enterprises; however, a substantial portion of productive assets in the PRC are still owned by the government.  In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies.  It also exercises significant control over the PRC’s economic growth through the allocation of resources, the control of payment of foreign currency-denominated obligations, the setting of monetary policy and the provision of preferential treatment to particular industries or companies.  Also, since early 2004, the PRC government has implemented certain measures to control the pace of economic growth.

 

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of capital investments and expenditures in China, which in turn could have a material adverse effect on our business and prospects.

 

Our business is largely subject to the uncertain legal environment in China and your ability to sue and enforce judgments could be limited.

 

As our business is located in the PRC, we are subject to and have to operate within the framework of the PRC legal system.  Any changes in the laws or policies of the PRC or the implementation thereof, for example in areas such as foreign exchange controls, tariffs, trade barriers, taxes, and environmental protection, may have a material impact on our operations and financial performance.

 

The Chinese legal system is a civil law system based on written statutes.  Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally followed.  The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in China.  However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties.  These uncertainties could limit the legal protections available to foreign shareholders, such as the right of foreign invested enterprises to hold licenses and permits such as requisite business licenses.

 

Following the Effective Date, all of our directors and officers will reside outside of the United States.  China does not have a treaty with United States providing for the reciprocal recognition and enforcement of judgments of courts.  It may be difficult, if not impossible, to acquire jurisdiction over those persons if a lawsuit is initiated against us and/or our officers and directors by a shareholder or group of shareholders in the United States.  Furthermore, because the majority of our assets are located in the PRC, it would also be extremely difficult to access those assets to satisfy an award entered against us in a United States court.  It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the United States federal securities laws against us in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in the PRC courts.  Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the United States federal securities laws or otherwise.  Any, or all, of these factors may adversely affect the legal protections afforded to you.

 

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We may have limited legal recourse under PRC laws if disputes arise under our contracts with third parties.

 

The PRC government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade.  However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable.  The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the PRC government and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.  Any rights we may have to specific performance, or to seek an injunction under PRC laws, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring.  The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.  Although legislation in China over the past 30 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us, and foreign investors, including you.  The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on our operations.

 

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

 

The PRC only recently has permitted provincial and local economic autonomy and private economic activities.  The PRC government has exercised and continues to exercise substantial control over virtually every sector of the PRC economy through regulation and state ownership.  Our ability to operate in the PRC may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters.  We believe that our operations 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 the PRC or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.

 

Failure to comply with PRC regulations relating to offshore investments by PRC residents may subject our PRC resident shareholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiary, 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 (“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 (“SPV”); under Circular 75, a “special purpose company” refers to an offshore entity established or controlled, directly or indirectly, by PRC residents for the purpose of seeking offshore equity financing on the strength of the domestic assets or interests owned by such PRC residents in onshore companies.  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 obligations, and Notice 106 makes the offshore SPV jointly responsible for these filings.  In the case of a 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 before March 31, 2006.  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 subsidiaries 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.

 

Based on our understanding of current PRC laws and an opinion we received from our PRC counsel, HighKing & Partners, we believe our current controlling shareholders are not PRC residents and are not subject to Circular 75, and therefore are not required to register with the relevant branch of SAFE, however, we cannot provide any assurances that the relevant PRC authority will not have a different opinion.  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.

 

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In addition, PRC residents may not always be able to complete the necessary registration procedures required by Circular 75 and other regulations regarding offshore investments.  We also have little control over either our present or prospective direct or indirect shareholders or the outcome of such registration procedures.  A failure by our current or prospective PRC resident beneficial holders or future PRC resident shareholders to comply with Circular 75 and other regulations regarding offshore investments, 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.

 

Ambiguities in the New M&A Rule implemented on September 8, 2006 relating to acquisitions of assets and equity interests of Chinese companies by foreign persons may present risks in our compliance status under the regulations.

 

Effective September 8, 2006, the MOFCOM, together with several other government agencies, promulgated the New M&A Rule to regulate the merger and acquisition of PRC equity and assets by foreign investors.

 

The transactions contemplated by the Share Exchange Agreement are structured in a manner such that consummation of the transactions would not bring these transactions within the regulatory scope of the New M&A Rule.  However, due to the ambiguities in the meaning of many provisions of the New M&A Rule, until there has been clarification either by pronouncements, regulations or practices, there is some uncertainty in the scope of the regulations.  Moreover, the ambiguities may provide to the authorities wide latitude in the enforcement of the regulations and the transactions to which they may or may not apply.  Therefore, it is possible that the future issuance of new regulations and pronouncements for the purposes of clarifying the application of New M&A Rule may require us to obtain approval from the appropriate authority for the transactions contemplated by the Share Exchange Agreement and failure to obtain such approval, if required, may cause the PRC government to take actions that may have a material adverse effect on our control of and revenue from Longkong.

 

The New M&A Rule, among other things, also includes provisions that purport to require that a SPV which is formed for purposes of listing of equity interests in PRC companies through the acquisition of PRC equity with foreign equity as consideration, and which is controlled directly or indirectly by PRC companies or individuals, must obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange (excluding the over the counter market).

 

In the future, if we decide to be listed on a national or other securities exchange, and if we are defined as a SPV as provided under the New M&A Rule, the CSRC may require that we obtain its approval for a future offering on such stock exchange.  Such offering may be delayed until we obtain CSRC approval, which may take several months, if obtaining such approval is even practicable at all.  The uncertainty of obtaining CSRC approval may have a material adverse effect on our ability to obtain financing in the future.

 

We may face regulatory uncertainties that could restrict our ability to issue equity compensation to our directors and employees and other parties who are PRC citizens or residents under PRC law.

 

On April 6, 2007, the State Administration for Foreign Exchange (“SAFE”) issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company,” also known as “Circular 78”.  For any equity compensation plan which is so covered and is adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan.  In addition, Circular 78 also requires PRC citizens within three months after the issuance of Circular 78 to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s covered equity compensation plan prior to April 6, 2007.  We may adopt an equity compensation plan after the closing of the Share Exchange and may make option grants to some of our directors and senior officers, all of whom are PRC citizens.  Circular 78 may require PRC citizens who receive option grants to register with SAFE.  We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time-consuming.  If it is determined that any of our equity compensation plans fails to comply with such provisions, this may subject us and recipients of such options to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees.  In that case, our ability to compensate our employees and directors through equity compensation would be hindered and our business operations may be adversely affected.

 

The PRC economic cycle may negatively impact our operating results.

 

The rapid growth of the PRC economy before 2008 generally led to higher levels of inflation.  The PRC economy has more recently experienced a slowing of its growth rate.  A number of factors have contributed to this slow-down, including appreciation of the RMB.  In addition, the slow-down has been exacerbated by the recent global crisis in the financial services and credit markets, which has resulted in significant volatility and dislocation in the global capital markets.  It is uncertain how long the global crisis in the financial services and credit markets will continue and the significance of the adverse impact it may have on the global economy in general, or the Chinese economy in particular.  Slowing economic growth in China could result in slowing growth and demand for our products and services which could reduce our revenues.  In the event of a recovery in the PRC, renewed high growth levels may again lead to inflation.  Government attempts to control inflation may adversely affect the business climate and growth of private enterprise.  In addition, our profitability may be adversely affected if our prices rise at a rate that is insufficient to compensate for the rise in inflation.

 

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Governmental control of currency conversion may affect the value of your investment.

 

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China.  We receive all of our revenues in RMB.  Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us.  Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the PRC SAFE by complying with certain procedural requirements.  However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.

 

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

 

The value of our common stock will be indirectly affected by the foreign exchange rate between U.S. Dollars and RMB.  Because substantially all of our earnings and cash assets are denominated in RMB and our financial results are reported in U.S. Dollars, fluctuations in the exchange rate between the U.S. Dollar and the RMB will affect our balance sheet and our earnings per share in U.S. Dollars.  In addition, 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 not 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.

 

Any outbreak of the Swine Flu (H1N1), severe acute respiratory syndrome (“SARS”), the Avian Flu, or another widespread public health problem in the PRC could adversely affect our operations.

 

There have been recent outbreaks of the highly pathogenic Swine Flu, caused by the H1N1 virus, in certain regions of the world, including parts of China.  Our business is dependent upon our ability to attract a large volume of visitors to our tourism destination, and an outbreak of the Swine Flu, or a renewed outbreak of SARS, the Avian Flu, or another widespread public health problem in China, could have a negative effect on our operations.  Any such outbreak could have an impact on our operations as a result of:

 

·quarantines or closures of our tourist destination;

 

·the sickness or death of our key officers and employees, and

 

·a general slowdown in the Chinese economy.

 

Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.

 

Because our operations are located in China, information about our operations are not readily available from independent third-party sources.

 

Because we are based in China, stockholders may have greater difficulty in obtaining information about us on a timely basis than would stockholders of an entirely U.S.-based company.  Our operations will continue to be conducted in China and stockholders may have difficulty in obtaining information about us from sources other than the company itself.  Information available from newspapers, trade journals, or local, regional or national regulatory agencies will not be readily available to stockholders.  Stockholders will be dependent upon our management for reports of our progress, development, activities and operations.

 

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Because our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue our business.

 

Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit.  A significant portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit.  Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our employees and other creditors, we may be unable to continue our business.

 

Failure to comply with the U.S. Foreign Corrupt Practices Act and Chinese anti-corruption laws could subject us to penalties and other adverse consequences.

 

We are required to comply with the United States Foreign Corrupt Practices Act (“FCPA”) which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business.  In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls.  Foreign companies, including some of our competitors, are not subject to these prohibitions.  The PRC also strictly prohibits bribery of government officials.  However, corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China.  If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage.

 

While we intend to implement measures to ensure compliance with the FCPA and Chinese anti-corruption laws by all individuals involved with our company, our employees or other agents may engage in such conduct for which we might be held responsible.  If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.  In addition, our brand and reputation, our sales activities or our common stock price could be adversely affected if we become the target of any negative publicity as a result of actions taken by our employees or other agents.

 

Due to various restrictions under PRC laws on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our stockholders.

 

The Wholly-Foreign Owned Enterprise Law (1986), as amended and the Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises.  Under these regulations, wholly foreign owned enterprises, such as Longkong, may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.  Additionally, Longkong is required to set aside 10% of its after tax profits each year, if any, to fund certain reserve funds until the total amount of such reserve exceeds 50% of its registered capital.  These reserves are not distributable as loans, advances or cash dividends except in the event of liquidation and cannot be used for working capital purposes.  Furthermore, if our PRC subsidiary incurs debt on its own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments.  If we or our subsidiaries and affiliated entities are unable to receive all of the revenues from our operations due to these contractual or dividend arrangements, we may be unable to pay dividends on our common stock.

 

The implementation of the new PRC employment contract law and increases in the labor costs in China may hurt our business and profitability.

 

A new employment contract law became effective on January 1, 2008 in China.  It imposes more stringent requirements on employers in relation to entry into fixed-term employment contracts, recruitment of temporary employees and dismissal of employees.  In addition, under the newly promulgated Regulations on Paid Annual Leave for Employees, which also became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to paid vacation ranging from 5 to 15 days, depending on the length of the employee’s service.  Employees who waive such vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation day so waived.  As a result of the new law and regulations, our labor costs may increase.  There is no assurance that disputes, work stoppages or strikes will not arise in the future.  Increases in the labor costs or future disputes with our employees could damage our business, financial condition or operating results.

 

Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China.  Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.

 

China passed a new Enterprise Income Tax Law (the “EIT Law”) and its implementing rules, both of which 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.

 

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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 and affiliated entities 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 2010 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.

 

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 (the “Notice”), further interpreting the application of the New EIT Law and its implementation with respect to non-Chinese enterprises 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) 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 reside in China.  A resident enterprise would be generally subject to the uniform 25% enterprise income tax rate as to its worldwide income.  Although the Notice is directly applicable to enterprises registered in an offshore jurisdiction and controlled by Chinese domestic enterprises or groups, it is uncertain whether the PRC tax authorities will make reference to the Notice when determining the resident status of other offshore companies, such as our company.  Because substantially all of our management is currently based in China, it is likely we may be treated as a Chinese resident enterprise for enterprise income tax purposes.  The tax consequences of such treatment are currently unclear, as they will depend on how local tax authorities apply or enforce the New EIT Law or the implementation regulations.

 

If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the United States and China, and our PRC tax may not be creditable against our U.S. tax.  If we are considered a PRC “resident enterprise,” it is unclear whether the dividends we pay with respect to our shares, or the gain you may realize from the transfer of our shares, would be treated as income derived from sources within the PRC and be subject to PRC tax.  If we are required under the New EIT Law to withhold PRC income tax on our dividends payable to our foreign stockholders, or if you are required to pay PRC income tax on the transfer of your shares, the value of your investment in our shares may be materially and adversely affected.

 

Cultural, political and language differences exist between China and the United States, which could materially and adversely affect our business, operating results and financial condition.

 

There are material cultural, political and language differences between China and the United States, which make business negotiations and doing business more difficult in China than in the United States.  Furthermore, continuing trade surpluses, a result of greater Chinese exports to the U.S. than U.S. exports to China, have become a sensitive political issue in the United States, and various members of Congress have threatened trade sanctions against China should the country continue a trade surplus with the United States.  In addition, continuing strong economic growth in China with possible military buildup may result in American economic sanctions against China that could adversely affect our financial position and results of operations.  There are additional challenges caused by distance, conflicting and changing laws and regulations, foreign laws, trading and investment policies and the burdens of complying with a wide variety of laws and regulations.  These risks could in turn materially and adversely affect the Company’s business, operating results and financial condition.

 

Risks Related to Our Common Stock Generally

 

There is a substantial lack of liquidity of our common stock and volatility risks.

 

Our common stock is quoted on the OTCBB under the symbol “BTXV.”  The liquidity of our common stock may be very limited and affected by our limited trading market.  The OTCBB market is an inter-dealer market much less regulated than the major exchanges, and is subject to abuses, volatilities and shorting.  There is currently no broadly followed and established trading market for our common stock.  An established trading market may never develop or be maintained.  Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders.  Absence of an active trading market reduces the liquidity of the shares traded.

 

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The trading volume of our common stock may be limited and sporadic.  This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.  As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price.  We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.  As a result of such trading activity, the quoted price for our common stock on the OTCBB may not necessarily be a reliable indicator of our fair market value.  In addition, if our shares of common stock cease to be quoted, holders would find it more difficult to dispose of, or to obtain accurate quotation as to the market value of, our common stock and as a result, the market value of our common stock likely would decline.

 

The market price for our stock may be volatile and subject to fluctuations in response to factors, including the following:

  

·the increased concentration of the ownership of our shares by a limited number of affiliated stockholders following the Share Exchange may limit interest in our securities;

 

·variations in quarterly operating results from the expectations of securities analysts or investors;

 

·revisions in securities analysts’ estimates or reductions in security analysts’ coverage;

 

·announcements of new attractions or services by us or our competitors;

 

·reductions in the market share of our services;

 

·announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

·general technological, market or economic trends;

 

·investor perception of our industry or prospects;

 

·insider selling or buying;

 

·investors entering into short sale contracts;

 

·regulatory developments affecting our industry; and

 

·additions or departures of key personnel.

  

The market price for our common stock is particularly volatile given our status as a relatively small company with a small and thinly traded “float” that could lead to wide fluctuations in our share price.  The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future.  The volatility in our share price is attributable to a number of factors.  First, as noted above, our common stock is sporadically and/or thinly traded.  As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction.  The price for our shares could, for example, decline precipitously in the event that a large number of our common stock is sold without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price.  Secondly, we are a speculative or “risky” investment due to our lack of operating history as a U.S. public company and uncertainty of future market acceptance for our current and potential services.  As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment, be more inclined to sell their shares more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.

 

Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance.  We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time, including as to whether our common stock will sustain current market prices, or as to what effect that the sale of shares or the availability of common stock for sale at any time will have on the prevailing market price.

 

Our common stock may never be listed on a major stock exchange.

 

We anticipate seeking the listing of our common stock on a national or other securities exchange at some time in the future, assuming that we can satisfy the initial listing standards for such exchange.  We currently do not satisfy the initial listing standards and cannot ensure that we will be able to satisfy such listing standards or that our common stock will be accepted for listing on any such exchange.  Should we fail to satisfy the initial listing standards of such exchanges, or our common stock is otherwise rejected for listing, the trading price of our common stock could suffer, the trading market for our common stock may be less liquid, and our common stock price may be subject to increased volatility.

 

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A decline in the price of our common stock could affect our ability to raise working capital and adversely impact our ability to continue operations.

 

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital.  A decline in the price of our common stock could be especially detrimental to our liquidity and our operations.  Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new services and continue our current operations.  If our common stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations.  If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.

 

Concentrated ownership of our common stock creates a risk of sudden changes in our common stock price.

 

The sale by Grand Fountain or Zhang Shanjiu of a significant portion of its or his holdings could have a material adverse effect on the market price of our common stock.

 

Sales of our currently issued and outstanding stock may become freely tradable pursuant to Rule 144 and may dilute the market for your shares and have a depressive effect on the price of the shares of our common stock.

 

A substantial majority of the outstanding shares of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) (“Rule 144”).  As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws.  Rule 144 provides in essence that a non-affiliate who has held restricted securities for a period of at least six months (one year after filing Form 10 information with the SEC for shell companies such as BTHC and former shell companies) may sell their shares of common stock.  Under Rule 144, affiliates who have held restricted securities for a period of at least six months (one year after filing Form 10 information with the SEC for shell companies such as BTHC and former shell companies) may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s outstanding shares of common stock or the average weekly trading volume during the four calendar weeks prior to the sale (the four calendar week rule does not apply to companies quoted on the OTCBB).  A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any active market that may develop.

 

The securities issued in connection with the Share Exchange are restricted securities and may not be transferred in the absence of registration or the availability of a resale exemption.

 

The shares of common stock being issued in connection with the Share Exchange are being issued in reliance on an exemption from the registration requirements under Section 4(2) of the Securities Act and Regulation D promulgated thereunder or Regulation S.  Consequently, these securities will be subject to restrictions on transfer under the Securities Act and may not be transferred in the absence of registration or the availability of a resale exemption.  In particular, in the absence of registration, such securities cannot be resold to the public until certain requirements under Rule 144 promulgated under the Securities Act have been satisfied, including certain holding period requirements.  As a result, a purchaser who receives any such securities issued in connection with the Share Exchange may be unable to sell such securities at the time or at the price or upon such other terms and conditions as the purchaser desires, and the terms of such sale may be less favorable to the purchaser than might be obtainable in the absence of such limitations and restrictions.

 

If we issue additional shares or derivative securities in the future, including shares and warrants to purchase shares to Greentree Financial Group, Inc., it will result in the dilution of our existing stockholders.

 

Our Certificate of Incorporation authorizes the issuance of up to 40,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share.  Our board of directors may choose to issue some or all of such shares, or derivative securities to purchase some or all of such shares, to provide additional financing in the future.  Further, we may be required to issue shares or warrants to purchase shares of our common stock to Greentree Financial Group, Inc. (“Greentree”) pursuant to the Service Agreement, dated September 1, 2010, between Long Fortune and Greentree (“Greentree Securities”), which is described in more detail in “Legal Proceedings” below.  The Greentree Securities, if issued by us, may contain anti-dilution provisions for a period of time that could allow Greentree to maintain its ownership percentage in our company.  The issuance of any such shares, including the Greentree Securities, would result in a reduction of the book value and market price of the outstanding shares of our common stock and could adversely affect the market price of our common stock.  If we issue any such additional shares, including the Greentree Securities, such issuance will cause a reduction in the proportionate ownership and voting power of all current stockholders.

  

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We do not plan to declare or pay any dividends to our stockholders in the near future.

