Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of
Report (Date of earliest event reported): December 24,
2009
COVENANT
GROUP OF CHINA INC.
(Exact
Name of Registrant as Specified in Charter)
Nevada
|
000-53463
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27-1555191
|
||
(State
or other jurisdiction
of
incorporation)
|
(Commission
File Number)
|
(IRS
Employer
Identification
No.)
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Two
Bala Plaza, Suite 300
Bala
Cynwyd, PA
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19004
|
|
(Address
of principal executive offices)
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(Zip
Code)
|
Registrant's
telephone number, including area code: (610) 660-7828
Everest
Resources Corp.
8798
51st
Avenue
Edmonton,
Alberta
Canada
T6E 5E8
|
(Former
name or former address, if changed since last
report)
|
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
o
|
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
o
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 DFR
240.14a-12)
|
o
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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o
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Pre-commencement
communications pursuant to Rule 13e-4 (c) under the Exchange Act (17 CFR
240.13e-4(c))
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CURRENT
REPORT ON FORM 8-K
____________________
TABLE
OF CONTENTS
Page
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Item 1.01 | 1 | ||
Item 2.01 | 2 | ||
2 | |||
4 | |||
4 | |||
28 | |||
42 | |||
54 | |||
54 | |||
59 | |||
Item 3.02 | 59 | ||
Item 4.01 | 61 | ||
Item 5.01 | 62 | ||
Item 5.02 | 62 | ||
Item 5.03 | 62 | ||
Item 5.06 | 62 | ||
Item 9.01 | 62 |
Entry
into a Material Definitive
Agreement.
|
On
December 24, 2009 (the "Closing Date"), Everest Resources Corp., a Nevada
corporation (the "Company" or “Everest”), entered into and consummated a series
of agreements which resulted in the acquisition of all of the share capital of
Covenant Group Holdings Inc., a holding company incorporated under the laws of
the state of Delaware ("Covenant Holdings") and the divestiture of the Company's
prior exploration business. On the Closing Date, the name of the Company was
also changed to Covenant Group of China Inc.
Pursuant
to the terms of a Share Exchange Agreement, dated December 24, 2009, by and
among Everest, Covenant Holdings and all of the shareholders of Covenant
Holdings (the "Covenant Holdings Shareholders") (the "Share Exchange
Agreement"), each of the Covenant Holdings Shareholders have exchanged their
respective shares of Covenant Holdings for shares of the Company's common
stock. Shares of Covenant Holdings common stock held of record on the
Closing Date by the Covenant Holdings Shareholders were exchanged on a
one-for-one basis for shares of the Company's common stock (the "Share
Exchange"). As a result of the Share Exchange, an aggregate of 9,380,909 shares
of the Company's common stock were issued to the Covenant Holdings Shareholders
and Covenant Holdings became a wholly-owned subsidiary of Everest.
In
addition, the following actions occurred under the terms of the Share Exchange
Agreement:
●
|
Immediately
preceding the closing of the Share Exchange, Covenant Holdings entered
into Share Cancellation and Loan Agreement dated December 24, 2009 (the
"Cancellation Agreement") with Mr. Gary Sidhu (the former majority
shareholder of the Company) pursuant to which Covenant Holdings agreed to
pay Mr. Sidhu an aggregate of $290,000 in exchange for the surrender of 5
million shares of the Company's common stock held by Mr. Sidhu for
cancellation (the "Cancellation" and, together with the Share Exchange,
the "Transactions"). Mr. Sidhu received $100,000 and a
non-interest bearing Promissory Note in the principal amount of $190,000
on or before the closing of the Transactions. At the Closing
Date, Covenant Holdings prepaid $90,000 of the Promissory
Note. The remaining outstanding principal amount of the
Promissory Note is to be paid in full on or before the 90th day following
the closing of the Transactions. At the closing of the
Transactions, Mr. Sidhu surrendered 4.5 million shares of common stock in
the Company to Covenant Holdings for cancellation. The
remaining 500,000 shares shall be surrendered and cancelled upon payment
in full of the Promissory
Note.
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●
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As
a condition to the closing of the Share Exchange, Mr. Sidhu and Mr. Mohan
Singh, in his capacity as President and Principal Executive Officer of the
Company, entered into a termination agreement (the “Termination
Agreement”) to terminate a declaration of trust executed by Mr. Sidhu on
July 8, 2007 (the “Declaration of Trust”), wherein Mr. Sidhu had
previously agreed to hold for the Company and deliver title to the
Company, on the Company’s demand, a certain mineral claim upon 471
contiguous acres of Crown mineral lands located in British Columbia,
Canada (the “Mineral Right”). Pursuant to the Termination
Agreement, the Company has agreed to surrender all of its right, title and
interest in and to the Mineral Right under the Declaration of Trust, and
Mr. Sidhu has agreed to release and indemnify the Company from all claims,
costs, expenses and liabilities relating to the Mineral Right and/or the
Declaration of Trust.
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●
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Also
as a condition to the closing of the Share Exchange, Messrs. Fredric
Rittereiser, Kenneth Wong and K. Ivan F. Gothner were appointed to the
board of directors of the Company, with Mr. Rittereiser being named
Chairman of the Board, and Mr. Mohan Singh, the former sole member of the
board of directors of the Company, resigned effective as of the close of
business on the Closing Date. As a requirement to listing the
Company's common stock on the NASDAQ Capital Market or other exchange, the
Company will seek to add additional independent directors and increase the
size of the board of directors following the Share
Exchange. The board's composition (and that of its committees)
will be subject to the corporate governance provisions of its primary
trading market, including the requirement for appointment of independent
directors in accordance with the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley"), and regulations adopted by the SEC and FINRA pursuant
thereto.
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1
●
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Also
as a condition to the closing of the Share Exchange, Mr. Singh resigned as
the President, Principal Executive Officer, Secretary, Treasurer,
Principal Financial Officer, and Principal Accounting Officer of the
Company and Mr. Wong was appointed as President and Mr. Justin Csik was
appointed as Acting Chief Financial Officer, General Counsel and Corporate
Secretary.
|
Each of
the Share Exchange Agreement and Cancellation Agreement contained such
representations, warranties, obligations and conditions as are customary for
transactions of the type governed by such agreements.
As a result
of the consummation of the Transactions there are currently 11,480,909 shares of
the Company's common stock issued and outstanding. Upon the cancellation of the
500,000 shares held by Mr. Sidhu which are to be surrendered upon payment of the
Promissory Note, there will be 10,980,909 shares of the Company's common stock
issued and outstanding, approximately 85.4% of which will be held by the former
Covenant Holdings Shareholders. The shareholders of the Company
immediately prior to the completion of these transactions will hold the
remaining 14.6% of the issued and outstanding shares of the
Company.
As of the
date of the Share Exchange Agreement and currently, there were no material
relationships between Everest and Covenant Holdings, or any of their respective
affiliates, directors or officers, or any associates of their respective
officers or directors, other than in respect of the Share Exchange
Agreement.
The
foregoing description of the Share Exchange Agreement and Cancellation Agreement
do not purport to be complete and is qualified in its entirety by reference to
the complete text of the Share Exchange Agreement and Cancellation Agreement
which are filed as exhibits hereto and incorporated herein by
reference.
Completion
of Acquisition of Disposition of
Assets
|
The
Share Exchange
On
December 24, 2009, the Company entered into the Share Exchange Agreement with
Covenant Holdings and the Covenant Holdings Shareholders. Upon the
closing of the Share Exchange on the Closing Date, each of the Covenant Holdings
Shareholders exchanged their respective shares of Covenant Holdings for shares
of the Company's common stock on a one-for-one basis. The Covenant
Holdings Shareholders also released Covenant Holdings and the Company from any
and all claims in respect of prior share ownership, including, without
limitation, any prior contractual agreements, warrants, or options pertaining to
issuance of shares or anti-dilution rights. As a result of the Share
Exchange, an aggregate of 9,380,909 shares of the Company's common stock were
issued to the Covenant Holdings Shareholders and Covenant Holdings became a
wholly-owned subsidiary of Everest.
Immediately
preceding
the closing of the Share Exchange, pursuant to the terms of the Cancellation
Agreement, Covenant Holdings agreed to pay Mr. Sidhu an aggregate of $290,000 in
exchange for the surrender and cancellation of 5 million shares of the Company's
common stock held by him. Mr. Sidhu received $100,000 and a
Promissory Note in the principal amount of $190,000 on or before the closing of
the Transactions. At the Closing Date, Covenant Holdings prepaid
$90,000 of the Promissory Note. The remaining outstanding principal
amount of the Promissory Note is to be paid in full on or before the 90th day
following the closing of the Transactions. At the closing of the
Transactions, Mr. Sidhu surrendered 4.5 million shares of common stock in the
Company to Covenant Holdings for cancellation. The remaining 500,000
shares shall be surrendered and cancelled upon payment in full of the Promissory
Note.
After
giving effect to the cancellation of Mr. Sidhu’s 4.5 million shares, the
shareholders of the Company immediately preceding the Share Exchange held
2,100,000 shares of the Company's common stock before giving effect to the stock
issuances in the Share Exchange. 1,600,000 of such shares constitute
the Company's "public float" prior to the Share Exchange and will continue to
represent the shares of our common stock held for resale without further
registration by the holders thereof until such time as the applicability of Rule
144 of the Securities Act of 1933, as amended, (the "Securities Act") or other
exemption from registration under the Securities Act permits sales of the shares
issued to the Covenant Holdings Shareholders, or a registration statement has
been declared effective with respect to such shares. The remaining
500,000 shares are held by Mr. Sidhu and will be surrendered and cancelled upon
payment of the Promissory Note issued by Covenant Holdings in favor of Mr. Sidhu
on the Closing Date.
2
As a result
of the Share Exchange, Covenant Holdings became a wholly-owned subsidiary of the
Company and, assuming the cancellation of the remaining 500,000 of Mr.
Sidhu’s shares under the Cancellation Agreement, the Covenant Holdings
Shareholders will hold approximately 85.4% of the Company's outstanding common
stock. The shareholders of the Company immediately prior to the
consummation of the Transactions will hold the remaining 14.6% of the issued and
outstanding shares of the Company's common stock.
Prior to
the closing of the Share Exchange, there were no options or warrants to purchase
shares of capital stock of Everest or Covenant Holdings outstanding and neither
the Company or Covenant Holdings had adopted an equity incentive plan or
otherwise reserved shares for issuance as incentive awards to officers,
directors, employees and other qualified persons in the future.
The
shares of the Company's common stock issued to the Covenant Holdings
Shareholders in connection with the Share Exchange were not registered under the
Securities Act, in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act. These securities may not be
offered or sold absent registration or an applicable exemption from the
registration requirements. Certificates representing these shares
contain a legend stating the same.
As of the
date of the Share Exchange Agreement, there were no material relationships
between the Company and Covenant Holdings or between the Company and any of
Covenant Holdings’ respective affiliates, directors or officers, or any
associates of its respective officers or directors, other than in respect of the
Share Exchange Agreement.
Changes
Resulting from the Share Exchange
The
Company intends to carry on Covenant Holdings' business as its sole line of
business. The Company has relocated its executive offices to Two Bala
Plaza, Suite 300, Bala Cynwyd, PA 19004, and its telephone number is (610)
660-7828.
The
shareholders of the Company immediately preceding the Share Exchange will not be
required to exchange their existing Everest stock certificates for certificates
of the Company stating its new name, since the OTC Bulletin Board will consider
the existing stock certificates as constituting "good delivery" in securities
transactions subsequent to the Share Exchange. The Nasdaq Capital
Market will also consider the submission of existing stock certificates as "good
delivery," in the event that the Company's shares are listed on that
exchange. The Company cannot be certain that it will receive approval
to list its common stock on any exchange or market should it apply for such
listing.
Changes
to the Board of Directors and Executive Officers
Effective
as of the Closing Date, Mr. Singh resigned as our sole director, the size of our
board of directors was increased from one to three and Messrs. Rittereiser, Wong
and Gothner were appointed to the board of directors, with Mr. Rittereiser being
named Chairman of the Board.
Further,
Mr. Singh resigned as the President, Principal Executive Officer, Secretary,
Treasurer, Principal Financial Officer, and Principal Accounting Officer of the
Company and Mr. Wong was elected to the office of President and Mr. Csik was
elected to serve as the Company's acting Chief Financial Officer, General
Counsel and Corporate Secretary.
The
directors hold office for one-year terms until the election and qualification of
their successors. Officers are elected by the board of directors and
serve at the discretion of the board.
Accounting
Treatment; Change of Control
The Share
Exchange is being accounted for as a "reverse acquisition," since the Covenant
Holdings Shareholders own a majority of the outstanding shares of the Company's
common stock immediately following the Share Exchange. Covenant
Holdings is deemed to be the acquiror in the reverse acquisition. As
the Company, the legal acquiror, is a non-operating shell, this "reverse
acquisition" is considered to be a capital transaction in substance rather than
a business combination. Consequently, the assets and liabilities and the
historical operations that will be reflected in the financial statements prior
to the Share Exchange will be those of Covenant Holdings and will be recorded at
the historical cost basis of Covenant Holdings, and the consolidated financial
statements after completion of the Share Exchange will include the assets and
liabilities of the Company and Covenant Holdings, historical operations of
Covenant Holdings and operations of the Company from the closing date of the
Share Exchange. Except as described in the previous paragraphs, no
arrangements or understandings exist among present or former controlling
shareholders with respect to the election of members of the Company's board of
directors and, to our knowledge, no other arrangements exist that might result
in a change of control of the Company. Further, as a result of the
issuance of the shares of the Company common stock pursuant to the Share
Exchange, a change in control of the Company occurred on the date of the
consummation of the Share Exchange. The Company will continue to be a
"small business issuer," as defined under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), following the Share Exchange.
3
We were
incorporated in the State of Nevada on November 8, 2006 under the name Everest
Resources Corp. as an exploration stage corporation that intended to engage in
the exploration of gold. On December 24, 2009 we acquired all of the
equity interests in Covenant Holdings, a privately held company incorporated
under the laws of the State of Delaware and engaged in the business of acquiring
significant equity interests in Chinese operating companies and providing
Chinese companies with strategic support, including administrative, legal,
accounting and marketing assistance.
Prior to
our acquisition of Covenant Holdings, we were in the development stage and had
minimal business operations. We had no interest in any property, but
had the right to conduct mineral exploration activities on nine (9) contiguous
mineral title cells covering 471 acres of Crown mineral lands located in
southern British Columbia, Canada. In connection with the acquisition
of Covenant Holdings, we transferred our prior assets and liabilities to a
wholly owned subsidiary and sold all of the outstanding capital stock of that
subsidiary to our former director and officer in exchange for 5,000,000 shares
of our common stock.
Covenant
Holdings
was formed in June 2009 as a Delaware corporation and is headquartered in Bala
Cynwyd, Pennsylvania. As a result of the consummation of the Share
Exchange with Covenant Holdings, we are a holding company that seeks to acquire
equity interests in private companies based and operating in the People's
Republic of China ("China" or the "PRC"). Our core strategy is to
invest in growth companies headquartered in China and to utilize our substantial
experience in the U.S. and China of our management team, as well as our
experience in the U.S. capital markets, to provide these companies with support,
including administrative, legal, accounting and marketing assistance, and an
infusion of capital with the long term goal of preparing them to become public
companies in their own right.
Description
of our Business
We are a
holding company engaged in the business of acquiring equity interests in private
companies based and operating in China to provide these companies with support,
including administrative, legal, accounting and marketing assistance, and an
infusion of capital with the long term goal of preparing them to become public
companies in their own right. We believe that equity investments in
China present one of the most attractive global investment opportunities
available in the coming four to seven years. We plan to focus on
growth company acquisitions located in China. The local Chinese
equity markets are highly concentrated, serving only a small fraction of the
local corporate market. This fact, taken together with the current
international economic uncertainty, presents a unique opportunity to acquire
small, growing and profitable Chinese companies at historically realistic
valuations.
Business
Overview
Our
strategy is to invest in growth companies and to provide them with extensive
support, including administrative, legal, accounting and marketing assistance,
and capital infusions with the long term goal of preparing them to become public
companies in their own right. The Japanese trading companies were
built around a similar concept. Also, in the United States, a company
following an analogous structure is the company formerly known as Thermo
Electron Corporation, now known as Thermo Fischer Scientific, traded on the
NYSE/Euronext Exchange under the symbol TMO.
4
On June
24, 2009, prior to the Share Exchange, Covenant Holdings initiated the execution
of this strategy by acquiring 100% of the equity interests in two private
Chinese technology companies, Chongqing HongSheng Sysway Information Industry
Co., Inc. (“Sysway” or “Chonqing Sysway”) and Hainan Jien Intelligent
Engineering Co., Inc. (“JIEN” or “Hainan Jien”), in exchange for an aggregate of
2,750,000 shares of its common stock pursuant to certain China operating company
acquisition agreements (“China Agreements”). As a condition to the
China Agreements, both Chongqing Sysway and Hainan Jien were authorized to
distribute to their original equity holders and management a dividend against
their respective profits for the years ended 2008 and 2009. Also in
accordance with the China Agreements, we have agreed to engage in a capital
raise by the first quarter of 2010 to inject a minimum of $2.5 million into each
of Chongqing Sysway and JIEN. If we are unable to raise the funds or
secure a timely extension to raise the funds to inject into Chongqing Sysway and
JIEN, the original Chinese equity owners of these subsidiaries would have a
claim for breach of the China Agreements against the Company, for which one
contract remedy is rescission of such agreements and transfer of the ownership
of the companies back to the original owners.
Also
prior to the Share Exchange, Covenant Holdings engaged in certain capital
raising activities as a private company. During November 2009,
Covenant Holdings issued 200,909 shares of its common stock to an offshore
entity (the “Offshore Investor”) in exchange for the retirement of three bridge
loans issued by the Offshore Investor to Covenant Holdings, the principal and
interest of which amounted to $401,818 and which was converted to the 200,909
shares mentioned above. The shares were issued to the Offshore
Investor on November 10, 2009 pursuant to a private placement offering exemption
under Section 4(2) under the Securities Act. Additionally, Covenant
Holdings issued a private placement memorandum dated November 24, 2009,
soliciting subscriptions for up to 750,000 shares of its common stock at a price
of $2.00 per share ($1,500,000) from certain “accredited investors” and non
“U.S. persons,” as those individuals are defined under the Securities Act (the
“Private Placement”). According to the terms of the Private
Placement, the minimum amount to effect a close under the Private Placement was
$300,000 (150,000 shares) and the minimum purchase amount was 10,000 shares
($20,000). Covenant Holdings has accepted subscriptions for 200,000
shares ($400,000) under the Private Placement. While the terms of the
Private Placement permitted the offering to continue until January 31, 2010 and
to be extended for up to an additional one month thereafter, Covenant Holdings
has elected to terminate the Private Placement as of the Closing
Date.
Typically,
we will invest in and provide strategic direction for companies in support of
their growth and expansion. We believe that Chinese growth companies
present the most consistent opportunity for generating above average equity
returns and the creation of long-term sustainable capital
appreciation. We expect our companies to experience growth as a
result of their special market position, their market growth potential, and/or
through strategic acquisitions.
We will
target opportunities in China through our tracking and targeting of businesses
that will benefit from the introduction of the Chinese government's new business
policy model, "the scientific concept," which focuses on domestic economic
growth and social progress. The central government’s plan is to
redefine its historic economic policy of promoting growth through export-driven
businesses to a new model of expansion in domestic investment, with a focus on
consumption and employment within China. A component of this policy
is to encourage investors to introduce and develop technologies and to invest in
technologically intensive projects in order to promote and facilitate the
development of local technology companies.
Our
initial focus is on Information Technology (“IT”) companies that are well
positioned to capitalize on opportunities created by the government’s new
policies or which are serving industrial sectors that are a target of the
government’s economic development policies. IT spending growth in
emerging markets such as China is nearly double that of western economies, and
IT is considered to be a major factor in promoting GDP growth, balancing
economic development, expanding the business base and accelerating the growth of
a consumer class. IT spending is expected to increase in China from
$73.0 billion in 2008 to $127.0 billion in 2013. China Information
Technology Report Q4 2009 (by Business Monitor International, as
published on October 15, 2009 by www.marketresearch.com). Our initial
portfolio acquisitions of Sysway and JIEN were in furtherance of this
focus. Chongqing Sysway is engaged in the design, development and
integration of advanced information systems and management software and JIEN
specializes in the design and installation of security and surveillance
systems.
5
As the
Chinese government’s long-term economic plan is also focused on developing
consumer consumption, we intend to selectively review potential investment
opportunities in small-to-medium size Chinese enterprises ("SMEs") in sectors
beyond IT that will benefit from the impact of these economic policies and that
fit our strategic objectives.
We are
committed to employing a rigorous, targeted investment approach to the growth of
the Company and our acquisition of operating companies in China. We
do not intend to invest in Chinese development stage companies that lack proven
technologies, market acceptance or a demonstrated business model. We
will target companies where the technology risk is limited and there is a normal
business risk of expansion and execution of a business plan. In most
cases, target companies will have an established market presence and base of
revenue with a management team committed to, and capable of, executing a
successful growth strategy.
We have
established the following investment criteria for our investment in or
acquisition of target companies:
●
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Focus
on “unique growth companies”—i.e. businesses and technologies that
participate in, or focus on, serving industrial sectors that are supported
by the PRC’s five and ten year plans for internal economic
development.
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●
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Investment
will provide the Company with a substantial position in special growth
companies.
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●
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These
special growth companies should
also:
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o
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Benefit
from the support of both the local and regional
government;
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o
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Be
privately owned—i.e. there should not be an ownership stake held by the
government;
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o
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Be
free from competition with any government
enterprise;
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o
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Have
demonstrated profitable organic growth for 2-3
years;
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o
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Exhibit
a well established and growing customer base, market penetration and
operating infrastructure;
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o
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Have
an effective and proven management team which is willing to make a
multi-year contractual commitment to the execution of the business
plan;
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o
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Be
able to provide comprehensive financial
statements;
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o
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Be
willing to commit to a program of establishing a system of sound corporate
governance in accordance with U.S. public market standards and comply with
all local laws and regulations as well as U.S. securities laws and
exchange listing requirements. This will include adopting a
code of conduct and U.S. accounting
standards.
|
Potential
acquisition targets are thoroughly researched by our management team and
advisors. The members of our Board of Directors, advisory board and
management team have extensive experience, including substantial transaction and
financing expertise, in both the U.S. and China.
To our
knowledge, we are the first firm positioned to work with Chinese growth
companies in gaining access to the U.S. capital markets while simultaneously
assisting such enterprises with becoming public companies in their own
right. Although the Company is not a private equity firm in the
traditional sense, emergent trends in private equity investment in China
indicate there is increasing demand for growth capital for companies in light of
the Chinese government’s economic initiatives and the country’s rapidly
expanding consumer base. Private equity investment in China will boom
in the next few years. Specifically, it is predicted that China
should experience a 30% rise in such investment during the 2009-2011 period
(China's Private Equity Boom,
by Shaun Rein, Business Week, July
16, 2008). In 2005, investors allocated $5.0 billion to China and in
2008, $20.5 billion was invested. This surge, according to Business
Week, is supported by four pillars: the growth of the Chinese middle class; the
global competitiveness of Chinese firms; the tightening of credit for smaller
Chinese firms; and the Chinese stock market. Nevertheless, the
success of our business will primarily be characterized by the investment
opportunity that China presents and the positioning of our portfolio companies
to capitalize on such opportunity within their respective
industries.
6
Portfolio
Company Overviews
Currently,
our portfolio consists of two subsidiaries that are actively engaged in various
segments of the IT sector. Chongqing Sysway and Hainan Jien,
described in detail below, both deploy technologies and services that are
supported by their local governments’ long term technology/economic plans.
Chongqing Sysway currently provides its products and services to the tobacco and
financial services industries, while Hainan Jien provides its products and
services primarily to financial institutions and government
agencies. These companies are headquartered in Chongqing and Haikou,
respectively, and have research and development centers in Chongqing and
Hangzhou and local offices located in Beijing, Tianjin, Shijiazhuang, Zhengzhou,
Chengdu, Hangzhou, Wuhan and Sanya (Hubei Province). Together, the
companies employed 125 people at the end of the third quarter of
2009.