 

We have not declared any dividends in the past, and we do not intend to distribute dividends in the near future.  The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors and subject to PRC law, and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant.  There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.

 

The requirements of being a public company may strain our resources and distract management.

 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).  These requirements are extensive.  The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition.  The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting.

 

We may incur significant costs associated with our public company reporting requirements and costs associated with applicable corporate governance requirements.  We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly.  This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.  We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.  As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.  We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.  Even though BTHC has been a reporting company since November 14, 2007, this risk applies to us because we completed the Share Exchange on October 18, 2010, whereby a Chinese operating company became our wholly owned subsidiary.  This Chinese operating company is newly reporting and we are adjusting to the increased disclosure requirements for us to comply with corporate governance and accounting requirements.

 

If we are late in filing our quarterly or annual reports with the SEC, we may be de-listed from the OTCBB.

 

Under OTCBB rules relating to the timely filing of periodic reports with the SEC, any OTCBB issuer who fails to file a periodic report (Forms 10-Q or 10-K) by the due date of such report, three (3) times during any twenty-four (24) month period are de-listed from the OTCBB.  Therefore, if we are late in filing a periodic report three times in any twenty-four (24) month period and are de-listed from the OTCBB, our securities may become worthless and we may be forced to curtail or abandon our business plan.

 

Persons associated with securities offerings, including consultants, may be deemed to be broker dealers.

 

In the event that any of our securities are offered without engaging a registered broker-dealer, we may face claims for rescission and other remedies.  If any claims or actions were to be brought against us relating to our lack of compliance with the broker-dealer requirements, we could be subject to penalties, required to pay fines, make damages payments or settlement payments, or repurchase such securities.  In addition, any claims or actions could force us to expend significant financial resources to defend our company, could divert the attention of our management from our core business and could harm our reputation.

 

Future changes in financial accounting standards or practices may cause adverse unexpected financial reporting fluctuations and affect reported results of operations.

 

A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective.  New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future.  Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business.

 

“Penny Stock” rules may make buying or selling our common stock difficult.

 

Trading in our common stock is subject to the “penny stock” rules.  The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions.  These rules require that any broker-dealer that recommends our common stock to persons other than prior customers and accredited investors, must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction.  Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market.  In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer.  The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market price and liquidity of our common stock.

 

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We have the right to issue up to 10,000,000 shares of preferred stock, which may adversely affect the voting power of the holders of our other securities and may deter hostile takeovers or delay changes in management control.

 

We may issue up to 10,000,000 shares of preferred stock from time to time in one or more series, and with such rights, preferences and designations as our board of directors may determine from time to time.  To date, our board of directors has not authorized any class or series of preferred stock.  However, our board of directors, without further approval of our common stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights, liquidation preferences and other rights and restrictions relating to any series of our preferred stock.  Issuances of shares of preferred stock, while providing flexibility in connection with possible financings, acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of our other securities and may, under certain circumstances, have the effect of deterring hostile takeovers or delay changes in management control.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

We have no outstanding or unresolved comments from the SEC staff.

 

ITEM 2. PROPERTIES.

 

All land in China is owned by the government. Individuals and companies are permitted to acquire land use rights for specific purposes. Industrial land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations. In 2004, we entered into a development and management agreement with the Yaodianzi Town Government, Linyi City, Yishui County, Shandong Province to operate and manage the Underground Grand Canyon tourist destination from 2004 through 2062.  In practice, this agreement operates similar to a business license under which we are authorized to operate our business at the Underground Grand Canyon.  This agreement does not, however, grant to us the right to the use of any land on or around the Underground Grand Canyon to operate our business.  Instead, we rely on a combination of land use rights received directly from the government, as well as leasing agreements entered into with several village committees.

 

Between 2004 and 2008, we entered into 19 leasing or mountain leasing agreements with several village committees to lease land on and around the Underground Grand Canyon.  The leases expire between December 30, 2027 and January 1, 2066.  The leases generally required a one-time payment upon execution of the leasing agreement, but several leases require annual payments.  The dollar amount of such payments, whether one time or annual, vary among the leasing agreements.  If the villagers or village committees breach the leasing agreements and do not allow us to use the land, we may not be able to force such villagers or village committees to carry out the leasing agreements, but can only stop paying compensation as provided in the leasing agreements.

 

In 2009, we received one land use rights certificate to use 2,545 square meters of land for tourism purposes in Yishui County, Shandong Province.  The land use rights expire on July 6, 2047.  In 2010, we received one land use rights certificate and property certificate to use 30,372 square meters of land and 835 square meters of building in Junan County, Shandong Province.  As of December 31, 2011, we have paid a total of $269,751 for our land use rights and property rights in Junan County.

 

We operate our business out of an office of approximately 1,700 square meters (approximately 18,300 square feet) located on the premises of the Underground Grand Canyon.  We do not own or lease any other properties or space for the operation of our business or otherwise.

 

We believe that all of our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

 

In order to carry out our expansion and acquisition strategy, we will either need to acquire additional land use rights certificates or may need to enter into agreements with village committees and villagers to establish or acquire additional tourist destinations.  There can be no assurances that we will be able to obtain the land use rights or execute leasing agreements with villagers or village committees in order to carry out our expansion and acquisition strategy.

 

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ITEM 3. LEGAL PROCEEDINGS.

 

We do not have any material proceedings pending nor are we aware of any pending investigation or threatened litigation by any third party other than the matter discussed below.

 

With respect to the previously reported matter entitled Greentree Financial Group, Inc. v. Long Fortune Valley Tourism International, Ltd., BTHC XV, Inc. and Halter Financial Investments L.P., on April 12, 2011, Greentree Financial Group, Inc. (“Greentree”) filed its opposition to BTHC’s and Long Fortune’s motion to dismiss the Amended Complaint, which was filed by the parties on March 25, 2011.  On April 22, 2011, BTHC and Long Fortune filed a reply in further support of their motion to dismiss.  On May 10, 2011, prior to a decision being rendered on the motion to dismiss, Greentree advised the Court that Greentree, BTHC and Long Fortune had reached an agreement in principle to settle all claims involving BTHC and Long Fortune.  That settlement has now been formalized and effectuated, and, on July 6, 2011, Greentree filed a Notice of Voluntary Dismissal with Prejudice of all claims brought against Long Fortune and BTHC.  On July 8, 2011, the Court dismissed with prejudice all claims brought against defendants BTHC and Long Fortune. 

 

ITEM 4. (REMOVED AND RESERVED).

 

PART II

 

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

 

Market Information

 

BTHC’s common stock is traded on the OTCBB under the symbol “BTXV”.  There is no trading market for our stock.  Our stockholders may find it difficult to sell their shares.  The following table sets forth, for the periods indicated, the reported high and low quotations for our common stock as reported in the over-the-counter market.

 

   High   Low 
Fiscal year ended December 31, 2011           
First Quarter   $N/A   $N/A 
Second Quarter     N/A    N/A 
Third Quarter   N/A    N/A 
Fourth Quarter   N/A    N/A 

 

   High   Low 
Fiscal year ended December 31, 2010           
First Quarter   $N/A   $N/A 
Second Quarter    N/A    N/A 
Third Quarter    N/A    N/A 
Fourth Quarter    N/A    N/A 

 

Stockholders

 

We have approximately 508 stockholders of record of our issued and outstanding common stock.

 

Dividend Policy

 

We do not currently intend to pay any cash dividends in the foreseeable future on our common stock and, instead, intend to retain earnings, if any, for future operation and expansion.  Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.

 

Equity Compensation Plan Information

 

We currently do not have any equity compensation plans.  See “Item 12. – Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.”

 

Recent Sales of Unregistered Securities

 

There were no sales of unregistered securities in the fourth quarter of 2011 not otherwise previously reported.

 

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ITEM 6.   SELECTED FINANCIAL DATA.

 

Not applicable to smaller reporting companies.

 

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

 

We are a tourism development and management company headquartered in Shandong Province, China.  Our business specializes in the development and management of natural, cultural and historic scenic sites and ecotourism projects in China, with particular emphasis on the cave tourism sector of the tourism industry.  Since 2004, we have operated the “Underground Grand Canyon” tourist attraction in Linyi City, Yishui County, Shandong Province, China, pursuant to a development and management agreement with the local Yaodianzi Town Government, whereby we will operate and manage the attraction through 2062.  At 6,100 meters (approximately 3.75 miles), the Yinli underground caves form the longest cave system in northern China and contains several stalactite and stalagmite formations, as well as rivers and streams.  We have invested approximately $12 million to improve the infrastructure and facilities at the attraction, including: the construction of restaurant facilities for our visitors and an office and accommodation for our staff and entertainment attractions; the repair of roads, electrical lines and water pipes leading to the attraction; and the acquisition of new equipment for use at our new entertainment attractions.  We have developed an additional 3,100 meters (approximately 2 miles) into four entertainment attractions, including: an “Underground Water Drifting” attraction; the “Electric Slide Car” attraction; the “Battery Vehicle” attraction; and the “Strop Ropeway” attraction. The Underground Grand Canyon has been awarded “AAAA Level Scenic Spot” and “National Geological Park” designations by the PRC National Tourism Administration and the PRC Ministry of Land and Resources, respectively.   We plan to continue to expand our business and strengthen our brand by acquiring additional tourist destinations within specified geographic regions in China and by obtaining the exclusive rights to manage and operate them.  Our goal is to become China’s leading tourism development and management company.

 

Visitors to the Underground Grand Canyon are attracted through word of mouth, as well as through our advertising with automobile clubs and domestic travel and touring agencies.  We enter into cooperation agreements each year certain domestic travel agencies throughout China, through which we receive a regular flow of visitors.  We expect that the number of visitors to the attraction will increase as we enter into such agreements with additional travel agencies, as well as through repeat business from existing travel agencies based on the positive experiences of prior visitors.  We also advertise with domestic automobile clubs comprised of individuals with their own vehicles who arrange travel and tourism activities independently or as a group, and on Internet travel websites. The number of visitors to the attraction has increased from approximately 150,000 in 2004 to approximately 683,000 in 2011, which is a compounded annual growth rate of 355%.  During the fiscal year ended December 31, 2011, visitors from travel agencies accounted for approximately 45% of our total number of visitors, while individual families accounted for the remaining 55% of our visitors.    

 

Our sales revenue increased approximately $2.5 million, or approximately 27%, to approximately $11.6 million in the fiscal year ended December 31, 2011 from approximately $9.1 million in the fiscal year ended December 31, 2010.  Our revenue is generated from admission tickets (67% of our 2011 sales revenue), water drifting attraction fees (26% of our 2011 sales revenue), rail car fees (5% of our 2011 sales revenue) and other fees and services (2% of our 2011 sales revenue).  Our net income increased approximately $0.3 million, or approximately 8%, to approximately $4.3 million in the fiscal year ended December 31, 2011 from approximately $4.0 million in the fiscal year ended December 31, 2010.

 

2011 Financial Performance Highlights

 

We continued to experience strong demand for our services during the fiscal year ended December 31, 2011, which resulted in revenue and net income growth. The following are some financial highlights for the year:

 

·Sales: Sales increased $2,471,135, or 27%, to $11,615,716 for the year ended December 31, 2011, from $ 9,144,581 for 2010.

 

·Gross Profit: Gross profit increased $1,922,689, or 21%, to $11,067,270 for the year ended December 31, 2011, from $9,144,581 for 2010. As a percentage of revenues, gross profit decreased 5% to 95% for year 2011 from 100% for 2010.

 

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·Income from operations: Income from operations increased $1,391,955, or 26%, to $6,752,302 for the year ended December 31, 2011, from $5,360,347 for 2010.

 

·Net income: Net income increased $279,856, or 7%, to $4,280,510 for the year ended December 31, 2011, from $4,000,654 for 2010.

 

·Fully diluted net income per share: Fully diluted net income per share was $0.24 for the year ended December 31, 2011, as compared $0.23 for 2010.

 

Results of Operations

 

Comparison of Fiscal Years Ended December 31, 2011 and 2010

 

The following table sets forth key components of our results of operations for fiscal years ended December 31, 2011 and 2010:

 

   For the fiscal year ended December 31, 
   2011   2010 
   (in thousands of U.S. dollars) 
                 
Revenues  $11,616    100%  $9,145    100%
Cost of revenue   549    5%   -    - 
Selling expenses   2,716    23%   2,401    26%
General and administrative expenses   1,599    14%   1,383    15%
Income from operations   6,752    58%   5,361    59%
Other income (expenses)   (1,204)   10%   (162)   2%
Income before income taxes   5,548    48%   5,199    57%
Income tax expense   1,267    11%   1,198    13%
Net income   4,281    37%   4,001    44%

 

 Our functional currency is RMB; however, our financial information is expressed in U.S. dollars.  The results of operations reported in the table above are based on the exchange rate of RMB 6.3009 to $1 for the fiscal year ended December 31, 2011 and the exchange rate of RMB 6.7595 to $1 for the fiscal year ended December 31, 2010.

 

Revenues.  Our sales revenue increased approximately $2.5 million, or approximately 27%, to approximately $11.6 million in the fiscal year ended December 31, 2011 compared to approximately $9.1 million in the fiscal year ended December 31, 2010. This increase is primarily attributed to the development of the local tourist industry and the Company’s effort on expanding the sales and marketing teams and exploring the national market.

 

Selling Expenses.  Our selling expenses are primarily comprised of depreciation, advertising and promotion expenses, sales staff salaries and benefits, materials purchases for operating maintenance and service charges.  Our selling expenses increased approximately $0.3 million, or approximately 13%, to approximately $2.7 million in the fiscal year ended December 31, 2011 from approximately $2.4 million in the fiscal year ended December 31, 2010.  The increase is primarily due to increased marketing efforts including recruiting more marketing and sales personnel and increasing on advertisement spending by the Company during the 2011 period.

 

General and Administrative Expenses.  Our general and administrative expenses are primarily comprised of administrative expenses, salaries and fringe benefits, depreciation and amortization costs.  Our general and administrative expenses increased approximately $0.2 million, or approximately 16%, to approximately $1.6 million in the fiscal year ended December 31, 2011 from approximately $1.4 million in the fiscal year ended December 31, 2010.  The increase is primarily due to increases in labor costs including local employees’ salary increase and increase in amortization as a result of acquisition of more fixed assets. .

 

Income from Operations and Operating Margin.  Our income from operations increased approximately $1.4 million, or approximately 26%, to approximately $6.8 million in the fiscal year ended December 31, 2011 from approximately $5.4 million in the fiscal year ended December 31, 2010.  Income from operations as a percentage of revenues was 58% and 59% for the fiscal year ended December 31, 2011 and 2010, respectively.  The decrease in our income from operations and operating margin was primarily due to an increase in other income.

 

Other Income (Expenses).  We incurred net other expenses of approximately $1.2 million in the fiscal year ended December 31, 2011 compared to net other income of approximately $0.2 million in the fiscal year ended December 31, 2010.  The decrease was primarily due to increase of financial expenses for the fiscal year 2011.

 

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Income Tax Expense.  Our income tax expense increased approximately $0.1 million, or approximately 6%, to approximately $1.3 million in the fiscal year ended December 31, 2011 from approximately $1.2 million in the fiscal year ended December 31, 2010.This increase is primarily due to increase in profit.

 

Net Income.  Due to the foregoing reasons, our net income increased approximately $0.3 million, or approximately 7%, to approximately $4.3 million in the fiscal year ended December 31, 2011 from approximately $4.0 million in the fiscal year ended December 31, 2010.

 

Liquidity and Capital Resources

 

As of December 31, 2011, we had cash and cash equivalents of approximately $0.7 million.  The following table sets forth key components of our net cash flow for the periods indicated.

 

   Year Ended December 31 
   (All amounts in thousands of
U.S. dollars)  
 
   2011   2010 
       (Restated) 
Net cash provided by operating activities   $5,591   $3,533 
Net cash used in investing activities    (5,502)   (12,174)
Net cash provided by financing activities    159    7,767 
Effect of foreign exchange rate changes    240    7 
Cash and cash equivalents at the beginning of the period    209    1,076 
Cash and cash equivalents at the end of the period    697    209 

 

Cash Flows from Operating Activities.

 

Net cash provided by operating activities was approximately $5.6 million in the fiscal year ended December 31, 2011, an increase of approximately $2.1 million from approximately $3.5 million in the fiscal year ended December 31, 2010.  The increase was primarily attributable to the increase in revenue during the 2011 period.

 

Cash Flows from Investing Activities.

 

Net cash used in investing activities for the fiscal year ended December 31, 2011 was approximately $5.5 million, an approximately $6.7 million decrease from approximately $12.2 million for the fiscal year ended December 31, 2010.  The decrease was primarily due to a decrease in investment activities and in related party transactions during the 2011 period.

 

Cash Flows from Financing Activities.

 

Net cash provided by financing activities was approximately $0.2 million in the fiscal year ended December 31, 2011, an approximately $7.6 million decrease from approximately $7.8 million for the fiscal year ended December 31, 2010.  The decrease was primarily due to the increased repayment of borrowing during the fiscal year ended December 31, 2011.

 

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Obligations under Material Contracts

 

The following table sets forth our material contractual obligations as of December 31, 2011:

 

(All amounts in thousands of U.S. dollars)

 

   Maturity
 date
  Interest 
rate
   As of 
December 31,
2011
   As of 
December 31,
 2010
 
Yishui Rural Credit Cooperative  04/20/2011   10.62%   -    910 
                   
Yishui Rural Credit Cooperative  04/26/2011   11.15%   -    455 
                   
Yishui Rural Credit Cooperative  04/26/2011   5.31%   -    303 
                   
Yishui Rural Credit Cooperative  05/20/2011   10.62%   -    1,517 
                   
Yishui Rural Credit Cooperative  01/10/2012   10.46%   952    - 
                   
Yishui Rural Credit Cooperative  06/15/2012   13.88%   794    - 
                   
Yishui Rural Credit Cooperative  08/15/2012   12.47%   2,539    - 
                   
Bank of Linshang  05/28/2011   7.97%   -    759 
                   
Bank of Linshang  08/22/2012   9.84%   794    - 
                   
China Construction Bank Yishui Branch  07/25/2011   5.84%   -    910 
                   
China Construction Bank Yishui Branch  08/01/2011   5.84%   -    607 
                   
Industrial and Commercial Bank of China Yishui Branch  09/15/2011   6.37%   -    1,062 
                   
Bank of China Yishui Branch  09/13/2012   4.54%   794    - 
                   
Bank of China Yishui Branch  03/01/2012   8.07%   2,381    - 
                   
Bank of China Yishui Branch  09/28/2011   5.84%   -    455 
                   
Industrial and Commercial Bank of China Yishui Branch  10/14/2011   6.67%   -    759 
                   
Bank of China Yishui Branch  10/20/2011   6.12%   -    2,276 
                   
Bank of China Yishui Branch  10/26/2011   6.12%   -    303 
                   
ShanDong YiSheng Guarantee Co., Ltd.  02/07/2012   12.60%   952    - 
                   
JuNan Xin Yuan Investment Consulting Co., Ltd.  01/08/2012   12.60%   793      
                   
JuNan Xin Yuan Investment Consulting Co., Ltd.  02/11/2012   12.60%   952      
            10,951    10,316 

  

The above loan contracts contain the following common covenants: the Company committed to repay the principle and interest of such loans as scheduled in contract; the Company should provide audited financial within six months of year-end; the Company shall voluntarily accept the investigation from the creditors on its finance and property; as required by the creditors, the Company shall provide the real, legal, complete, valid financial accounting statements and other documents and information.

 

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 in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:

 

Cash and cash equivalents

 

Cash and cash equivalents include interest bearing and non-interest bearing bank deposits, money market accounts, and short-term certificates of deposit with original maturities of three months or less.

 

Accounts receivable

 

Accounts receivable are recognized and carried at original invoiced amount less an allowance for uncollectible accounts, as needed.