Chongqing
Sysway
Chongqing
Sysway is a developer of advanced information systems and collaboration
software, and it is also a systems integrator for manufacturers in the Chinese
tobacco industry. It operates in Sichuan province and the Chongqing
Central region of China. Chongqing is the portal to the southwest
region of China and a key city in the PRC government’s urbanization
strategy.
Sysway is
strategically positioned to directly benefit from the Chongqing government's
five year "Information Industry Development Plan," whereby the local government
plans to invest 158 billion RMB (currently about $23 billion; 6.82 RMB=1 USD) to
install advanced information systems for the automation of over 100 local
SMEs. We believe that Sysway may become a leader in this area for
advanced information systems software and systems integration.
Major
projects for the company involve the construction of IT infrastructure for
state–owned tobacco enterprises, mainly in the form of automated data collection
and analysis for improving internal workflow and supply chain
management. Based on its re-useable Java components platform, the
company has developed a series of vertical2/horizontal data management systems
for information gathered from the tobacco, agricultural, industrial and
commercial (banking) sectors.
Chongqing
Sysway is well positioned to serve its core tobacco industry clients, as this
industry is concentrated in Chongqing and Chengdu in central southwest China.
China is the world’s biggest producer of tobacco and is inhabited by 350 million
smokers. Tobacco industry taxes and profits make up 8% of the State
Monopoly Administration (STMA) revenues. In 2008, almost $63.0 billion was
raised by taxing cigarettes. The PRC Government is concerned for the health
status of its citizens, and in the next year, another increase in the tobacco
tax rate is being contemplated. China, Thank You for Smoking,
University of Southern California US-China Institute, March 6, 2009,
http://www.uschina.usc.edu/.
During
2009, Chongqing Sysway began implementing a growth strategy working with local
alliance partners to enter into the financial services industry and provide
information security solutions to commercial banks.
Hainan
Jien
Hainan
Jien is a Hainan-based firm ranked one of China’s top 100 security and
surveillance enterprises in 2005 by China Security and
Protection Magazine, published by The Ministry of Public Security of the
PRC. JIEN designs and installs security and surveillance
infrastructure to protect financial institutions and government agencies and
implements systems for intelligent construction (“IC”) projects for commercial
customers. IC construction involves designing and building structures
with an integrated technology plan, which includes equipment management
automation systems, fire warning systems, communication systems, security
systems, and business support systems. IC systems, combined with advanced
building structures, internal and external operating systems and service, make
the functionality of buildings more comfortable, safe and
energy-efficient. It embraces the North American concept of “green
buildings,” with its understanding and implementation of highly sophisticated
communications, network and security systems. According to national
statistics in 2006, the IC market was reputed to comprise $23 billion of the
total $260 billion construction industry. During the first half 2008,
China’s output value of construction hit $331.0 billion. In a survey of 1,400
construction companies, it was estimated that approximately 45% of these
enterprises have implemented informatization development.
7
JIEN is
one of only two companies in Hainan province that holds a 3111 Project
Initiative Certification—the "Safe City" Certification issued by the China
Security and Protection Industry Association—to participate in the government’s
Safe City Projects. The 3111 Project is the initial phase of the Safe
City Project, which is an ongoing nationwide initiative sponsored by the
Ministry of Public Security to enhance general security in China’s cities, which
includes the implementation of new surveillance cameras in high-traffic areas
throughout a total of approximately 660 cities. These security systems will be
integrated and networked together both regionally and nationally to ensure
safety and security for citizens and to help deploy public services in the most
timely and effective manner possible. Contracts for this project are typically a
year or more in duration and are signed and paid for by both the national and
local governments.
China has
a much broader ten year program to deploy a system of high-tech surveillance and
tracking known as “golden shield.” The goal of this program is to
deploy a nation-wide system that will enable law enforcement to monitor all
highways and streets. It is estimated that the internal-security
market will reach $33 billion by 2010. The Left Coaster, Police State 2.0,
http://www.theleftcoaster.com/archives/012630.php.
Market
Overview
China,
In General
China’s
fourth quarter 2009 economic stimulus plan of $586 billion (4 trillion RMB)
already has had a positive impact, as demonstrated by China’s first three
quarters economic growth of 7.7%. In addition, the transition of the
Chinese economy, due in part to the stimulus’ focus on internal investment,
industrial output and consumption, has begun to be evidenced. For
example, for the first nine months of 2009:
●
|
China’s
consumer spending has expanded 15.1% on a year-to-year basis
(Source: NuWire Investor, China Set for Double Digit
Growth in 2010,
http://www.nuwireinvestor.com/articles/china-set-for-double-digit-growth-in-2010-54183.aspx);
|
●
|
Spending
will increase by 50% in China’s top 25 cities in the next 5 years
(Source: Proactive Investors UK, Latest Figures Spark Further
Optimism in China’s Speedy Economic Recovery and Future Prospects,
http://www.proactiveinvestors.co.uk/companies/news/9360/latest-figures-spark-further-optimism-in-chinas-speedy-economic-recovery-and-future-prospects-9360.html);
|
●
|
Fixed
asset investment has increased 33.4% since January 2009
(Source: NuWire Investor, China Set for Double Digit
Growth in 2010,
http://www.nuwireinvestor.com/articles/china-set-for-double-digit-growth-in-2010-54183.aspx);
|
●
|
Industrial
output increased 9.4% during the first 10 months of 2009 (Source:
Westender, China Goes
Shopping, http://www.westender.com.au/news/718
);
|
●
|
Producer
price index (PPI wholesale level) dropped 6.5% (Source: Xinhua
News Agency, China’s CPI
Falls 1.1% in First Nine Months, PPI down 6.5%,
http://news.xinhuanet.com/english/2009-10/22/content_12295654.htm);
|
●
|
Consumer
price index (CPI) dropped 1.1% (Source: Xinhua News Agency,
China’s CPI Falls 1.1%
in First Nine Months, PPI down 6.5%,
http://news.xinhuanet.com/english/2009-10/22/content_12295654.htm).
|
China’s
economy is approximately one-fifth the size of the U.S.
economy. Thus, the U.S. stimulus plan of $798 billion illustrates the
relative significance of the Chinese plan of $586 billion and its potential to
affect the Chinese economy. In light of this degree of government
intervention, our strategy was also influenced by the following:
●
|
China’s New Economic
Policy. The hallmarks of China’s policy are to: (i)
significantly increase spending and implement substantial tax cuts by
reducing the value-added tax and adopting preferential tax policies for
SMEs; (ii) increase bank liquidity and continue to reduce interest rates;
(iii) implement comprehensive industrial restructuring and facilitate the
merger and reorganization of enterprises; and (iv) promote innovation in
science and technology.
|
8
●
|
Chinese Economy has Significant
Reserves. China has a substantial $2.3 trillion in
foreign exchange reserves, up from $1.96 trillion at the beginning of the
year, to keep the economy at its currently planned 8% plus growth
level. In addition, China maintains a significant 35% savings
rate, resulting in approximately $3.0 trillion in individual bank
savings.
|
●
|
Major International Market
Participants are Investing in China. Warren Buffet, Jim
Rogers, the John Templeton Fund, the Carlyle Group, Temasek Holdings, and
Cargill are investing in China. Goldman Sachs, also an investor
in China, estimates that China's GDP growth will be 8.3% in 2009 and 10.5%
in 2010. Goldman Sachs predicts that China will surpass the
U.S. economy by 2027. Optimism about China stretches across a
wide range of American investors.
|
●
|
Foreign Direct and Private
Equity Investment. Foreign Direct investment increased from 2007 to
2008 23.6% from $74.8 billion to $92.4 billion in 10,357 less projects.
China’s private equity market, according Business Week, should register
30%-plus growth for the next three years, with 2009 targeted for $15.0
billion. China's Private Equity Boom,
by Shaun Rein, Business Week,
July 16, 2008. The larger projects and large companies receive
the majority of these investments. This market reality, together with the
lack of bank loans for small non-government companies, work to create an
opportunity for aggressive equity investing in selected
SMEs. SMEs suffer from budget constraints and limited resources
to hire qualified people. They typically do not have access to
credit nor adequate budgets for R&D
purposes.
|
●
|
Current Chinese Regulatory
Environment. The current attitude of Chinese regulators
toward large financial transactions is one of caution as evidenced by the
fact that the central government has stymied recent deals involving
Goldman Sachs and The Carlyle Group. Consequently, new investment
strategies, including bridge loans, private investment in public equity
transactions and mezzanine financings, are being used in China by both
international and local private equity funds, with locals using
RMB-denominated funds.
|
Chinese
IT Market
IT
opportunities are abundant in China since the introduction of the PRC
government’s adoption of the “scientific concept” policy model. This
model features fostering domestic economic growth and social
progress. According to PRC officials during the 17th
Party Congress held in October 2007, the Party will aggressively redefine its
present economic policy of promoting external growth in the export-driven
business to a new model of expansion in domestic investment and consumption
within China. This is part of a new five-year economic plan to move
from a planned economy to a market driven economy and to become integrated into
global market systems.
China’s
IT
market is expected to outperform on a global scale during 2009-2013, according
to the China Information
Technology Report Q4 2009 (by Business Monitor International, as
published on October 15, 2009 by www.marketresearch.com). Growth in
2009 will remain in single digits due to overall economic growth. The
Chinese stimulus program and the rural electronics subsidiary programs are
expected to raise IT spending from $78.0 billion in 2009 to $124.0 billion by
2013. Computer sales are projected to move from $52.0 billion to
$80.0 billion in 2013. Software sales increased from $8.8 billion in
2008 to almost $10.0 billion in 2009. IT services will reach $16.4
billion in 2009, and this sector is expected to achieve a compound annual growth
rate (CAGR) of 135 between 2009 and 2013.
China’s
Banking Regulatory Commission (CBRC) is compelling banks to emphasize mitigating
IT risk. The nation’s commercial banks lag far behind international competitors,
according to China Construction Bank, in the application of risk measures to
limit regional credit risk, which expands market risks and operational risks,
thereby jeopardizing domestic risk management as well as global risk
management.
The
Chinese capital market, which is the fourth largest in the world, currently
lacks advanced risk management procedures, and the country’s retail brokerage
business is plagued with inconsistencies and corporate governance. In
the last three years, over twenty firms have been closed down as the CBRC
imposed stricter supervision of the retail market. Consequently, the opportunity
for domestically-developed transaction IT-based systems with full risk and
security features will be in great demand as Chinese investors move into the
global markets.
The
Company recognizes the favorable operating conditions that are unfolding in the
Chinese economy in a number of Chinese industries using advanced
IT. In addition to the security and surveillance, tobacco, and
financial services industries, there are great opportunities in the automotive,
retail consumer, energy reduction, alternate fuel, and carbon emissions
markets. All of these industries are heavily reliant on software and
supported by the government through policy statements. Individual
state-authorized committees implement such policies. The
implementation process is expressly identified in five and ten year
plans.
9
China,
operating under this new policy, has established an economic structure that is
highly favorable for investing in Chinese information technology
companies. This is primarily due to the fact that this industry is
characterized by a number of growth drivers, including the vast rural market,
government spending and demand from the internet and communications
industries. Consequently, informationization among SMEs is a
government priority, as the Ministry of Industry and Information Technology
(MIIT) has already invested over $743.0 million in 2008 and will add credit
loans and guarantee credit to SMEs. Additionally, rapidly growing
internet adoption across China and the demand for IT-enabled business solutions
create the potential for a lucrative market for IT-security
development.
Special
Economic Zones
The PRC
offers investors a complex system of incentives at the national, regional and
local levels. Party members have great influence at the regional and
local levels where they live, impacting regional business activities and seeking
employment for locals. There are special economic zones, hundreds of
development zones and designated inland cities that vie for foreign
investment. One of our subsidiaries, Chongqing Sysway, is located in
an experimental zone in a more rural area where, recently, foreign banks led by
a subsidiary of HSBC have established their presence. Our other
subsidiary, JIEN, is located in a special economic zone in Hainan, China, where
there is access to a large high-tech employee pool. China also has numerous
national science parks, many focused on commercializing technology research
developed in Chinese universities. PRC policy is to encourage
investors to fund the introduction, innovation and development of technology,
and invest in technology intensive projects in order to promote and facilitate
technology companies.
Government
and Small Business IT Markets
Investment
in technology solutions is growing at exponential rates in two areas of
opportunity for the Company. One opportunity is the government, regional and
local IT markets. The other is the large independent small business market (SMEs
with 1,000 or less employees and less than $45.0 million in
revenue). By the end of 2008, China’s 9.7 million SMEs accounted for
99% of the number of enterprises, 60% of the GDP and provided jobs for 80% of
the urban population.
The
market for IT is flourishing in the SME market. In this area, Chinese
companies will invest $28 billion, excluding communications, through 2010,
according to the China Center of Information Industry Development
(CCID). In general, the SME market will invest more in high-end IT
infrastructure and services, seeking to increase competitive
advantage.
The SMEs
operating environment has been historically tougher than the larger
government-invested companies because of a lack of financing. SMEs
depend on commercial loans, which are difficult to obtain, and government
subsidies to fund their expansion and are too small to list their companies on
national exchanges to raise necessary capital. As result, China
recently launched a new exchange called ChiNext for small companies to enhance
economic growth and to increase employment.
China
joined the World Trade Organization on November 26, 2001. Since then, China has
removed or relaxed various restrictions on financial regulations. The China
Ministry of Finance modified its banking regulation principles "to grant more
operational freedom to financial institutions and to tighten up supervision of
the financial situation." Financial liberalization has accelerated the
integration of the global financial system, stimulated the innovation of
financial technology and products, and improved operational efficiency. However, due
to the intense competition in the financial markets, various types of
operational risks faced by financial institutions increased substantially. In
order to realize comprehensive operational efficiency and improve and sustain
competitiveness, financial institutions have to strengthen their operational
soundness, identify and quantify various risks in advance, and establish and
carry out an effective risk management system.
10
Financial
services institutions globally have spent heavily on IT for many years. In the
fast-paced, competitive financial services industry, companies are increasingly
relying on flexible and reliable IT infrastructure to gain competitive
advantages. The securities and banking industries are key markets of IT system
investment.
Surveillance
System Market
The
electronic market research company, iSuppli Corporation, estimates that the
Chinese security and surveillance equipment market will withstand the impact of
the economic recession and make further expansion during and after 2009 due to
investments by the Chinese government in the security and surveillance industry,
as well as due to the expanding home security system
business. iSuppli also forecasts that the Chinese security industry
will reach $18.9 billion by the end of 2009, an increase of 7.5% over the $17.5
billion spent in 2008. As this market expands to its capacity of
$26.5 billion by 2013, a CAGR of 8.6% is expected from 2008 to
2013. Comparatively, the revenue of the global security market in
2008 is estimated to shrink by 2%.
Growth in
this market has been, and continues to be, driven by:
●
|
increased
demand for security and surveillance products within China by a new
customer group composed of various smaller industries and organizations,
such as residential estates, factories and shopping
centers;
|
●
|
preparation
for the 2010 World's Expo in Shanghai by the PRC
government: while the expenditure on security and surveillance
during the 2008 Olympics reached $300 million, the expenditure on security
and surveillance infrastructure for the 2010 World's Expo in Shanghai is
expected to reach $3.0 billion;
|
●
|
3111
Project, the “Safe City Project” (See page 8 for a further discussion
of the Safe City Project); and
|
●
|
IC.
|
Activity
in the IC industry is influenced by annual investment in construction, public
infrastructure, and the modernization of existing systems and related
hardware. As new and better technologies are created, demand will be
affected by the scale of technological improvements and, as a result,
economically feasible break-through designs in IC will have a larger effect in
stimulating demand than marginal improvements at elite prices, due
to:
●
|
The
recent four years growth rate of China’s GDP, which has increased at an
average of 10% with annual investment in fixed assets remaining high
(according to a National Bureau of Statistics of China report, the growth
rate of China’s GDP in 2005, 2006, 2007 and 2008 was 10.2%, 11.6%, 11.9%
and 9.0 %, respectively. Source: http://info.secu.hc360.com);
|
●
|
Growth
in construction: according to national statistics, as of 2008,
China’s total output value in the construction industry exceeds $886
billion (RMB 6114.4 billion). The IC industry has significant
growth potential, and IC is considered China's key economic development
industry. Currently, the percentage of new construction for which IC
accounts for is as follows: America, 70%; Japan, 60%; and China,
10%. However, in China, this figure is expected to rise to
around 33% in 2012.
|
11
Source: http://info.secu.hc360.com.
;
and
●
|
Market
demand forecast: according to the nation’s “11th Five-Year
Plan,” the growth rate of the construction market is expected to remain at
or above 10% through 2010. Annual growth rate of the IC
industry is higher than the construction market itself, which could reach
20% before 2010. Source: http://www.topenergy.org. Based
on the above estimates, the management of JIEN believes that annual
investment in the IC industry can be estimated as shown
below:
|
Units:
US$ Billion
Year
|
2008
|
2009-e
|
2010-e
|
Intelligent
Construction Market
|
$18.4
|
$23
|
$28.75
|
Banking
Industry
According
to the latest report of CINSOS Consulting Corporation (CINSOS), China’s banking
IT expenditures were $5.83 billion (RMB 39.76 billion) in 2008, a 10.9% increase
over 2007. CINSOS forecasts the China banking IT market to reach $7.65 billion
(RMB 48.85 billion) by 2011, while the average growth ratio from 2008 to 2011 is
10.04% (Source: The
IT Expenditure of Banking in China in 2008 reached RMB 39.76 billion,
CINSOS Consulting Corporation, 26 Feb 2009). Generally, banks will
spend more money on third party service systems such as payment and settlement
systems, open fund trading and channel integration systems.
Source: The IT Expenditure of Banking in
China in 2008 reached RMB 39.76 billion, CINSOS Consulting Corporation,
26 Feb 2009.
12
Security
Service
The role
of software in China's network security products industry will likely increase
and the network security service industry will also likely see dynamic
growth. CCID Consulting Co. Ltd. ("CCID Consulting"), China's leading
research, consulting and IT outsourcing service provider, has reported that with
the actualization of the ''Administrative Measures for the Graded Protection of
Information Security,'' the pivotal industries are paying more attention to
their network security strategic plan. Demands from the telecoms, finance and
energy industries, as well as government network security services, have grown
rapidly.
In
addition, CCID Consulting reported that the Chinese electronic security industry
scale reached $ (RMB 51.38 billion) in 2008, an increase of 22.5%
compared to the same period last year. By 2009, the industry scale is
predicted to reach $8.38 billion (RMB 57.13 billion), an increase of 11.2% over
2008. In 2011, the overall market is expected to reach $12.23 billion
(RMB 83.58 billion). In general, this market is expected to develop
in the following directions: rapid rise of security service demands and
increased proportion of software in security products; expansion in mobile
applications; and emergence of related security
products. Source: http://www.ccidconsulting.com.
Network
security demands, such as security consulting, security management monitoring
and grade evaluation, have become the important driving forces of this market
and frequent accidents have compelled SME’s to devote more funds to network
security.
Office
Automation Collaboration Software and Tobacco Industry
CCID
Consulting forecasts that the size of China’s office automation and
collaboration software market will maintain a relatively fast growth rate during
upcoming 3 years, with annual investment reaching RMB 5.591 billion by
2012.
Figure
Size and Growth of China's OA and Collaboration Software Market
2004-2012
6.82 RMB
= $1.00
Source: http://www.ccidconsulting.com.
It is
suggested by the report, Forecast & Analysis of the IT
Solution Market of Chinese Governmental Industry 2009-2013, issued by
International Data Corporation ("IDC"), that new opportunities will be created
in E-government due to initiatives such as enhancement of government service,
government department integration, expanding domestic demand, and enhancement of
supervision. IDC predicts that the IT market scale of the
governmental IT industry will reach $7.9 billion (RMB 53.65 billion) by 2009 and
$10.7 billion (RMB 73.36 billion) by 2013, with an average CAGR from 2008 to
2013 of 8%. Industrial solutions will feature, among other items,
system application platform planning and design, application system integration
and data sharing.
13
The
Scale and Forecast of General IT Market of Governmental Industry
2005-2013
(Unit:
100 Million RMB)
6.82 RMB
= $1.00
The
Chinese Government will likely have an ongoing need for basic IT construction in
the future. This continued procurement of IT hardware is primarily
due to the historically unbalanced development between different regions and
governmental departments within China. As a result, the average
annual CAGR of the IT hardware industry in China from 2008 to 2013 will be 5.6%,
while the software and service market of the same period will be 13.2% and 14%,
respectively.
Information
technology applications in the Chinese tobacco industry during 2008 made
remarkable progress due to demand related to industrial data centers,
E-government and other major projects that contributed to the promotion and
innovation of industrial management and IT. This industry also
benefited from sustainable industrial development and industrial
informationization investments totaling $550 million, which increased by 14.5%
compared to 2007. In 2009, industrial IT application construction
projects have emerged as the technological hub of the entire industry through
proliferation of the new model of "supply by order" and in-depth integration of
industrial enterprises. Industrial IT application construction will
further strengthen fundamental management, feature crucial application, speed up
in-depth progress of basic construction, and elevate industrial modernization in
China. Investments in this industry are estimated to reach $620
million by the end of 2009 and continue to $1.01 billion by 2013. The
China Tobacco Industry Informatization Development Research Annual Report
2008-2009,
http://www.baogaochina.com/2009-02/2008_2009yancaoxinxihuafazhanyanBaoGao.html.
14
Tobacco
Industry Investment in IT 2005 – 2013
(Unit:
million USD)
The China
Tobacco Industry Informatization Development Research Annual Report 2008-2009,
http://www.baogaochina.com/2009-02/2008_2009yancaoxinxihuafazhanyanBaoGao.html.
Tobacco
manufacturers have been consolidated by the central government from over 150
enterprises to 17 large groups. Consequently, each of the existing groups must
accept more extensive management responsibilities than previously. Consequently,
these circumstances will create demand for the tobacco industry to improve and
implement their IT systems in order to control quality and monitor their
transactions.
Our
Competitive Strengths
Our
Investment Strategy and Management Team
At the
holding company level, we believe the following strengths will allow us to
effectively execute our investment strategy.
We
look to invest primarily in “unique growth companies” in China.
Through
our research and due diligence, we focus primarily on “unique growth companies”
as our potential investment targets. These businesses and technologies either
participate in or focus on serving industrial sectors that are supported by the
PRC’s five and ten year plans for internal economic development. As a result,
our operating subsidiaries will operate in business environments supported by
the Central and local governments and recognized as important to the economic
expansion of China, thereby positioning our subsidiaries for expansive growth
upon the successful execution of their business plans.
We
will hold significant ownership stakes in our operating
subsidiaries.
We intend
to hold a significant equity stake in each of our operating subsidiaries. As a
result, we will have a vested interest in the successful growth of our operating
subsidiaries. Our management team at the holding company level, both
in the U.S. and China, will lend its expertise and resources to facilitate the
sustained growth of our subsidiaries as well as assist these businesses in
gaining access to necessary capital for growth. Moreover, this
strategy will allow for centralized control over the reporting obligations of
our subsidiaries to ensure their regulatory compliance in the US markets and
sound corporate governance.
15
Our
Board and management possess extensive experience both in China and in the U.S.
capital markets.
Our
subsidiaries will benefit from the guidance and resources available to them at
the holding company level. It is the goal of our Board, management
and advisory board to work closely with our operating subsidiaries in assisting
them with compliance requirements they will encounter as component parts of a
U.S. public company, while simultaneously providing them access to necessary
growth capital that will allow them to meet expanding market opportunities in
China and ultimately generate a return to our investors. To this end,
members of our Board and senior management are prepared to lend their years of
experience with and knowledge of raising funds in the U.S. capital markets as
well as their extensive management experience with U.S. public
companies. Beyond this strength, our Board, management and advisory
board members bring their experience with and understanding of China, its
business culture, its economic opportunities, and its government to the
development of the Company and the potential growth of our
subsidiaries. Consequently, through our unique holding company
structure, we are effectively situated as to serve as the key liaison between
our subsidiaries and the U.S. investor.
Based on our research and experiences
in China and the U.S. capital markets, we have a targeted investment strategy
that focuses on quality operating companies.
In light
of the vast investment opportunities in a rapidly developing economy such as
China’s, we have the opportunity to be selective in the operating companies we
choose to invest in. Consequently, we can utilize our experience in
China and in the U.S. capital markets to invest in companies that have the
greatest potential to generate sustained growth for the Company and eventually
become standalone public entities. We have established the following
investment criteria for our investment in or acquisition of target
companies:
●
|
Focus
on “unique growth companies”—i.e. businesses and technologies that
participate in, or focus on, serving industrial sectors that are supported
by the PRC’s five and ten year plans for internal economic
development.
|
●
|
Investment
will provide the Company with a substantial position in special growth
companies.
|
●
|
These
special growth companies should
also:
|
o
|
Benefit
from the support of both the local and regional
government;
|
o
|
Be
privately owned—i.e. there should not be an ownership stake held by the
government;
|
o
|
Be
free from competition with any government
enterprise;
|
o
|
Have
demonstrated profitable organic growth for 2-3
years;
|
o
|
Exhibit
a well established and growing customer base, market penetration and
operating infrastructure;
|
o
|
Have
an effective and proven management team which is willing to make a
multi-year contractual commitment to the execution of the business
plan;
|
o
|
Be
able to provide comprehensive financial
statements;
|
o
|
Be
willing to commit to a program of establishing a system of sound corporate
governance in accordance with U.S. public market standards and comply with
all local laws and regulations as well as U.S. securities laws and
exchange listing requirements. This will include adopting a
code of conduct and U.S. accounting
standards.
|
Our
Subsidiaries' Competitive Strengths in the IT Industry in China
We
believe the following strengths differentiate our subsidiaries from their
competitors, enabling our subsidiaries to attain leadership positions in the IT
market in China.
Strong
Solution and Service Development Capability
Solution
development
efforts of our subsidiaries are led by experienced senior management teams, most
of whom have computer science, mathematics or engineering backgrounds. As of
September 30, 2009, our subsidiaries employed a combined 33 software development
engineers, or 26.4%, of their aggregate work force. The software
development of these subsidiaries has reached level four out of the five levels
certified under CMMI, the de facto standard for software integration and
development capabilities. The quality control processes of Chongqing Sysway and
JIEN are ISO9001 certified. Both subsidiaries use component-based platforms in
the software development process that enable them to redeploy relevant modules
for future solutions or to repackage them as stand-alone standardized
solutions.
16
The
primary goal of the research efforts of our subsidiaries is to develop solutions
that may be strategically implemented and commercialized. As an investment in
long-term growth, our subsidiaries fund and operate their own research and
development that focuses on core technologies underlying solutions and solution
protocols, staffed with engineers dedicated to the research conducted by the
centers. Our subsidiaries are committed to research and development
and their focus on commercializing research results enables them to work toward
becoming leaders in the competitive Chinese IT market, with the ability to
provide a broad range of quality software solutions and the potential for
sustained long-term growth.
Proven
Management with a Successful Business Record
The
senior management teams of our subsidiaries consist of computer scientists and
engineers with extensive management experience in the IT industry ranging from
16 years to 25 years. These management teams have complementary skills in the
areas of software development, operations, finance, and sales and marketing.
Under the leadership of these management teams, our subsidiaries have
substantially expanded their operations and solution lines, and achieved
significant revenue growth.
Certifications
and Honors Given to Our Subsidiaries
Chongqing
Sysway
Certification
& Honors
|
Certification
Body
|
Certification
Date
|
CMMI
Level 3
|
CMU/SEI
|
July
2009
|
Quality
Certification of IS09001:2000 standard
|
China
Beijing BTIHEA Certification Co., Ltd.
|
May
2009
|
Excellent
Company of System Integration
|
The
System Integration Certification Center of Chongqing
|
March
2009
|
Qualified
Software & Services Outsourcing Enterprise
|
Chongqing
Information Industrial Bureau
|
November
2008
|
Intelligent
Construction System Certification Level 3
|
Ministry
of Housing and Urban-Rural Development
|
June
2008
|
National
Computer Information System Integration Level 2
|
Ministry
of Information Industry of the PRC
|
April
2008
|
Customer
Satisfied Products of Software Development & System
Integration
|
China
Association For Quality
|
March
2003
|
Customer
Satisfied Company in Chongqing
|
Supervise
Bureau of Quality & Technology, Chongqing
|
December
2003
|
Technical
Support Center for Chongqing Enterprises Information
|
Chongqing
Enterprise Resource Plan (ERP) Group
|
November
2001
|
Qualified
Software Enterprise
|
Chongqing
Information Industrial Bureau
|
January
2001
|
Approved
to be 863/CIMS System Integration & Consultation Service
Company
|
863/CIMS
Experts Team of China
|
August
2000
|
Hi-tech
Enterprise
|
Chongqing
Science & Technology Commission
|
January
1999
|
17
Hainan
JIEN
Certification
& Honors
|
Certification
Body
|
Certification
Date
|
Security
and surveillance certificate level 1
|
Public
security bureau, Hainan Province
|
October
2009
|
Member
of the Procurement Center of the Central People's
Government
|
Procurement
Center of the Central People's Government
|
March
2008
|
Computer
Information System Integration Level 2
|
Hainan
Development Bureau
|
April
2007
(valid
for 3 years)
|
Certificate
in intelligent construction design and installation level
2
|
Department
of Construction, Hainan Province
|
April
2007
|
Member
of Hainan Software Industry Association
|
Hainan
Software Industry Association
|
2007
|
Commercial
Credit Qualification Certificate
|
Hainan
Guoli Credit Certification Center
|
June
2007
|
Quality Certification
of IS09001:2000
|
China
Quality Certification Centre
|
April
2007
(valid
for 3 years)
|
Authentication
Certificate of Commercial Credit AAA
|
Commercial
Credit Administration of Hainan Province
|
August
2006
|
Greatest
Grow Up of 100 Enterprise for China Public Security & Safety
Industry
|
A
Subordinate of The Ministry of Public Security of PRC
|
January
2005
|
Our
Growth Strategy
Holding
Company Level
As a U.S.
public company, we will raise additional capital in the capital markets and
deploy this capital to acquire and/or invest in targeted special growth
companies based in China. Our business model is predicated on having
local management continue to operate their respective businesses and to deploy
the capital invested by us in support of their business plan and growth
strategy. Our model is designed to allow the expansion stage of our
subsidiaries' growth to proceed efficiently and rapidly. The organic growth of
our subsidiaries will be accelerated through our investment in them and by the
reinvestment of the companies’ profits in their continued growth. Our
access to the U.S. capital market will provide the needed growth capital, while
our Board, management and advisory board will provide our subsidiaries with
access to strategic and global management resources. Our plan is to build each
individual subsidiary, allowing it to be focused and self-sufficient in its
particular market and thus positioning it for a public offering or sale to a
larger company.
Our
Operating Subsidiaries
Chinese
institutions are facing increasing competitive pressures as China’s markets
continue to be opened up to international trade. The Company’s goal is to become
a leader in software development, IT security and risk management, and
electronic transaction services for the financial services industry in China as
a base to expand domestically. We intend to achieve this goal by implementing
the following strategies through our subsidiaries:
Strengthen
relationships with key clients.
Our
clients include leaders in the financial services industry in China. We expect
our clients’ IT needs to evolve as they address an increasingly competitive
market, continue their modernization process and offer their customers
progressively more sophisticated and innovative solutions and services. This
requires substantial IT investments to revamp legacy systems, build new
infrastructures and meet increased demands on internal management of work
processes, resources and risk. We intend to address IT demand from these large
financial institutions and increase the sales of our solutions and services by
implementing, among others, the following measures:
18
●
|
Maintain high level of client
satisfaction. We aim to maintain a high level of client
satisfaction by continuing to exceed our clients’ expectations in the
projects we undertake and provide quality services on an on-going
basis.
|
●
|
Anticipate client
needs. We will leverage our industry know-how and
long-term client relationships to understand our clients’ development and
spending initiatives, so as to best coordinate our research and
development and marketing efforts. We offer value-added services such as
business and technical architecture consulting beyond our normal
business.
|
●
|
Organically expand with our
clients. As our clients’ IT needs evolve and as our
clients expand geographically, we plan to expand our offerings and
geographic coverage.
|
●
|
Actively identify
cross-selling opportunities. Our solutions and services
cover all major banking information systems and we believe there are
substantial opportunities for us to cross-sell our wide range of solutions
and services to our existing client base. We will continue to leverage
existing client relationships and our on-going projects to actively
identify opportunities to market additional solutions and services to our
clients.
|
Diversify
our client base and service offerings to capture new growth
opportunities.
Enhancing
the core competencies of our subsidiaries in other IT growth areas will not only
improve our revenue and potential profit margins but also sustain our long term
growth. We believe our geographical positioning, technological
know-how, cost-effective modular and streamlined designs, our implementation
approach, and broad solution and service offerings will be attractive to
potential financial services clients:
●
|
Our current banking
clients. We plan to provide more service offerings to
our main customers such as China Construction Bank, Agricultural Bank of
China and Bank of China.
|
●
|
National and city commercial
banks. According to IDC, national and city commercial
banks in China will experience rapid growth in the next few years. In
addition, many of these banks have raised or are raising capital in
domestic and overseas capital markets. We plan to focus on the marketing
of our standardized software to address the particular needs of this group
of financial institutions.
|
●
|
Insurance
providers. We are positioning to capture growth
opportunities in the slowly evolving insurance IT market by leveraging our
current leadership position and know-how in the banking industry. We plan
to continue to invest in research and development of new solution
offerings to satisfy the growing information technology needs of this
market segment.
|
●
|
Other
enterprises. We will offer our solutions and services to
support corporate, treasury, finance and other related functions of other
enterprises such as tobacco, automobile, retail sales, energy reduction
and renewable energy companies. We plan to further leverage these
finance-related solutions and services to enter the IT solutions and
services market for these non-financial
enterprises.
|
●
|
International financial
services providers. We plan to leverage our knowledge of
the Chinese market and the overseas market to provide solutions and
services to international financial institutions that are or will be doing
business in China and to Chinese financial institutions when they are
ready to expand overseas.
|
Grow
business through organic growth and accretive acquisitions.
The
current financial services software solution and IT services market is
fragmented, presenting consolidation opportunities. With all of the Chinese
banks regulated to be Basel II compliant by 2010, our companies will take
advantage of the significant demand for IT solutions in the Chinese financial
industry. We will pursue strategic acquisitions and alliances that
fit with our core competencies and growth strategy. We intend to selectively
pursue additional acquisitions to access new sectors or new clients, expand our
solution and service offerings and/or strengthen our market leadership position.
We may also seek overseas acquisitions in the financial services IT market. We
also plan to continue forging strategic alliances with complementary businesses
and technologies, and we will establish our R&D programs for investment into
intelligent information management systems for:
19
●
|
Open
standards software for inclusion of all professional market
participants;
|
●
|
Virtualization
software technology designed for trading
markets;
|
●
|
Green
initiatives to reduce e-waste through environmentally preferable
solutions;
|
●
|
Life
cycle management to manage global information from all markets;
and
|
●
|
Create
and implement a “dark pool” strategy for building trading systems that
address the large “block sized” trades in equities, derivatives, bonds,
commodities and carbon emissions
trades.
|
Attract
and retain quality employees.
To
enhance our development efforts and to support our growth objectives, we intend
to continue to attract additional skilled and experienced software engineering
and project management personnel. We also intend to hire and retain additional
sales and service personnel with client and industry knowledge. We will continue
to build a strong management team with in-house talent and recruit additional
management talent as needed. We will continue to utilize our research centers
and external resources to provide training programs for our
employees.
Our
Services and Products
Chongqing
Sysway
Chongqing
Sysway’s core business products are tobacco industry administration software and
systems integration, both of which are protected by company-owned intellectual
property rights. Currently, Chongqing Sysway’s administration software solution
for the tobacco industry provides core products for the tobacco industrial
supply chain, including serial software products such as enterprise resources
planning administration systems (“ERP”), manufacture execution systems, Office
Automation and collaboration software (“OA”), E-government solutions, human
resources management systems, and trade development systems. Of these
product offerings, our ERP and E-government solutions have emerged as leading
domestic leading industrial software products.
Currently,
Chongqing Sysway’s primary product offerings are as follows:
●
|
Software: Enterprise
Information Portal System; Application
Date: 29 November
2007
|
o
|
Description: The
system is designed for corporations or government entities that have
multiple branch locations (as end users are able to access and adjust the
system at reduced costs in comparison to other systems). The Portal system
generally is composed of several servers, and interfaces with different
operating systems and databases while maintaining high system security to
protect the end user’s personal information. The menu is user- friendly
and the system is based on the Java 2 Platform, Enterprise Edition (J2EE)
technique structure.
|
●
|
Software: Sales
Management System; Application
Date: 29 November
2007
|
o
|
Description: This
system includes market forecasts, trend analysis, client relationship
management, daily sales management, and project distribution
management. The system facilitates the sharing of data between
the corporation and the branches.
|
●
|
Software: Human
Resource Management System; Application
Date: 29 November
2007
|
20
o
|
Description: The
system provides a comprehensive database on all employees to enable middle
to large size enterprises to quickly identify employees fitting special
needs requirements. The system maintains data regarding: education,
standard testing results, and performance reviews. The system
is based on the J2EE technique.
|
●
|
Software: Content
Management Platform System; Application
Date: 29 November
2007
|
o
|
Description: The
platform is used for content auditing, issuance, decorate, style
adjustment, and accessing management for dynamic websites. It is suited
for management use in corporate, government or individual
projects.
|
●
|
Software: Collectivize
Tobacco Materials Litigation Supplying Chain Management System; Application
Date: 29 November
2007
|
o
|
Description: The
system tracks raw materials from purchase through the supply chain,
including receipt, inventory, sale and realization of the related revenue
and receivable. It is designed for tobacco manufacturers, but can also be
applied to mining industries. The core support technique is
J2EE.
|
●
|
Software: Enterprise
Resource Plan (iERP) v 3.1; Application
Date: 14 October
2002
|
o
|
Description: This
system received RMB 2,000,000 in funding from the National Science and
Technology Department in 2002, and was written into the National Torch
Plan. It is a comprehensive software plan based on the JAVA component for
manufacturing activities, and it includes several modules: production
plan, distribution, material purchase, manufacture, quality management,
and labor and capital management. Consequently, each module can be
separated from the overall plan, which means the end user is able to
purchase any module based on its needs. The system has been used in
assembly line manufacturing
enterprises.
|
●
|
Software: CAPP
V 3.5 (JAVA Development Kit (“JDK”)); Application
Date: 24 February
2003
|
o
|
JDK
is a software development kit for producing Java programs, which is the
core of JAVA. Java is a technology that allows software, designed and
written just once for an idealized "virtual machine," to run on a variety
of real computers, thus facilitating our security consulting services to
our customer base comprising the financial industry and government-related
entities. Going forward, we will continue to enhance the company’s core
competencies, such as this technology, through improving our research and
development and benchmarking U.S. financial industry best practices to add
value to our clients and grow our
business.
|
Hainan
Jien
Hainan
Jien designs and installs security and surveillance infrastructure to protect
financial institutions and government agencies and implements systems for IC
projects for commercial customers. JIEN's security and surveillance
business is primarily sourced from the Chinese government’s “Safe City Project”
3111 Project initiative. To this end, the company specializes in the
installation of security and surveillance systems in various public areas, from
city-wide surveillance systems and traffic surveillance systems to critical
government locations, cyber cafes, bars and discotheques. With regard to the IC
services offered by Hainan Jien, the company focuses IC projects on three
distinct areas:
●
|
Intelligent
Building
(“IBC”): Hainan Jien is acting as the largest IBC
integrator in Hainan province. Due to recent continuing growth
of both industrial and residential development in Hainan, as well as
increasing demand for IBC, Hainan Jien expects increasing demand in the
IBC field for project design and construction
sales.
|
21
●
|
Intelligent Housing: Hainan
province, as a popular retirement residence destination in China, attracts
many real estate developers and domestic and international investors; the
additional investment from abroad contributes to the demand for IBC
services in the real estate industry in
Hainan.
|
●
|
Intelligent Hotel: Hainan,
also known as “China’s Hawaii,” is quickly becoming one of the world's
largest tourist destinations. Multiple brands of world famous
hotels have built new hotels in the province, such as Sheraton,
Shangri-La, and Hilton. With the development and popularization
of the Intelligent Hotel systems line, the company hopes to obtain strong
market share in this field as it
grows.
|
Below is
a graphical representation of a typical IC project performed by Hainan
Jien:
22
Financial
Overview
Covenant
Holdings
Covenant
Holdings is a holding company engaged in the business of acquiring equity
interests in private companies based and operating in China to provide these
companies with support, including administrative, legal, accounting and
marketing assistance, and an infusion of capital with the long term goal of
preparing them to become public companies in their own right. We plan
to focus on growth company acquisitions located in China, and we have acquired,
as of June of 2009, 100% equity interests in Chongqing Sysway and Hainan Jien
pursuant to the China Agreements. See “Description of our
Business.”
For the
three months ended September 30, 2009, Covenant Holdings had revenues of $2.957
million, with net income of $104,671. Since Covenant Holdings was
formed in June 2009, it had no operations during the same period
2008.
Chongqing
Sysway
Chongqing
Sysway is a software, research and development, and system integration high-tech
firm operating in Chongqing which is one of China's municipalities directly
under the Central Government. It is also an important city and center of the
southwest region and the upper areas along the Yangtze River. The company is
mainly involved in providing E-government Solutions to the nationwide Tobacco
Monopoly Administration, as well as OA software to the local tobacco industry,
commercial Banks and manufacturing industry. One of its products - Sysway
enterprise information portal system - has been nominated as a successful case
by Microsoft China. Chongqing Sysway will benefit from a five year
Information Industry Development Plan launched in 2008, where the local
Chongqing government began investing 158 billion RMB to install advanced
information systems for the automation of over 100 local
SMEs. Chongqing Sysway expects to be a leader in this area for OA
software and systems integration.
Major
projects for the company center on the construction of IT infrastructure for
PRC–owned tobacco enterprises employing automated data collection and
quantification for improving internal workflow and supply chain management.
Based on its re-useable Java components platform and Business Intelligence,
Chongqing Sysway has developed a series of data management and analysis systems
for information gathered from the agriculture, industrial and commercial
(banking) sectors. These systems are being widely used by many
Government departments and manufacturers.
Relying
on its strong development capability and government relationships, Chongqing
Sysway has begun to enter the financial industry to provide information security
solutions to local commercial banks.
For the
six months ended June 30, 2009, Chongqing Sysway’s revenues grew from $1.637
million to $2.337 million compared to the same period in 2008, with net income
decreasing from $251,085 to $169,451 compared to the same period in
2008.
Chongqing
Sysway’s revenues grew from $4.017 million in 2007 to $4.361 million in 2008,
with net income increasing from $488,000 in 2007 to $538,000 in
2008.
Total
revenues by industry in 2008 included 82% from tobacco and manufacturing
industry projects; 16% from financial services industry projects, a new area
without prior revenues; and 2% from governmental sector projects. In
comparison, total revenues by industry for 2007 included 38% from tobacco
industry projects; 53% from manufacturing industry projects; 5% from financial
services industry projects; 1% from governmental sector projects; and 3% from
other projects.
Total
revenue by product in 2008 were split 77% from hardware, 10% from software and
13% from services, a shift from 79%, 20% and 1%, respectively, in
2007.
23
Chongqing
Sysway’s 10 largest customers during 2008 are as shown in the chart
below:
Clients
|
$ | 000s |
%
of Total Revenue
|
|||||
Chongqing
Bo En Technology Corporation
|
1,114 | 22.8 | ||||||
China
Netcom Group Chongqing Branch
|
932 | 19.0 | ||||||
Chongqing
Three Gorges Bank
|
651 | 13.3 | ||||||
Aisino
Corporation
|
599 | 12.2 | ||||||
Chongqing
He Shan Electronic Co.
|
342 | 7.0 | ||||||
China
Tobacco Chuanyu Industrial Corporation
|
276 | 5.6 | ||||||
Chongqing
Pu Tian Printing Press Co.
|
205 | 4.2 | ||||||
Chongqing
Tobacco Industry Co
|
201 | 4.1 | ||||||
Chongqing
Xing Feng Yu Decoration Engineering Co.
|
131 | 2.7 | ||||||
China
Tobacco Tianjin Industrial Co.
|
96 | 2.0 | ||||||
TOTAL
|
4,547 | 92.9 |
Impact of Industrial
Development Trends and Market Competition Order on the
Company
The
software industry is a strategic pillar industry influencing China’s economic
development. The Chinese government has recently refined and issued multiple
policies and laws which created a better environment for industrial
development. For example, in 2007 it advocated to “press ahead [with]
the merger of information technology application and
industrialization.” As a result, software has become an important
foundation for pushing forward industrial structure adjustment and industrial
technological innovation. Additionally, rapidly growing Chinese market demand,
coupled with demand from the international market, has contributed to the
amenable business environment for the Chinese software industry.
The
remarkable progress of Chinese IT application construction, the ongoing
innovation of tobacco industry reforms and modern service based on new
technology has laid the technological groundwork for Chongqing Sysway's area of
the Chinese software business. In the long run, mergers and acquisitions will
also become an emergent trend for the industry. Mergers between software,
service, network and technology firms will create new opportunities for software
enterprises. These combinations will occur as a natural result of the
expansion of the software business and its continuing development, thereby
becoming an integral component of the business objectives for software
enterprises.
Currently,
Chinese IT application construction has progressed from fundamental construction
to popular application. Government information technology application,
enterprise information technology application and software authorization have
all produced considerable demand for software. Moreover, particularly in the
areas of innovative state construction, information security and national
defense security, as well as implementation of certain policies such as
government procurement laws, Chinese-produced software has the competitive
advantage in the Chinese market.
The
combination of solid industrial subsidy policies, the rapidly growing Chinese
market demand and the presence of the international market have worked to create
the rapid development of Chinese software industry. As a result, CCID
Consultants predicts that the annual complex growth rate of the Chinese software
industry will be 18.3% from 2008 to 2012, and industrial scale will reach 1.3454
billion RMB by 2012.
In light
of the foregoing, Chongqing Sysway will proceed with its research and
development initiatives, strengthen its technological innovation, promote its
products’ competitiveness, master internationally-advanced critical techniques
and systems as soon as practicable, and precisely implement industrial norms.
The goal is to maintain and develop company advantages and market position in
the government, tobacco and SME financial enterprise sectors in order to bridge
the technological gap with international software enterprises and develop
self-owned, practical and innovative software products with Chinese
characteristics. In addition, Chongqing Sysway will enhance brand
awareness of its software and service quality management and make achievements
in the localization and customization of famous-brand software and
services.
24
Hainan
Jien
Hainan
Jien is a
Hainan-based integrative high-tech firm ranked one of China’s Top 100 security
& surveillance enterprises in 2005 by China Security and Protection
Magazine, which is directly managed by China's Ministry of Public
Security. Hainan Jien designs and installs security and surveillance
infrastructure to protect financial institutions and government agencies and
implements IC projects for commercial customers. The Chinese market
for intelligent construction reached approximately $3.5 billion in 2006, and it
is estimated that the IC market will continuously maintain 20% growth and will
reach $ 12.5 billion in 2012. Additionally, the Chinese market for
security and surveillance reached approximately $11.6 billion in 2006, and, due
in part to development for the 2008 Olympics, the Chinese security and
surveillance market reached approximately $18.4 billion in
2008. Exhibiting a CAGR of 25%, the Chinese market will reach $36
billion in 2011. Sources: http://info.secu.hc360.com and
http://hi.baidu.com/dgtx/blog/item.
The
company is one of two companies in Hainan province that hold a 3111 Project
Initiative Certification-- the Safe City Certification by the China Security and
Protection Industry Association to carry on safe city projects. The 3111 Project
is the initial phase of the Safe City Certification, which is an ongoing project
sponsored by the Ministry of Public Security that dictates
surveillance systems to be installed in 660 cities in China. Each
project integrates surveillance technology, information network, fire alarm and
police emergency alert systems.