 

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The allowance on uncollectible accounts receivable reflects management’s best estimate of probable losses determined principally on the basis of historical experience.  All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for uncollectible accounts receivable.  When facts subsequently become available to indicate that the amount provided as the allowance was incorrect, an adjustment which is classified as a change in estimate is made.

 

Property, plant and equipment, net

 

Property, plant and equipment are recorded at cost and are stated net of accumulated depreciation.  Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets, taking into account the estimated residual value.  The estimated useful lives are as follows:

 

Estimated useful lives   
Building 20 years   
Machinery and equipment 10 years   
Motor vehicle 5 years   
Office equipment 5 years   

 

Maintenance and repairs are charged directly to expense as incurred, whereas betterments and capital expenditures for infrastructure and facilities improvement are generally capitalized in their respective property accounts.  When an item is retired or otherwise disposed of, the cost and applicable accumulated depreciation are removed and the resulting gain or loss is recognized and reflected in current operations.  For all periods presented in the statement of operations and comprehensive income, certain labor charges normally capitalized were charged to operating expenses as we were unable to adequately separate these costs.

 

Construction in progress

 

Construction in progress represents property and equipment under construction.  No depreciation is recorded in respect of construction in progress.  Construction in progress is transferred to property and equipment, and depreciation of the asset commences, when the asset has been substantially completed and is ready for its intended use.

 

Capitalized interest

 

The interest costs associated with construction projects are capitalized and included as part of the cost of the project.  When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using our weighted-average cost of borrowing.  Capitalization of interest ceases when the project is substantially complete.

 

Impairment of long-lived assets

 

We account for impairment of property, plant and equipment and amortizable intangible assets in accordance with ASC 360, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires us to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable.  An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value.  There were no impairments of our long-lived assets as of December 31, 2011 and 2010.

 

Revenue Recognition

 

Revenue is generated from bundled passes (beginning January 1, 2010), admission tickets, water drifting attraction fees, rail car fees and other fees and services, including battery vehicle fees, strop ropeway fees and parking fees.  A bundled pass is for same-day general access to our “Underground Grand Canyon” tourist destination and same-day general access to the “Fluorescent Lake” tourist destination operated by Fluorescent Lake.  Because the bundled pass entitles its holder to visit the Fluorescent Lake tourist destination, the price of the bundled pass, which is sold at both the Underground Grand Canyon and the Fluorescent Lake, is higher than the regular admission ticket price to the Underground Grand Canyon.

 

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Through a revenue sharing agreement between Longkong and Fluorescent Lake, if a bundled pass (RMB118) is sold at the Underground Grand Canyon, approximately 92% (RMB108) of the cost of the pass is allocated as revenue to Longkong with the remaining 8% (RMB10) being allocated to Fluorescent Lake and recorded as a liability to a related party on our balance sheet.  If a bundled pass is sold at the Fluorescent Lake, approximately 36% (RMB42) of the cost of the pass is allocated as revenue to Longkong and recorded as a receivable from a related party on our balance sheet with the remaining 64% (RMB76) being recorded as revenue by Fluorescent Lake.  While negotiating the terms of the revenue sharing agreement, Fluorescent Lake’s management agreed to the premium percentages allocated to the Underground Grand Canyon due to several factors, including that the Underground Grand Canyon is relatively better known than the Fluorescent Lake based on the number of visitors to each tourist attraction annually, that the Underground Grand Canyon offers five entertainment attractions, in addition to the general walking tour, to Fluorescent Lake’s one entertainment attraction and that Longkong’s management did not expect to see a significant increase in the number of visitors to the Underground Grand Canyon solely as a result of the sales of bundled passes by Fluorescent Lake.  The revenue sharing agreement only contains the economic terms summarized above and is otherwise terminable at the will of either party and does not contain a term.  Longkong’s and Fluorescent Lake’s management expects to review the terms of the revenue sharing agreement annually and decide whether to continue the relationship as is, modify the existing terms, which could be more or less beneficial to Longkong, or terminate the relationship.

 

Neither Longkong nor Fluorescent Lake sells bundled passes in advance.  Because the bundled pass expires if not used the same day it is sold to a visitor, neither company has any unfilled obligations at the end of the day the bundled pass is sold.  Accordingly, there are no unused, unexpired passes and therefore no deferred revenue at December 31, 2011.

 

A regular admission ticket to the Underground Grand Canyon is RMB76 and a regular admission ticket to the Fluorescent Lake is RMB68.  Therefore, our relative fair value of each bundled pass is RMB62, which is the proportion that our regular admission ticket price (RMB76) bears to the total of the regular admission ticket prices for both attractions (RMB144) to the price of a bundled pass (RMB118).  For each bundled pass sold by the Underground Grand Canyon, we receive a benefit of RMB46 above our relative fair value.  Because the revenue sharing arrangement is with a related party company, the benefit for each bundled pass sold by the Underground Grand Canyon is characterized as a related party commission received.  For each bundled pass sold by the Fluorescent Lake, we receive RMB20 less than our relative fair value.  The amount of this loss is characterized as a related party commission paid and recorded net of the related party commission received by us for bundled passes sold by the Underground Ground Canyon.

 

An admission ticket entitles the visitor to a one-time admission to the Underground Grand Canyon and entertainment attraction fees entitle the visitor to a one-time usage of the particular entertainment attraction.  No weekly, monthly or other annual or season type passes are offered to the Underground Grand Canyon.  Longkong does not sell admission tickets in advance.  Admission ticket prices and entertainment attraction fees are generally collected when tickets are sold upon the visitors entering the facility.  Revenue is recognized when the tickets are used.  Occasionally, visitors are granted admission to the Underground Grand Canyon on credit.  At such times, we recognize revenue when the service has occurred and record accounts receivable.  Revenue is recorded net of relevant business taxes.  See “Item 13. – Certain Relationships and Related Transactions, and Director Independence.” for additional information regarding the bundled pass and revenue allocation between Longkong and Fluorescent Lake.

 

Rebates

 

Commencing January 1, 2010, we started to offer a return, also referred to as a rebate, to the travel agencies with which we have entered into cooperation agreements.  The rebates are based on the total number of visitors the travel agency brings to the Underground Grand Canyon during a calendar year.  We recognize the rebate obligation as a reduction of revenue based on the estimated number of visitors brought to the Underground Grand Canyon by those travel agencies expected to claim rebates.

 

Operating leases

 

Leases in which substantially all the rewards and risks of ownership of the asset remain with the lessor are accounted for as operating leases.  Payments made under operating leases are charged to the statements of operations on a straight-line basis over the shorter of the lease term or estimated useful life.

 

Income taxes

 

We account for income and deferred tax under the provision of ASC 740 “Income Taxes”.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  ASC 740 also requires the recognition of the future tax benefits of net operating loss carry forwards.  A valuation allowance is established when the deferred tax assets are not expected to be realized within a reasonable period of time.

 

Comprehensive income

 

We have adopted ASC 220, “Reporting Comprehensive Income”, which establishes standards for reporting and displaying comprehensive income, its components, and accumulated balances in a full-set of general-purpose financial statements.  Our accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.

 

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Foreign currency transactions and translation

 

Our reporting currency is the U.S. dollar.  The functional currencies of our subsidiaries are local currencies, primarily the PRC currency Yuan (Renminbi) and Hong Kong dollar.  Transactions denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the date of the transactions.  The financial statements are translated into U.S. dollars using period-end rates of exchange for assets and liabilities and average rates of exchange for the period for revenues and expenses.  Exchange gains or losses on transaction are included in earnings.

 

Earnings per share

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period.  Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.  At December 31, 2011 and 2010, respectively, we had no common stock equivalents that could potentially dilute future earnings per share.

 

Related Parties

 

A party is considered to be related to our company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with our company.  Related parties also include our principal owners, our management, members of the immediate families of our principal owners and our management and other parties with which we may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.  A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

 

Fair value of financial instruments

 

We adopted ASC 820 “Fair Value Measurements,” which defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures.  Current assets and current liabilities are qualified as financial instruments and management believes their carrying amounts are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and if applicable, their current interest rate is equivalent to interest rates currently available.  The three levels are defined as follows:

 

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.

 

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value.

 

As of the balance sheet date, the estimated fair values of the financial instruments were not materially different from their carrying values as presented due to the short maturities of these instruments and that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective period-ends.  Determining which category an asset or liability falls within the hierarchy requires significant judgment.  We evaluate the hierarchy disclosures each quarter.

 

Recent Issued Accounting Pronouncements

 

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 IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

 

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In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The guidance in ASU 2011-05 applies to both annual and interim financial statements and eliminates the option for reporting entities to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. This ASU also requires consecutive presentation of the statement of net income and other comprehensive income. Finally, this ASU requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU should be applied retrospectively and are effective for fiscal year, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

 

Seasonality of our Sales

 

Our operating results and operating cash flows historically have been subject to seasonal variations. Peak months occur during periods of warmer weather, when students are on summer vacation and during our National Holiday.  Our peak months are April, May, July, August and October, which collectively accounted for 73% of our total visitors in 2011.

 

Inflation

 

Inflation does not materially affect our business or the results of our operations.

 

Off-Balance Sheet Arrangements

 

We have entered into financial guarantees and similar commitments to guarantee the payment obligations of third parties.  Conversely, our debt with lenders is also guaranteed by other parties which may be related or unrelated to us.  As an industry practice, Chinese financial institutions require third party guarantees in order to provide both short term and long term bank loans to any corporate borrower.  Because of this requirement, it is common practice that Chinese private enterprises enter into arrangements with other private enterprises to provide mutual guarantees in order to obtain bank loans from local Chinese financial institutions.

 

Typically, we enter into such mutual guarantees for companies that have good longstanding relationships with us and a mutual guarantee provided to us of approximately similar amounts.  Such guarantees are typically for a period of two years from the date of issuance of the guarantees.

 

Changes in the economic environment could leave us exposed to obligations that we have guaranteed which could have a materially negative impact on our ongoing business, and cause us to potentially be unable to meet our obligations under other bank financings.  Additionally, should any of the companies for which we provide guarantees default, and the banks enforce our guarantees, our recourse may only be limited to default on the mutual guarantee and we may not be able to meet the liquidity and working capital requirements for our ongoing business, resulting in a material adverse impact on our business.

 

As of December 31, 2011, we had 3 guarantees of approximately $6.3 million in total principal outstanding.  Our potential liability under guarantees could include interest, default interest and the obligation to pay costs of collection in addition to principal amounts to which the guarantees relate.

 

We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated financial statements.  Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.  We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk, or credit support to us or engages in leasing, hedging, or research and development services with us.

 

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

 

Our operations are carried out in the PRC and we are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC economy. Our 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.

 

Interest Rate Risk

 

We generally do not invest in or hold debt securities.  Accordingly, fluctuations in applicable interest rates would not have a material impact on our company.  At December 31, 2011, we had short-term loans payable of approximately $11.0 million.  These notes have interest rates ranging from 5.31% to 11.15%.  Due to the short-term nature of the notes, a hypothetical 10% increase or decrease in applicable interest rates is not expected to have a material impact on Longkong’s earnings, loss or cash flows.

 

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Foreign Exchange Risk

 

All of our transactions are transacted in RMB.  As a result, changes in the relative values of U.S. Dollars and RMB affect our reported levels of revenues and profitability as the results are translated into U.S. Dollars for reporting purposes.  However, because we conduct our sales and purchases in RMB, fluctuations in exchange rates are not expected to significantly affect financial stability, or gross and net profit margins.  We do not currently expect to incur significant foreign exchange gains or losses, or gains or losses associated with any foreign operations.

 

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Consolidated Financial Statements

 

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

 

Quarterly Financial Results

 

The following table sets forth certain unaudited financial information for each of the eight quarters ended December 31, 2011. The consolidated financial statements for each of these quarters have been prepared on the same basis as the audited consolidated financial statements included in this annual report and, in the opinion of management, include all adjustments necessary for the fair presentation of the results of operations for these periods. This information should be read together with our audited consolidated financial statements and the related notes included elsewhere in this annual report.

 

(All amounts in thousands of U.S. dollars)

 

   Dec 31,   Sep 30,   Jun 30,   Mar
31,
   Dec 31,   Sep 30,   Jun 30,   Mar
31,
 
   2011   2011   2011   2011   2010   2010   2010   2010 
Sales  $11,616   $9,000   $4,986   $990   $9,145   $7,962   $4,501   $1,321 
Gross profit   11,067    9,000    4,986    990    9,145    7,962    4,501    1,321 
Earnings (Loss) before income tax expenses   5,548    4,978    2,485    (101)   5,198    5,522    2,613    373 
Net income attributable                                        
Basic earnings per share   0.24    0.21    0.10    (0.00)   0.23    0.24    0.11    0.02 
Diluted earnings per share   0.24    0.21    0.10    (0.00)   0.23    0.24    0.11    0.02 

  

Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly net earnings per share will not necessarily equal the total for the year.

 

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.

 

Our management maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that the material information required to be disclosed by us in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (our principal financial and accounting officer), to allow timely decisions regarding required disclosure.

 

As of December 31, 2011, our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act.  Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2011 as a result of the following material weaknesses identified in our internal control over financial reporting:

 

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·An absence of independence and financial expertise on our board of directors limiting its ability to provide effective oversight of our management;

 

·Lack of sufficient accounting personnel at the Chinese operating company level with the experience and training to effectively address the U.S. GAAP accounting, financial reporting, internal control, and other regulatory compliance requirements of being a U.S. public company; and

 

·Deficiency in the knowledge by our personnel responsible for our internal control over financial reporting and certain U.S. GAAP and SEC financial reporting principles.

 

In addition, management identified significant deficiencies with respect to the timely public reporting of events requiring such reporting.  These deficiencies caused us to file late certain Current Reports on Form 8-K.

 

Our management will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures, as well as our internal control over financial reporting, on an ongoing basis, and is committed to taking action and implementing improvements, as necessary and as funds allow.  However, our management cannot guarantee that the measures to be taken will remediate the material weaknesses identified or that any additional material weaknesses or significant deficiencies will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting.

 

Notwithstanding the material weaknesses described above, our management believes that there are no material inaccuracies or omissions of material fact and, to the best of its knowledge, believes that the consolidated financial statements included in this Annual Report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with U.S. GAAP.

 

Management's Annual Report on Internal Control over Financial Reporting

 

The management of our company is responsible for establishing and maintaining adequate internal control over financial reporting for our company.  Our internal control system was designed to, in general, provide reasonable assurance to our management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011.  The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on that assessment, our management has determined that as of December 31, 2011, our internal control over financial reporting was not effective for the purposes for which it is intended due to: (i) an absence of independence and financial expertise on the Board of Directors limiting its ability to provide effective oversight of our management; (ii) we lacked sufficient accounting personnel at the Chinese operating company level with the experience and training to effectively address the US GAAP accounting, financial reporting, internal control, and other regulatory compliance requirements of being a U.S. public company; and (iii) deficiency in the knowledge by our personnel responsible for our internal control over financial reporting and certain US GAAP and SEC financial reporting principles.

 

To remediate these identified material weaknesses, as financial conditions permit, we plan to:

 

·Hire an English speaking Chief Financial Officer who has experience with U.S. public companies, U.S. GAAP and SEC rules and regulations; and

 

·Hire additional, qualified accounting personnel at the Chinese operating company level to enhance our financial reporting competencies.  Our management will also continue to provide training to existing accounting personnel regarding our significant accounting policies and procedures.

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report.

 

Changes in Internal Control over Financial Reporting

 

No change in our system of internal control over financial reporting occurred during the period covered by this report (fourth quarter of the fiscal year ended December 31, 2011) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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ITEM 9B.     OTHER INFORMATION.

 

None.

 

PART III

 

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

Directors and Executive Officers 

 

The following sets forth the name and position of each of our officers and directors:

 

Name Age Position(s)
Zhang Shanjiu 53 Chairman, President and Chief Executive Officer
Yu Xinbo 33 Chief Financial Officer, Treasurer and Secretary
Kong Xianghai 42 Chief Administrative Officer
Chen Rongguang 53 Chief Operating Officer

 

Mr. Zhang Shanjiu has served as our President, Chief Executive Officer and Chairman since October 2010, and has served as the Chairman and Chief Executive Officer of Longkong since its founding in 2004. Mr. Zhang has ten years’ management experience in the travel and entertainment industry and also has five years’ experience working as a physician.  Mr. Zhang holds a diploma from the Linyi Medical College and a Master’s Degree in administrative management from Peking University.  Mr. Zhang’s accumulation of over 17 years of valuable experience in the tourism development and management business qualifies him to serve on our board of directors.

 

Mr. Yu Xinbo has served as our Chief Financial Officer since October 2010, and has served in the same capacity for Longkong since 2004.   Prior to joining us Mr. Yu served from 1996 – 2004 in various financial and accounting positions.  Mr. Yu holds a diploma from the Shandong Trade and Community College and a Bachelor’s Degree in accounting from the Shandong Economic University.

 

Mr. Kong Xianghai has served as our Chief Administrative Officer since October 2010, and has served in the same capacity for Longkong since 2008.  Prior to joining us, Mr. Kong served, from 2007 to 2008, as President of Qingyuan Food Co., Ltd., a PRC-based food production company; and from 2005 to 2007, as Vice President of FUWAH Amusement & Tourism Co., Ltd. a tourism company. Mr. Kong has another 13 years’ experience in various other management positions in China. Mr. Kong holds a Master’s Degree in Enterprise Management from Northwest University (China).

 

Mr. Chen Rongguang has served as our Chief Operating Officer since October 2010, and has served in the same capacity for Longkong since 2006.   Prior to joining us, Mr. Chen served, from 1999 to 2006, as the Operation Manager of Yishui Yongchang Machinery Co., Ltd. and has another 23 years’ experience working in other operational management positions in China.  Mr. Chen holds a Bachelor’s Degree in marketing from the Shanghai Fudan University.

 

Family Relationships

 

There are no family relationships between or among any of the directors or executive officers.

 

Involvement in Certain Legal Proceedings

 

No executive officer or director has been involved in the last ten years in any of the following:

  

·Any bankruptcy petition filed by or against any business or property of such person, or of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

·Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

·Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;

 

·Being found by a court of competent jurisdiction (in a civil action), 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;

 

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·Being the subject of or a party to any judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated relating to an alleged violation of any federal or state securities or commodities law or regulation, or 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, fraud, wire fraud or fraud in connection with any business entity; or

 

·Being 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, any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Board Meetings; Board Committees and Director Independence

 

The board of directors held no formal meetings during the most recently completed fiscal year.  All proceedings of the board of directors were conducted by resolutions consented to in writing by the sole director and filed with the minutes of the proceedings of the directors.  Such resolutions consented to in writing by the sole director entitled to vote on that resolution at a meeting of the directors are, according to the corporate laws of the State of Delaware and our By-laws, as valid and effective as if they had been passed at a meeting of the directors duly called and held.

 

As of this date, BTHC’s board of directors has not appointed a nominating committee, audit committee or compensation committee, or committees performing similar functions nor does it have a written nominating, compensation or audit committee charter.  The board of directors does not believe that it is necessary to have such committees because it believes the functions of such committees can be adequately performed by the board of directors.  Further, BTHC is not a “listed company” under SEC rules and thus is not required to have an audit, compensation or nominating committee.  Accordingly, BTHC does not have an “audit committee financial expert” as such term is defined in the rules promulgated under the Securities Act and the Exchange Act.  The functions ordinarily handled by these committees are currently handled by the entire board of directors.  The board of directors intends, however, to review the governance structure and institute board committees as necessary and advisable in the future, to facilitate the management of BTHC’s business.