For the
six months ended June 30, 2009, Chongqing Sysway’s revenues decreased from
$3.106 million to $3.025 million compared to the same period in 2008, with net
income increasing from $296,687 to $491,157 compared to the same period in
2008.
The total
revenues of Hainan Jien increased from $3.582 million in 2007 to $5.57 million
in 2008 with net income increasing from $489,000 in 2007 to $660,000 in
2008.
Total
revenues by industry in 2008 included 78% from governmental sectors, an increase
from 30% in 2007; 1.8% from financial industry projects, a decrease from 26% of
the total revenues in 2007; 9.2 % from the hotel industry, a decrease from 15.8%
of the total revenues in 2007; 3% from real estate, a decrease from 3% of the
total revenues in 2007; and 3% from various industries, consistent with
2007. The change in 2008 revenue mix reflects management’s desire to
create a greater balance of customers in several industries and to create
greater specialty in growing sectors such as government, hotel, and the
financial industries while at the same time reducing risks specific to any one
industry.
Total
revenues by product in 2008 were split 80% from hardware, 5% from software and
15% from services, an increase from 30%, a decrease from 10% and a decrease from
20%, respectively, in 2007.
With
respect to emergent opportunities for Hainan Jien, the company is looking to
pursue the following:
●
|
According
to the publication Hainan Daily, Hainan will accelerate the development of
its competitive industries. As a result, the Hainan government will
encourage key provincial projects that focus on economic and social
development. In 2009, there are approximately 100 key projects
starting to be built, with total investment reaching $45.4 billion and
annual investment at $7 billion. It is estimated that IT system
expenditures will take up 5% of the total $7 billion annual investment
($350 million). Source: Hainan Daily News, December
28, 2008.
|
●
|
Hainan
Daily learned from the Haitang Bay Management Committee that the following
hotels will be constructed in Hainan: Kempinski, Langham Place,
Sofitel, Conrad, Yat Lin Hilton, Filmon, Grand Hyatt, Sheraton, The Luxury
Collection, Shangri-La, and Renaissance. Most of these brands are entering
Hainan for the first time. By 2010, $1.7 billion will be
invested in the hospitality industry. Source: Hainan
Daily News, November 17, 2009.
|
●
|
China
Mobil will invest about $800 million to improve IT in Hainan with the goal
of creating an information technology-oriented island. It is
expected that the IT market will receive approximately 30% of this $800
million ($240 million) investment. Source: China
News Net, July 22, 2009.
|
25
●
|
According
to Mr. Li Jianfei, director of the Hainan Provincial Construction
Department, Hainan has emerged as a comprehensive development opportunity
from Haikou to Sanya. Currently, there are about $14.5 billion
in leisure real estate projects under construction in
Hainan. It is expected that the IT market will comprise
approximately 7% among this $14.5 billion ($1 billion) in
investment. Source: Xinhua Net Agency, Hainan
Leisure Real Estate Industry: Multinational Corporations Secure Investment
in the Financial Crisis, April 14, 2009. Hainan Jien will
likely comprise 0.5% of this total potential market ($5
million).
|
Hainan
Jien’s 10 largest customers during 2008 are as shown in the chart
below:
Clients
|
$ | 000s |
%
of Total Revenue
|
|||||
Provincial
People's Hospital, Hainan
|
2,924 | 52.50 | ||||||
National
Technical School, Hainan Province
|
609 | 10.92 | ||||||
Sanya
Haiyun Industry Co., Ltd.
|
488 | 8.77 | ||||||
National
Tax Bureau of Gongan County, Hubei Province
|
478 | 9.19 | ||||||
Hainan
Information Technology Co., Ltd.
|
277 | 4.98 | ||||||
Yalong
Bay Golf Co., Ltd.
|
174 | 3.35 | ||||||
Minsheng
Industry Investment Co., Ltd.
|
117 | 2.25 | ||||||
Haikou
Modern Europeanization Co., Ltd.
|
58 | 1.04 | ||||||
Bank
of China, Hainan Branch
|
42 | 0.75 | ||||||
Wenchang
Southern China Real Estate Development Co., Ltd.
|
34 | 0.60 | ||||||
TOTAL
|
5,201 | 94.35 |
Employees
At September
30, 2009, we employed approximately 125 full time employees. Covenant Holdings
employed 2 full time employees and 2 part-time employees. Our
operating subsidiaries, Chongqing Sysway and Hainan JIEN, employed 52 and 73
full time employees, respectively.
Competition
There are
currently two US listed companies in China’s financial IT service sector
recognized as leaders due to their size and financial strength, thereby posing
competition to our operating subsidiaries. Those companies
are:
●
|
Longtop,
a NYSE listed company (LFT), which operates in similar business fields
covering hardware, software and service support primarily for the
financial services industry. LFT’s total revenues for the 6
months ended September 2009 were $71.3 million, an increase of 50.1% over
the corresponding period of a year ago. Software development revenues
represented 86% of the total revenues. The company estimates revenue to
increase to $158.0 million for the fiscal year ended March 31, 2010, up
from $106.3 million for the fiscal year March 31, 2009, with software
development responsible for $137.0 million of the
revenues.
|
●
|
Yucheng
Technologies, a NASDAQ listed company (YTEC), is a leading IT service
provider to the Chinese banking industry. YTEC’s exclusive focus on the
banking sector allows it to provide high value software in the form of
customized solutions. In its report for the third quarter 2009,
the company stated that 2009 revenues primarily driven by software
solutions increased by 60%, and it confirmed that the company will have
revenue for the year in the range of $69-$72
million.
|
26
We do not
believe that any privately held Chinese companies have the size or financial
strength to effectively compete with our operating subsidiaries.
Description
of Property
Covenant
Holdings
Covenant Holdings is headquartered in
Bala Cynwyd, PA at Two Bala Plaza, Suite 300, Bala Cynwyd, PA.
Chongqing
Sysway
Chongqing
Sysway’s headquarters and manufacturing facilities are located in Chongqing,
PRC, one of the four Chinese municipalities. We currently rent our
facility, the total area of which is approximately 1,200 meters.
Hainan
Jien
JIEN’s
headquarters and manufacturing facilities are located in the Northern part of
Hainan Province, Haikou City. We have been granted the right to use the land in
Haikou City by the Municipal administration of state-owned land through
2010. The total space reaches approximately 1,100 square
meters.
Intellectual
Property
The
Company has the following patented software types in China which are renewable
every 5 years from inception at a minimal fee:
Chongqing
Sysway
The
following software has been certificated by Chongqing Information Industry
Bureau.
Software
|
Application
Date
|
Enterprise
Information Portal System
|
29
November 2007
|
Sales
Management System
|
29
November 2007
|
Human
Resource Management System
|
29
November 2007
|
Content
Management Platform System
|
29
November 2007
|
Collectivize
Tobacco Materials Litigation Supplying Chain Management
System
|
29
November 2007
|
Enterprise
Resource Plan (iERP) v 3.1
|
14
October 2002
|
CAPP
V 3.5
|
24
February 2003
|
Hainan
Jien
JIEN
currently has intellectual property rights to an automatic spit plate
machine. In 2010, JIEN plans to apply for one to two additional
patents through the State Intellectual Property Office for a CRM software system
and an energy-saving construction management software system.
Legal
Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. However, litigation is
subject to inherent uncertainties and an adverse result in these or other
matters may arise from time to time that may have an adverse affect on our
business, financial conditions, or operating results. We are
currently not aware of any such legal proceedings or claims that will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.
27
Forward-Looking
Statements
The
information in this report contains forward-looking statements within the
meaning of Section 21E of the Exchange Act. All statements other than statements
of historical fact made in this report including, without limitation, statements
regarding our future financial position or results, levels of activity, events,
trends or plans, are forward-looking statements. In particular, the statements
herein regarding industry prospects and our future results of operations or
financial position are forward-looking statements. Forward-looking statements
generally can be identified by the use of forward-looking terminology such as
“may,” “will,” “expect,” “intend,” “project,” “estimate,” “anticipate,” or
“believe” or the negative thereof or any variation thereon or similar
terminology. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, there is no assurance that such
expectations will be accomplished. Forward-looking statements reflect our
current expectations and are inherently uncertain. Our actual results may differ
significantly from our expectations. Some factors that might cause or contribute
to such discrepancy include those factors listed in the section "Risk Factors"
beginning on page 42 of this Report on Form 8-K.
All
subsequent written and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their entirety by these
cautionary statements. We assume no duty to update or revise our
forward-looking statements based on changes in internal estimates or
expectations or otherwise.
Management
Discussion and Analysis of Plan of Operations
The
following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not
be construed to imply that the results discussed herein will necessarily
continue into the future, or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future. Such
discussion represents only the best present assessment of our
management.
Our
management's discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our
estimates and assumptions. We base our estimates on historical
experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
This
discussion should be read in conjunction with the other sections of this Report,
including "Risk Factors," "Description of Business" and the Financial Statements
referenced in Item 9.01 and attached hereto as Exhibits 99.1, 99.2, 99.3 and
99.4. The various sections of this discussion contain a number of
forward-looking statements, all of which are based on our current expectations
and could be affected by the uncertainties and risk factors described throughout
this Report. See "Forward-Looking Statements." Our actual results may
differ materially.
While our
significant accounting policies are more fully described in Note 2 to our
financial statements, we believe that the following accounting policies are the
most critical to aid you in fully understanding and evaluating this management
discussion and analysis.
Overview
Everest
was incorporated in the State of Nevada on November 8, 2006. On December 24,
2009, Everest entered into and closed the Share Exchange Agreement with Covenant
Holdings, a privately held company incorporated under the laws of the State of
Delaware. Pursuant to the Share Exchange Agreement, Everest acquired all of the
issued and outstanding capital stock of Covenant Holdings in exchange for
9,380,909 shares of common stock.
Prior to
our acquisition of Covenant Holdings, we were in the development stage and had
minimal business operations. We had no interest in any property, but
we had rights and interests in and to a Mineral Right pursuant to a Declaration
of Trust, which permitted us to conduct mineral exploration activities on nine
(9) contiguous mineral title cells covering 471 acres of Crown mineral lands
located in southern British Columbia, Canada. In connection with the
acquisition of Covenant Holdings, we terminated the Declaration of Trust
pursuant to the Termination Agreement, and under the Cancellation Agreement, our
former majority shareholder agreed to cancel 5 million shares of our common
stock, 4.5 million shares of which were cancelled upon the closing of the Share
Exchange Agreement while 500,000 shares are to be cancelled upon payment of a
$190,000 Promissory Note issued to the majority shareholder by Covenant
Holdings. See “The Share Exchange" beginning on page 2.
28
Covenant
Holdings
Covenant
Holdings, was formed in the State of Delaware on June 10, 2009. It is
in the business of identifying and investing in growth companies organized and
doing business in China.
On June
24, 2009, Covenant Holdings entered into a stock acquisition and reorganization
agreement with the Chongqing Sysway and its stockholders. Pursuant to the terms
of this agreement, Covenant Holdings acquired 100% of the outstanding equity
interest in Chongqing Sysway, in exchange for 1,400,000 shares of Covenant
Holdings' common stock. Chongqing Sysway was
incorporated in Chongqing City, Sichuan Province, PRC, in 1999 as a State Owned
Enterprise (SOE). In 2005, the two SOE shareholders sold their
ownership shares to the original minority shareholders and since then, Chongqing
Sysway has operated as a private enterprise mainly engaged in system integration
services, including computer system installation, website design, and system
firewall setup, particularly for tobacco industry.
On June
24, 2009, Covenant Holdings also entered into a stock acquisition and
reorganization agreement with Hainan Jien and its stockholders. Pursuant to the
terms of this agreement, Covenant acquired 100% of the outstanding equity
interest in Hainan Jien, in exchange for 1,350,000 shares of Covenant Holdings’
common stock. Hainan Jien was incorporated in Hainan Province, PRC in 1999.
Hainan Jien is engaged in providing full service design and installation of
intelligent equipment for financial institutions, government agencies and
businesses.
On
December 24, 2009, Covenant Holdings entered into a share exchange agreement
with Everest whereby Covenant Holdings Shareholders became the majority owners
of Everest. The Share Exchange is being accounted for as a "reverse
acquisition," since the Covenant Holdings Shareholders own a majority of the
outstanding shares of the Company's common stock immediately following the Share
Exchange. Covenant Holdings is deemed to be the acquiror in the
reverse acquisition. Consequently, the assets and liabilities and the
historical operations that will be reflected in the financial statements prior
to the Share Exchange will be those of Covenant Holdings and will be recorded at
the historical cost basis of Covenant Holdings, and the consolidated financial
statements after completion of the Share Exchange will include the assets and
liabilities of the Company and Covenant Holdings, historical operations of
Covenant Holdings and operations of the Company from the closing date of the
Share Exchange. Further, as a result of the issuance of the shares of
the Company common stock pursuant to the Share Exchange, a change in control of
the Company occurred on the date of the consummation of the Share
Exchange. The Company will continue to be a "small business issuer,"
as defined under the Exchange Act, following the Share Exchange.
Chongqing
Sysway
Chongqing
Sysway is a software, research and development, and system integration high-tech
company operating in Sichuan province and the Chongqing Central region of
China. It is mainly involved in providing system integration services
and collaboration software to the manufacturing industry, particularly for
tobacco industry.
Hainan
Jien
Hainan
Jien is an integrative high-tech firm, specializing in design and install
security and surveillance infrastructure to protect financial institutions and
government agencies, and implements IC projects for commercial customers. It is
one of two companies in Hainan province that hold a 3111 Project Initiative
Certification-- the Safe City Certification by the China Security and Protection
Industry Association to carry on safe city projects. The 3111 Project is the
initial phase of the Safe City Certification, which is an ongoing project
sponsored by the Ministry of Public Security that dictates surveillance systems
to be installed in 660 cities in China. Each project integrates
surveillance technology, information network, fire alarm and police emergency
alert systems.
29
Critical
Accounting Policies
In
presenting our financial statements in conformity with accounting principles
generally accepted in the United States, we are required to make certain
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported
results.
Basis
of Presentation
The
Company’s financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US
GAAP”).
Principle
of Consolidation
The
consolidated financial statements as of an at September 30, 2009 include the
accounts of Covenant Holdings, Chongqing Sysway and Hainan Jien. All
intercompany transactions and account balances are eliminated in
consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management,
include the recoverability of long-lived assets and the valuation of
inventories. Actual results could differ from those
estimates.
Accounts
and Retentions Receivable
Our
policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Based on historical
collection activity, the Company had allowances of $55,368 at September 30,
2009.
We have
retentions receivable for product quality assurance, our retention rate varies
from 3% to 5% of the sales price with variable terms from 1 year to 3 years. At
September 30, 2009, our retentions receivable was $1,364,212. $1.2 million of
this amount was current and due within one year. The remainder was
non-current.
Inventories
Chongqing
Sysway values inventories at the lower of cost or market with cost determined on
a specific identification method. Hainan Jien values inventories at
the lower of cost or market with cost determined on a first in, first out
basis.
Property
and Equipment
On
a consolidated basis, property and equipment are stated at cost, net of
accumulated depreciation. Expenditures for maintenance and repairs
are expensed as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for substantially all assets with 5% salvage value and estimated lives
ranging from 3 to 25 years as follows:
30
Building
|
20-25
years
|
Leasehold
improvements
|
Shorter
of lease term or 10 years
|
Vehicle
|
5-10
years
|
Office
Equipment
|
3-5
years
|
Goodwill
Goodwill
represents the excess of the fair value of the consideration transferred over
the net of the acquisition date amount of identifiable assets acquired and the
liability assumed. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," (codified in
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 350), goodwill is not amortized but is tested for impairment
annually, or when circumstances indicate a possible impairment may exist.
Impairment testing is performed at a reporting unit level. An impairment loss
generally would be recognized when the carrying amount of the reporting unit
exceeds the fair value of the reporting unit, with the fair value of the
reporting unit determined using a discounted cash flow (DCF) analysis. A number
of significant assumptions and estimates are involved in the application of the
DCF analysis to forecast operating cash flows, including the discount rate, the
internal rate of return, and projections of realizations and costs to produce.
Management considers historical experience and all available information at the
time the fair values of its reporting units are estimated.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin ("SAB") No. 104 (codified in FASB ASC Topic
480). Revenue is recognized at the date of shipment to customers when
a formal arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectibility is reasonably assured. Payments received before all of
the relevant criteria for revenue recognition are recorded as unearned
revenue.
The
Company records its revenue when certain milestones as defined in the service
contract are reached. These service contracts have clear milestones and
deliverables with distinct values assigned to each milestone. The
milestones do not require the delivery of multiple elements as noted in Emerging
Issues Task Force (EITF) Issue No. 00-21 “Revenue Arrangements with Multiple
Deliverables” (codified in FASB ASC Topic 605). In accordance with SAB No.
104, the Company treats each milestone as an individual revenue agreement and
only recognizes revenue for each milestone when all the conditions of SAB No.
104 defined earlier are met.
Sales
revenue represents the invoiced value of products and services, net of
value-added tax (“VAT”). All of Chongqing Sysway’s products and
services that are sold and provided in the PRC are subject to Chinese VAT of 17%
of the gross sales price. This VAT may be offset by VAT paid by the
company on raw materials and other materials included in the cost of producing
their finished product. Chongqing Sysway recorded VAT payable and VAT
receivable net of payments in the financial statements. The VAT tax
return is filed offsetting the payables against the receivables.
Hainan
Jien is qualified as a small business so that all of its products sold or
services provided in the PRC are subject to a fixed VAT rate of 4% of the gross
sales price regardless of the VAT paid. Sales revenue represents the
invoiced value of goods or services, net of VAT. This VAT cannot be
offset by VAT paid by Hainan Jien on raw materials and other materials included
in the cost of producing their finished products.
The
standard warranty of Hainan Jien is provided to its customers and is not
considered an additional service; rather it is considered an integral part of
the product and services’ sale. Hainan Jien believes that the
existence of its standard product warranty in a sales contract does not
constitute a deliverable in the arrangement and thus there is no need to apply
the EITF No. 00-21 separation and allocation model for a multiple
deliverable arrangement. SFAS No. 5 specifically address the accounting for
standard warranties and neither SAB No. 104 nor EITF No. 00-21 supersedes SFAS
No. 5 (codified in FASB ASC Topic Warranty). The Company believes that
accounting for its standard warranty pursuant to SFAS No. 5 does not impact
revenue recognition because the cost of honoring the warranty can be reliably
estimated.
31
Foreign
Currency Translation and Comprehensive Income (Loss)
The
functional currency of our subsidiaries is the RMB. For financial
reporting purposes, RMB has been translated into U.S. dollars ("USD") as the
reporting currency. Assets and liabilities are translated at the
exchange rate in effect at the balance sheet date. Revenues and
expenses are translated at the average rate of exchange prevailing during the
reporting period. Translation adjustments arising from the use of
different exchange rates from period to period are included as a component of
stockholders' equity as "Accumulated other comprehensive
income." Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant
fluctuation in exchange rate for the conversion of RMB to USD after the balance
sheet dates.
We use
SFAS No. 130, “Reporting Comprehensive Income” (codified in FASB ASC Topic
220) Comprehensive income is comprised of net income and all changes
to the statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to
stockholders. Comprehensive income for the period ended September 30,
2009 included net income and foreign currency translation
adjustments.
Segment
Reporting
SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(codified in FASB ASC Topic 280), requires use of the “management approach”
model for segment reporting. The management approach model is based on the way a
company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
SFAS 131
has no effect on the Company's financial statements as substantially all of the
Company's operations are conducted in one industry segment. The
Company consists of one reportable business segment. All of the
Company's assets are located in the PRC.
Recent
Accounting Pronouncements
On June
10, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01 "Topic 105 - Generally Accepted Accounting Principles-amendments based
on Statement of Financial Accounting Standards No. 168 -The FASB Accounting
Standards Codification™ and the Hierarchy of Generally Accepted Accounting
Principles.” ASU No. 2009-01 re-defines authoritative US GAAP for
nongovernmental entities to be only comprised of the FASB Accounting Standards
Codification™ (“Codification”) and, for SEC registrants, guidance issued by the
SEC. The Codification is a reorganization and compilation of all
then-existing authoritative US GAAP for nongovernmental entities, except for
guidance issued by the SEC. The Codification is amended to effect
non-SEC changes to authoritative US GAAP. Adoption of ASU No. 2009-01
only changed the referencing convention of US GAAP in Notes to the
Consolidated Financial Statements.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (codified in FASB ASC
Topic 855-10-05), which provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
165 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was selected. SFAS No.
165 is effective for interim and annual periods ending after June 15, 2009, and
accordingly, the Company adopted this pronouncement during the second quarter of
2009. SFAS 165 requires that public entities evaluate subsequent events through
the date that the financial statements are issued. The Company has evaluated
subsequent events through December 7, 2009.
32
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations," which is effective for business combinations of the Company for
which the acquisition date is on or after January 1, 2009. SFAS No. 141(R)
changes how the acquisition method is applied in accordance with SFAS No. 141.
The primary revisions to this Statement require an acquirer in a business
combination to measure assets acquired, liabilities assumed, and any
noncontrolling interest in the acquired at the acquisition date, at their fair
values as of that date, with limited exceptions specified in the Statement. SFAS
No. 141(R) also requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as well as the
noncontrolling interest in the acquired, at the full amounts of their fair
values (or other amounts determined in accordance with the Statement). Assets
acquired and liabilities assumed arising from contractual contingencies as of
the acquisition date are to be measured at their acquisition-date fair values,
and assets or liabilities arising from all other contingencies as of the
acquisition date are to be measured at their acquisition-date fair value, only
if it is more likely than not that they meet the definition of an asset or a
liability in FASB Concepts Statement No. 6, "Elements of Financial Statements."
SFAS No. 141(R) significantly amends other Statements and authoritative
guidance, including FASB Interpretation No. 4, "Applicability of FASB Statement
No. 2 to Business Combinations Accounted for by the Purchase Method," and now
requires the capitalization of research and development assets acquired in a
business combination at their acquisition-date fair values, separately from
goodwill. SFAS No. 109, "Accounting for Income Taxes," was also amended by SFAS
No. 141(R) to require the acquirer to recognize changes in the amount of its
deferred tax benefits that are recognizable because of a business combination
either in income from continuing operations in the period of the combination or
directly in contributed capital, depending on the circumstances. The Company
expects SFAS No. 141(R) will have a significant impact on accounting for
business combinations, but the effect is dependent upon acquisitions at that
time.
In
April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (codified in FASB ASC
Topic 825-10-50). This FSP essentially expands the disclosure about fair value
of financial instruments that were previously required only annually to also be
required for interim period reporting. In addition, the FSP requires certain
additional disclosures regarding the methods and significant assumptions used to
estimate the fair value of financial instruments. These additional disclosures
are required beginning with the quarter ending June 30, 2009. This FSP had no
material impact on the Company’s financial position, results of operations or
cash flows.
FASB ASC
820-10 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this standard relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. This standard is effective for fiscal years beginning after
November 15, 2007; however, it provides a one-year deferral of the effective
date for non-financial assets and non-financial liabilities, except those that
are recognized or disclosed in the financial statements at fair value at least
annually. The Company adopted this standard for financial assets and financial
liabilities and nonfinancial assets and nonfinancial liabilities disclosed or
recognized at fair value on a recurring basis (at least annually) as of January
1, 2008. The Company adopted the standard for nonfinancial assets and
nonfinancial liabilities on June 10, 2009. The adoption of this standard did not
have a material impact on its financial statements.
FASB ASC
820-10 provides additional guidance for Fair Value Measurements when the volume
and level of activity for the asset or liability has significantly decreased.
This standard is effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this standard did not have a material effect on
its financial statements.
FASB ASC
805 establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. This standard also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. This standard was adopted by the Company beginning June 10, 2009
and will change the accounting for business combinations on a prospective
basis.
FASB ASC
350-30 and 275-10 amend the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. This standard is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. The adoption
of this standard did not have any impact on the Company’s financial
statements.
33
FASB ASC
320-10 amends the other-than-temporary impairment guidance for debt and equity
securities. This standard is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of this standard did not have a
material effect on its financial statements.
Covenant
Holdings
Consolidated
Results of Operations
As of September 30, 2009
Covenant
Holdings was formed on June 10, 2009 and, until the acquisition of 100% of the
equity interests in Chongqing Sysway and Hainan Jien on June 24, 2009, had no
operations. Therefore, the following table presents the consolidated
results of operations of Covenant Holdings for the period from June 24, 2009
through September 30, 2009.
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
Period
Ended
September
30, 2009
|
||||
$
|
%
of Sales
|
|||
Sales
|
2,957,242
|
|||
Cost
of sales
|
(2,325,551)
|
78.6%
|
||
Gross
profit
|
631,691
|
21.4%
|
||
Operating
expenses
|
493,362
|
16.7%
|
||
Income
from operations
|
138,329
|
4.7%
|
||
Non-operating
income
|
584
|
0.02%
|
||
Income
tax expense
|
34,242
|
1.2%
|
||
Net
income
|
104,671
|
3.5%
|
||
Consolidated
Liquidity and Capital Resources
As of
September 30, 2009, the Company had cash and cash equivalents of approximately
$1.00 million, other current assets of approximately $6.62 million and current
liabilities of approximately $4.76 million. Working capital amounted to $2.87
million at September 30, 2009. The ratio of current assets to current
liabilities was 1.60-to-1 at September 30, 2009.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the period since business inception through September
30, 2009:
Cash
provided by (used in):
|
||
Operating
Activities
|
$
|
(203,383)
|
Investing
Activities
|
753,180
|
|
Financing
Activities
|
453,888
|
Off-Balance Sheet
Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and
classified as stockholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We
do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.
34
Contractual
Obligations
Since
June 2009, Hainan Jien obtained several short term loans from Shenzhen
Development Bank for the aggregate amount of approximately $86,000, interest
rate at 5.832% per annum, with various maturity dates due within five months
from the borrowing date. $32,000 of this amount was repaid on
November 7, 2009, and the remainder is due to be repaid on or before the end of
February 2010.
In
September 2009, Covenant Holdings entered into three bridge loan agreements with
the Offshore Investor in the aggregate amount of $399,870 for financing certain
startup expenditures. These three bridge loans bear interest at the
rate of 6% per annum. Principal and interest will be payable in full six months
from the loan agreement date. These bridge loans may be prepaid at
any time, in whole or in part, without interest, penalty or premium of any
kind. Subsequent to the end of the period, Covenant Holdings and the
Offshore Investor entered into an agreement whereby the bridge loans were
retired in exchange for 200,909 shares of Covenant Holdings' common
stock.
Chongqing
Sysway
Results
of Operations
Six Months Ended June 30, 2009 Compared
to June 30, 2008
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
Six
Months Ended June 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
$
|
%
of Sales
|
$
|
%
of Sales
|
|||||||||||||
Sales
|
2,337,032
|
1,637,231
|
||||||||||||||
Cost
of sales
|
(1,842,514)
|
79
|
%
|
(1,231,682)
|
75
|
%
|
||||||||||
Gross
Profit
|
494,518
|
21
|
%
|
405,549
|
25
|
%
|
||||||||||
Operating
Expenses
|
(268,466)
|
11
|
%
|
(255,846)
|
16
|
%
|
||||||||||
Income
from Operation
|
226,052
|
10
|
%
|
149,703
|
9
|
%
|
||||||||||
Other
Income (Expenses), net
|
(118)
|
(0.01)
|
%
|
185,078
|
11
|
%
|
||||||||||
Income
tax expense
|
(56,483)
|
(3)
|
%
|
(83,696)
|
(5)
|
%
|
||||||||||
Net
Income
|
169,451
|
7
|
%
|
251,085
|
15
|
%
|
Sales. Net sales
for the six months ended June 30, 2009 were approximately $2.34 million while
our net sales in the same period for 2008 were approximately $1.64 million, an
increase in revenues of $0.70 million, or 43%. The increase was due to
increased sales of our self-developed software, obtaining new contracts through
the strategic alliance with other IT companies, and expanding our new customers
in the finance industry while strengthening our customers’ base in the tobacco
industry through our own sales team. We believe that our sales will
continue to grow through alliances with other in-state and out-of-state IT
companies while we strengthen and expand the customer base beyond the tobacco
industry and increase sales from newly developed software.
Cost of Sales.
Cost of sales for the six months ended June 30, 2009 were approximately $1.84
million while our cost of sales for the same period in 2008, were approximately
$1.23 million, an increase of $0.61 million, or 50%. The increase in cost
of sales can be attributed to the growth in sales in 2009. Cost of
sales as a percentage of sales was approximately 79% for the six months ended
June 30, 2009 and 75% for the same period of 2008. The slight increase in cost
of sales as a percentage of sales in 2009 was mainly due to increased hardware
and direct labor costs as a result of overall price increases in China. We
believe that our cost of sales will continue to remain stable or decrease as we
will continuously improve the efficiency of cost control.
35
Gross
Profit. Gross profit was $0.49 million for the six
months ended June 30, 2009 as compared to $0.41 million for the same period of
2008, representing gross margin of approximately 21% and 25% for the first half
year of 2009 and 2008, respectively. The increase in our gross profits was
mainly due to the increase of sales revenue, while the slight decrease in gross
profit margin was mainly due to increases in production costs.
Operating Expenses.
Operating expenses consisting of selling, general and administrative
expenses totaled approximately $0.27 million for the first six months of 2009 as
compared to $0.26 million for the same period of 2008, a slight increase of
$12,620 or 5%. The increase in operating expenses was mainly due to
proportional increases in payroll and welfare expenses as we hired more
employees and sales people and the increased expense of a training program
offered to our project managers. Operating expenses as a percentage of
sales was about 11% and 16% for the six months ended June 30, 2009 and
2008.
Net
Income. Our net income for the six months ended June 30,
2009 was approximately $0.17 million as compared to net income of approximately
$0.25 million for the six months ended June 30, 2008, a decrease of $81,634 or
33%. Despite the increase in our sales and operating income during the
first half of 2009, the decrease of net income was mainly attributable to a
reversal of a previously recognized bad debt provision of $159,210 and subsidy
income from the government of $25,824 during the first half of 2008. Our
management believes that net income will continue to increase as we continue to
increase our sales, design and manufacture our new software products with less
costs, and increase the efficient control of our operating
expenses.
Year Ended December 31, 2008 Compared
to December 31, 2007
The
following table sets forth the results of our operations for the years indicated
as a percentage of net sales:
Year
Ended December 31,
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
$
|
%
of Sales
|
$
|
%
of Sales
|
|||||||||||||
Sales
|
4,924,438
|
4,013,972
|
||||||||||||||
Cost
of sales
|
(3,826,264)
|
78
|
%
|
(3,050,588)
|
76
|
%
|
||||||||||
Gross
Profit
|
1,098,174
|
22
|
%
|
963,384
|
24
|
%
|
||||||||||
Operating
Expenses
|
(615,989)
|
13
|
%
|
(530,666)
|
13
|
%
|
||||||||||
Income
from Operation
|
482,185
|
10
|
%
|
432,718
|
11
|
%
|
||||||||||
Other
Income (Expenses), net
|
195,749
|
4
|
%
|
55,672
|
1
|
%
|
||||||||||
Income
tax expense
|
(181,060)
|
(4)
|
%
|
-
|
-
|
|||||||||||
Net
Income
|
496,874
|
10
|
%
|
488,390
|
12
|
%
|
Sales. Net sales
for 2008 were approximately $4.92 million while our net sales in same period for
2007 were approximately $4.01 million, an increase in revenues of $0.91 million,
or 23%. The increase was due to increased sales on self-developed
software, obtaining new contracts of system integration projects through
strategic alliances with other IT companies, and expanding our new customers in
the finance industry while strengthening old customers in the tobacco industry
through our own sales team. We believe that sales will continue to
grow through alliances with other in-state and out-of-state IT companies while
we strengthen and expand the customer base in addition to tobacco industry and
increase sales from newly developed software.
Cost of Sales. Cost of
sales for 2008 were approximately $3.83 million while our cost of sales for the
same period in 2007, were approximately $3.05 million, an increase of $0.78
million, or 25%. The increase in cost of sales can be attributed to
the growth in sales in 2008. Cost of sales as a percentage of sales
was approximately 78% for the year of 2008 and 76% for the year of 2007. The
slight increase in cost of sales as a percentage of sales in 2008 was mainly due
to increased hardware and direct labor cost as a result of overall price
increases in China during 2008. We believe that the cost of sales
will continue to remain stable or decrease, as we focus on cost
control.
Gross
Profit. Gross profit was $1.10 million for the year of 2008 as
compared to $0.96 million for the year of 2007, representing gross margin of
approximately 22% and 24% for the year of 2008 and 2007, respectively. The
increase in our gross profits mainly due to the increase of sales revenue, while
the slight decrease in gross profit margin was mainly due to the increase in
production cost.
36
Operating Expenses.
Operating expenses, consisting of selling, general and
administrative expenses, totaled approximately $0.62 million for 2008 as
compared to $0.53 million for 2007, an increase of approximately $85,323 or
16%. The increase in operating expenses was mainly due to increase in
payroll and welfare expenses as we hired more employees and salespeople, and the
expense of a training program offered to project managers. Operating expenses as
a percentage of sales was about 13% in 2008 and 2007.
Net
Income. Our net income for the year ended December 31,
2008 was approximately $0.50 million as compared to net income of approximately
$0.49 for the year ended December 31, 2007, an increase of $8.484 or
1.7%. This increase was attributable to growth in revenue and control of
expenses. Our management believes that net income will continue to increase
as we continue to increase our sales; design and manufacture new software
products with greater efficiency and control on our operating
expenses.
Liquidity and Capital
Resources
The
following is a summary of cash provided by or used in each of the indicated
types of activities during six months ended June 30, 2009 and 2008:
June
30,
|
||||
2009
|
2008
|
|||
Cash
provided by (used in):
|
||||
Operating
Activities
|
$
|
842
|
$
|
(436,539)
|
Investing
Activities
|
(5,350)
|
(11,890)
|
||
Financing
Activities
|
-
|
(127,867)
|
Net cash flow provided by operating
activities was $ 842 for the six months ended June 30, 2009, as compared to cash
used in operating activities of $436,539 in the same period of 2008. The
increase in net cash flow provided by operating activities in the first half of
2009 was mainly due to less cash payment made for inventory, taxes payable and
accounts payable as compared with same period of 2008.
Net cash
flow used in investing activities was $5,350 for the six months ended June 30,
2009, as compared to net cash used in investing activities of $11,890 for the
same period of 2008. The net cash used in investing activities was
mainly due to acquisition of office equipment for both 2009 and
2008.
Net cash
flow used in financing activities was $0 for the six months ended June 30, 2009
as compared to net cash used in financing activities of $127,867 for the same
period of 2008, which was mainly due to the repayment to a related party of
$77,922 and repayment of a short term loan for $49,945.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during years ended December 31, 2008 and 2007:
December
31,
|
||||
2008
|
2007
|
|||
Cash
provided by (used in):
|
||||
Operating
Activities
|
$
|
(476,069)
|
$
|
519,083
|
Investing
Activities
|
(18,374)
|
(8,641)
|
||
Financing
Activities
|
(129,952)
|
(11,707)
|
Net
cash flow used in operating activities was $476,069 in fiscal 2008, as compared
to cash provided by operating activities of $519,083 in fiscal 2007. The
increase in net cash flow used in operating activities in fiscal 2008 was mainly
due to increase in payment for inventory and accounts payable.
37
Net cash
flow used in investing activities was $18,374 for fiscal 2008, as compared to
net cash used in investing activities of $8,641 in fiscal 2007. The
increase of net cash flow used in investing activities in fiscal 2008 was mainly
due to acquisition of the office equipment.
Net cash
flow used in financing activities was $129,952 in fiscal 2008 as compared to net
cash used in financing activities of $11,707 in fiscal 2007. The increase of net
cash flow used in financing activities in fiscal 2008 was mainly due to the
repayment to related party of $79,193 and repayment of short term loan for
$50,759.
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and
classified as stockholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We
do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.
Hainan
Jien
Results
of Operations
Six Months Ended June 30, 2009 Compared
to June 30, 2008
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
Six
Months Ended June 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
$
|
%
of Sales
|
$
|
%
of Sales
|
|||||||||||||
Sales
|
3,025,835
|
3,106,608
|
||||||||||||||
Cost
of Sales
|
(2,300,666)
|
76
|
%
|
(2,629,202)
|
85
|
%
|
||||||||||
Gross
Profit
|
725,169
|
24
|
%
|
477,406
|
15
|
%
|
||||||||||
Operating
Expenses
|
(229,500)
|
8
|
%
|
(163,221)
|
5
|
%
|
||||||||||
Income
from Operation
|
495,669
|
16
|
%
|
314,185
|
10
|
%
|
||||||||||
Other
Expenses
|
(4,512)
|
(0.1)
|
%
|
(17,498)
|
(0.6)
|
%
|
||||||||||
Net
Income
|
491,157
|
16
|
%
|
296,687
|
10
|
%
|
Sales. Net sales
for the six months ended June 30, 2009 were approximately $3.03 million while
our net sales in the same period for 2008 were approximately $3.11 million, a
decrease in revenues of $80,773 or 3%. The decrease was due to the overall
downturn of the Chinese economy, which resulted in budget cutting for most
businesses on certain administrative expenses, including the expense for
installation and improving intelligence systems. As the financial
industry raised its standards on lending for commercial real estate loans to
take precaution for bad debts, real estate developers tightened their capital
expenditures for auxiliary functions and features of commercial properties, such
as the installation the intelligence systems the buildings. As the Chinese
economy has been gradually recovering, we believe that our sales will continue
to grow while we keep improving the quality of our services.
Cost of Sales.
Cost of sales for the six months ended June 30, 2009 were
approximately $2.30 million while our cost of sales for the same period in 2008,
were approximately $2.63 million, a decrease of $0.33 million, or 12%. The
decrease in cost of sales is attributed to the reduction in sales for the first
half of 2009. Cost of sales as a percentage of sales was
approximately 76% for the first six months of 2009 and 85% for the same period
of 2008. The decrease in cost of sales as a percentage of sales in 2009 was
mainly due to the decrease of sales and our efficient control on hardware
purchase costs through our successful bargaining with our vendors in the systems
integration business.
38
Gross
Profit. Gross profit was $0.73 million for the first half year
ended June 30, 2009 as compared to $0.48 million for the same period of 2008,
representing gross margin of approximately 24% and 15% for the first six months
of 2009 and 2008, respectively. The increase in our gross profits was
mainly due to the decrease on cost of sales; the increase in gross profit margin
was mainly a result of decreased purchase cost of hardware.
Operating
Expenses. Operating expenses consisted of selling, general and
administrative expenses totaled approximately $0.23 million for the six months
ended June 30, 2009 as compared to $0.16 million for the same period in 2008, an
increase of $66,279 or 41%. The increase in operating expenses was mainly
due to an increased tax rate that is charged based on net sales.
Net Income. Our
net income for the first half year ended June 30, 2009 was $0.49 million as
compared to approximately $0.30 million for the first half year ended June 30,
2008, an increase of $0.19 million or 66%. This increase is
attributable to decrease in our cost of sale as a result of our efficient cost
control. Our management believes that net income will continue to increase as we
continue to increase our sales by providing better quality services and
controlling our costs and operating expenses.
Year Ended December 31, 2008 Compared
to December 31, 2007
The
following table sets forth the results of operations for the years indicated as
a percentage of net sales:
Year
Ended December 31,
|
||||||||||||||||
2008
|
2007
|
|||||||||||||||
$
|
%
of Sales
|
$
|
%
of Sales
|
|||||||||||||
Sales
|
5,554,357
|
3,580,253
|
||||||||||||||
Cost
of sales
|
(4,403,810)
|
79
|
%
|
(2,732,574)
|
76
|
%
|
||||||||||
Gross
Profit
|
1,150,547
|
21
|
%
|
847,679
|
24
|
%
|
||||||||||
Operating
Expenses
|
(489,260)
|
9
|
%
|
(362,269)
|
10
|
%
|
||||||||||
Income
from Operation
|
661,287
|
12
|
%
|
485,410
|
14
|
%
|
||||||||||
Other
Income (Expenses), net
|
(3,849)
|
(0.07)
|
%
|
3,152
|
0.09
|
%
|
||||||||||
Net
Income
|
657,438
|
12
|
%
|
488,562
|
14
|
%
|
Sales. Net sales
for 2008 were approximately $5.55 million while net sales in same period for
2007 were approximately $3.58 million, an increase in revenues of $1.97 million,
or 55%. The increase was due to strengthening our sales force and the
expansion of our customer base in industries other than financial services and
government agencies. We believe that our sales will continue to grow while we
keep improving the quality of our services.
Cost of Sales.
Cost of sales for 2008 were approximately $4.40 million while cost
of sales for the same period in 2007, were approximately $2.73 million, an
increase of $1.67 million, or 61%. The increase in cost of sales is
attributed to the growth in sales in 2008. Cost of sales as a
percentage of sales was approximately 79% for the year of 2008 and 76% for the
year of 2007. The increase in cost of sales as a percentage of sales in 2008 was
mainly due the higher cost of purchasing hardware in connection with our systems
integration business. We believe that our cost of sales will decrease as we
focus on cost control.
Gross
Profit. Gross profit was $1.15 million for the year of 2008 as
compared to $0.85 million for the year of 2007, representing gross margin of
approximately 21% and 24% for the year of 2008 and 2007,
respectively. The increase in our gross profit was mainly due to our
increased sales; the decrease in gross profit margin was mainly a result of
increased cost of purchasing hardware in connection with our systems integration
business.
Operating
Expenses. Operating expenses, consisting of selling, general
and administrative expenses, totaling approximately $0.49 million for 2008 as
compared to $0.36 million for 2007, an increase of $126,992 or 35%. The
increase in operating expenses was mainly due to proportional increases in
payroll, insurance and travel expenses associated with our increased
sales.
39
Net Income. Our
net income for the year ended December 31, 2008 was $0.66 million as compared to
approximately $0.49 million for the year ended December 31, 2007, an increase of
$0.17 million or 35%. This increase was attributable to the growth in
our revenue. Our management believes that net income will continue to
increase as we continue to increase our sales through providing better quality
services, and controlling our cost and operating expenses.
Liquidity
and Capital Resources
The
following is a summary of cash provided by or used in each of the indicated
types of activities during six months ended June 30, 2009 and 2008:
June
30,
|
||||
2009
|
2008
|
|||
Cash
provided by (used in):
|
||||
Operating
Activities
|
$
|
498,614
|
$
|
(119,757)
|
Investing
Activities
|
-
|
(18,601)
|
||
Financing
Activities
|
140,284
|
(3,306)
|
Net cash
flow provided by operating activities was $498,614 in the first half year ended
June 30, 2009, as compared to cash flow used in $119,757 in the same period of
2008. The increase in net cash flow provided by operating activities in the
first six months in 2009 was mainly due to increased net income coupled with
decreasing our accounts receivable outstanding and fewer payments made on
inventory.
Net cash
flow used in investing activities was $0 for the first half year of 2009, as
compared to net cash used in investing activities of $18,601 in the first half
year of 2008, which was mainly for the acquisition of office
equipment.
Net cash
flow provided by financing activities was $140,284 in the first half year ended
June 30, 2009 as compared to net cash used in financing activities of $3,306 for
the same period of 2008. The increase of net cash flow provided by financing
activities in the first half of 2009 was mainly due to a quick advance of
$108,232 from a shareholder while in the same period of 2008, we repaid $1,181
to the shareholder. We’ve also obtained a short term loan of $35,052 in the
first half year of 2009 while in the same period of 2008, we’ve repaid
$2,125.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during years ended December 31, 2008 and 2007:
December
31,
|
||||
2008
|
2007
|
|||
Cash
provided by (used in):
|
||||
Operating
Activities
|
$
|
(177,704)
|
$
|
134,215
|
Investing
Activities
|
(59,858)
|
(1,531)
|
||
Financing
Activities
|
(1,200)
|
100,565
|
Net cash
flow used in operating activities was $177,704 in fiscal 2008, as compared to
cash flow provided by $134,215 in fiscal 2007. The increase in net cash flow
used in operating activities in fiscal 2008 was mainly due to increase in our
accounts receivable and tax payments, although our net income has
increased.
Net cash
flow used in investing activities was $59,858 for fiscal 2008, as compared to
net cash used in investing activities of $1,531 in fiscal 2007. The
increase of net cash flow used in investing activities in fiscal 2008 was mainly
due to the acquisition of the office equipment.
40
Net cash
flow used in financing activities was $1,200 in fiscal 2008 as compared to net
cash provided by financing activities of $100,565 for fiscal 2007. The increase
of net cash flow used in financing activities in fiscal 2008 was mainly due to a
quick advance of $1,200 to the shareholder while in 2007, we received $100,565
repayment from the shareholder.
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and
classified as stockholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We
do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.
41
Risk Factors
Our
business and an investment in our securities are subject to a variety of
risks. The following risk factors describe the most significant
events, facts or circumstances that could have a material adverse effect upon
our business, financial condition, results of operations, ability to implement
our business plan, and the market price for our securities. Many of
these events are outside of our control. The risks described below are not the
only ones facing our company. Additional risks not presently known to
us or that we currently believe are immaterial may also impair our business
operations. If any of these risks actually occur, our business,
financial condition or results of operation may be materially adversely
affected. In such case, the trading price of our common stock could
decline and investors in our common stock could lose all or part of their
investment.
Risks Related to Our IT
Businesses in China.
Our operating
subsidiaries may not be able to adapt to rapid changes in the dynamic Chinese IT
industry, thereby losing market and revenue opportunities. The Chinese IT industry
is extremely dynamic, characterized by rapid changes in technology and the
frequent introduction of new and more advanced equipment and software
applications. We expect to address this business challenge with the intellectual
and human resources of our subsidiaries. Nonetheless, these growth companies
will be subject to the general risks, uncertainties and problems frequently
encountered by similar companies operating in the Chinese IT industry. These
include, among others, the following:
·
|
the
failure to anticipate and adapt to developing market
trends;
|
·
|
the
failure to identify, develop and market services and products that respond
to changing client needs and changing technological
standards;
|
·
|
the
inability to maintain, upgrade and improve our current services and
products;
|
·
|
the
inability to attract and retain skilled personnel, relevant to our
companies' service and product offerings;
and
|
·
|
the
failure to manage our currently rapidly expanding
operations.
|
·
|
If our
subsidiaries are unable to meet these challenges and any others that they may
encounter in the combination of operations or expansion, it is possible that
they will lose market and revenue opportunities and growth will be
slowed.
We depend on the
financial services industry and changes within that industry could reduce demand
for products and services. Unfavorable economic
conditions adversely impacting that part of the financial services industry
could have a material adverse effect on our business, financial condition and
results of operations. For example, depository financial institutions have
experienced, and may continue to experience, cyclical fluctuations in
profitability as well as increasing challenges to improve their operating
efficiencies. Due to the entrance of foreign global players, non-traditional
competitors and the global financial crises, the profit margins of depository
financial institutions have narrowed. As a result, some financial institutions
have slowed, and may continue to slow, their capital spending, including
spending on web-based products and solutions, which can negatively impact sales
to new and existing clients. Decreases in, or reallocation of, capital
expenditures by our current and potential clients, unfavorable economic
conditions and new or persisting competitive pressures could adversely affect
our business, financial condition and results of operations.
Our businesses
may be adversely affected by disruptions in the growth and development of the
banking and financial services sectors in the PRC. Our customer base
comprises commercial banks and financial institutions in the PRC. Any economic
downturn or regional financial upheavals disrupting growth and developments in
the PRC banking and the financial services sector would presumably result in the
reduction of IT expenditure or the postponement of major IT upgrading projects.