 

Until the closing of the Share Exchange, Timothy Halter served as an executive officer of BTHC and therefore is not an independent director.  The board of directors has not made any determination as to whether Zhang Shanjiu is independent within the meaning of NASDAQ Marketplace Rule 5605(a)(2), and this rule is not presently applicable to us.  However, based on the definition of independence under this rule, we believe that Zhang Shanjiu would not be considered to be an independent director.  We are not currently subject to any law, rule or regulation, however, requiring that all or any portion of our board of directors include “independent” directors.

 

We do not have any defined policy or procedure requirements for stockholders to submit recommendations or nominations for directors.  We believe that, given the early stages of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level.  We do not currently have any specific or minimum criteria for the election of nominees to the board of directors and we do not have any specific process or procedure for evaluating such nominees.  Our board of directors assesses all candidates, whether submitted by management or stockholders, and makes recommendations for election or appointment.

 

We intend to appoint such persons and form such committees as are required to meet the corporate governance requirements imposed by a U.S. national securities exchange.  Therefore, we intend that a majority of our directors eventually will be independent directors and at least one of our new independent directors will qualify as an “audit committee financial expert.”  Additionally, we will adopt charters relative to each such committee.

 

A stockholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our Chief Executive Officer at the address appearing on the face page of this Annual Report.  We do not have a policy regarding the attendance of board members at the annual meeting of stockholders.

 

Code of Ethics

 

On April 15, 2012, Our Board of Directors has adopted a Code of Business Conduct and Ethics applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer.  Since its adoption, there have been no waivers of our Code of Business Conduct and Ethics.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of a registered class of our equity securities, to file reports of beneficial ownership and changes in beneficial ownership of our securities with the SEC on Forms 3 (Initial Statement of Beneficial Ownership), 4 (Statement of Changes of Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial Ownership of Securities).  Directors, executive officers and beneficial owners of more than 10% of our common stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file.  Based solely on our review of the copies of such forms furnished to us, or written representations that no reports were required, we believe that for the fiscal year ended December 31, 2011, our executive officers, directors and greater than 10% shareholders were in compliance with the reporting requirements of Section 16(a) under the Exchange Act.

 

ITEM 11.      EXECUTIVE COMPENSATION.

  

Summary Compensation Table – December 31, 2011, 2010 and 2009

 

The following table sets forth information relating to all compensation awarded to, earned by or paid to our Chairman, President and Chief Executive Officer, our Chief Financial Officer and each of our next three highest paid executives, if any, whose total compensation exceeded $100,000 during the fiscal year ended December 31, 2011, for all services rendered in all capacities to us during the years ended December 31, 2011, 2010 and 2009, respectively.

 

Name and
Principal
Position
  Year   Salary ($)   Bonus
($)
   Stock
Awards ($)
   Option
Awards
($)
   Non-Equity
Incentive Plan
Compensation
($)
   Nonqualified
Deferred
Compensation
Earnings ($)
   All Other
Compensation
($)
   Total($) 
Zhang Shanjiu   2011    56250    0    0    0    0    0    0    56250 
Chairman,    2010    35450    0    0    0    0    0    0    35,450 
President and    2009    29,640    0    0    0    0    0    0    29,640 
Chief Executive Officer                                             
                                              
Yu Xinbo   2011    13125    0    0    0    0    0    0    13125 
Chief    2010    10,636    0    0    0    0    0    0    10,636 
Financial    2009    7,253    0    0    0    0    0    0    7,253 
Officer, Treasurer and Secretary                                             

 

Grants of Plan-Based Awards in Fiscal 2011

 

There were no option or other equity grants in 2011.

 

Outstanding Equity Awards at 2011 Fiscal Year End

 

There were no options or other equity awards outstanding in 2011.

 

Option Exercises and Stock Vested in Fiscal 2011

 

There were no option exercises or stock vested in 2011.

 

Pension Benefits

 

There were no pension benefit plans in effect in 2011.

 

Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans

 

There were no nonqualified defined contribution or other nonqualified deferred compensation plans in effect in 2011.

 

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

 

On October 18, 2010, we entered into employment agreements with Zhang Shanjiu, our Chairman, President and Chief Executive Officer, Yu Xinbo, our Chief Financial Officer, Treasurer and Secretary, Kong Xianghai, our Chief Administrative Officer, and Chen Rongguang, our Chief Operating Officer.

 

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The term of each agreement is five years, during which each executive officer will be entitled to a base salary of approximately $7,500 (except for Zhang Shanjiu, who will be entitled to a base salary of approximately $36,000) per year, subject to increase by the Board of Directors.  In addition to the base salary, each executive officer will be eligible to receive discretionary bonuses at times and in amounts to be determined by the Board of Directors or an applicable committee thereof.  Each executive officer will be eligible to receive grants of stock options or other equity compensation awards pursuant to an equity compensation plan to be adopted by the Board of Directors, subject to the approval of our stockholders and compliance with applicable law, after the closing of the Share Exchange.

 

Each executive officer is entitled to receive, at our expense, medical, health and social insurance coverage.  In addition, subject to certain insurable conditions and the completion of requisite documentation, each executive officer is entitled to long term disability insurance coverage providing for “lifetime” disability benefits and life insurance each in an amount to be determined by the Board of Directors.  We will also make available to each executive officer any and all other executive or fringe benefits made available to our other executives.  Each executive officer is entitled to paid vacation of a duration we provide to our other executives.

 

Each executive officer will be provided with liability insurance coverage generally provided to our officers and managers.  We agreed to indemnify each executive officer against all costs, damages and expenses, including attorneys’ fees, that may be incurred as a result of claims by third parties arising out of or from the executive officer’s lawful acts as our employee, provided that such acts are not grossly negligent and are performed in good faith and in a manner reasonably believed by such executive officer to be in the best interests of our company.

 

During the term of the agreements, and for one year thereafter, the executive officers cannot, directly or indirectly, own, manage, control, participate in, consult with, render services for, or in any other manner engage in any business, or as an investor in or lender to any business (in each case including on the executive officer’s own behalf or on behalf of another entity) that competes either directly or indirectly with us in our business, in any market in which we operate, or are considering operating at any given point in time during the term.  Each executive officer is permitted to be a passive owner of less than 5% of the outstanding stock of a publicly traded corporation that engages in a competing business, so long as the executive officer does not have a direct or indirect participation in the business of such corporation.  Zhang Shanjiu, as our sole director, has waived the non-compete provisions of his employment agreement with respect to the businesses he owned or controlled, directly or indirectly, as of the Closing Date of the Share Exchange.

 

The executive officer’s employment may be terminated: (i) by us immediately upon his death; (ii) by us upon fifteen days’ notice during the continuance of any Disability (as defined below) of the executive officer; (iii) by us without Good Cause (as defined below); (iv) by us for Good Cause (as defined below) upon notice specifying the particular circumstances forming the basis thereof; (v) by the executive officer voluntarily other than for Good Reason (as defined below); or (vi) by the executive officer for Good Reason (as defined below) upon notice specifying the particular circumstances forming the basis thereof.

 

“Disability” means an inability by the executive officer to perform a substantial portion of his duties by reason of physical or mental incapacity or disability for a total of one hundred twenty (120) days or more in any consecutive period of three hundred and sixty five (365) days, as determined by the Board of Directors in its good faith judgment.

 

“Good Cause” means: (i) the commission of a felony, or a crime involving moral turpitude, or the commission of any other act or omission involving dishonesty, disloyalty, or fraud with respect to our company; (ii) conduct tending to bring us or any of our affiliates into substantial public disgrace or disrepute; (iii) substantial and repeated failure to perform duties as reasonably directed by the Board of Directors; (iv) gross negligence or willful misconduct with respect to us or any of our affiliates; or (v) any material misrepresentation by the executive officer under the agreement; provided, however, that such Good Cause will not exist unless we provide the executive officer with written notice specifying in reasonable detail the factors constituting such Good Cause, as applicable, and such factors have not been cured by the executive officer within thirty (30) days after such notice or such longer period as may reasonably be necessary to accomplish the cure.

 

“Good Reason” means the occurrence of any of the following events: (i) the assignment to the executive officer of any duties inconsistent in any material respect with his or her then position (including status, offices, titles and reporting relationships), authority, duties or responsibilities, or any other action or actions by us that, when taken as a whole, results in a significant diminution in his position, authority, duties or responsibilities, excluding for this purpose any isolated, immaterial and inadvertent action not taken in bad faith and which is remedied by us promptly after receipt of notice thereof provided by the executive officer; (ii) a material breach by us of one or more provisions of the agreement, provided that such Good Reason will not exist unless the executive officer has provided us with written notice specifying in reasonable detail the factors constituting such material breach and such material breach has not been cured by us within thirty (30) days after such notice or such longer period as may reasonably be necessary to accomplish the cure; (iii) any purported termination by us of the executive officer’s employment otherwise than as expressly permitted by the agreement; or (iv) a change in control whereby (A) a person (other than a person who is our officer or director on October 18, 2010), including a group as defined in Section 13(d)(3) of the Exchange Act, becomes, or obtains the right to become, the beneficial owner of our securities having fifty one percent (51%) or more of the combined voting power of our then outstanding securities, (B) we consummate a merger in which we are not the surviving entity, (C) all or substantially all of our assets are sold, or (D) our stockholders approve the dissolution or liquidation of our company.

 

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If the executive officer is terminated by us without Good Cause or if the executive officer resigns for Good Reason, he will be entitled to receive as severance one year’s base salary and the immediate vesting of all granted but unvested option grants.  If any executive officer were terminated as of the date hereof, each executive officer would be entitled to receive approximately $7,500 (except for Zhang Shanjiu, who will be entitled to receive approximately $36,000).

 

Compensation of Directors

 

We do not currently have an established policy to provide compensation to members of our Board of Directors for their services in that capacity.  We intend to develop such a policy in the near future.  It is currently anticipated that non-employee directors will receive a fee for service as a director, and be eligible to receive awards which may be granted pursuant to an equity compensation plan, if approved by our stockholders.

 

Compensation Committee Interlocks and Insider Participation

 

No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.

 

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

 

As of March 31, 2012, there were 18,089,660 shares of common stock outstanding.  The following table sets forth certain information concerning the number of BTHC common shares owned beneficially by: (i) each person (including any group) known to us to own five percent (5%) or more of any class of BTHC’s voting securities, (ii) each of BTHC’s directors and executive officers, and (iii) all officers and directors as a group.  Unless otherwise indicated, the stockholders listed possess sole voting and investment power with respect to the common shares shown.  The address for each beneficial owner, unless otherwise noted, is c/o Underground Grand Canyon, Linyi City, Yishui County, Shandong Province, China  276400.

 

Name and Address of Beneficial Owner  Amount and Nature of Beneficial
Ownership(1)
   Percentage of Class(2) 
Officers and Directors
Zhang Shanjiu
Chairman of the Board, President
and Chief Executive Officer
   16,605,791(3)   91.8%
           
Yu Xinbo
Chief Financial Officer, Treasurer and Secretary
   88,381    
           
Kong Xianghai
Chief Administrative Officer
        
           
Chen Rongguang
Chief Operating Officer
        
           
All Executive Officers and Directors as a group (five persons)   17,031,227    91.8%
5% Stockholders
Grand Fountain Capital Holding Limited
3rd Floor, Queensgate House
113 South Church Street
P.O. Box 10240 Grand Cayman
KY1-1002, Cayman Islands
   7,856,081(3)   43.4%
           
Chen Rongxia(5)
   7,856,081(3)   43.4%
           
Zhang Qian   4,968,971(3)   27.5%

 

 

* less than 1%

 

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 (1) Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares.  Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares).  In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided.  In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights.

 

(2) Percentages are rounded to the nearest one-tenth of one percent.  The percentage of class is based on 18089660 shares of the Company’s common stock issued and outstanding as of March 31, 2012.

 

(3) Includes shares 3,780,739 shares of the Company’s common stock held directly, as well as 4,968,971 shares held by Mr. Zhang’s daughter and 7,856,081 shares held by Grand Fountain Capital Holding Limited, an entity controlled by Chen Rongxia, Mr. Zhang’s wife.

  

Change in Control

 

There are no known arrangements, 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 BTHC.

 

Equity Compensation Plans

 

Currently, we intend to adopt a stock option plan, restricted stock plan and/or other equity compensation plan for the benefit of directors, officers, employees and other eligible participants.  If a determination is made to implement any such plans, they will be submitted to stockholders for their consideration, at which time stockholders would be provided with detailed information regarding such plan(s).  If approved, and awards are granted, they will likely have a dilutive effect on BTHC’s stockholders as well as affect BTHC’s net income and stockholders’ equity, although the actual results cannot be determined until after any such plans are implemented.

 

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

 

Certain Relationships and Related Transactions

 

The following includes a summary of transactions since the beginning of the 2010 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”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.

 

·Beginning November 27, 2009, and from time to time thereafter, Longkong has loaned funds to Yishui Underground Fluorescent Lake Travel Development Co., Ltd. (“Fluorescent Lake”), a company controlled by the immediate family of Zhang Shanjiu, our Chairman, President and Chief Executive Officer, that operates a cave, the only attraction in which is the light shining from fireflies that live on the ceiling of the cave.  Given the possible complementary nature of the business operated by Fluorescent Lake, we provide these loans with a view toward potentially developing and supporting strategic ventures and/or engaging in other transactions in the future.  Pursuant to the Loan Agreement executed between the parties on December 31, 2009, Fluorescent Lake is required to repay loans that were outstanding as of such date in full, with accrued interest, on the due date.  Periodic payments of principal and interest are no longer required with respect to those loans.  For loans to Fluorescent Lake after December 31, 2009, Longkong generally executes written agreements with Fluorescent Lake, unless the dollar amount of the loan is less than $150,000.  These loan agreements provide that the loans are interest free and are due within 12 months of the date of the loan.  The due dates for the loans were between January 27, 2011 and December 31, 2011, but the Company has obtained an extension through December 31, 2012. During the fiscal year ended December 31, 2011, Longkong received interest payments and principal payments from Fluorescent Lake in the amount of approximately $Nil and $4.2 million, respectively.  As of December 31, 2011, the outstanding aggregate balance of the loans was approximately $7.3 million, and the largest aggregate principal outstanding during the fiscal year ended December 31, 2011 was approximately RMB8.20 million (approximately $1.3.

 

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·Beginning January 5, 2010, and from time to time thereafter, Longkong has loaned funds to Yishui Yinhe Travel Development Co., Ltd. (“Yinhe Travel”), a company controlled by Zhang Shanjiu, our Chairman, President and Chief Executive Officer, that operates hotels and a water amusement park.  Given the possible complementary nature of the business operated by Yinhe Travel, we provide these loans with a view toward potentially developing and supporting strategic ventures and/or engaging in other transactions in the future.  Longkong generally executes written agreements with Yinhe Travel, which provide that the loans are interest free and are due within 12 months of the date of the loan.  The due dates of the loans are between January 5, 2011 and December 31, 2011.  During the fiscal year ended December 31, 2011, Longkong received interest payments and principal payments from Yinhe Travel in the amount of approximately $10.3 million.  As of December 31, 2011, the outstanding aggregate balance of the loans was approximately $11.3 million.

 

·During 2010, Longkong loaned approximately $2,000 to Zhang Shanjiu, our Chairman, President and Chief Executive Officer, approximately $5,000 to Yu Xinbo, our Chief Financial Officer, Treasurer and Secretary, and approximately $1,000 to Chen Rongguang, our Chief Operating Officer.  The parties did not execute written agreements with respect to these loans, which were interest-free, and there was no formal due date for repayment.  These loans were repaid in full in November 2010.  

  

·During the year ended December 31, 2010, Longkong loaned approximately $759,000 to Junan Tianma Island Travel Development Co., Ltd. (“Tianma Island”), a company controlled by Zhang Shanjiu, our Chairman, President and Chief Executive Officer, that operates an island resort.  We provided this loan because Tianma Island experienced a short-term shortage of working capital.  The parties did not execute a written agreement with respect to this loan, which was interest-free, and there was no formal due date for repayment.   During the fiscal year ended December 31, 2010, Longkong received interest payments and principal payments from Tianma Island in the amount of approximately $0 and $759,000, respectively.    The loan was repaid in full as of December 31, 2010. 

 

·During 2010, Zhang Shanjiu, our Chairman, President and Chief Executive Officer, loaned approximately $359,000 to Longkong, $248,000 of which was used to purchase land occupancy rights and the remaining balance of which was used for general corporate purposes.  The parties did not execute a written agreement with respect to these loans, which were interest-free, and there was no formal due date for repayment. The loans were repaid in full as of December 31, 2011.  

 

·During the six months ended June 30, 2010, Yu Xinbo, our Chief Financial Officer, Treasurer and Secretary, loaned approximately $27,000 to Longkong, which was used for general corporate purposes.  The parties did not execute a written agreement with respect to this loan, which was interest-free, and there was no formal due date for repayment. The loan was repaid in full as of December 31, 2011. 

 

·On January 1, 2010, Longkong began selling a bundled pass for general access to the “Underground Grand Canyon” tourist destination as well as general access to the “Fluorescent Lake” tourist destination operated by Fluorescent Lake.  Because the bundled pass entitles its holder to visit the Fluorescent Lake tourist destination, the price of the bundled pass, which is sold at both the Underground Grand Canyon and the Fluorescent Lake, is higher than the regular admission ticket price to the Underground Grand Canyon.  On February 11, 2010, Longkong and Fluorescent Lake executed a revenue sharing agreement, effective as of January 1, 2010 (the “Revenue Sharing Agreement”).  Pursuant to the terms of the Revenue Sharing Agreement, if a bundled pass (RMB118) is sold at the Underground Grand Canyon, approximately 92% (RMB108) of the cost of the pass is allocated as revenue to Longkong with the remaining 8% (RMB10) being allocated to Fluorescent Lake and recorded as a liability to a related party on our balance sheet.  If a bundled pass is sold at the Fluorescent Lake, approximately 36% (RMB42) of the cost of the pass is allocated as revenue to Longkong and recorded as a receivable from a related party on our balance sheet with the remaining 64% (RMB76) being recorded as revenue by Fluorescent Lake.  Revenue from sales of bundled passes was approximately $2.9 million (including approximately $738,000 in related party commissions) in the fiscal year ended December 31, 2011 and the number of visitors who used a bundled pass was approximately 137,500 during the fiscal year ended December 31, 2011.  Of the 137,500 visitors who used a bundled pass, approximately 114,000 of the passes were sold by the Underground Ground Canyon, accounting for approximately $2.1 million in revenue (approximately $811,000 in related party commissions received) to Longkong and approximately $0.3 million in revenue to Fluorescent Lake, and approximately 23,500 of the passes were sold by the Fluorescent Lake, accounting for approximately $0.2 million in revenue (approximately $73,000 in related party commissions paid) to Longkong and approximately $0.3 million in revenue to Fluorescent Lake. A regular admission ticket to the Underground Grand Canyon is RMB76 and a regular admission ticket to the Fluorescent Lake is RMB68.  Therefore, our relative fair value of each bundled pass is RMB62, which is the proportion that our regular admission ticket price (RMB76) bears to the total of the regular admission ticket prices for both attractions (RMB144) to the price of a bundled pass (RMB118).  For each bundled pass sold by the Underground Grand Canyon, we receive a benefit of RMB46 above our relative fair value.  Because the revenue sharing arrangement is with a related party company, the benefit for each bundled pass sold by the Underground Grand Canyon is characterized as a related party commission received.  For each bundled pass sold by the Fluorescent Lake, we receive RMB20 less than our relative fair value.  The amount of this loss is characterized as a related party commission paid and recorded net of the related party commission received by us for bundled passes sold by the Underground Ground Canyon.

 

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·Pursuant to a Guarantee Contract, dated March 14, 2008, between Longkong and the Agricultural Development Bank of China, Junan Branch (“Agricultural Bank”), Longkong has guaranteed a loan by Agricultural Bank to Tianma Island.  The loan bears interest at a rate of 7.83% per annum and is due March 13, 2014.  Periodic payments of $736,000, $1.2 million, $1.5 million and $1.8 million are due by Tianma Island on March 13, 2011, March 13, 2012, March 13, 2013 and March 13, 2014, respectively.  The balance due of the loan at December 31, 2011 was RMB 10 million (approximately $1.59 million).  The largest aggregate amount of principal outstanding during the fiscal year ended December 31, 2011 was RMB 30 million (approximately $4.8 million).  As Tianma Island remains current on this loan, Longkong has not been required to make any payments of principal or interest on Tianma Island’s behalf under this guarantee.
   
·Pursuant to the Guarantee Contract, dated April 2010, between Lonkong and Yishui Rural Credit Cooperative, Longkong has guaranteed a one-year loan by the bank to Fluorescent Lake for the amount of approximately $731,500, repayable in April 2011.  The loan matured and was paid off by Fluorescent Lake in April 2011.

 

·Pursuant to the Guarantee Contract, dated December 30, 2011, between Longkong and LinShang Bank, Longkong has guaranteed a one-year loan by the bank to Fluorescent Lake for the amount of approximately $793,537. The loan is due December 2014. The guarantee period is two years starting from the due date of the loan. Longkong has not been required to make any payments of principle or interest on Fluorescent Lake’s behalf under this guarantee. As of December 31, 2011, Longkong believes the risk of paying or performing the guarantee on Fluorescent Lake’s behalf is remote.

 

·Prsuant to the Guarantee Contracted, dated November 15, 2011 between Longkong and YuNan Rural Credit Union, Longkong has guaranteed a one- year loan by the bank to Tianma Island for the amount of $952,245. The loan is due November 2012. The guarantee period is two years starting from the due date of the loan. Longkong has not been required to make any payments of principle or interest on behalf of Tianma Island. As of December 31, 2011, Longkong believes the risk of paying or performing the guarantee on Tianma Island’s behalf is remote.

 

Potential Conflicts of Interest

 

Zhang Shanjiu, our Chairman, President and Chief Executive Officer, owns or controls many businesses in addition to our company, some of which are in the travel industry, including the companies we have made loans to (Fluorescent Lake, Yinhe Travel and Tianma Island) and other companies that operate hotels and travel agencies.  Zhang Shanjiu’s employment agreement requires him to devote substantially all of his business time, attention and energy to performing his duties and responsibilities to us and also contains a non-compete provision prohibiting him from, among other things, owning, controlling or managing any business that competes directly or indirectly with us in any market in which we are operating or considering operating.  Both of these provisions, however, are subject either to waiver by the board of directors or are enforceable by the board of directors.  Zhang Shanjiu, as our sole director, has waived the non-compete provisions of his employment agreement with respect to the businesses he owned or controlled, directly or indirectly, as of the closing date of the Share Exchange.  Because Zhang Shanjiu presently is our sole director and also presently owns or controls companies that compete with us, he may allocate his time to other businesses and activities, thereby causing possible conflicts of interest in his determination as to how much time to devote to the affairs of our company.  If other business affairs require Zhang Shanjiu to devote more substantial amounts of time to such affairs, it could limit his ability to devote substantial time to our affairs and could have a negative impact on our ongoing business.

 

Because certain of Zhang Shanjiu’s other businesses compete or may compete with our business, certain opportunities, including acquisition opportunities, that may ultimately complement our business may also complement the business operated by Zhang Shanjiu’s other business interests, which may lead to those opportunities being presented to those businesses instead of our company.  Moreover, in light of Zhang Shanjiu’s other business affiliations, he may have fiduciary obligations to present potential investment and business opportunities to those entities in addition to presenting them to our company, which could cause additional conflicts of interest.  Although we are seeking to locate one or more sites as acquisition and/or management opportunities, no definitive agreements have been executed, nor have there been any preliminary agreements, discussions or negotiations, with respect to any of these opportunities and there can be no assurances that we will execute any such agreements or enter into discussions or negotiations with respect to any potential sites.

 

As of December 31, 2011, we have made approximately $18.5 million in loans to entities controlled by Zhang Shanjiu.  Although most of the loans are payable on demand, Zhang Shanjiu’s influence over our company and the companies to which we have made loans may cause delays in repayment or modifications to repayment terms that might not otherwise occur in an arms’ length transaction.  To the extent Zhang Shanjiu determines that he values the business operated by these other companies more than our company, he may cause us to make additional loans to these businesses, which could have a material adverse effect on our financial condition, particularly if we are unable to repay our short-term indebtedness as a result of Zhang Shanjiu not compelling repayment of the loans we have made to these other companies.  Presently, we plan to reduce the level of short-term loans we make to related parties, both in an effort to reduce our overall leverage and to focus on our core business, although there can be no assurance that circumstances will not arise that will lead us to loan funds to related parties in the future.  Furthermore, the process of reducing the amount of short-term loans may take a year or more to put in place.

 

50
 

 

There can be no assurances that any conflicts of interest will be resolved in our favor.  Any such conflicts that are not resolved in our favor may have a material adverse effect on our business, financial condition and results of operations.  In any event, it cannot be predicted with any degree of certainty as to whether or not Zhang Shanjiu will have a conflict of interest with respect to a particular transaction as such determination would be dependent upon the specific facts and circumstances surrounding such transaction at the time.

 

We are not currently subject to any law, rule or regulation requiring that all or any portion of our board of directors include “independent” directors.  We intend to appoint such persons and form such committees as are required to meet the corporate governance requirements imposed by a U.S. national securities exchange.  Therefore, we intend that a majority of our directors eventually will be independent directors and at least one of our new independent directors will qualify as an “audit committee financial expert.”  At that time, we intend to have our Audit Committee or a majority of our independent directors approve all related party transactions, which, we believe, will minimize the number and potential impact of any future conflicts of interest.

 

Policy for Approval of Related Party Transactions

 

We do not currently have a formal policy for review and approval of related party transactions required to be disclosed pursuant to Item 404(a) of Regulation S-K.  We expect our board to adopt such a policy in the near future.

 

Promoters and Certain Control Persons

 

We did not have any promoters at any time during the past five fiscal years.

 

Director Independence

 

Until the closing of the Share Exchange, Timothy Halter served as an executive officer of BTHC and therefore is not an independent director.  The board of directors has not made any determination as to whether Zhang Shanjiu is independent within the meaning of NASDAQ Marketplace Rule 5605(a)(2), and this rule is not presently applicable to us.  However, based on the definition of independence under this rule, we believe that Zhang Shanjiu would not be considered to be an independent director.  We are not currently subject to any law, rule or regulation, however, requiring that all or any portion of our board of directors include “independent” directors.

 

ITEM 14.       PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

Independent Registered Public Accounting Firm’s Fees

 

The following is a summary of the fees billed to the Company by former auditors through March 2011, Zhonglei Certified Public Accountants Ltd. (“Zhonglei”), and the Company’s current auditors, MaloneBailey LLP (“MaloneBailey”) Moore Stephens for professional services rendered for the fiscal years ended December 31, 2011 and 2010:

 

   December 31, 2011   December 31, 2010 
Audit Fees  $90,000   $97,375 
Audit Related Fees   -    - 
Tax Fees   2,500    235 
All Other Fees   -    - 
TOTAL  $92,500   $97,610 

 

 “Audit Fees” consisted of the fees billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that were normally provided by Malone Bailey and Zhonglei in connection with our statutory and regulatory filings or engagements.

 

“Audit Related Fees” consisted of the fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees.

 

“Tax Fees” consisted of the fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax Fees were fees for preparation of our tax returns and consultancy and advice on other tax planning matters.

 

51
 

 

“All Other Fees” consisted of the fees billed for products and services provided by Malone Bailey and Zhonglei and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees.

 

Our board of directors has considered whether the provision of the non-audit services described above is compatible with maintaining auditor independence and determined that such services are appropriate. Before auditors are engaged to provide us audit or non-audit services, such engagement is (without exception, required to be) approved by the audit committee of our Board of Directors.

 

PART IV

 

ITEM 15.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

(a)        All financial statements.

 

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.

 

(b)      Exhibits.

 

The exhibits listed in the following Exhibit Index are filed as part of this Annual Report.

 

 

Exhibit
No.
 

Description 

     
  2.1 First Amended Joint Plan of Reorganization filed by the Debtors and Official Committee of Unsecured Creditors, In the United States Bankruptcy Court, Northern District of Texas, Dallas Division, In Re: Ballantrae Healthcare, LLC, et. al., Debtors, Case No. 03-33152-HDH-11, dated September 29, 2004.(1)
     
  2.2 Order Confirming First Amended and Joint Plan of Reorganization, Chapter 11, Case No. 03-33152-HDH-11, Signed November 29, 2004.(1)
     
  2.3 Share Exchange Agreement, dated October 6, 2010, by and among BTHC XV, Inc., Halter Financial Investments LP, Grand Fountain Capital Holding Limited, Zhang Shanjiu, Zhang Qian, Li Shikun, Yu Xinbo and Long Fortune Valley Tourism International Limited.(2)
     
  3.1 Agreement and Plan of Merger by and between BTHC XV, Inc. and BTHC XV, LLC, dated August 16, 2006.(1)
     
  3.2 Certificate of Merger as filed with the Secretary of State of the State of Delaware on August 16, 2006.(1)
     
  3.3 Articles of Merger as filed with the Secretary of State of the State of Texas on August 16, 2006.(1)
     
  3.4 Certificate of Incorporation of BTHC XV, Inc.(1)
     
  3.5 Bylaws of BTHC XV, Inc.(1)
     
  10.1 Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Bank of China, Yi Shui Branch dated November 27, 2009.(5)+
     
  10.2 Loan Contract between Shandong Longkong Travel Development Co., Ltd. and ICBC, Yi Shui Branch dated January 20, 2010.(6)+
     
  10.3 Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd dated November 26, 2009.(3)+
     
  10.4 Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd dated November 24, 2009.(3)+
     
  10.5 Credit Line Limit Agreement between Shandong Longkong Travel Development Co., Ltd. and Bank of China, Yi Shui Branch dated November 27, 2009.(3)+
     
  10.6 Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated January 9, 2010.(5)+

 

52
 

 

  10.7 Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated January 9, 2010.(5)+

 

     
  10.8 Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated April 21, 2010.(5)+
     
  10.9 Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated May 21, 2010.(5)+
     
  10.10 Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated May 21, 2010.(5)+
     
  10.11 Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated May 24, 2010.(5)+
     
  10.12 Loan Contract of Working Capital between Shandong Longkong Travel Development Co., Ltd. and Lin Shang Bank Co Ltd. Yishui Branch dated May 28, 2010.(3)+
     
  10.13 Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Industrial & Commercial Bank of China Co., Ltd, Yishui Branch dated May 11, 2010.(5)+
     
  10.14 Maximum Mortgage Agreement between Shandong Longkong Travel Development Co., Ltd. and Industrial & Commercial Bank of China Co., Ltd Yi Shui Branch dated July 5, 2009.(3)+
     
  10.15 Maximum Mortgage Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated January 12, 2009.(3)+
     
  10.16 Pledge Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated May 24, 2009.(3)+
     
  10.17 Pledge Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated April 21, 2010.(3)+
     
  10.18 Employment Contract between Shandong Longkong Tourism Group Co., Ltd and Yu Xinbo dated December 30, 2007.(3)+†
     
  10.19 Employment Contract between Shandong Longkong Tourism Group Co., Ltd and Kong Xianghai dated August 28, 2008.(3)+†
     
  10.20 Employment Contract between Shandong Longkong Tourism Group Co., Ltd and Zhang Shanjiu dated December 30, 2007.(3)+†
     
  10.21 Employment Contract between Shandong Longkong Tourism Group Co., Ltd and Chen Rongguang dated December 30, 2007.(3)+†
     
  10.22 Employment Agreement between BTHC XV, Inc. and Yu Xinbo dated October 18, 2010.(3)†

 

     
  10.23 Employment Agreement between BTHC XV, Inc. and Kong Xianghai dated October 18, 2010.(3)†
     
  10.24 Employment Agreement between BTHC XV, Inc. and Zhang Shanjiu dated October 18, 2010.(3)†
     
  10.25 Employment Agreement between BTHC XV, Inc. and Chen Rongguang dated October 18, 2010.(3)†
     
  10.26 Land Lease Contract between Shandong Longkong Tourism Group Co., Ltd and Yaodianzi Town Houwujia Village Council dated September 30, 2004.(3)+
     
  10.27 Land Lease Contract between Shandong Longkong Tourism Group Co., Ltd and Yaodianzi Town Haizi Village Council dated November 26, 2004.(3)+
     
  10.28 Lease Contract of Mountain Waste between Shandong Longkong Tourism Group Co., Ltd and Yaodianzi Town Houwujia Village Council dated September 30, 2004.(3)+

 

53
 

  

  10.29 Developing and Managing Contract of Yishuia Yao Dianzi Cave between Shandong Di Xia Da Xia Gu Nu You Kai Fa Co., Ltd. and PRC Government of Yaodianzi Town, Yishui County dated April 2, 2004.(3)+
     
  10.30 Licensing Trade Mark Contract between Shandong Shan Jiu Ching Tong Gong Yi Pin Co. Ltd and Shandong Longkong Travel Development Co., Ltd. dated September 28, 2010.(3)+
     
  10.31 Commitment of Contingent After-Payment or Call-Payment of Housing Fund of Zhang Shanjiu dated September 28, 2010.(3)+
     
  10.32 Guarantee Agreement between Shandong Longkong Travel Development Co., Ltd., Shandong Yinlian Guarantee Co., Ltd, Li Hongwei and Yishui Rural Credit Cooperative dated April 30, 2010.(3)+
     
  10.33 Guarantee Agreement between Shandong Longkong Travel Development Co., Ltd. and Agricultural Development Bank of China dated March 14, 2008.(3)+
     
  10.34 Pledge Agreement between Shandong Longkong Travel Development Co., Ltd. and Agricultural Development Bank of China dated March 14, 2008.(3)+
     
  10.35 Supplemental Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd (undated).(3)+
     
  10.36  Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd dated April 24, 2010.(3)+
     
  10.37  Supplemental Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd dated December 31, 2009.(3)+

 

     
  10.38  Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated January 5, 2010.(3)+
     
  10.39  Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated January 9, 2010.(3)+
     
  10.40  Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated January 11, 2010.(3)+
     
  10.41  Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated April 22, 2010.(3)+
     
  10.42  Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated April 22, 2010.(3)+
     
  10.43 Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated May 7, 2010.(3)+
     
  10.44 Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated May 14, 2010.(3)+
     
  10.45 Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated May 22, 2010.(3)+
     
  10.46 Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated May 29, 2010.(3)+
     
  10.47 Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated June 5, 2010.(3)+
     
  10.48 Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated June 7, 2010.(3)+
     
  10.49 Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated June 9, 2010.(3)+
     

 

54
 

 

 

  10.50 Exclusive Service Agreement between Long Fortune Valley Tourism International Limited and Greentree Financial Group, Inc. dated September 1, 2010.(3)
     
  10.51 Schedules to the Share Exchange Agreement, dated October 6, 2010, by and among BTHC XV, Inc., Halter Financial Investments LP, Grand Fountain Capital Holding Limited, Zhang Shanjiu, Zhang Qian, Li Shikun, Yu Xinbo and Long Fortune Valley Tourism International Limited.(4)
     
  10.52 Grand Canyon & Fluorescent Lake Full-Pass Distribution Agreement, dated as of February 10, 2010, between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd.(5)+

 

  10.53  Form of Cooperation Agreement between Shandong Longkong Travel Management Co., Ltd. and a travel agency.(6)+  
       
  10.54  Renminbi Loan Application (short term) (Applicable to the Middle & Small Scale Enterprise Renminbi Loan), dated October 21, 2010, between Shandong Longkong Travel Management Co., Ltd. and Bank of China, Yishui Branch.(7) +  
       
  10.55  Contract of Loan of Small Scale Enterprise, dated October 22, 2010, between Shandong Longkong Travel Management Co., Ltd. and Industrial and Commercial Bank of China, Yishui Branch.(7) +  
       
  10.56  Renminbi Loan Application (short term) (Applicable to the Middle & Small Scale Enterprise Renminbi Loan), dated October 27, 2010, between Shandong Longkong Travel Management Co., Ltd. and Bank of China, Yishui Branch.(7) +  
       
  21.1 Subsidiaries of the Registrant.(3)   
       
  23.1 Consent of HighKing & Partners.(5)  
       
  31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*  
       
  31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*  
       
  32.1 Certifications of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*  
       
  32.2 Certifications of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*  

 

 

  * Filed herewith
  Management Agreement
  + English translation of a Chinese language document.
(1) Incorporated by reference to BTHC’s Form 10-SB12G filed on September 13, 2007.
(2) Incorporated by reference to Exhibit 2.1 to BTHC’s Form 8-K filed on October 6, 2010.
(3) Incorporated by reference to BTHC’s Form 8-K filed on November 4, 2010.
(4) Incorporated by reference to BTHC’s Form 8-K/A filed on January 3, 2011.
(5) Incorporated by reference to BTHC’s Form 10-K filed on April 15, 2011.
(6) Incorporated by reference to BTHC’s Form 8-K/A filed on June 29, 2011.
(7) Incorporated by reference to BTHC’s Form 10-K/A filed on June 29, 2011.
         

55
 

 

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.

 

  BTHC XV, Inc.
     
Date: April 20, 2012 By: /s/ Zhang Shanjiu
 

Zhang Shanjiu

Chief Executive Officer

(Principal Executive Officer)

     
Date: April 20, 2012 By: /s/ Yu Xinbo
 

Chief Financial Officer

(Principal Financial and Accounting 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/ Zhang Shanjiu   Chairman, President and Chief   April 20, 2012
Zhang Shanjiu   Executive Officer (Principal
Executive Officer)
   
         
/s/ Yu Xinbo   Chief Financial Officer, Treasurer and   April 20, 2012
Yu Xinbo   Secretary (Principal Financial
and Accounting Officer)
   

 

56
 

 

AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF

BTHC XV, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

    Page
Reports of Independent Registered Public Accounting Firms   F-2
Consolidated Balance Sheets   F-3
Consolidated Statements of Income   F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income   F-5
Consolidated Statements of Cash Flows   F-6
Notes to Consolidated Financial Statements   F-7

 

 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

BTHC XV, Inc. and Subsidiaries

 Yishui, China

 

We have audited the accompanying consolidated balance sheets of BTHC XV, Inc. and its Subsidiaries (collectively, the “Company”) as of December 31, 2011 and December 31, 2010, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for the years then ended. In connection with our audit for the consolidated financial statements, we have also audited the condensed parent company financial statements for the year ended December 31, 2011. These consolidated financial statements and condensed parent company financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 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 and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BTHC XV, Inc. and its Subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related condensed parent company financial statements, when considered in relation to the consolidated financial statements taken a whole, presents fairly, in all material aspects, the information set forth therein.