If that should occur, there would be a detrimental impact on our growth
opportunities if banks and financial institutions in the PRC are less prepared
to incur expenditures to purchase or upgrade IT infrastructure and security
surveillance systems. Our financial performance and overall investor value may
therefore be adversely affected.
42
There exists
substantial and increasing competition with which our businesses must compete in
service offerings and pricing, and if our subsidiaries are not successful in
addressing those issues, they may lose market share and revenue
potential. In general, the level of
competition in the PRC market for IT services and solutions to the financial
services sector is intense. We face competition from both local and
international companies. Some of the competitors have longer operating
histories, larger clientele, more varied service and product offerings and more
extensive personnel and financial resources which place them in a better
position than our subsidiaries to develop and expand their range of services and
market share. It is also expected that there will be competition from new
entrants into the industry. Current or future competitors may develop or offer
services that are comparable or superior to ours at a lower price. In addition,
only some of the products and services of the companies are protected by
intellectual property rights, therefore competitors would not be prevented from
copying our business techniques. If we fail to successfully compete against our
current and future competitors, our business, financial condition and operating
results will be adversely affected.
In some service
areas of the IT business, prices are decreasing which is adversely effecting
margins in those areas; if our subsidiaries do not meet the resulting pricing
structure or shift away from those areas of business to more remunerative
services, they may lose business opportunities and may experience
losses. There has been
increasing competition in some areas of IT consulting services with the result
of more competitive pricing and falling margins. Customers may elect to engage
competitors who offer better pricing rather than use our subsidiaries. If our
subsidiaries do not successfully manage their businesses and compete in these
areas for engagements, they will suffer financial losses. Our subsidiaries may
also address the competitive situation by shifting to other service areas where
margins are better or they may provide extra services or enhancements that
result in different pricing. If they are not successful in implementing new or
differentiating services, they may suffer losses in particular segments of their
businesses.
The failure to
retain existing customers or changes in their continued use of our services will
adversely affect operating results. Our subsidiaries, in
part, compete using service and product fee structures designed to establish
solid, long term client relationships and recurring revenues through ongoing
usage by customers. Some of their revenues are dependent on recurring revenues
and the continued acceptance of their services by customers in areas such as
account presentation, payments and other financial services. The failure to
retain the existing customers or a change in spending patterns and budgetary
aspects of competing products would adversely affect the business model. Also,
competitors may compete directly with our businesses by adopting a similar
business model or through the acquisition of companies, such as resellers, who
provide complementary products or services.
As a holding
company, our business plan calls for cross selling, development of new offerings
and expanded marketing by our subsidiaries; if they are unable to achieve these
goals, our subsidiaries will not grow as expected and the future value of the
holding company to investors may be less than expected. The expansion of our
subsidiaries' businesses is dependent, in part, on developing, marketing,
selling and supporting new financial products and services to the financial
industry and cross selling to expand customer base and generally increasing
marketing. If any new products developed prove defective or if
the companies fail to properly market these products to the
financial industry or sell these products to their customers, the businesses of
our subsidiaries may not expand and grow. In such a circumstance, the value of
these companies may remain stagnant or decline, which would adversely affect our
financial condition and results of operations.
IT infrastructure
components are obtained from selected suppliers; if the ability to obtain needed
items is disrupted, our subsidiaries' businesses would be adversely
affected. Many of the IT
consulting services and system infrastructure installations conducted by our
subsidiaries depend on the availability of the necessary hardware equipment and
software applications from third parties. Our subsidiaries have established
relations with selected suppliers. There is no assurance that these
vendors/distributors will continue to offer needed items or not terminate their
relationship with our subsidiaries. Although there are alternative suppliers for
most of the needs, if our subsidiaries are unable to obtain the necessary IT
infrastructure components from these or comparable vendors/distributors on a
timely basis, our business, financial condition and results of operation would
be adversely affected.
If the senior
management team and critical staff are not retained, our subsidiaries would
suffer a loss of reputation and an inability to manage their commitments and
expand their operations as planned. In a service-oriented
business, personal relationships, goodwill and networks are critical in
obtaining and maintaining customer engagements. The ability to successfully
complete engagements depends on a trained, knowledgeable and stable staff. The
success of our subsidiaries depends on the continued efforts of the senior
management teams in building good relationships with existing and potential
customers and in the implementation of the growth and business strategy and
their company’s ability to retain and replace its staff. Each senior management
team has substantial experience in the services offered by the company and has
been instrumental in their past growth and expansion. The loss of any member of
the senior management team and critical staff could, without adequate
replacement, result in an adverse impact on their businesses, financial
conditions and results of operations.
43
If our
subsidiaries are unable to protect their proprietary technology and other
rights, they may be unable to effectively compete. Our subsidiaries rely on
a combination of patent, copyright, trademark and anti-competition laws, as well
as licensing agreements, third-party nondisclosure agreements, internal
confidentiality policies and other contractual provisions and technical measures
to protect their intellectual property rights. There can be no assurance that
these protections will be adequate to prevent competitors from copying or
reverse-engineering their products, or that competitors will not independently
develop technologies that are substantially equivalent or superior to their
technology. To protect their trade secrets and other proprietary information,
employees, consultants, advisors and collaborators are required to enter into
non-disclosure confidentiality agreements. There can be no assurance that these
agreements will provide meaningful protection for the trade secrets, know-how or
other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. Although our subsidiaries hold registered rights
covering certain aspects of their technology, there can be no assurance of the
level of protection that these registrations will provide. Our subsidiaries may
have to resort to litigation to enforce the intellectual property rights, to
protect the trade secrets or know-how, or to determine their scope, validity or
enforceability. Enforcing or defending intellectual property rights is
expensive, could cause diversion of our resources and may not prove
successful.
If our
subsidiaries' proprietary rights infringe on those of other persons, they could
be required to redesign those products, pay royalties or enter into license
agreements with third parties or have to cease offering the infringing products
or services, any of which could have an adverse impact on the business and
revenues and profits of our subsidiaries and us. There can be no
assurance that a third party will not assert that the intellectual property
rights and services of our subsidiaries violates their intellectual property
rights. To some extent the law of the PRC is not extensively developed in the
area of enforcement. As the number of products offered by our subsidiaries and
competitors increases and the functionality of these products further overlap,
the provision of web-based financial services technology may become increasingly
subject to infringement claims. Any claims, whether with or without merit,
could:
●
|
be
expensive and time consuming to
defend;
|
●
|
cause
the companies to cease making, licensing or using products that
incorporate the challenged intellectual
property;
|
●
|
require
the companies to redesign our products, if
feasible;
|
●
|
divert
management's attention and resources;
and
|
●
|
require
the companies to pay royalties or enter into licensing agreements in order
to obtain the right to use necessary
technologies.
|
System failures
could hurt our business reputation, and our subsidiaries could be liable for
some types of failures, the extent or amount of which cannot be
predicted. The operations of our
subsidiaries depend on their ability to protect their systems from interruption
caused by damage from fire, earthquake, power loss, telecommunications failure,
unauthorized entry or other events beyond our control. Our subsidiaries, in the
future, plan to maintain their own offsite disaster recovery facility if it is
necessary to their business strategies. In the event of major disasters, both
primary and backup locations could be adversely impacted. Our subsidiaries do
not currently have sufficient backup facilities to provide full Internet
services if their primary facility is not functioning. They could also
experience system interruptions due to the failure of their systems to function
as intended or the failure of the systems relied upon to deliver services such
as the Internet, certain services specific to the financial industry, processors
that integrate with other systems and networks, and systems of third parties.
Loss of all or part of the systems for a period of time could have a material
adverse effect on our subsidiaries’ businesses and reputation. Our subsidiaries
may be liable to their clients for breach of contract for interruptions in
service. Due to the numerous variables surrounding system disruptions, the
extent or amount of any potential liability cannot be predicted.
44
Security breaches
could have a material adverse effect on our business and the business
reputations of our subsidiaries. Computer systems may be
vulnerable to computer viruses, hackers, and other disruptive problems caused by
unauthorized access to, or improper use of, systems by third parties or
employees. Although our subsidiaries intend to continue to implement
state-of-the-art security measures, computer attacks or disruptions may
jeopardize the security of information stored in and transmitted through
computer systems of the clients and their end-users. Actual or perceived
concerns that company systems may be vulnerable to such attacks or disruptions
may deter financial services providers and consumers from using the company's
services.
Data
networks are also vulnerable to attacks, unauthorized access and disruptions.
For example, in a number of public networks, hackers have bypassed firewalls and
misappropriated confidential information. It is possible that, despite existing
safeguards, an employee could divert end-user funds while these funds are in
company control, exposing the subsidiaries to a risk of loss or litigation and
possible liability. In dealing with numerous end-users, it is possible that some
level of fraud or error
will occur, which may result in
erroneous external payments. Losses or liabilities that are incurred as a result
of any of the foregoing could have a material adverse effect on the business of
our subsidiaries.
The potential
obsolescence of our subsidiaries' technology or the offering of new, more
efficient means of conducting business could negatively impact our
business. The industry for account
presentation and payments services is relatively new and subject to rapid
change. Success will depend substantially upon an ability to enhance existing
products and to develop and introduce, on a timely and cost-effective basis, new
products and features that meet the changing financial industry requirements and
incorporate technological advancements. If our individual subsidiaries are
unable to develop new products and enhanced functionalities or technologies to
adapt to these changes, or if they cannot offset a decline in revenues of
existing products by sales of new products, their business would
suffer.
Our subsidiaries'
businesses use internally developed software and systems as well as third-party
products, any of which may contain errors and bugs, the effect of which could
cause our subsidiaries to spend additional money and time to correct, cause a
breach of services agreements and/or pay damages. Our subsidiaries' products
may contain undetected errors, defects or bugs that may or may not be
correctable. The products involve integration with products and systems
developed by third parties. Complex software programs of third parties may
contain undetected errors or bugs when they are first introduced or as new
versions are released. There can be no assurance that errors will not be found
in existing or future products or third-party products upon which our
subsidiaries' products
are dependent, which could result in delays, loss of market acceptance of their
products, diversion of resources, injury to their reputation, and increased
expenses and potentially the payment of damages.
Our subsidiaries
could be sued for contract or product liability claims, and those lawsuits may
disrupt our business, divert management's attention or have an adverse effect on
our financial results. The financial industry
uses our products and services to provide web-based account presentation,
customer service and other financial services to their end-users. Failures in a
client's system could result in an increase in service and warranty costs or a
claim for substantial damages. There can be no assurance that the limitations of
liability set forth in company contracts would be enforceable or would otherwise
protect us from liability for damages. The successful assertion of one or more
large claims could result in substantial cost to the company and divert
management's attention from operations. Any contract liability claim or
litigation against the company could, therefore, have a material adverse effect
on the business, financial condition and results of operations. In addition,
because many of our subsidiaries projects are business-critical projects for
financial services providers, a failure or inability to meet a client's
expectations could seriously damage the company's reputation and affect its
ability to attract new business.
Part of the
business plan in the future is to seek additional services and clients and
business opportunities through the acquisitions of related service and product
providers; in such acquisitions, we will have to manage the integration, which
may be disruptive to ongoing business, not successful, or more costly than
estimated. Part of our business
plan for our individual subsidiaries is to acquire additional businesses. To
achieve the anticipated benefits of these acquisitions, our subsidiaries will
need to successfully integrate the acquired employees, products and services,
data and business methods of operations. In addition, our
subsidiaries may also have to consolidate certain functions and integrate
procedures, personnel, product lines and operations in an efficient and
effective manner. The integration process may be disruptive
to, and may cause an interruption of, business as a result of a number of
potential obstacles, such as:
45
●
|
the
loss of key employees or customers;
|
●
|
the
need to coordinate diverse
organizations;
|
●
|
difficulties
in integrating administrative and other
functions;
|
●
|
the
loss of key members of management following the acquisition;
and
|
●
|
the
diversion of management's attention from our day-to-day
operations.
|
We have
not identified any other Chinese operating companies at this time to be acquired
and therefore we cannot provide further specific information to you. In this
regard, we are not dissimilar from a blank check company whereby the success of
the Company will be predicated upon finding suitable acquisition target
companies, successfully purchasing them at a fair and economical price, and
integrating them into the business culture of our Company.
If our
subsidiaries are not successful in integrating these businesses or if the
integrations take longer than expected, there could be significant costs and our
businesses could be adversely affected.
We will incur
costs as a result of being a public company, and the requirements of being a
public company may divert management’s attention from our business and adversely
affect our financial results. As a
public company, we will be subject to a number of requirements, including the
reporting requirements of the Exchange Act, Sarbanes-Oxley and eventually the
listing standards of Nasdaq. These requirements will cause us to incur costs and
might place a strain on our systems and resources. The Exchange Act requires,
among other things, that we file annual, quarterly and current reports with
respect to our business and financial condition. Sarbanes-Oxley requires, among
other things, that we maintain effective disclosure controls and procedures and
internal control over financial reporting. In order to maintain and improve the
effectiveness of our disclosure controls and procedures and internal control
over financial reporting, significant resources and management oversight will be
required. As a result, our management’s attention might be diverted from other
business concerns, which could have a material adverse effect on our business,
results of operations and financial condition. Furthermore, we might not be able
to retain our independent directors or attract new independent directors for our
committees.
If we fail to
establish and maintain an effective system of internal control, we may not be
able to report our financial results accurately or to prevent
fraud. Any inability to report and file our financial results
accurately and timely could harm our business and adversely impact the trading
price of our common stock. We are required to
establish and maintain internal controls over financial reporting, disclosure
controls, and to comply with other requirements of Sarbanes-Oxley and the rules
promulgated by the SEC thereunder. Our management, including our
President, cannot guarantee that our internal controls and disclosure controls
will prevent all possible errors or all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met. In addition, the design of a control system must reflect the
fact that there are resource constraints and the benefit of controls must be
relative to their costs. Because of the inherent limitations in all
control systems, no system of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Further, controls can be circumvented by
individual acts of some persons, by collusion of two or more persons, or by
management override of the controls. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions. Over time, a control may become inadequate because of
changes in conditions or the degree of compliance with policies or procedures
may deteriorate. Because of inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and may not be
detected.
46
We are a holding
company that depends on cash flow from our subsidiaries to meet our
obligations. After the Share
Exchange, we became a holding company with no material assets other than the
stock of our subsidiaries. Accordingly, all our operations will be
conducted by our direct and indirect subsidiaries. We currently
expect that the earnings and cash flow of our subsidiaries will primarily be
retained and used by us in its operations.
All of Covenant
Holdings' liabilities survived the Share Exchange and there may be undisclosed
liabilities that could have a negative impact on our financial
condition. Before the Share
Exchange, certain due diligence activities on the Company and Covenant Holdings
were performed. The due diligence process may not have revealed all
liabilities (actual or contingent) of the Company and Covenant Holdings that
existed or which may arise in the future relating to the Company's activities
before the consummation of the Share Exchange. Notwithstanding that
all of the Company's pre-closing liabilities were transferred to SplitCo
pursuant to the Transfer Agreement Split-Off, it is possible that claims for
such liabilities may still be made against us, which we will be required to
defend or otherwise resolve. The provisions and terms of the Transfer
Agreement and Split-Off may not be sufficient to protect us from claims and
liabilities and any breaches of related representations and
warranties. Any liabilities remaining from the Company's pre-closing
activities could harm our financial condition and results of
operations.
Because Covenant
Holdings has become public by means of a share exchange, we may not be able to
attract the attention of major brokerage firms. There may be risks
associated with Covenant Holdings' becoming public through the Share
Exchange. Securities analysts of major brokerage firms may not
provide coverage of us since there is no incentive to brokerage firms to
recommend the purchase of our common stock. No assurance can be given
that brokerage firms will, in the future, want to conduct any secondary
offerings on our behalf.
New accounting
standards could result in changes to our methods of quantifying and recording
accounting transactions, and could affect our financial results and financial
position. Changes to US GAAP arise
from new and revised standards, interpretations, and other guidance issued by
FASB, the SEC, and others. In addition, the U.S. Government may issue
new or revised Cost Accounting Standards or Cost Principles. The
effects of such changes may include prescribing an accounting method where none
had been previously specified, prescribing a single acceptable method of
accounting from among several acceptable methods that currently exist, or
revoking the acceptability of a current method and replacing it with an entirely
different method, among others. Such changes could result in
unanticipated effects on our results of operations, financial position, and
other financial measures.
Risks Related to the
Shares.
We may need
additional capital to execute our business plan and fund operations and may not
be able to obtain such capital on acceptable terms or at all. Capital requirements are
difficult to plan in our rapidly changing industry. We expect that we will
need additional capital to fund our future growth.
Our
ability to obtain additional capital on acceptable terms or at all is subject to
a variety of uncertainties, including:
●
|
Investors'
perceptions of, and demand for, companies in our
industries;
|
●
|
Investors'
perceptions of, and demand for, companies operating in the
PRC
|
●
|
Conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
|
●
|
Our
future results of operations, financial condition and cash
flows;
|
●
|
Governmental
regulation of foreign investment in companies in particular
countries;
|
●
|
Economic,
political and other conditions in the United States, the PRC, and other
countries; and
|
●
|
Governmental
policies relating to foreign currency
borrowings.
|
We may be
required to pursue sources of additional capital through various means,
including joint venture projects and debt or equity financings. There is no
assurance that we will be successful in locating a suitable financing
transaction in a timely fashion or at all. In addition, there is no assurance
that we will be successful in obtaining the capital we require by any other
means. Future financings through equity investments are likely to be dilutive to
our existing shareholders. Also, the terms of securities we may issue in future
capital transactions may be more favorable for our new investors. Newly issued
securities may include preferences, superior voting rights, the issuance of
warrants or other derivative securities, and the issuances of incentive awards
under equity employee incentive plans, which may have additional dilutive
effects. Further, we may incur substantial costs in pursuing future capital
and/or financing, including investment banking fees, legal fees, accounting
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible notes and warrants, which will adversely impact
our financial condition.
47
If we
cannot raise additional funds on favorable terms or at all, we may not be able
to carry out all or parts of our strategy to maintain our growth and
competitiveness or to fund our operations. If the amount of capital
we are able to raise from financing activities, together with our revenues from
operations, is not sufficient to satisfy our capital needs, even to the extent
that we reduce our operations accordingly, we may be required to cease
operations.
The market price
of our common stock may be volatile, which could cause the value of your
investment to decline or could subject us to securities class action
litigation. Many factors could cause
the market price of our common stock to rise and fall, including the
following:
●
|
variations
in our or our competitors’ actual or anticipated operating
results;
|
●
|
variations
in our or our competitors’ growth
rates;
|
●
|
recruitment
or departure of key personnel;
|
●
|
changes
in the estimates of our operating performance or changes in
recommendations by any securities analyst that follows our
stock;
|
●
|
substantial
sales of our common stock; or
|
●
|
changes
in accounting principles.
|
Market
volatility, as well as general economic, market or potential conditions, could
reduce the market price of our common stock in spite of our operating
performance. In the past, following periods of volatility in the market price of
a company’s securities, securities class action litigation often has been
brought against that company. Due to the potential volatility of our stock
price, we therefore may be the target of securities litigation in the future.
Securities litigation could result in substantial costs and divert management’s
attention and resources from our business.
Shares of our
common stock lack a significant trading market. Shares of our common
stock are not eligible as yet for trading on any national securities
exchange. Our common stock may be quoted in the over-the-counter
market on the OTC Bulletin Board or in what are commonly referred to as "pink
sheets." These markets are highly illiquid. Although we
intend to apply for listing of our common stock on an exchange, there can be no
assurance if and when the initial listing criteria could be met or if such
application would be granted, or that the trading of the common stock will be
sustained. There is no assurance that an active trading market in our
common stock will develop, or if such a market develops, that it will be
sustained. In addition, there is a greater chance for market
volatility for securities that are quoted on the OTC Bulletin Board as opposed
to securities that trade on a national exchange. This volatility may
be caused by a variety of factors, including the lack of readily available
quotations, the absence of consistent administrative supervision of "bid" and
"ask" quotations and generally lower trading volume. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the common stock, or to obtain coverage
for significant news events concerning us, and the common stock would become
substantially less attractive for margin loans, for investment by financial
institutions, as consideration in future capital raising transactions or other
purposes.
Future sales of
shares of our common stock by our shareholders could cause our stock price to
decline. We
cannot predict the effect, if any, that market sales of shares of our common
stock or the availability of shares of common stock for sale will have on the
market price prevailing from time to time. If our stockholders sell
substantial amounts of our common stock in the public market upon the
effectiveness of a registration statement, or upon the expiration of any holding
period under Rule 144, such sales could create a circumstance commonly referred
to as an "overhang" and in anticipation of which the market price of our common
stock could fall. The existence of an overhang, whether or not sales
have occurred or are occurring, also could make more difficult our ability to
raise additional financing through the sale of equity or equity-related
securities in the future at a time and price that we deem reasonable or
appropriate. The shares of common stock issued in the Share Exchange
will be freely tradable upon the earlier of (i) effectiveness of a registration
statement covering such shares; and (ii) the date on which such shares may be
sold without registration pursuant to Rule 144 under the Securities Act and the
sale of such shares could have a negative impact on the price of our common
stock.
48
We may issue
additional shares of our capital stock or debt securities to raise capital or
complete acquisitions, which would reduce the equity interest of our
shareholders. Our articles of
incorporation authorizes the issuance of up to 100,000,000 shares of common
stock, par value $.00001 per share, and up to 100,000,000 shares of preferred
stock, par value $.00001 per share. There are approximately
88,519,091 authorized and unissued shares of our common stock and 100,000,000
shares of our preferred stock which have not been reserved and are available for
future issuance. Although we have no commitments as of the date of
this offering to issue our securities, we may issue a substantial number of
additional shares of our common stock, to complete a business combination or to
raise capital. The issuance of additional shares of our common
stock:
●
|
may
significantly reduce the equity interest of our existing shareholders;
and
|
●
|
may
adversely affect prevailing market prices for our common
stock.
|
We currently do
not intend to pay dividends on our common stock and, consequently, your only
opportunity to achieve a return on your investment is if the price of our common
stock appreciates. We do not expect to pay
dividends on shares of our common stock in the foreseeable future. In addition,
because we are a holding company, our ability to pay cash dividends on shares of
our common stock may be limited by restrictions on our ability to obtain
sufficient funds through dividends from our subsidiaries. Subject to
these restrictions, the payment of cash dividends in the future, if any, will be
at the discretion of our Board of Directors and will depend upon such factors as
earnings levels, capital requirements, our overall financial condition and any
other factors deemed relevant by our Board of Directors. Consequently, your only
opportunity to achieve a return on your investment in the Company will be if the
market price of our common stock appreciates.
Risks Related to the
Organization and Operations of the Company.
Revenues of the
company. The
Company may not generate any revenues other than revenues being claimed through
its ownership of certain technology companies based in
China. Therefore, there can be no assurances that the Company will
have the available funds to satisfy its obligations; moreover, there can be no
assurances that the Company will declare or pay cash dividends or make
distributions to investors of its Shares (even if the issuer is
profitable).
Risks Related to Acquisition
of Chinese Companies.
Risks attendant
to acquisitions. The Company has acquired
equity interests in two Chinese companies pursuant to certain China
Agreements. Other Chinese companies will be sought to be acquired and
there will be no defined amount as to the number of Chinese companies that may
be acquired and because target companies have yet to be identified, there is no
available information regarding these companies. Acquisitions involve
a number of special risks, including: failure of the acquired business to
achieve expected results; diversion of management’s attention; failure to retain
key personnel of the acquired business; the need by the acquired business to
obtain additional financing which if necessary and available, could increase
leverage, dilute equity, or both; the potential negative effect on the financial
statements of the Company from the increase in goodwill and other intangibles;
and the high cost and expenses of completing acquisitions and risks associated
with unanticipated events or liabilities. These risks could have a
material adverse effect on the business, results of operations and financial
condition of the Company. The Company expects to face competition for
acquisition candidates, which may limit the number of opportunities to acquire
companies and may lead to higher acquisition prices. The Company
cannot assure investors that it will be able to identify, acquire, or manage
profitably additional businesses or to integrate successfully any acquired
businesses into its existing business without substantial costs, delays or other
operational or financial difficulties. In addition, the Company may
inadvertently assume unknown liabilities in acquisitions that it has completed
or plans to complete. The Company’s assumption of unknown liabilities in
acquisitions may harm the financial condition and operating results of the
Company. Acquisitions may be structured in such a manner that would result in
the assumption of unknown liabilities not disclosed by the seller or uncovered
during pre-acquisition due diligence. These obligations and liabilities could
harm the financial condition and operating results of the Company.
49
Market
risks. An
investor in a private equity transaction (such as the Company's acquisition of
the Chinese technology companies) generally determines the terms of the
investment based upon financial projections for the target
company. Projected operating results for such companies will normally
be based primarily on judgments of the management of those
companies. In all cases, projections are only estimates of future
results based upon assumptions made at the time the projections are
developed. There can be no assurance that the projected results will
be obtained, and actual results may vary significantly from the
projections. General economic conditions or other factors that are
not predictable can have a material adverse impact on the reliability of
projections. For any given investment, total loss of invested capital
is possible.
Under the China
Agreements, sustained ownership of our subsidiaries will depend upon our ability
to raise additional funds to inject into our
subsidiaries. Pursuant
to the China Agreements, we have agreed to engage in a capital raise of $5
million by the first quarter of 2010 to inject $2.5 million in each of JIEN and
Chongqing Sysway. In the event that we are unable to raise the funds
in a timely manner, we would request an extension from JIEN and Chongqing
Sysway. If the Company was unable to raise the funds or secure a
timely extension to raise the funds to inject into the subsidiaries, the
original Chinese equity owners of these subsidiaries would have a claim for
breach of the China Agreements against the Company, for which one contract
remedy might be rescission of such agreements and transfer of the ownership of
the subsidiaries back to the original Chinese owners.
Risks Related to Our
Business being Conducted in China.
Recent Chinese
regulations relating to the establishment of offshore special purpose companies
by Chinese residents and registration requirements for employee stock ownership
plans or share option plans may subject our Chinese resident shareholders to
personal liability and limit our ability to acquire companies in China or to
inject capital into our subsidiaries in China, limit our Chinese subsidiaries'
ability to distribute profits to us, or otherwise materially and adversely
affect us. The Chinese State Administration of Foreign
Exchange ("SAFE") issued a public notice in October 2005, requiring Chinese
residents, including both legal persons and natural persons, to register with
the competent local SAFE branch before establishing or controlling any company
outside of China established for the purpose of acquiring any assets of or
equity interest in companies in China and raising funds from overseas (referred
to as an “offshore special purpose company”). In addition, any
Chinese resident that is a shareholder of an offshore special purpose company is
required to amend his or her SAFE registration with the local SAFE branch in the
event of any increase or decrease of capital, transfer of shares, merger,
division, equity investment or creation of any security interest over any assets
located in China with respect to that offshore special purpose
company. To further clarify the implementation of Circular 75, the
SAFE issued Circular 124 and Circular 106 on November 24, 2005 and May 29, 2007,
respectively. Under Circular 106, PRC subsidiaries of an offshore special
purpose company are required to coordinate and supervise the filing of SAFE
registrations by the offshore holding company’s shareholders who are Chinese
residents in a timely manner. If these shareholders fail to comply, the Chinese
subsidiaries are required to report to the local SAFE authorities. If
the Chinese subsidiaries of the offshore parent company do not report to the
local SAFE authorities, they may be prohibited from distributing their profits
and proceeds from any reduction in capital, share transfer or liquidation to
their offshore parent company, and the offshore parent company may be restricted
in its ability to contribute additional capital into its Chinese
subsidiaries. Moreover, failure to comply with the above SAFE
registration requirements could result in liabilities under China law for
evasion of foreign exchange restrictions. The failure or inability of these
Chinese resident beneficial owners to comply with the applicable SAFE
registration requirements may subject these beneficial owners or us to the
fines, legal sanctions and restrictions described above.
On
March 28, 2007, SAFE released detailed registration procedures for employee
stock ownership plans or share option plans to be established by overseas listed
companies and for individual plan participants. Any failure to comply with the
relevant registration procedures may affect the effectiveness of our employee
stock ownership plans or share option plans and subject the plan participants,
the companies offering the plans or the relevant intermediaries, as the case may
be, to penalties under PRC foreign exchange regime. These penalties may subject
us to fines and legal sanctions, prevent us from being able to make
distributions or pay dividends, as a result of which our business operations and
our ability to distribute profits to you could be materially and adversely
affected.
50
In
addition, the NDRC promulgated a rule in October 2004, or the NDRC Rule, which
requires NDRC approvals for overseas investment projects made by PRC entities.
The NDRC Rule also provides that approval procedures for overseas investment
projects of PRC individuals must be implemented with reference to this rule.
However, there exist extensive uncertainties in terms of interpretation of the
NDRC Rule with respect to its application to a PRC individual’s overseas
investment, and in practice, we are not aware of any precedents that a PRC
individual’s overseas investment has been approved by the NDRC or challenged by
the NDRC based on the absence of NDRC approval. Our current beneficial owners
who are PRC individuals did not apply for NDRC approval for investment in us. We
cannot predict how and to what extent this will affect our business operations
or future strategy. For example, the failure of our shareholders who are PRC
individuals to comply with the NDRC Rule may subject these persons or our PRC
subsidiary to certain liabilities under PRC laws, which could adversely affect
our business.
Chinese
regulation of loans and direct investment by offshore holding companies to
Chinese entities may delay or prevent us from using the proceeds of this
offering to make loans or additional capital contributions to our operating
subsidiaries, which could materially and adversely affect our liquidity and our
ability to fund and expand our business. We may make loans to
our subsidiaries, or we may make additional capital contributions to our
subsidiaries. Any loans to our subsidiaries are subject to Chinese
regulations. For example, loans by us to our subsidiaries in China,
which are foreign-invested enterprise, to finance their activities cannot exceed
statutory limits and must be registered with the SAFE.
We may
also decide to finance our subsidiaries by means of capital contributions. These
capital contributions must be approved by the Ministry of Commerce or its local
counterpart. We cannot assure you that we will be able to obtain these
government approvals on a timely basis, or if at all, with respect to future
capital contributions by us to our subsidiaries. If we fail to receive such
approvals, our ability to capitalize our Chinese operations may be negatively
affected, which could adversely affect our liquidity and our ability to fund and
expand our business.
A return to
profit repatriation controls may limit the ability to expand business and reduce
the attractiveness of investing in Chinese business opportunities. PRC law allows
enterprises owned by foreign investors to remit their profits, dividends and
bonuses earned in the PRC to other countries, and the remittance does not
require prior approval by SAFE. SAFE regulations required extensive
documentation and reporting, some of which was burdensome and slowed payments.
If there is a return to payment restrictions and reporting, the ability of a
Chinese company to attract investors will be reduced. Also, current investors
may not be able to obtain the profits of the business in which they own for
other reasons. Relevant PRC law and regulation permit payment of dividends only
from retained earnings, if any, determined in accordance with PRC accounting
standards and regulations. It is possible that the PRC tax authorities may
require changes in the income of the company that may limit its ability to pay
dividends and other distributions to shareholders. PRC law requires companies to
set aside a portion of net income to fund certain reserves, which amounts are
not to distributable as dividends. These rules and possible changes could
restrict our companies from repatriating funds to us, and ultimately, the
shareholders as dividends.
The economy of
China has been experiencing unprecedented growth and this has resulted in some
inflation. If the Chinese
government tries to control inflation by traditional means of monetary policy or
returns to planned economic techniques, our business will suffer a reduction in
sales growth and expansion opportunities. The rapid growth of the
Chinese economy has resulted in higher levels of inflation. If the government
tries to control inflation, it may have an adverse effect on the business
climate and growth of private enterprise in the PRC. An economic slow down will
have an adverse effect on our sales and may increase costs. On the other hand,
if inflation is allowed to proceed unchecked, our companies' costs would likely
increase, and there can be no assurance that they would be able to increase
their prices to an extent that would offset the increase in their
expenses.
Fluctuation in
the value of the RMB may reduce the value of your investment. The change in value of
the RMB against the U.S. dollar, Euro and other currencies is affected by, among
other things, changes in China’s political and economic
conditions. On July 21, 2005, the PRC government changed its
decade-old policy of pegging the value of the RMB to the U.S.
dollar. Under the current policy, the RMB is permitted to fluctuate
within a narrow and managed band against a basket of certain foreign currencies.
This change in policy has resulted in a greater fluctuation range between RMB
and the U.S. dollar. There remains significant international pressure
on China to adopt a more flexible and more market-oriented currency policy that
allows a greater fluctuation in the exchange rate between the RMB and the U.S.
dollar. Accordingly, we expect that there will be increasing fluctuations in the
RMB exchange rate against the U.S. dollar in the near future. Any
significant revaluation of the RMB may have a material adverse effect on the
value of, and any dividends paid on, our Common Stock in U.S. dollar
terms.
51
We are subject to
international economic and political risks over which we have little or no
control and may be unable to alter our business practice in time to avoid the
possibility of reduced revenues. Our business is
conducted in China. Doing business outside the United States,
particularly in China, subjects us to various risks, including changing economic
and political conditions, major work stoppages, exchange controls, currency
fluctuations, armed conflicts and unexpected changes in United States and
foreign laws relating to tariffs, trade restrictions, transportation
regulations, foreign investments and taxation. We have no control
over most of these risks and may be unable to anticipate changes in
international economic and political conditions and, therefore, unable to alter
our business practice in time to avoid the possibility of reduced
revenues.
China's economic
policies could affect our business. Substantially all of our
assets are located in China and all of our revenue is derived from our
operations in China. Accordingly, our results of operations and
prospects are subject, to a significant extent, to the economic, political and
legal developments in China.
While
China'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 Chinese government has implemented various measures
to encourage economic growth and guide the allocation of
resources. Some of these measures benefit the overall economy of
China, but they may also have a negative effect on us. For example,
operating results and financial condition may be adversely affected by
government control over capital investments or changes in tax
regulations. The economy of China has been changing from a planned
economy to a more market-oriented economy. In recent years the
Chinese 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 China are
still owned by the Chinese government. In addition, the Chinese
government continues to play a significant role in regulating industry
development by imposing industrial policies. It also exercises
significant control over China'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.
We may have
difficulty establishing adequate management, legal and financial controls in
China. Historically, China has
not adopted a Western style of management and financial reporting concepts and
practices, as well modern banking, computer and other control
systems. We may have difficulty in hiring and retaining a sufficient
number of qualified employees to work in China. As a result of these
factors, we may experience difficulty in establishing management, legal and
financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
China could
change its policies toward private enterprise or even nationalize or expropriate
private enterprises. Our business is subject
to significant political and economic uncertainties and may be affected by
political, economic and social developments in China. Over the past
several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. The Chinese government may not continue to pursue
these policies or may significantly alter them to our detriment from time to
time with little, if any, prior notice.
Changes
in policies, laws and regulations or in their interpretation or the imposition
of confiscatory taxation, restrictions on currency conversion, restrictions or
prohibitions on dividend payments to stockholders, or devaluations of currency
could cause a decline in the price of our common stock. Nationalization or
expropriation could even result in the total loss of an investment in our
stock.
The nature and
application of many laws of China create an uncertain environment for business
operations and they could have a negative effect on us. The legal system in
China is a civil law system. Unlike the common law system, the civil
law system is based on written statutes in which decided legal cases have little
value as precedents. In 1979, China began to promulgate a
comprehensive system of laws and has since introduced many laws and regulations
to provide general guidance on economic and business practices in China and to
regulate foreign investment. Progress has been made in the
promulgation of laws and regulations dealing with economic matters such as
corporate organization and governance, foreign investment, commerce, taxation
and trade. The promulgation of new laws, changes of existing laws and
the abrogation of local regulations by national laws could cause a decline in
the price of our common stock. In addition, as these laws,
regulations and legal requirements are relatively recent, their interpretation
and enforcement involve significant uncertainty.
52
If certain
exemptions within the PRC regarding withholding taxes are removed, our
subsidiaries may be required to deduct Chinese corporate withholding taxes from
any dividends that are paid to us which will reduce the return on
investment. Under current PRC tax
laws, regulations and rulings, companies are exempt from paying withholding
taxes with respect to dividends paid to stockholders outside the PRC. If the
foregoing exemption is eliminated, in the future we may be required to withhold
such taxes which will reduce its revenues and the amount of retained earnings
that may be distributed to the shareholders.
The PRC legal
system has inherent uncertainties that could limit the legal protections
available to you. Most of the Company assets and all of our
operations are in the PRC. The Chinese legal system is based on written
statutes. Prior court decisions may be cited for reference but are not binding
on subsequent cases and have limited precedential value. Since 1979, the Chinese
legislative bodies have promulgated laws and regulations dealing with such
economic matters as foreign investment, corporate organization and governance,
commerce, taxation and trade. However, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their non-binding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. The laws in the PRC differ from the laws in
the United States and may afford less protection to our shareholders. Unlike
laws in the United States, the applicable laws of China do not specifically
allow shareholders to sue the directors, supervisors, officers or other
shareholders on behalf of the company to enforce a claim against these parties
that the company has failed to enforce itself. Therefore, any action brought
against the company or its officers and directors or its assets may be very
difficult to pursue if not impossible. It is unlikely that any suit in the PRC
would be able to be based on theories common in the United States or based on
United States securities laws.
It will be
extremely difficult to acquire jurisdiction and enforce liabilities against any
officers, directors and assets based in China. As our
executive officers and directors may be Chinese citizens, it may be difficult,
if not impossible, to acquire jurisdiction over these persons in the event a
lawsuit is initiated against us and/or our officers and directors by a
shareholder or group of shareholders in the United States. Also,
because our operating subsidiaries and assets are located in China, it may be
extremely difficult or impossible for you to access those assets to enforce
judgments rendered against us or our directors or executive offices by U.S.
courts. In addition, the courts in China may not permit the
enforcement of judgments arising out of U.S. federal and state corporate,
securities or similar laws. Accordingly, U.S. investors may not be
able to enforce judgments against us for violation of U.S. securities
laws.
53
Security
Ownership of Certain Beneficial Owners and
Management
The
following tables set forth certain information as of December 24, 2009 regarding
the number of shares of common stock beneficially owned by (i) each person or
entity known to us to own more than 5% of our common stock; and (ii) all of our
executive officers and directors as a group.
Unless
otherwise indicated, each of the shareholders named in the table below has sole
voting and investment power with respect to such shares of common
stock. Except as otherwise indicated, the address of each of the
shareholders listed below is: c/o Covenant Holdings, Two Bala Plaza, Suite 300,
Bala Cynwyd, PA 19004.
Shares of
common stock subject to options, warrants, or other rights currently exercisable
or exercisable within 60 days of December 24, 2009, are deemed to be
beneficially owned and outstanding for computing the share ownership and
percentage of the shareholder holding such options and warrants, but are not
deemed outstanding for computing the percentage of any other
shareholder.
Name
of Beneficial Owner
|
Number
of Shares Beneficially Owned(1)
|
Percentage
Beneficially
Owned(2)
|
||||||
5%
Shareholders:
|
||||||||
Ma
Bing Feng
HaiNan
JIEN Intelligent Engineering Co.
Floor
6, No.38 DaTong Road,
Fortune
Centre,
Haikou
City, Hainan Province, China 570102
|
810,000
|
7.1%
|
||||||
Song
Xiaozhong
c/o
ChongQing Sysway Information Technology Co., Ltd
4F,H
Building, 67th, No.3 Keyuan Road,
Hi-tech
Industrial Development Zone,
ChongQing,
China 400041
|
606,158
|
5.3%
|
||||||
Directors
and Executive Officers:
|
||||||||
Fredric
Rittereiser
|
0
|
*
|
||||||
Kenneth
Wong
|
300,000
|
2.6%
|
||||||
K.
Ivan F. Gothner
|
250,000
|
2.2%
|
||||||
Justin
D. Csik
|
100,000
|
*
|
||||||
All
Directors and named Executive Officers as a group (4
persons)
|
650,000
|
5.7%
|
__________________________
*
|
Represents
less than 1% of the shares outstanding.
|
(1)
|
Beneficial
ownership has been determined in accordance with Rule 13d-3 under the
Exchange Act. Unless otherwise noted, we believe that all
person named in the table have sole voting and investment power with
respect to all shares of common stock beneficially owned by
them.
|
(2)
|
Based
on 11,480,909 shares of common stock issued and outstanding as of December
24, 2009.
|
Executive
Officers and Directors
The
following persons became our executive officers and directors on December 24,
2009, upon effectiveness of the Share Exchange and hold the positions set forth
opposite their respective names.
Name
|
Age
|
Position
|
Fredric
W. Rittereiser
|
73
|
Chairman
of the Board of Directors
|
Kenneth
Wong
|
53
|
President
and Director
|
K.
Ivan F. Gothner
|
51
|
Director
|
Justin
D. Csik
|
26
|
Acting
Chief Financial Officer, Corporate Secretary and General
Counsel
|
Our
directors hold office for one-year terms and until their successors have been
elected and qualified. Our officers are elected annually by the board
of directors and serve at the discretion of the board.
54
Biographies
Fredric W.
Rittereiser, Chairman of the Board of Directors. Mr. Rittereiser was a
founder of Covenant Holdings and has over 40 years of capital markets experience
as a senior executive at numerous Wall Street firms. In the past, he
acted as an independent consultant advising global companies with market entry
and strategic development issues specializing in China-related
projects. He is the former President of Instinet Corporation, which
became one of the world's leading electronic securities trading firms under his
leadership.
After
seven years of service at the NYPD Intelligence Division as a detective, he
started his Wall Street career in 1964 as an institutional equities trader with
Merrill Lynch & Co. Subsequently, he became one of the leading
block traders on Wall Street. In 1973, Mr. Rittereiser became
President of the Wall Street trading firm Troster, Singer &
Co. Under his guidance, the company was transformed into a leading
institutional block-trading house on the Nasdaq. From 1973 until
1980, he served as the NASDAQ representative on the National Market System
Committee responsible for negotiated rates, developing market linkages in the
U.S., promoting price competition and endorsing Nasdaq as the electronic market
for growth companies and new issues.
In 1983,
he joined Instinet Corporation as President and Chief Operating
Officer. Under his leadership, the company evolved into a highly
efficient continuous electronic communications network or ECN that allowed
institutions and dealers to negotiate securities trades
anonymously. Mr. Rittereiser successfully negotiated the sale of
Instinet to the Reuters Group in 1987. Between 1983 and 2002, Mr.
Rittereiser was CEO and COO of three public companies – Instinet, Sherwood Group
and Ashton Technology Group. Mr. Rittereiser is also the founder of
Ashton Technology Group and Gomez Advisors, Inc.
Between
1991 and 1993, he became a special consultant to Booz Allen and Hamilton, a
global strategy and technology-consulting group. He is currently
retired but has recently served as a director of AgFeed Industries, Inc. and as
Chairman of its Compensation Committee, and he is currently Chairman of AgFeed’s
Strategic Affairs Committee. Mr. Rittereiser has also served as a
board member of the International Heritage Mutual Fund.
Kenneth Wong,
President and Director. Mr. Wong was a founder
of Covenant Holdings. For nearly thirty years, Mr. Wong combined his business
acumen, cross-cultural facility and focused management tactics to establish CIG
Asia, Ltd., a successful Philadelphia, PA-based national property and casualty
insurance brokerage firm. Under his direction as president, the
company provides its diverse client base with the coverage and financial advice
in complex business environments.
In 2008,
Mr. Wong was appointed to the Traveler’s Insurance Company’s national diversity
advisory council to assist this major insurance carrier in developing the
diverse emerging markets in the United States. Mr. Wong also serves as Managing
Partner of SmithWong Associates, LLC, a consulting firm specializing in the
development of new market opportunities for both U.S. and China-based companies.
To date, the firm’s efforts have helped generate close to one-half billion
dollars for their clients. Mr. Wong is a board member of Holly
High, Ltd., a Beijing-based company specializing in mergers and
acquisitions.
Mr.
Wong’s commitment to the full inclusion of Asian Americans and new Americans
living, working and doing business in the United States, in general, and in the
Delaware Valley, in particular, has positioned him for numerous leadership
roles. Mr. Wong, the son of Chinese immigrants, was appointed by
President George W. Bush to serve as a commissioner on the President’s Advisory
Commission for Asian Americans and Pacific Islanders, where he focused on
economic issues and community development.
At the
recent 2008 National U.S. Hong Kong Business Association (NUSHKBA) Caucus, Mr.
Wong was elected unanimously to the national presidency of this organization.
NUSHKBA represents the 10 U.S. based Hong Kong business associations that focus
on developing economic trade relationships with Hong Kong and China. NUSHKBA is
a member of the Hong Kong Business Association Worldwide, which is affiliated
with the prestigious Hong Kong Trade and Development Council.
55
K. Ivan F.
Gothner, Director. Mr. Gothner, a founder
of Covenant Holdings, has been Managing Director and founder of Adirondack
Partners, LLC, a private merchant-banking firm that focuses on serving small and
mid-size growth companies, since 1993. He has been active as a
merchant banker focusing on small and mid-size growth companies for his entire
career. His work has focused on companies experiencing rapid growth as a result
of introducing new technologies and products or by entering new markets. Prior
to founding Adirondack Partners, Mr. Gothner was Senior Vice President of
Barclays Bank from 1990 to 1992, responsible for establishing an investment
banking unit to serve small and mid-sized companies. Mr. Gothner
joined Kleinwort Benson Limited in 1986 and from 1987 to 1990, he served as a
Senior Vice President of the firm and General Manager of the KB Mezzanine Fund,
L.P., a specialized fund which invested in the equity and junior capital of
small and mid-sized businesses. Currently, Mr. Gothner serves on the
Board of Directors of ArtID, LLC, Covenant Group Holdings, Inc., AgFeed
Industries, Inc. (where he is also Chairman of the Audit Committee and
Compensation Committee and a member of the Nominating and Corporate Governance
Committee) and Best Buddies of Massachusetts. Mr. Gothner received a
Bachelor’s of Art from Columbia College in political science and economics and a
MIA from Columbia University’s School of International Affairs in international
economic policy and finance.
Justin D. Csik,
Acting Chief Financial Officer, Corporate Secretary and General
Counsel. Mr. Csik joined Covenant Holdings in October,
2009. Mr. Csik is a practicing attorney with a background in
accounting and economics. Upon being admitted to the state bars of
Pennsylvania and New Jersey, Mr. Csik was a corporate finance associate with
Buchanan Ingersoll & Rooney PC from 2008 to 2009. While at
Buchanan Ingersoll, he worked on a variety of securities regulatory,
transactional and corporate governance matters for a number of clients ranging
from small businesses to large, publicly-traded companies. He was
also a member of his firm’s China practice group, where he assisted clients with
legal issues unique to U.S. public companies with primarily China-based
operations.
Prior to joining Buchanan Ingersoll,
Mr. Csik worked for Deloitte & Touche LLP for an extended audit and
assurance internship in 2004. During his time with Deloitte, he
worked on the major phases of financial statement audits for a variety of public
and privately-held clients, which included substantive account testing and SEC
reporting. Thereafter, Mr. Csik served as a judicial intern for
United States District Judge Freda L. Wolfson, where he researched and wrote
draft opinions and legal memoranda on various civil law issues. In
2007, he was also a member of Buchanan Ingersoll’s summer associate
program.
Mr. Csik received his Bachelor of
Science in accountancy and economics from Villanova University in 2005,
graduating magna cum
laude. In 2008, Mr. Csik received his Juris Doctor degree from
Rutgers School of Law—Camden. During law school, he was both an
editor and published author for the Rutgers Law Journal.
There are
no family relationships among our directors and executive officers.
Advisory
Board
To assist with the effective execution
of its business plan, we have begun to organize a strategic advisory board,
initially comprised of the following individuals:
John P.
Hughes. Mr.