 

/s/ MaloneBailey, LLP

 www.malonebailey.com

 Houston, Texas

April 16, 2012

 

F-2
 

 

BTHC XV, Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

   December 31,   December 31, 
   2011   2010 
         
Assets          
Current Assets          
Cash and cash equivalents  $696,796   $208,955 
           
Accounts receivable   169,345    36,968 
Other Receivable and advance payments   1,351,552    960,588 
Due from related parties   18,781,553    13,422,978 
Deferred tax assets   -    380,465 
Other current assets   26,525    25,354 
Total current assets   21,025,771    15,035,308 
           
Property, plant and equipment, net   13,916,042    13,603,339 
Intangible assets, net   261,349    259,218 
Long term investment   320,298    306,156 
Other assets   136,104    140,959 
Total Assets  $35,659,564   $29,344,980 
           
Liabilities and Stockholders' Equity          
Current Liabilities          
Accounts payable  $846,098   $399,472 
Accrued liabilities   46,971    277,108 
Taxes payable   4,209,113    3,917,347 
Short term debt   10,950,817    10,315,600 
Due to related parties   82,239    28,463 
Total current liabilities   16,135,238    14,937,990 
           
Long term deferred tax liabilities   -    32,967 
Total Liabilities  $16,135,238   $14,970,957 
Stockholders' Equity          
           
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding   -    - 
Common stock, $0.001 par value, 40,000,000 shares authorized, 18,089,660 shares issued and outstanding   18,090    18,090 
Additional paid-in capital   1,172,358    1,172,358 
Statutory reserves   913,370    913,370 
Retained earnings   15,562,794    11,282,284 
Accumulated other comprehensive income   1,857,714    987,921 
Total stockholders' equity   19,524,326    14,374,023 
Total Liabilities and Stockholders' Equity  $35,659,564   $29,344,980 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3
 

 

BTHC XV, Inc. and Subsidiaries

 

Consolidated Statements of Operations and Other Comprehensive Income

 

   For the Years Ended December 31, 
   2011   2010 
Revenue  $11,615,716   $9,144,581 
Cost of revenue   548,446    - 
Gross Profit   11,067,270    9,144,581 
           
Operating Expenses          
Selling expenses   2,716,253    2,400,806 
General and administrative   1,598,715    1,383,428 
Total operating expenses   4,314,968    3,784,234 
           
Income from Operations   6,752,302    5,360,347 
           
Other Income (Expenses):          
Other income (expenses), net   (1,204,295)   (162,234)
Total Other Income (Expenses)   (1,204,295)   (162,234)
           
Income before Income Taxes   5,548,007    5,198,113 
Income taxes   1,267,497    1,197,459 
Net Income  $4,280,510   $4,000,654 
           
Other Comprehensive Income          
Foreign currency translation adjustment   869,793    517,921 
Comprehensive Income  $5,150,303   $4,518,575 
           
Earnings per Share, Basic and Diluted  $0.24   $0.23 
           
Weighted Average Shares Outstanding, Basic and Diluted   18,089,660    17,371,030 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4
 

 

BTHC XV, Inc. and Subsidiaries

 Consolidated Statements of Changes in Shareholders’ Equity

 

           Additional   Accumulated Other           Total 
   Preferred Stock   Common Stock   Paid-in   Comprehensive   Statutory   Retained   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Income   Reserves   Earnings   Equity 
                                     
Balance at December 31, 2008 (Restated)   -    -    17,185,177   $17,185   $949,814   $450,000   $593,000   $2,568,000   $4,577,999 
                                              
Contributions from shareholders                       1,000                   1,000 
Foreign currency translation adjustment                            20,000              20,000 
Net income                                      5,034,000    5,034,000 
                                              
Balance at December 31, 2009 (Restated)   -    -    17,185,177    17,185    950,814    470,000    593,000    7,602,000    9,632,999 
                                              
Shares issued at share exchange and direct costs             904,483    905    (429,171)                  (428,266)
Contributions from shareholders                       650,715                   650,715 
Foreign currency translation adjustment                            517,921              517,921 
Allocation of statutory reserve                                 320,370    (320,370)   - 
Net income                                      4,000,654    4,000,654 
                                              
Balance at December 31, 2010 (Restated)   -    -    18,089,660    18,090    1,172,358    987,921    913,370    11,282,284    14,374,023 
                                              
Foreign currency translation adjustment                            869,793              869,793 
Net income                                      4,280,510    4,280,510 
                                              
Balance at December 31, 2011   -    -   $18,089,660   $18,090   $1,172,358   $1,857,714   $913,370   $15,562,794   $19,524,326 

 

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

 

F-5
 

 

BTHC XV, Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

   Years  ended 
   December 31, 2011   December 31, 2010 
         
Cash Flows From Operating Activities          
Net Income  $4,280,510   $4,000,654 
Adjustments to reconcile net income to net cash  provided by (used in) operating activities:          
Depreciation expense   920,649    689,628 
Amortization expense   9,599    5,033 
Amortization of prepaid rent   25,045    3,199 
Investment Income        (2,687)
Changes in operating assets and liabilities:          
Accounts receivable   (130,669)   (36,051)
Other receivable and advance payments   (226,007)   (946,805)
Accounts payable   428,174    (611,184)
Accrued liabilities   (242,937)   (583)
Amount due to related party   52,461    27,757 
Taxes payable   110,817    636,451 
Deferred Tax Asset   398,039    (265,444)
L/T Deferred tax liabilities   (34,490)   32,150 
Net cash provided by operating activities   5,591,191    3,532,118 
           
Cash Flows From Investing Activities          
Cash paid for notes receivable from related parties   (4,873,445)   (8,137,970)
Cash paid for purchase of fixed assets and intangibles   (628,411)   (3,778,044)
Cash paid for long term investment   -    (257,826)
Net cash provided by (used in) investing activities   (5,501,856)   (12,173,840)
           
Cash Flows From Financing Activities          
Proceeds from short term debt   18,267,232    12,279,020 
Principal payments on short term debt   (18,108,524)   (4,734,080)
Cash proceeds from shareholders capital contribution   -    650,715 
Cash paid to restructure capital structure   -    (428,266)
Net cash provided by financing activities   158,708    7,767,389 
           
Effect of exchange rate changes on cash   239,798    7,288 
Net decrease in cash and cash equivalents   487,841    (867,045)
Cash and cash equivalents, beginning of period   208,955    1,076,000 
Cash and cash equivalents, end of period   696,796    208,955 
Supplemental disclosure information:          
Income taxes paid  $813,673   $839,692 
Interest paid  $940,400   $338,513 
           
Non-cash investing and financing activities:          
Construction in progress purchased on credit   -   $80,866 
Allocation of statutory reserve   -   $320,370 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6
 

 

 

NOTE 1 - DESCRIPTION OF BUSINESS AND ORGANIZATION

 

Organization

 

BTHC XV, Inc. (the “Company”) was formed on March 31, 2006 and incorporated on August 16, 2006 in the State of Delaware. The Company is the U. S. Bankruptcy Court mandated reincorporation of and successor to BTHC XV, LLC, a Texas Limited Liability Company which was discharged from bankruptcy on November 29, 2004.  The effective date of the merger of BTHC XV, Inc. and BTHC XV, LLC was August 16, 2006. On October 18, 2010, the Company (i) closed a share exchange transaction pursuant to which BTHC XV became the 100% parent of Long Fortune Valley Tourism International (Cayman) Limited (“LFVT Cayman”), (ii) assumed the operations of LFVT Cayman and its subsidiaries, including Rich Valley Capital Holding Limited (Rich Valley”), Long Fortune Valley Tourism International (Hong Kong) Limited (“LFHK”), and Shandong Longkong Travel Management Co., Ltd. (“Longkong”).

 

LFVT Cayman was incorporated on December 9, 2009 as an exempted company limited by shares in the Cayman Islands.  The Company is 45.7% owned by Grand Fountain Capital Holding Limited (a Cayman Islands company 99.8% owned by Chen, Rongxia, Zhang, Shanjiu’s spouse), 28.9% owned by Zhang, Qian, Zhang, Shanjiu’s daughter, 22% owned by Zhang, Shanjiu, 2.9% owned by Li, Shikun and 0.5% owned by Yu, Xinbo, LFVT Cayman has 50,000 common shares authorized with $1.00 par value each and 1,750 shares issued and outstanding. Since inception, the Company has not conducted any substantive operations of its own, except to serve as a holding company that owns 100% of the equity of Rich Valley, a British Virgin Islands company that was established by LFVT Cayman on December 9, 2009 as a wholly-owned subsidiary.

 

Rich Valley has 50,000 common shares authorized with no par value and one share issued and outstanding. The share was issued for $1.00. Since inception, Rich Valley has not conducted any substantive operations of its own, except to serve as a holding company that owns 100% of the equity of LFHK, a Hong Kong company that was established by Rich Valley on December 22, 2009 as a wholly-owned subsidiary.

 

LFHK has 10,000 common shares authorized with HK$1.00 par value each and 10,000 shares issued and outstanding. Since inception, LFHK has not conducted any substantive operations of its own, except to serve as a holding company that owns 100% of the equity of Longkong, a limited liability company organized in the PRC on March 15, 2004.  Longkong operates its business in Linyi City, Yishui County, Shandong Province, PRC.

 

Longkong was organized with an initial registered capital of approximately $2.4 million, which was 79.2% owned by Zhang Shanjiu and 20.8% owned by Zhang Qian, Zhang Shanjiu’s daughter.  Since then the Company experienced several equity transactions and by the end of 2008, the Company was 100% held by Long Fortune Valley Limited, a company organized under the laws of Gibraltar (“Fortune Valley”) with registered capital of approximately $967,000. Fortune Valley was a company that was established on behalf of Zhang, Shanjiu by a third party trustee in Gibraltar.  The shares of Fortune Valley were held in trust for the benefit of Zhang, Shanjiu, who beneficially owned the shares of Fortune Valley and had the ability to exercise control over Fortune Valley.  On December 29, 2009, Fortune Valley sold 100% of the equity interests in Longkong to LFHK for $1. In December 2010, Longkong’s registered capital increased to approximately $4.2 million.

 

Pursuant to the acquisitions described above, the Company acquired all the equity interests of the subsidiaries under common control as all of the entities are ultimately controlled by the same parties (Zhang, Shanjiu and his immediate family).  Accordingly, the financial statements have been prepared as if the existing corporate structure had been in existence throughout all periods and the acquisitions had occurred as of the beginning of the earliest period presented in the accompany financial statements.

 

F-7
 

 

Nature of operations

 

The business scope of Longkong is tourism development.  The key business project is a cave named the “Underground Grand Canyon” that is located in Linyi City, Yishui County, Shandong Province, PRC.  The Underground Grand Canyon tourist destination, at 6,100 meters (approximately 3.75 miles), is the longest cave system in northern China and contains several stalactite and stalagmite formations, as well as rivers and streams.  To date, approximately 3,100 meters (approximately 2 miles) have been developed into five entertainment attractions, including: (i) the “Underground Water Drifting” attraction; (ii) the “Electric Slide Car” attraction; (iii) the “Battery Vehicle” attraction; (iv) the “Strop Ropeway” attraction; and (v) the “Treasure Hunting Cave”. Revenue is generated from admission tickets, water drifting attraction fees, rail car fees and other fees and services, including battery vehicle fees, strop ropeway fees, treasure hunting cave fees and parking fees.  An admission ticket is for general access to the “Underground Grand Canyon” tourist destination.  Visitors are charged additional fees for the entertainment attractions in and around the Underground Grand Canyon.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant inter-company transactions and balances have been eliminated upon consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

 

Risk and uncertainties

 

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, foreign currency exchange rates and the volatility of public markets.

 

Concentration of credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade receivables. As of December 31, 2011 and 2010, substantially all of the Company’s cash were held by major financial institutions located in the PRC and Hong Kong, which management believes are of high credit quality. Most of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent on the industry economies prevailing in their respective areas; however, concentration of credit risk with respect to trade accounts receivable is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risks.

 

F-8
 

 

Fair value of financial instruments

 

The Company adopted Financial Accounting Standards Board (FASB) ASC 820 “Fair Value Measurements,” which defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. Current assets and current liabilities qualified as financial instruments and management believes their carrying amounts are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and if applicable, their current interest rate is equivalent to interest rates currently available.  The three levels are defined as follow:

  

  ¨

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

     
  ¨ Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

  ¨ Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value.

  

As of the balance sheet date, the estimated fair values of the financial instruments were not materially different from their carrying values as presented due to the short maturities of these instruments and that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective period-ends. Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates the hierarchy disclosures each quarter.

 

Cash and cash equivalents

 

Cash and cash equivalents include interest bearing and non-interest bearing bank deposits, money market accounts, and short-term certificates of deposit with original maturities of three months or less.

 

Accounts receivable

 

Accounts receivable are recognized and carried at original invoiced amount less an allowance for uncollectible accounts, as needed.

 

The allowance on uncollectible accounts receivable reflects management’s best estimate of probable losses determined principally on the basis of historical experience. All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for uncollectible accounts receivable. When facts subsequently become available to indicate that the amount provided as the allowance was incorrect, an adjustment which is classified as a change in estimate is made.

 

Property, plant and equipment

 

Property, plant and equipment are recorded at cost and are stated net of accumulated depreciation.  Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets, taking into account the estimated residual value.  The estimated useful lives are as follows:

 

Building 20 years
Machinery and equipment 10 years
Motor vehicle 5 years
Office equipment 5 years

 

F-9
 

 

Maintenance and repairs are charged directly to expense as incurred, whereas betterments and capital expenditures for infrastructure and facilities improvement are generally capitalized in their respective property accounts.  When an item is retired or otherwise disposed of, the cost and applicable accumulated depreciation are removed and the resulting gain or loss is recognized and reflected in current operations.  

 

Construction in progress

 

Construction in progress represents property and equipment under construction.  No depreciation is recorded in respect of construction in progress.  Construction in progress is transferred to property and equipment, and depreciation of the asset commences, when the asset has been substantially completed and is ready for its intended use.

 

 Capitalized interest

 

The interest costs associated with construction projects are capitalized and included as part of the cost of the project. When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using the Company’s weighted-average cost of borrowing. Capitalization of interest ceases when the project is substantially completed. The capitalized interests as part of the construction in progress as of December 31, 2011 and 2010 were $Nil and $128,598, respectively.

 

Impairment of long-lived assets

 

The Company accounts for impairment of property, plant and equipment and amortizable intangible assets in accordance with ASC 360, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the Company to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value. There were no impairments of its long-lived assets as of December 31, 2011 and 2010.

 

Intangible assets

 

The Company’s intangible assets consist of land use rights at December 31, 2011 and December 31, 2010. According to the laws of China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over 42 years, the lease term of the rights.

 

Revenue Recognition

 

Revenue of the Company is generated from bundled passes, admission tickets, water drifting attraction fees, rail car fees and other fees and services, including battery vehicle fees, strop ropeway fees, treasure hunting cave fees (beginning February 2011) and parking fees.  A bundled pass is for same-day general access to the Company’s “Underground Grand Canyon” tourist destination and same-day general access to the “Fluorescent Lake” tourist destination operated by Yishui Underground Fluorescent Lake Travel Development Co., Ltd. (“Fluorescent Lake”).  Because the bundled pass entitles its holder to visit the Fluorescent Lake tourist destination, the price of the bundled pass, which is sold at both the Underground Grand Canyon and the Fluorescent Lake, is higher than the regular admission ticket price to the Underground Grand Canyon.

 

F-10
 

 

Pursuant to a 2010 revenue sharing agreement between Longkong and Fluorescent Lake, if a bundled pass (RMB118) is sold at the Underground Grand Canyon, approximately 92% (RMB108) of the cost of the pass is allocated as revenue to Longkong with the remaining 8% (RMB10) being allocated to Fluorescent Lake and recorded as a liability to a related party on the Company’s balance sheet.  If a bundled pass is sold at the Fluorescent Lake, approximately 36% (RMB42) of the cost of the pass is allocated as revenue to Longkong and recorded as a receivable from a related party on the Company’s balance sheet with the remaining 64% (RMB76) being recorded as revenue by Fluorescent Lake.  While negotiating the terms of the revenue sharing agreement, Fluorescent Lake’s management agreed to the premium percentages allocated to the Underground Grand Canyon due to several factors, including that the Underground Grand Canyon is relatively better known than the Fluorescent Lake based on the number of visitors to each tourist attraction annually, that the Underground Grand Canyon offers five entertainment attractions, in addition to the general walking tour, to Fluorescent Lake’s one entertainment attraction and that Longkong’s management did not expect to see a significant increase in the number of visitors to the Underground Grand Canyon solely as a result of the sales of bundled passes by Fluorescent Lake.  The revenue sharing agreement only contains economic terms and is otherwise terminable at the will of either party and does not contain a term.  During the fiscal years ended December 31, 2011 and December 31, 2010, the allocation was as follows:

 

       Fluorescent Lake   Bundled Pass 
If bundled pass sold at:  Longkong Received   Received   Price 
Underground Grand Canyon  RMB108   RMB10   RMB118 
Fluorescent Lake  RMB42   RMB76   RMB118 

 

In March 2011, the local government approved an increase in our admission ticket price for visitors effective April 1, 2011, which led to a RMB10 increase in the price of the bundled pass to RMB128 also effective that date.  During April and May 2011, if a bundled pass (RMB128) was sold at the Underground Grand Canyon, approximately 91% (RMB116) of the cost of the pass was allocated as revenue to Longkong with the remaining 9% (RMB12) being allocated to Fluorescent Lake and recorded as a liability to a related party on the Company’s balance sheet.  If a bundled pass was sold at the Fluorescent Lake, approximately 39% (RMB50) of the cost of the pass was allocated as revenue to Longkong and recorded as a receivable from a related party on the Company’s balance sheet with the remaining 61% (RMB78) being recorded as revenue by Fluorescent Lake.  During April and May 2011, the allocation was as follows:

 

       Fluorescent Lake   Bundled 
If bundled pass sold at:  Longkong Received   Received   Pass Price 
Underground Grand Canyon  RMB116   RMB12   RMB128 
Fluorescent Lake  RMB50   RMB78   RMB128 

 

Beginning June 1, 2011, the price of the bundled pass increased again RMB10 to RMB138.  From and after June 1, 2011, if a bundled pass (RMB138) is sold at the Underground Grand Canyon, approximately 88% (RMB121) of the cost of the pass is allocated as revenue to Longkong with the remaining 12% (RMB17) being allocated to Fluorescent Lake and recorded as a liability to a related party on the Company’s balance sheet.  If a bundled pass is sold at the Fluorescent Lake, approximately 40% (RMB55) of the cost of the pass is allocated as revenue to Longkong and recorded as a receivable from a related party on the Company’s balance sheet with the remaining 60% (RMB83) being recorded as revenue by Fluorescent Lake.  From and after June 1, 2011, the allocation is as follows:

 

       Fluorescent Lake   Bundled Pass 
If bundled pass sold at:  Longkong Received   Received   Price 
Underground Grand Canyon  RMB121   RMB17   RMB138 
Fluorescent Lake  RMB55   RMB83   RMB138 

 

Longkong’s and Fluorescent Lake’s management expects to review the terms of the revenue sharing agreement annually and decide whether to continue the relationship as is, modify the existing terms, which could be more or less beneficial to Longkong, or terminate the relationship.

 

F-11
 

 

Neither Longkong nor Fluorescent Lake sells bundled passes in advance.  Because the bundled pass expires if not used the same day it is sold to a visitor, neither company has any unfilled obligations at the end of the day the bundled pass is sold.  Accordingly, there are no unused, unexpired passes and therefore no deferred revenue at December 31, 2011 and December 31, 2010.

 

Prior to April 1, 2011, a regular admission ticket to the Underground Grand Canyon was RMB76 and a regular admission ticket to the Fluorescent Lake was RMB68.  Therefore, Longkong’s relative fair value of each bundled pass was RMB62, which is the proportion that its regular admission ticket price (RMB76) bore to the total of the regular admission ticket prices for both attractions (RMB144) to the former price of a bundled pass (RMB118).  For each bundled pass sold by the Underground Grand Canyon, Longkong received a benefit of RMB46 above its relative fair value.  Because the revenue sharing arrangement is with a related party company, the benefit for each bundled pass sold by the Underground Grand Canyon was characterized as a related party commission received.  For each bundled pass sold by the Fluorescent Lake, Longkong received RMB20 less than its relative fair value.  This difference was characterized as a related party commission paid and recorded net of the related party commission received by Longkong for bundled passes sold by the Underground Ground Canyon.  During the fiscal year ended December 31, 2010 and the three months ended March 31, 2011, the allocation was as follows:

 

       Longkong’s Relative   Commission 
If bundled pass sold at:  Longkong Received   Fair Value   Received/(Paid) 
Underground Grand Canyon  RMB108   RMB62   RMB46 
Fluorescent Lake  RMB42   RMB62   RMB(20)

 

During April and May 2011, a regular admission ticket to the Underground Grand Canyon was RMB96 and a regular admission ticket to the Fluorescent Lake was RMB80.  Therefore, Longkong’s relative fair value of each bundled pass was RMB70, which is the proportion that its regular admission ticket price (RMB96) bore to the total of the regular admission ticket prices for both attractions (RMB176) to the former price of a bundled pass (RMB128).  For each bundled pass sold by the Underground Grand Canyon, Longkong received a benefit of RMB46 above its relative fair value.  Because the revenue sharing arrangement is with a related party company, the benefit for each bundled pass sold by the Underground Grand Canyon was characterized as a related party commission received.  For each bundled pass sold by the Fluorescent Lake, Longkong received RMB20 less than its relative fair value.  This difference was characterized as a related party commission paid and recorded net of the related party commission received by Longkong for bundled passes sold by the Underground Grand Canyon.  During April and May 2011, the allocation was as follows:

 

       Longkong’s Relative   Commission 
If bundled pass sold at:  Longkong Received   Fair Value   Received/(Paid) 
Underground Grand Canyon  RMB116   RMB70   RMB46 
Fluorescent Lake  RMB50   RMB70   RMB(20)

 

From and after June 1, 2011, a regular admission ticket to the Underground Grand Canyon is RMB96 and a regular admission ticket to the Fluorescent Lake is RMB80.  Therefore, Longkong’s relative fair value of each bundled pass is RMB75, which is the proportion that its regular admission ticket price (RMB96) bears to the total of the regular admission ticket prices for both attractions (RMB176) to the price of a bundled pass (RMB138).  For each bundled pass sold by the Underground Grand Canyon, Longkong receives a benefit of RMB46 above its relative fair value.  Because the revenue sharing arrangement is with a related party company, the benefit for each bundled pass sold by the Underground Grand Canyon is characterized as a related party commission received.  For each bundled pass sold by the Fluorescent Lake, Longkong receives RMB20 less than its relative fair value.  This difference is characterized as a related party commission paid and recorded net of the related party commission received by Longkong for bundled passes sold by the Underground Grand Canyon.  From and after June 1, 2011, the allocation is as follows:

 

       Longkong’s Relative   Commission 
If bundled pass sold at:  Longkong Received   Fair Value   Received/(Paid) 
Underground Grand Canyon  RMB121   RMB75   RMB46 
Fluorescent Lake  RMB55   RMB75   RMB(20)

 

F-12
 

 

The amount of the net related party commissions received during fiscal years ended December 31, 2011 and December 31, 2010 was approximately $385,401 and approximately $486,053, respectively.  

 

An admission ticket entitles the visitor to a one-time admission to the Underground Grand Canyon and entertainment attraction fees entitle the visitor to a one-time usage of the particular entertainment attraction.  No weekly, monthly or other annual or season type passes are offered to the Underground Grand Canyon.  Longkong does not sell admission tickets in advance.  Admission ticket prices and entertainment attraction fees are generally collected when tickets are sold upon the visitors entering the facility.  Revenue is recognized when the tickets are used.  Occasionally, visitors are granted admission to the Underground Grand Canyon on credit.  At such times, the Company recognizes revenue when the service has occurred and records accounts receivable.  Revenue is recorded net of relevant business taxes.  Business taxes are charged at 3% on sales of admission tickets and 5% of other fee and service revenues.  Such taxes were $488,383 and $379,082 for the years ended December 31, 2011 and 2010, respectively. Refer to Note 9 – Related-Party Transactions.

 

The Company’s revenues are subject to seasonal variation and accordingly interim results may not be indicative of the estimated results for a full fiscal year.

 

Rebates

Commencing January 1, 2010, the Company started to offer a return, also referred to as a rebate, to the travel agencies with which Longkong has entered into cooperation agreements.  The rebates are based on the total number of visitors the travel agency brings to the Underground Grand Canyon during a calendar year.  The Company recognizes the rebate obligation as a reduction of revenue based on the estimated number of visitors brought to the Underground Grand Canyon by those travel agencies expected to claim rebates.  The rebates for years ended December 31, 2011 and 2010 were $318,840 and $233,681, respectively.

 

Operating leases

Leases in which substantially all the rewards and risks of ownership of the asset remain with the lessor are accounted for as operating leases.  Payments made under operating leases are charged to the statements of operations on a straight-line basis over the shorter of the lease term or estimated useful life.

 

 Advertising costs

The Company expenses advertising costs as incurred.  Total advertising expenses were $1,054,256 and $1,225,288 for the years ended December 31, 2011 and 2010, respectively, and have been included as part of operating expenses.

 

Income taxes

 

The Company accounts for income and deferred tax under the provision of ASC 740 “Income Taxes”. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. ASC 740 also requires the recognition of the future tax benefits of net operating loss carry forwards. A valuation allowance is established when the deferred tax assets are not expected to be realized within a reasonable period of time.

 

Other income / (expenses)

 

Other expenses mainly consisted of interest expenses and bank service charges.

 

F-13
 

 

Comprehensive income

 

The Company has adopted ASC 220, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income, its components, and accumulated balances in a full-set of general-purpose financial statements. The Company’s accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.

 

Foreign currency translation

 

The reporting currency of the Company is the U.S. dollar. The functional currencies of the Company subsidiaries are local currencies, primarily the PRC currency Yuan (Renminbi) and Hong Kong dollar. Transactions denominated in foreign currencies are translated into U.S. dollar at exchange rate in effect on the date of the transactions. The financial statements are translated into U.S. dollars using period-end rates of exchange for assets and liabilities and average rates of exchange for the period for revenues and expenses. Exchange gains or losses on transaction are included in earnings.

 

Earnings per share

 

Basic earnings per share is computed by dividing net income by weighted average number of shares of common stock outstanding during each period.  Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.  At December 21, 2011 and 2010, respectively, the Company had no common stock equivalents that could potentially dilute future earnings per share.

  

 

Related Parties

 

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

 

Recently Issued Accounting Pronouncements

 

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 IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

 

F-14
 

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The guidance in ASU 2011-05 applies to both annual and interim financial statements and eliminates the option for reporting entities to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. This ASU also requires consecutive presentation of the statement of net income and other comprehensive income. Finally, this ASU requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU should be applied retrospectively and are effective for fiscal year, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

 

NOTE 3- OTHER RECEIVABLE AND ADVANCE PAYMENTS

 

Other receivable and advance payments at December 31, 2011and December 31, 2010 both included government subsidy receivables, note receivables from third party individuals, reserved cash deposit made to third party guarantee companies, advances to employees, and advances for operating expenses.

 

 NOTE 4 - PROPERTY PLANT AND EQUIPMENT, NET

 

Property, plant and equipment consisted of the following:

   December 31, 
    2011     2010 
         
Building  $15,899,850   $11,191,052 
Machinery and equipment   797,470    727,288 
Office equipment   232,049    188,701 
Automobiles   917,118    852,338 
           
Total at Cost   17,846,487    12,959,379 
           
Less: accumulated depreciation   (4,227,203)   (3,138,170)
Construction in progress   296,758    3,782,130 
           
Property, plant and equipment, net   13,916,042   $13,603,339 

 

Depreciation expense for the years ended December 31, 2011 and 2010 was $920,649 and $689,628 , respectively.

 

NOTE 5 – INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

   December 31, 
    2011     2010 
         
Cost of land use rights  $276,591   $264,379 
           
Less: accumulated amortization   (15,242)   (5,161)
           
Land use rights, net  $261,349   $259,218 

 

F-15
 

 

Amortization expense for the years ended December 31, 2011 and 2010 was $9,599 and $5,161, respectively.  The estimated amortization expense for each of the five succeeding fiscal years from 2011 is approximately $8,000 each year and $229,000 thereafter. The Company’s land use rights are pledged as collateral to secure bank loans (Note 7).

 

NOTE 6 – LONG TERM INVESTMENT

 

Long term investment is an equity investment of less than 1% in Yishui Rural Credit Cooperative, a financial institution located in Yishui County, Shandong Province. The investment is accounted for under the cost method. The Company’s long term investment is pledged as collateral to secure a bank loan (Note 7). Balance of long term investment was $320,298 and $306,156 at December 31, 2011 and 2010, respectively.

 

NOTE 7 – SHORT TERM DEBT

 

As of December 31, 2011 and 2010, the Company’s short term debts consist of the following:   

   Term       Interest   December 31,   December 31, 
   (Months)   Maturity Date   Rate   2011   2010 
                     
Yishui Rural Credit Cooperatives   12    04/20/2011    10.62%  $-    $ 910,200 (a) 
Yishui Rural Credit Cooperatives   12    04/26/2011    5.31%   -    303,400 (b) 
Yishui Rural Credit Cooperatives   12    04/26/2011    11.15%   -    455,100 (c) 
Yishui Rural Credit Cooperatives   12    05/20/2011    10.62%   -    1,517,000 (a) 
Yishui Rural Credit Cooperatives   12    01/10/2012    10.46%   952,245 (e)    - 
Yishui Rural Credit Cooperatives   12    06/15/2012    13.88%   793,537 (e)    - 
Yishui Rural Credit Cooperatives   12    08/15/2012    12.47%   2,539,322 (i)      
Industrial and Commercial Bank of China   12    09/15/2011    6.372%   -    1,061,900 (e) 
Industrial and Commercial Bank of China   12    10/14/2011    6.672%   -    758,500 (e) 
Bank of China   12    09/28/2011    5.841%   -    455,100 (f) 
Bank of China   12    10/20/2011    6.116%   -    2,275,500 (f) 
Bank of China   12    10/26/2011    6.116%   -    303,400 (f) 
Bank of China   12    09/13/2012    4.543%   793,537 (f)    - 
Bank of China   12    03/01/2012    8.0688%   2,380,612 (f)    - 
LinShang Bank   12    05/28/2011    7.965%   -    758,500 (g) 
LinShang Bank   12    08/22/2012    9.84%   793,537 (g)    - 
Construction Bank of China   12    07/25/2011    5.84%   -    910,200 (d) 
Construction Bank of China   12    08/01/2011    5.84%   -    606,800 (g) 
ShanDong YiSheng Guarantee Co., Ltd.   120 days    02/07/2012    12.6%   952,245 (h)    - 
JuNan Xin Yuan Investment Consulting Co., Ltd.   90 days    01/08/2012    12.6%   793,537 (h)    - 
JuNan Xin Yuan Investment Consulting Co., Ltd.   42 days    02/11/2012    12.6%   952,245 (h)    - 
              $10,950,817   $10,315,600 

  

F-16
 

 

  

(a) Guaranteed by Zhang Shanjiu; pledged by Longkong’s usufruct.

(b) Guaranteed by (i) two related party companies: Yishui Underground Fluorescent Lake Travel Development Co., Ltd. (“Fluorescent Lake”) and Junan Tianma Island Travel Development Co., Ltd. (“Tianma Island”) (see Note 9); (ii) Zhang Shanjiu, Zhang Hanwang, a current employee of Longkong unrelated to Zhang Shanjiu, and Xu Shuming, a former employee of Longkong; and (iii) Longkong’s equity investment in the bank (see Note 6).

(c) Guaranteed by (i) two related party companies: Fluorescent Lake and Tianma Island (see Note 9); and (ii) Zhang Shanjiu, Zhang Hanwang, a current employee of Longkong unrelated to Zhang Shanjiu, and Xu Shuming, a former employee of Longkong.

(d) Collateralized by Longkong’s land use rights.

(e) Guaranteed by Zhang Shanjiu and a third party guarantee company.

(f) Guaranteed by (i) three related party companies: Yishui Yinhe Travel Development Co., Ltd. (“Yinhe Travel”) using its land use rights, Tianma Island and Fluorescent Lake (see Note 9); and (ii) Zhang Shanjiu.

(g) Guaranteed by a third party guarantee company and counter guaranteed by Fluorescent Lake, a related party company (see Note 9).

(h) Guaranteed by Zhang Shanjiu and Chen Rongxia (Zhang Shanjiu’s wife).

(i) Guaranteed by Zhang Shanjiu and pledged by Tianma Island, a related party company (see Note 9).

 

The company has a one-year line of credit agreement with Bank of China expiring in September 2011. Total available line is $ 3,174,149 and all available line has been used as of December 31, 2011.

 

For the years ended December 31, 2011 and 2010, interest expenses totaled $940,400 and $467,265, respectively. Interest expense in the amount of Nil and $128,598 incurred during the year ended December 31, 2011 and 2010 was capitalized as part of the cost of the construction in progress.

 

NOTE 8- INCOME TAX

 

Cayman Islands and British Virgin Islands

Under the current laws of the Cayman Islands and the British Virgin Islands, the subsidiaries of the Company that are incorporated in the Cayman Islands and the British Virgin Islands are not subject to income taxes.

 

Hong Kong

LFHK was incorporated in Hong Kong, China. Under the current Hong Kong Inland Revenue Ordinance, the Company is subject to 16.5% income tax on its taxable income generated from operations in Hong Kong.  LFHK did not have any operations during the years ended December 31, 2011 and 2010 and therefore was not subject to Hong Kong Profits Tax.

 

F-17
 

 

PRC

 

In accordance with PRC State Tax Bureau Circulation “GuoShuiFa [2008] No.30”, the Company’s PRC subsidiary, Longkong has obtained the PRC tax authority’s approval on its income tax calculation. Longkong’s corporate income tax is calculated based on 7.5% of the total revenue generated in the year.

  

The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant tax filings, hence Longkong’s tax filings may not be finalized.  It is therefore uncertain as to whether the PRC tax authority may take different views about Longkong’s tax filings which may lead to additional tax liabilities.

The components of the provision for income taxes are:

 

   December 31, 
   2011   2010 
         
Current taxes expense - PRC  $912,967   $1,430,754 
Deferred taxes expense/ (benefit)- PRC   354,530    (233,295)
   $1,267,497   $1,197,459 

 

The principal components of the deferred income tax assets and liabilities are as follows:

 

   December 31, 
   2011   2010 
Deferred tax assets          
Write off other receivable  $-   $317,753 
Other payable provision   -    62,712 
Total deferred tax assets   -    380,465 
           
Deferred tax liabilities          
Capitalized interest   -    32,967 
Net deferred tax assets before valuation allowance   -    347,498 
Valuation allowance   -    - 
Net deferred tax assets  $-   $347,498 

 

A reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:

 

   2011   2010 
U.S. statutory rate   34%   34%
Foreign income not recognized in the U.S.   (34)%   (34)%
PRC enterprise income tax rate   25%   25%
Preferential tax rate   (9)%   - 
Changes in deferred tax assets valuation allowance   7%     
Tax effect of permanent differences   -%   (2)%
Provision for income tax   23%   23%

 

Accounting for Uncertainty in Income Taxes

 

The Company accounts for uncertainty in income taxes in accordance with applicable accounting standards, which prescribe a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These accounting standards also provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

F-18
 

 

Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.

 

The Company may from time to time be assessed interest or penalties by major tax jurisdictions. In the event it receives an assessment for interest and/or penalties, it will be classified in the financial statements as tax expen

 

NOTE 9.  RELATED PARTY TRANSACTIONS

 

    Relationship with the
Related Parties    Company
Yishui Yinhe Travel Development Co., Ltd. (“Yinhe Travel”)   Controlled by Director Mr. Zhang Shanjiu’s immediate family
     
Yishui Underground Fluorescent Lake Travel Development Co., Ltd. (“Fluorescent Lake”)   Controlled by Director Mr. Zhang Shanjiu’s immediate family 
     
Junan Tianma Island Travel Development Co., Ltd. (“Tianma Island”)   Controlled by Director Mr. Zhang Shanjiu’s immediate family 
     
Zhang, Shanjiu   Chairman, President and Chief Executive Officer
     
Yu, Xinbo   Chief Financial Officer, Treasurer and Secretary
     
Chen, Rongxia   Wife of Chairman, Chief Operating Officer
     
Zhang, Shanshuang   Brother of Chairman, Chief Operating Officer

 

(1)           Outstanding balances with related parties as of December 31, 2011 and 2010 are as follows:

 

   Due from related parties
(a)
   Due to related parties (b) 
   December 31,   December 31, 
   2011   2010   2011   2010 
Yinhe Travel  $11,283,588   $7,613,355       - 
Fluorescent Lake   7,256,180    5,680,678    82,239    28,463 
Zhang, Shanjiu   102,477                
Chen, Rongxia   79,354                
Yu, Xinbo   59,954                
   $18,781,553   $13,294,033   $82,239    28,463 

 

F-19
 

 

Notes:

 

a. Amounts due from related parties are unsecured related party loans, which are due upon request and interest free.

 

b. Amounts due to Fluorescent Lake represent the net revenue proceeds payable to the related party as a result of the bundle pass revenue sharing arrangement. See “ Note 2- Summary of significant accounting policies – Revenue recognition.”

 

(2)           Guarantees

 

The Company and its three related party companies provide loan guarantees to each other. As of December 31, 2011 and 2010, loans guaranteed by related parties were $6,507,006 and $5,157,800, respectively. (Note 7)

 

Details of related-party guarantees at December 31, 2011 pursuant to which the Company has executed a Guarantee Contract with the related parties and the creditor to guarantee loans of the related parties are as follows:

 

Pursuant to the Guarantee Contract, dated March 14, 2008, between Longkong and the Agricultural Development Bank of China, Junan Branch (“Agricultural Bank”), Longkong has guaranteed a six-year loan by Agricultural Bank to Tianma Island for the amount of approximately $6 million.  The loan is due March 2014.  The guarantee period is two years starting from the due date of the loan.  Tianma Island has been making timely principal payments and the balance due of the loan at December 31, 2011 was $4.7 million, the maximum potential amount of future payments that Longkong could be required to make under the guarantee.  The guarantee provided under the Guarantee Contract expires upon the payment in full of the loan.  Longkong will be required to make payment under the guarantee if Tianma Island fails to make a payment when due.  In such circumstance, Longkong will have recourse against Tianma Island for the full amount of the payment made on its behalf.  This obligation, however, is secured by the usufruct of Tianma Island.  Longkong’s guarantee to Agricultural Bank is secured by its usufruct.  Longkong periodically requests information from Tianma Island regarding its financial condition, including the amount of its outstanding indebtedness and payment histories, to assess the payment/performance risk of the guarantee.  As of December 31, 2011, Longkong believes the risk of paying or performing the guarantee on Tianma Island’s behalf is remote.

 

Pursuant to the Guarantee Contract, dated April 2010, between Longkong and Yishui Rural Credit Cooperative, Longkong has guaranteed a one-year loan by the bank to Fluorescent Lake for the amount of approximately $731,500.  The loan matured and was paid off by Fluorescent Lake in April 2011.

 

Pursuant to the Guarantee Contract, dated December 30, 2011, between Longkong and LinShang Bank, Longkong has guaranteed a one-year loan by the bank to Fluorescent Lake for the amount of approximately $793,537. The loan is due December 2014. The guarantee period is two years starting from the due date of the loan. Longkong has not been required to make any payments of principle or interest on Fluorescent Lake’s behalf under this guarantee. As of December 31, 2011, Longkong believes the risk of paying or performing the guarantee on Fluorescent Lake’s behalf is remote.

 

Pursuant to the Guarantee Contract, dated November 15, 2011 between Longkong and YuNan Rural Credit Cooperatives, Longkong has guaranteed a one- year loan by the bank to Tianma Island for the amount of $952,245. The loan is due November 2012. The guarantee period is two years starting from the due date of the loan. Longkong has not been required to make any payments of principle or interest on behalf of Tianma Island. As of December 31, 2011, Longkong believes the risk of paying or performing the guarantee on Tianma Island’s behalf is remote.

 

Pursuant to the Guarantee Contract, dated May 30, 2011 between LongKong and YiShui Rural Credit Cooperatives, Longkong has pledged its real estate to secure a three-year loan by the bank to Fluorescent Lake for the amount of $476,122. The loan matures in May 2014. Longkong has not been required to make any payments of principle or interest on Fluorescent Lake’s behalf. As of December 31, 2011, Longkong believes the risk of loosing its real estate due to Fluorescent Lake’s deault on this loan is remote.

 

F-20
 

 

NOTE 10.  SHAREHOLDERS’ EQUITY

 

Contributions

 

During the years ended December 31, 2011 and 2010, the shareholders of the Company contributed $0 and $650,715, respectively, to the Company.

 

Statutory Reserves

 

As stipulated by the relevant laws and regulations for enterprises operating in the PRC, the subsidiaries of the Company are required to make annual appropriations to a statutory surplus reserve fund. Specifically, Longkong is required to allocate 10% of its profits after taxes, as determined in accordance with the PRC accounting standards applicable to the subsidiary of the Company, to a statutory surplus reserve until such reserve reaches 50% of the registered capital of the subsidiary of the Company as decided by the board of directors. The Company allocated $Nil and $320,370 statutory reserve fund for the years ended December 31, 2011 and 2010, respectively.

 

F-21
 

 

NOTE 11.  COMMITMENTS AND CONTINGENCIES

 

Guarantees

 

In January and March 2011, respectively, Longkong agreed to guarantee two loans borrowed by Shandong Green Foodstuff Co., Ltd. (“Green Foodstuff”) from Industrial and Commercial Bank of China Yishui Branch (“ICBC”) totaling $1.5 million, which is the maximum potential amount of future payments that the Company could be required to make under the guarantee. The loans are due in January and March 2012 and paid off , respectively.

 

On April 14, 2011, Longkong agreed to guarantee a loan borrowed by Green Foodstuff from China Minsheng Bank Co., Ltd. (“CMB”) totaling $2.3 million, which is the maximum potential amount of future payments that the Company could be required to make under the guarantee. The loan is due in April 2014 and the guarantee period is two years from the due date of the loan. The guarantee expires upon the payment in full of the loan. Longkong will be required to make payment under the guarantee if Green Foodstuff fails to make a payment when due. In such circumstance, Longkong will have recourse against Green Foodstuff for the full amount of the payment made on its behalf. This obligation, however, is unsecured. Longkong’s guarantee to CMB also is unsecured. Longkong periodically requests information from Green Foodstuff regarding its financial condition, including the amount of its outstanding indebtedness and payment histories, to assess the payment/performance risk of the guarantee. As of December 31, 2011, Longkong believes the risk of paying or performing the guarantee on Green Foodstuff’s behalf is remote.

 

Legal Contingencies

 

On or around January 7, 2011, Greentree Financial Group, Inc. (“Greentree”) filed a two-count complaint (the “Complaint”) against BTHC, LFVT Cayman, and BTHC’s former principal shareholder, in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, entitled Greentree Financial Group, Inc. v. Long Fortune Valley Tourism International, Ltd., BTHC XV, Inc. and Halter Financial Investments L.P.   The Complaint asserted a claim for breach of contract against LFVT Cayman and a claim of tortious interference with a business relationship against BTHC and BTHC’s former principal shareholder.  BTHC was served with the summons and complaint on or around January 21, 2011.

 

On April 12, 2011, Greentree filed its opposition to BTHC’s and LFVT Cayman’s motion to dismiss the Amended Complaint, which was filed by the parties on March 25, 2011.  On April 22, 2011, BTHC and LFVT Cayman filed a reply in further support of their motion to dismiss.  On May 10, 2011, prior to a decision being rendered on the motion to dismiss, Greentree advised the Court that Greentree, BTHC and LFVT Cayman had reached an agreement in principle to settle all claims involving BTHC and LFVT Cayman.  That settlement has now been formalized and effectuated, and, on July 6, 2011, Greentree filed a Notice of Voluntary Dismissal with Prejudice of all claims brought against LFVT Cayman and BTHC.  On July 8, 2011, the Court dismissed with prejudice all claims brought against defendants BTHC and LFVT Cayman.

 

Operating Leases

 

The Company conducts significant operations from leased lands.  The term of  the leases is ranging from 23 years to 60 years.  Future minimum lease payments at December 31, 2011, by year and in the aggregate, under all non-cancelable operating leases are as follows:

 

F-22
 

 

Year ending Dec 31,    
2011  $21,666 
2012   21,666 
2013   21,666 
2014   21,666 
2015   21,666 
Thereafter   577,978 
   $686,308 

 

Rental expense was $0.025 million for the years ended December 31, 2011 and 2010, respectively.

 

NOTE 12.  SUBSEQUENT EVENTS

 

The Company entered a new loan with HuaXia Bank on 2/28/2012 in the amount of $ 5,554,762. The term of this loan is from 2/28/2012 to 11/19/2014 and the interest rate is 7.98%. The repayment schedule is $1,587,075 is due on 10/21/2012, $793,537 is due on 11/21/2013, $793,537 is due on 6/21/2014 and $2,380,612 is due on 11/19/2014. Per loan agreement, the debt-to-assets ratio of the Company should be lower than 65%. The loan is guaranteed by Yishui Yinhe Travel Development Co., Ltd. (“Yinhe Travel”) using its current and future real estates as collateral. The loan is also guaranteed by Zhang Shanjiu,

 

The Company entered a new loan with HuaXia Bank on 2/28/2012 in the amount of $793,537. The term of this loan is from 2/28/2012 to 6/19/2013 and the interest rate is 7.98%. Per loan agreement, the debt-to-assets ratio of the Company should be lower than 65%. The loan is guaranteed by Yishui Yinhe Travel Development Co., Ltd. (“Yinhe Travel”) using its land use right as collateral. The loan is also guaranteed by Zhang Shanjiu.

 

The Company obtained a new loan with TianYuan TianCheng Guarantee Company in the amount of $1,587,075 in January 2012. The loan bears an interest rate of 10.16% per annum. The loan matures in March 2013. The loan is guaranteed by Fluorescent Lake, Yinhe Travel, Zhang Shanjiu, Chen Rongxia and Chen Ronghui.

 

The Company paid off a loan from Yishui Rural Credit Cooperatives in the amount of approximately $952,245 in January 2012. The Company obtained a new loan from YiShui Rural Credit Cooperatives in the amount of $952,245 in January 2012. The loan bears an interest rate of 12.46% per annum and will mature in January 2013. Per loan agreement, the debt-to-assets ratio of the Company should be lower than 70%. The loan is guaranteed by ShanDong YiSheng Guarantee Co., Ltd. and Zhang Shanjiu.

 

The Company paid off a loan from Bank of China in the amount of approximately $2,380,612 as it matured. The Company also paid off a loan obtained from Bank of China in the amount of $793,537. The loan should be matured on 9/13/2012 but the Company paid off the loan in advance.

 

The Company renewed the loan from JuNan XinYuan Investment Consulting Co., Ltd in the amount of $793,537 and $952,245 in January 2012 and March 2012, respectively. These loans are due upon request.

 

The Company renewed the loan from ShanDong YiSheng Guarantee Co., Ltd. in the amount of $952,245 in February 2012. This loan is due upon request.

 

F-23
 

 

NOTE 13.  CONDENSED PARENT COMPANY FINANCIAL INFORMATION

 

Basis of Presentation

 

The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of the subsidiaries of BTHC XV, Inc. exceed 25% of the consolidated net assets of BTHC XV Inc. The ability of the Company’s Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries. Because substantially all of the Company’s operations are conducted in China and a substantial majority of the Company’s revenues are generated in China, a majority of the Company’s revenue being earned and currency received are denominated in Renminbi (“RMB”). RMB is subject to the exchange control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict the Company’s ability to convert RMB into US Dollars.

 

The condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Refer to the consolidated financial statements and notes presented above for additional information and disclosures with respect to these financial statements.

 

F-24
 

 

BTHC XV, Inc.

  Condensed Parent Company Balance Sheet

 (US Dollars in Thousands)

 

   December 31,   December 31, 
   2011   2010 
ASSETS        
Current assets        
Investment in subsidiaries   19,524    14,374 
           
TOTAL ASSETS   19,524    14,374 
           
SHAREHOLDERS’ EQUITY          
Preferred stock: 10,000,000 shares of $.001 par value authorized; None shares issued and outstanding  $-   $- 
Common Stock (par value $0.001 per share; 40,000,000 shares authorized; 18,089,669 shares issued and outstanding as of December 31, 2011 and 2010, respectively)   18    18 
           
Additional paid in capital   1,173    1,173 
Statutory reserve   913    913 
Accumulated other comprehensive income   1,857    988 
           
Retained earnings   15,563    11,282 
           
TOTAL SHAREHOLDERS’ EQUITY   19,524    14,374 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $19,524   $14,374 

 

BTHC XV, Inc.

  Condensed Parent Company Statement of Operations

 (US Dollars in Thousands)

 

   For the Years Ended December
31,
 
   2011   2010 
  Revenue   -    - 
  General and administrative expenses   5    - 
           
Total expenses   5    - 
Equity in undistributed income of subsidiaries   4,281    4,001 
           
Income before income taxes   -    - 
Provision for income tax   -    - 
           
Net income  $4,276   $4,001 

 

F-25
 

 

BTHC XV, Inc.

  Condensed Parent Company Statement of Cash Flows

 (US Dollars in Thousands)

   

   For the
Year
Ended
   For the  Year Ended 
   December
31,
   December 31, 
   2011   2010 
           
Cash Flows from Operating Activities          
Net income  $4,276   $4,001 
           
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
      Equity in undistributed income of subsidiaries   (4,276)   (4,001)
      Net Cash Provided by (Used in) Operating Activities   -    - 
           
Net Increase in Cash and Cash Equivalents   -    - 
Cash and Cash Equivalents, beginning of year   -    - 
Cash and Cash Equivalents, end of year  $-   $- 

 

F-26
 

 

EXHIBIT INDEX

 

 

Exhibit
No.
 

 

Description

  2.1   First Amended Joint Plan of Reorganization filed by the Debtors and Official Committee of Unsecured Creditors, In the United States Bankruptcy Court, Northern District of Texas, Dallas Division, In Re: Ballantrae Healthcare, LLC, et. al., Debtors, Case No. 03-33152-HDH-11, dated September 29, 2004.(1)
       
  2.2   Order Confirming First Amended and Joint Plan of Reorganization, Chapter 11, Case No. 03-33152-HDH-11, Signed November 29, 2004.(1)
       
  2.3   Share Exchange Agreement, dated October 6, 2010, by and among BTHC XV, Inc., Halter Financial Investments LP, Grand Fountain Capital Holding Limited, Zhang Shanjiu, Zhang Qian, Li Shikun, Yu Xinbo and Long Fortune Valley Tourism International Limited.(2)
       
  3.1   Agreement and Plan of Merger by and between BTHC XV, Inc. and BTHC XV, LLC, dated August 16, 2006.(1)
       
  3.2   Certificate of Merger as filed with the Secretary of State of the State of Delaware on August 16, 2006.(1)
       
  3.3   Articles of Merger as filed with the Secretary of State of the State of Texas on August 16, 2006.(1)
       
  3.4   Certificate of Incorporation of BTHC XV, Inc.(1)
       
  3.5   Bylaws of BTHC XV, Inc.(1)
       
  10.1   Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Bank of China, Yi Shui Branch dated November 27, 2009.(5)+
       
  10.2   Loan Contract between Shandong Longkong Travel Development Co., Ltd. and ICBC, Yi Shui Branch dated January 20, 2010.(6)+
       
  10.3   Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd dated November 26, 2009.(3)+
       
  10.4   Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd dated November 24, 2009.(3)+
       
  10.5   Credit Line Limit Agreement between Shandong Longkong Travel Development Co., Ltd. and Bank of China, Yi Shui Branch dated November 27, 2009.(3)+
       
  10.6   Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated January 9, 2010.(5)+
       
  10.7   Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated January 9, 2010.(5)+
  10.8   Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated April 21, 2010.(5)+
       
  10.9   Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated May 21, 2010.(5)+
       
  10.10   Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated May 21, 2010.(5)+
       
  10.11   Loan Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated May 24, 2010.(5)+
       
  10.12   Loan Contract of Working Capital between Shandong Longkong Travel Development Co., Ltd. and Lin Shang Bank Co Ltd. Yishui Branch dated May 28, 2010.(3)+
       
  10.13   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Industrial & Commercial Bank of

 

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      China Co., Ltd, Yishui Branch dated May 11, 2010.(5)+ 
       
  10.14   Maximum Mortgage Agreement between Shandong Longkong Travel Development Co., Ltd. and Industrial & Commercial Bank of China Co., Ltd Yi Shui Branch dated July 5, 2009.(3)+
       
  10.15   Maximum Mortgage Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated January 12, 2009.(3)+
       
  10.16   Pledge Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated May 24, 2009.(3)+
       
  10.17   Pledge Contract between Shandong Longkong Travel Development Co., Ltd. and Yishui Rural Credit Cooperative dated April 21, 2010.(3)+
       
  10.18   Employment Contract between Shandong Longkong Tourism Group Co., Ltd and Yu Xinbo dated December 30, 2007.(3)+†
       
  10.19   Employment Contract between Shandong Longkong Tourism Group Co., Ltd and Kong Xianghai dated August 28, 2008.(3)+†
       
  10.20   Employment Contract between Shandong Longkong Tourism Group Co., Ltd and Zhang Shanjiu dated December 30, 2007.(3)+†
       
  10.21   Employment Contract between Shandong Longkong Tourism Group Co., Ltd and Chen Rongguang dated December 30, 2007.(3)+†
       
  10.22   Employment Agreement between BTHC XV, Inc. and Yu Xinbo dated October 18, 2010.(3)†
       
  10.23   Employment Agreement between BTHC XV, Inc. and Kong Xianghai dated October 18, 2010.(3)†
       
  10.24   Employment Agreement between BTHC XV, Inc. and Zhang Shanjiu dated October 18, 2010.(3)†
       
  10.25   Employment Agreement between BTHC XV, Inc. and Chen Rongguang dated October 18, 2010.(3)†
       
  10.26   Land Lease Contract between Shandong Longkong Tourism Group Co., Ltd and Yaodianzi Town Houwujia Village Council dated September 30, 2004.(3)+
       
  10.27   Land Lease Contract between Shandong Longkong Tourism Group Co., Ltd and Yaodianzi Town Haizi Village Council dated November 26, 2004.(3)+
       
  10.28   Lease Contract of Mountain Waste between Shandong Longkong Tourism Group Co., Ltd and Yaodianzi Town Houwujia Village Council dated September 30, 2004.(3)+
       
  10.29   Developing and Managing Contract of Yishuia Yao Dianzi Cave between Shandong Di Xia Da Xia Gu Nu You Kai Fa Co., Ltd. and PRC Government of Yaodianzi Town, Yishui County dated April 2, 2004.(3)+
       
  10.30   Licensing Trade Mark Contract between Shandong Shan Jiu Ching Tong Gong Yi Pin Co. Ltd and Shandong Longkong Travel Development Co., Ltd. dated September 28, 2010.(3)+
       
  10.31   Commitment of Contingent After-Payment or Call-Payment of Housing Fund of Zhang Shanjiu dated September 28, 2010.(3)+
       
  10.32   Guarantee Agreement between Shandong Longkong Travel Development Co., Ltd., Shandong Yinlian Guarantee Co., Ltd, Li Hongwei and Yishui Rural Credit Cooperative dated April 30, 2010.(3)+
       
  10.33   Guarantee Agreement between Shandong Longkong Travel Development Co., Ltd. and Agricultural Development Bank of China dated March 14, 2008.(3)+
       
  10.34   Pledge Agreement between Shandong Longkong Travel Development Co., Ltd. and Agricultural Development Bank of China dated March 14, 2008.(3)+
       
  10.35   Supplemental Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground

 

F-28
 

 

      Fluorescent Lake Travel Development Co., Ltd (undated).(3)+ 
       
  10.36   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd dated April 24, 2010.(3)+
       
  10.37   Supplemental Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd dated December 31, 2009.(3)+
       
  10.38   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated January 5, 2010.(3)+
       
  10.39   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated January 9, 2010.(3)+
       
  10.40   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated January 11, 2010.(3)+
       
  10.41   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated April 22, 2010.(3)+
       
  10.42   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated April 22, 2010.(3)+
       
  10.43   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated May 7, 2010.(3)+
       
  10.44   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated May 14, 2010.(3)+
       
  10.45   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated May 22, 2010.(3)+
       
  10.46   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated May 29, 2010.(3)+
       
  10.47   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated June 5, 2010.(3)+
       
  10.48   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated June 7, 2010.(3)+
       
  10.49   Loan Agreement between Shandong Longkong Travel Development Co., Ltd. and Yishui Yinhe Travel Development Co., Ltd dated June 9, 2010.(3)+
       
  10.50   Exclusive Service Agreement between Long Fortune Valley Tourism International Limited and Greentree Financial Group, Inc. dated September 1, 2010.(3)
       
  10.51   Schedules to the Share Exchange Agreement, dated October 6, 2010, by and among BTHC XV, Inc., Halter Financial Investments LP, Grand Fountain Capital Holding Limited, Zhang Shanjiu, Zhang Qian, Li Shikun, Yu Xinbo and Long Fortune Valley Tourism International Limited.(4)
       
  10.52   Grand Canyon & Fluorescent Lake Full-Pass Distribution Agreement, dated as of February 10, 2010, between Shandong Longkong Travel Development Co., Ltd. and Yishui Underground Fluorescent Lake Travel Development Co., Ltd.(5)+
       
  10.53   Form of Cooperation Agreement between Shandong Longkong Travel Management Co., Ltd. and a travel agency.(6)+  
       
  10.54   Renminbi Loan Application (short term) (Applicable to the Middle & Small Scale Enterprise Renminbi Loan), dated October 21, 2010, between Shandong Longkong Travel Management Co., Ltd. and Bank of China, Yishui Branch.(7) +  

 

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  10.55   Contract of Loan of Small Scale Enterprise, dated October 22, 2010, between Shandong Longkong Travel Management Co., Ltd. and Industrial and Commercial Bank of China, Yishui Branch.(7) +  
       
  10.56   Renminbi Loan Application (short term) (Applicable to the Middle & Small Scale Enterprise Renminbi Loan), dated October 27, 2010, between Shandong Longkong Travel Management Co., Ltd. and Bank of China, Yishui Branch.(7) +  
       
  21.1   Subsidiaries of the Registrant.(3)  
       
  23.1   Consent of HighKing & Partners.(5)  
       
  31.1   Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*  
       
  31.2   Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*  
       
  32.1   Certifications of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*  
       
  32.2   Certifications of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*  

 

 

*  Filed herewith
  Management Agreement
+  English translation of a Chinese language document.
(1)Incorporated by reference to BTHC’s Form 10-SB12G filed on September 13, 2007.
(2)Incorporated by reference to Exhibit 2.1 to BTHC’s Form 8-K filed on October 6, 2010.
(3)Incorporated by reference to BTHC’s Form 8-K filed on November 4, 2010.
(4)Incorporated by reference to BTHC’s Form 8-K/A filed on January 3, 2011.
(5)Incorporated by reference to BTHC’s Form 10-K filed on April 15, 2011.
(6)Incorporated by reference to BTHC’s Form 8-K/A filed on June 29, 2011.
(7)Incorporated by reference to BTHC’s Form 10-K/A filed on June 29, 2011.

 

F-30