Hughes is currently a partner with Walston DuPont Group Advisors, a financial
advisory firm specializing in capital formation guidance for corporate
clients. He started his career in 1969 at Merrill Lynch as an equity
trader, and in 1976, he went on to join WH Newbolds & Son as manager of
equity trading. Thereafter, he joined Janney Montgomery Scott LLC in
1990 as First Vice President, Head of Equity Trading. He was elected
to Janney’s Management Committee in 2000 and became Senior Vice President,
Director of Capital Markets, a position in which he remained until May of
2008. During his 18 year tenure with Janney, he served on various
committees including Compliance Review, Risk Management, Capital Commitment,
Soft Dollar, and Product Review.
During his professional career, Mr.
Hughes served in numerous organizational roles within the securities
industry. In 1989, he was elected President of the Investment Traders
Association of Philadelphia. Thereafter, he served on the NASD Market
Surveillance Committee from 1990-1992 in the capacity of Chairman of the
Compliance Sub-Committee. He was also a member of the NASD’s District
#9 Business Conduct Committee from 1992-1994 and served as its chair in
1993. In 1998, he was appointed to the NASD Market Regulation
Committee and also served as its Chairman in 1999. In addition, he
was elected as Chairman of the Security Traders Association in 2003, an
international organization of over 5,000 members. Beyond these roles,
Mr. Hughes has also been a member of the SIA Trading Issues Committee, a member
of the NASD Trading Issues Committee and an NASD
Arbitrator. Currently, he is a member of SIFMA Trading Issues
Committee and the Security Traders Association Trading Issues
Committee.
56
Mr. Hughes also holds the following
FINRA Series professional licenses: 7; 9; 10; 24; 55;
63.
Sam
Zhou. Mr. Zhou has extensive experience both in the Asia
capital markets and with assisting Chinese businesses in attaining their capital
funding goals. Since 1995, he has served as Executive Director of
Sunrise Capital Group, where he has played a key leadership role in helping
Chinese private companies raise funds and obtain listing on domestic and
overseas stock exchanges. He holds a Bachelor of Economics from
Guangzhou Zhongshan University and a Master of Management in Finance from New
Zealand Massey University.
In
addition to his experience at Sunrise Capital Group, Mr. Zhou served from 2003
to 2005 as Deputy General Manager (Corporate Finance) of Singapore Southern
Packaging Group Limited, a listed company on the main board of the Singapore
Stock Exchange. In this capacity, Mr. Zhou was responsible for
raising capital, capital offerings, share buybacks, capital management and
structuring, strategic assessment of acquisitions, mergers and divestments, and
structuring takeovers. Prior to this position, he was Financial
Controller for Hong Kong-based Synergy Group Limited from 2001 to
2002.
From 2000 to 2001, Mr. Zhou gained his
banking experience as Banking Officer with the Hong Kong-based Bank of East
Asia, where he was mainly engaged in the development of its corporate lending
business. Prior to this position, he served as Mortgage Manager for
the Asia banking division of the New Zealand ASB Bank from 1999 to
2000.
Mr. Zhou’s early career was invested in
a variety of dynamic roles in China. From 1994 to 1996, he served as
Deputy General Manager of Shenzhen Bestar Industrial and Trade Co. Ltd., where
he was responsible for the Trading Department and Finance
Department. Prior to his time with Shenzhen Bestar, he was Manager of
the Import and Export Department of Shenzhen Zhonglu Tourism Products Co. Ltd.
from 1992 to 1993. Lastly, Mr. Zhou began his career as Assistant
Manager of the Import and Export department of Southern Industrial & Trading
Group (Shenzhen, China) Co. Ltd., where he worked from 1988 to
1991.
Key
Subsidiary Personnel
Although the following individuals are
not deemed executive officers as required by the rules promulgated under the
Exchange Act, we believe that they play a key role in the success of our
subsidiaries and their background and experience are relevant to our
stockholders.
Chongqing
Sysway
Song XiaoZhong –
Chairman: Song XiaoZhong, a university graduate with a Masters
degree, was born in Chongqing in 1966. He is currently Chairman of
Chongqing Sysway. Mr. Song joined Chongqing Sysway in 1993 and has
served as manager of the marketing department, deputy general manager, sales
supervisor, and financial controller. Prior to joining Chongqing
Sysway, Mr. XiaoZhong served as Youth League secretary in Ma Liu High
School.
Song GuangWei -
Deputy General Manager: Song GuangWei, a
university graduate with a Masters degree, was born in Chongqing in
1967. He is currently a board member and the deputy general manager
of Chongqing Sysway. Mr. Song joined Chongqing Sysway in 1993, and he
has served as general engineer, board member, deputy general manager, and
CFO. Prior to joining Chongqing Sysway, Mr. Song served as a teacher
at the Chinese People’s Liberation Army Chonqing Communication
College.
Li Jun – General
Manager: Li
Jun, a university graduate with a Doctorate degree from Chongqing University,
was born in Chongqing in 1967. He is currently the general manager of Chongqing
Sysway. Dr. Li joined Chongqing Sysway in 1999, and he has served as general
manger, department manager and sales center manager. Prior to joining
the Company, Dr. Li served as a teacher in Chongqing University.
57
Hainan
Jien
Ma Bing Feng -
Chairman & General Manager: Mr. Ma has more than ten
years of experience in Hainan Jien’s marketing and company operations. Since
1999, Mr. Ma has served as Chairman & General Manager in Hainan Jien. From
1998 to 1999, he served as General Manager of the Business Department of the
Hainan Air Group Information Company. Between 1996 and 1998, he was General
Manager of C&P IT Company, Hainan Branch.
Wang Jun Feng -
Vice General Manager: Mr. Wang holds a B.S. in computer science from
Wuhan University. Since 2005, Mr. Wang was Vice General Manager of Hainan Jien.
From 2003 to 2005, he served at Hainan Jien as Technology Manager. Prior to
this, from 2002 to 2003, he worked as a Technician for Wuhan Heng Da Automatic
Engineering Company.
Executive
Compensation
Prior to
the consummation of the Share Exchange, Mr. Mohan Singh served as President,
Principal Executive Officer, Secretary and Treasure of the
Company. Mr. Singh received no compensation for serving in these
offices.
To date,
Mr. Wong has not been compensated as President of Covenant Holdings. However, he
is currently in negotiations with the Company regarding his future compensation
as President of the Company. Mr. Csik has been compensated by Covenant Holdings
at the rate of $5,000 per month ($60,000 per year) since joining Covenant
Holdings. Neither Mr. Wong nor Mr. Csik is a party to a written employment
agreement or other compensatory arrangement with the Company. The advisability
of entering into these agreements with the Company executives and the terms of
any such agreement is a continuing source of discussion within the
Company.
Outstanding
Equity Awards at Fiscal Year-End
As of
December 24, 2009, there were no outstanding equity awards held by executive
officers of our company.
Board
Independence
Mr. Wong
does not qualify as "independent" director, as that term is defined by
applicable listing standards of The NASDAQ Stock Market and SEC rules, including
the rules relating to the independence standards of an audit committee and the
non-employee director definition of Rule 16b-3 promulgated under the Exchange
Act. As a requirement to listing the Company's common stock on The
NASDAQ Capital Market or other exchange, the Company intends to add independent
directors. The board's composition (and that of its committees) will
be subject to the corporate governance provisions of its primary trading market,
including the requirement for appointment of independent directors in accordance
with the Sarbanes-Oxley Act of 2002, and regulations adopted by the SEC and NASD
pursuant thereto.
Director
Compensation
Prior to
the consummation of the Share Exchange, Mr. Singh served as sole director of the
Company. Mr. Singh received no compensation for serving as a
director.
We do not
currently compensate our directors for acting as such, although we may do so in
the future, including with cash and/or equity. We reimburse our
directors for reasonable expenses incurred in connection with their service as
directors.
Code
of Ethics
We intend
to adopt a code of ethics that applies to our officers, directors and employees
but have not done so to date due to our relatively small size.
58
Board
Committees
Audit
Committee
We intend
to establish an audit committee of the board of directors, which will consist of
independent directors, of which at least one director will qualify as a
qualified financial expert as defined in Item 407(d)(5)(ii) of Regulation
S-K. The audit committee's duties would be to recommend to
our board of directors the engagement of independent auditors to audit our
financial statements and to review our accounting and auditing
principles. The audit committee would review the scope, timing and
fees for the annual audit and the results of audit examinations performed by the
internal auditors and independent public accountants, including their
recommendations to improve the system of accounting and internal
controls. The audit committee would at all times be composed
exclusively of directors who are, in the opinion of our board of directors, free
from any relationship which would interfere with the exercise of independent
judgment as a committee member and who possess an understanding of financial
statements and generally accepted accounting principles.
Compensation
Committee
We intend
to establish a compensation committee of the board of directors. The
compensation committee would review and approve our salary and benefits
policies, including compensation of executive officers. The
compensation committee would also administer our stock option plans and
recommend and approve grants of stock options under such plans.
Stock
Incentive Plans
We have
currently no stock incentive plan adopted. We intend to adopt a stock
incentive plan in order to further the growth and general prosperity of the
Company by enabling our employees, contractors and service providers to acquire
our common stock, increasing their personal involvement in the Company and
thereby enabling the Company to attract and retain its employees, contractors
and service providers.
Certain
Relationships and Related Transactions
None.
Unregistered
Sales of Equity Securities.
|
Pursuant
to the Share Exchange Agreement, on December 24, 2009, we issued 9,380,909
shares of our common stock to the Covenant Holdings Shareholders, in exchange
for the shares held by these shareholders pursuant to the Share Exchange
Agreement. Such securities were not registered under the Securities
Act, rather they were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 for the offer and sale of
securities not involving a public offering and Regulations D and S promulgated
thereunder.
Description
of our Securities
The
following description of our securities and provisions of our articles of
incorporation and bylaws is only a summary. We refer to the copies of
our articles of incorporation and bylaws, copies of which have been incorporated
by reference as exhibits to this Report on Form 8-K. The following
discussion is qualified in its entirety by reference to such
exhibits.
Authorized
Capital Stock
The total
number of stock authorized that may be issued by us is 200,000,000 shares,
100,000,000 shares of which is common stock with a par value of $0.0001 per
share and 100,000,000 shares of which is preferred stock with a par value of
$0.0001 per share.
59
Capital
Stock Issued and Outstanding
After
giving effect to the Share Exchange and the Cancellation Agreement, our issued
and outstanding securities, on a fully diluted basis, is as
follows:
●
|
11,480,909
shares of common stock; approximately 81.7% of which shares will be held
by the Covenant Holdings Shareholders and approximately 18.3%
of which are held by the existing shareholders of
Everest;
|
●
|
No
shares of preferred stock;
|
●
|
No
options to purchase any capital stock or securities convertible into
capital stock; and
|
●
|
No
warrants to purchase any capital stock or securities convertible into
capital stock.
|
Description
of Common Stock
The
holders of common stock are entitled to one vote per share. Our
Articles of Incorporation does not provide for cumulative voting. The
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by our board of directors out of legally available funds;
however, the current policy of our board of directors is to retain earnings, if
any, for operations and growth. Upon liquidation, dissolution or
winding-up, the holders of common stock are entitled to share ratably in all
assets that are legally available for distribution. The holders of
common stock have no preemptive, subscription, redemption or conversion
rights.
Market
Price and Dividends
Covenant
Holdings is, and has always been a privately-held company and now is a
wholly-owned subsidiary of the Company. There is not, and never has
been, a public market for the securities of Covenant Holdings. Our
common stock is currently approved for quotation on the OTC Bulletin Board
maintained by the National Association of Securities Dealers, Inc. under the
symbol EVRS.OTCBB, but there is currently no liquid trading market.
There are
no restrictions in our articles of incorporation or bylaws that prevent us from
declaring dividends. We have not previously paid any cash dividends
on our common stock and do not anticipate or contemplate paying dividends on our
common stock in the foreseeable future. We currently intend to
utilize all available funds to develop our business. We can give no
assurances that we will ever have excess funds available to pay
dividends.
Indemnification
of Directors and Officers
Under
Nevada law, a corporation may indemnify its directors, officers, employees and
agents under certain circumstances, including indemnification of such persons
against liability under the Securities Act of 1933, as amended. In
addition, a corporation may purchase or maintain insurance on behalf of its
directors, officers, employees or agents for any liability incurred by him in
such capacity, whether or not the corporation has the authority to indemnify
such person.
Our
By-Laws provides, among other things, that a director, officer, employee or
agent of the corporation may be indemnified against expenses (including
attorneys’ fees inclusive of any appeal), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
claim, action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best of our interests, and
with respect to any criminal action or proceeding, he had no reasonable cause to
believe that his conduct was unlawful.
The
effect of these provisions may be to eliminate the rights of us and our
shareholders (through shareholder derivative suits on behalf of us) to recover
monetary damages against a director, officer, employee or agent for breach of
fiduciary duty.
60
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be provided for directors, officers, employees, agents or persons
controlling an issuer pursuant to the foregoing provisions, the opinion of the
SEC is that such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is therefore unenforceable.
Market
Information
Our
common stock is currently approved for quotation on the OTC Bulletin Board
maintained by the National Association of Securities Dealers, Inc. under the
symbol EVRS.OTCBB, but there is currently no trading market. We have
notified the OTC Bulletin Board of our name change and will obtain a new
symbol. As soon as practicable, and assuming we satisfy all necessary
initial listing requirements, we intend to apply to have our common stock listed
for trading on the National Stock Exchange or The Nasdaq Stock Market, although
we cannot be certain that any of these applications will be
approved.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Pacific Stock Transfer
Company, 500 East Warm Springs Road, Suite 240, Las Vegas, Nevada 89119 and its
telephone number is (702) 361-3033.
Changes
in Registrant's Certifying
Accountant
|
On
December 24, 2009, we dismissed Manning Elliott LLP (“Manning Elliott”) as our
independent accountants. Manning Elliott had previously been engaged
as the principal accountant to audit our financial statements. The
reason for the dismissal of Manning Elliott is that, following the consummation
of the Share Exchange on December 24, 2009, (i) the former shareholders of
Covenant Holdings own a significant amount of the outstanding shares of our
common stock and (ii) our primary business became the business previously
conducted by Covenant Holdings. The independent registered public
accountant of Covenant Holdings for US accounting purposes was the firm of
Morison Cogen LLP (“Morison Cogen”). We believe that it is in our
best interest to have Morison Cogen continue to work with our business, and we
therefore retained Morison Cogen as our new principal independent registered
accounting firm, effective as of December 24, 2009. Morison Cogen is
located at 150 Monument Road, Suite 500, Bala Cynwyd, PA 19004. The
decision to change accountants was approved by our board of directors on
December 24, 2009.
The
report of Manning Elliott on our financial statements for the period from
November 8, 2006 (inception) through our fiscal year ended June 30, 2009 did not
contain an adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles, except that
the report was qualified as to our ability to continue as a going
concern.
From our
inception through December 23, 2009, there were no disagreements with Manning
Elliott on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Manning Elliott, would have caused it to make reference to the
matter in connection with its reports.
From our
inception through December 24, 2009, we did not consult Morison Cogen regarding
either: (i) the application of accounting principles to a specific completed or
contemplated transaction, or the type of audit opinion that might be rendered on
our financial statements; or (ii) any matter that was the subject of a
disagreement as described in Item 304(a)(1)(iv) of Regulation S-K.
We have made
the contents of this Current Report on Form 8-K available to Manning Elliott and
requested it to furnish us a letter addressed to the SEC as to whether Manning
Elliott agrees or disagrees with, or wishes to clarify our expression of, our
views, or containing any additional information. A copy of Manning
Elliott's letter to the SEC is included as Exhibit 16.1 to this
Current Report on Form 8-K.
61
Changes
in Control of Registrant
|
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report on
Form 8-K, which disclosure is incorporated herein by reference.
Departure
of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers.
|
Following
the Share Exchange, on December 24, 2009, Messrs. Rittereiser, Wong and Gothner
were appointed to the board of directors of the Company effective as of the
Closing Date, with Mr. Rittereiser being named Chairman of the
Board. Mr. Singh resigned as a director, effective as of the close of
business on the Closing Date.
Following
the Share Exchange, Mr. Singh resigned as President, Principal Executive
Officer, Secretary, Treasurer, Principal Financial Officer and Principal
Accounting Officer of the Company and Mr. Wong was appointed as President and
Mr. Csik was appointed as Acting Chief Financial Officer, General Counsel and
Corporate Secretary.
The
biographies of each of the new directors and officers are set forth in the
section entitled “Directors and Executive Officers” under Item 2.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
There are
no transactions since the beginning of our last fiscal year, or any currently
proposed transaction, in which we were or are to be a participant and the amount
involved exceeds the lesser of $120,000 or one percent of the average of our
total assets at year-end for the last three completed fiscal years, and in which
Messrs. Rittereiser, Wong, Gothner and Csik had or will have a direct or
indirect material interest, other than the ownership of shares of our common
stock as a result of the share exchange transaction. Such beneficial
ownership is set forth in the table under the caption “Security Ownership of
Certain Beneficial Owners and Management” under Item 2.01 of this Current Report
on Form 8-K, which disclosure is incorporated herein by reference.
Amendments
to Articles of Incorporation or Bylaws, Change in Fiscal
Year
|
On
December 24, 2009, immediately prior to the consummation of the Share Exchange,
we changed our name from Everest Resources Corp. to Covenant Group of China Inc.
by filing a Certificate of Amendment to the Articles of Incorporation of
Everest.
Immediately
prior to the consummation of the Share Exchange, on December 24, 2009, our board
of directors approved a change in our fiscal year from a fiscal year ending June
30 to a fiscal year ending on December 31. The change in our fiscal
year took effect on December 24, 2009 and, therefore, there will be no
transition period in connection with this change of fiscal
year-end. Our 2009 fiscal year will end on December 31,
2009.
Change
in Shell Company Status
|
On
December 24, 2009, we consummated the transactions contemplated by the Share
Exchange Agreement. As a result of the consummation of the Share
Exchange described in Items 1.01 and 2.01 of this Current Report on Form 8-K, we
believe that we are no longer a shell corporation as that term is defined in
Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act.
Financial
Statements and Exhibits
|
(a) Financial Statements of Businesses
Acquired. In accordance with Item 9.01(a), audited financial
statements for the operating subsidiaries of Covenant Holdings, Chongqing Sysway
and Hainan Jien, for the fiscal years ended December 31, 2008 and 2007 are filed
in this Current Report on Form 8-K as Exhibit 99.1.
The
unaudited financial statements for the operating subsidiaries of Covenant
Holdings, Chongqing Sysway and Hainan Jien, for the six-month interim periods
ended June 30, 2009 and 2008 are filed in this Current Report on Form 8-K as
Exhibit 99.2.
62
The
unaudited consolidated financial statements of Covenant Holdings for the
three-month interim period ended September 30, 2009 are filed in this Current
Report on Form 8-K as Exhibit 99.3.
(b) Pro Forma Financial
Information. In accordance with Item 9.01(b), our pro forma
financial statements are filed in this Current Report on Form 8-K as Exhibit
99.4.
Such pro
forma financial statements are based on the historical financial statements of
the Company and Covenant Holdings after giving effect to the share exchange
transaction. In accordance with Statement of Financial Accounting
Standards No. 141, "Business Combinations" (SFAS 141), and the assumptions and
adjustments described in the accompanying notes to the unaudited pro forma
combined financial statements, Covenant Holdings is considered the
accounting acquiror. The share exchange transaction was completed on
December 24, 2009. Because Covenant Holdings' owners as a group
retained or received the larger portion of the voting rights in the combined
entity and Covenant Holdings' senior management represents a majority of the
senior management of the combined entity, Covenant Holdings is considered the
acquiror for accounting purposes and will account for the share exchange
transaction as a reverse acquisition. The acquisition will be
accounted for as the recapitalization of Covenant Holdings. Our
fiscal year will end on December 31.
The
unaudited pro forma combined balance sheet presents the accounts of the Company
and Covenant Holdings as if the acquisition of Covenant Holdings by the Company
occurred on September 30, 2009. The unaudited pro forma consolidated
statements of operations present the accounts of the Company and Covenant
Holdings for the year ended December 31, 2008 and September 31, 2009 as if the
acquisition occurred on January 1, 2008 for income statement
purpose.
Reclassifications
have been made to historical financial statements to conform to our historical
financial statement presentation.
The
unaudited pro forma combined financial statements should be read in conjunction
with "Management's Discussion and Analysis of Plan of Operations" under Item
2.01 of this Current Report on Form 8-K, which disclosure is incorporated herein
by reference, and the historical consolidated financial statements and
accompanying notes of Covenant Holdings. The unaudited pro forma
combined financial statements are not intended to represent or be indicative of
our results of operations or financial condition that would have been reported
had the share exchange transaction been completed as of the dates presented, and
should not be taken as representative of the future results of operations or
financial condition of the Registrant.
(d) Exhibits. The
exhibits listed in the following Exhibit Index are filed as part of this Current
Report on Form 8-K.
Exhibit
Number
|
Description
|
||
2.1
|
Share
Exchange Agreement by and among Covenant Holdings, Everest. and the
Covenant Holdings Shareholders, dated as of December 24,
2009
|
||
2.2
|
Articles
of Exchange between Everest and Covenant Holdings, dated December 24,
2009
|
||
3(i).1
|
Articles
of Incorporation of Everest (Incorporated herein by reference to Exhibit
3.1 to the Company's Form SB-2 filed on August 30, 2007 (SEC reference no.
333-145798) (the "Form SB-2"))
|
||
3(i).2
|
Certificate
of Amendment to the Articles of Incorporation of
Everest
|
||
3(ii).1
|
By-Laws
of Everest (Incorporated herein by reference to Exhibit 3.2 to the Form
SB-2)
|
||
3(ii).2
|
Amendment
to Bylaws of Everest
|
||
4.1
|
Specimen
Stock Certificate
|
||
63
10.1
|
Termination
Agreement, dated as of December 24, 2009, by and between Gary Sidhu and
Everest
|
||
10.2
|
Share
Cancellation and Loan Agreement, dated December 24, 2009, by and between
Covenant Holdings and Gary Sidhu
|
||
10.3
|
Stock
Acquisition and Reorganization Agreement, dated as of June 24, 2009, by
and between Covenant Holdings and Chongqing
Sysway
|
||
10.4
|
Stock
Acquisition and Reorganization Agreement, dated as of June 24, 2009, by
and between Covenant Holdings and Hainan Jien
|
||
10.5
|
Resignation
Letter from Mohan Singh
|
||
10.6
|
Promissory
Note of Covenant Holdings in favor of Gary Sidhu in the principal amount
of $190,000
|
||
16.1
|
Letter
from Manning Elliott LLP
|
||
99.1(a)
|
Audited
Financial Statements, together with Notes to Financial Statements, of
Chongqing Sysway for the years ended December 31, 2008 and
2007
|
||
99.1(b)
|
Audited
Financial Statements, together with Notes to Financial Statements, of
Hainan Jien for the years ended December 31, 2008 and
2007
|
||
99.2(a)
|
Unaudited
Condensed Financial Statements, together with Notes to Condensed Financial
Statements, of Chongqing Sysway for the six months ended June 30, 2009 and
2008
|
||
99.2(b)
|
Unaudited
Condensed Financial Statements, together with Notes to Condensed Financial
Statements, of Hainan Jien for the six months ended June 30, 2009 and
2008
|
||
99.3
|
Unaudited
Consolidated Financial Statements, together with Notes to Consolidated
Financial Statements, of Covenant Holdings for the period from inception
through September 30, 2009
|
||
99.4
|
Unaudited
Pro-forma Combined Financial Statements of Covenant Holdings and Everest
as of September 30, 2009 and December 31,
2008
|
64
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
||
COVENANT
GROUP OF CHINA INC.
|
||
|
|
|
Date:
December
31, 2009
|
By:
|
/s/
Kenneth Wong
|
Name:
Kenneth Wong
|
||
Title: President
|
65
INDEX
TO EXHIBITS
Exhibit
Number
|
Description
|
||
2.1
|
Share
Exchange Agreement by and among Covenant Holdings, Everest. and the
Covenant Holdings Shareholders, dated as of December 24,
2009
|
||
2.2
|
Articles
of Exchange between Everest and Covenant Holdings, dated December 24,
2009
|
||
3(i).1
|
Articles
of Incorporation of Everest (Incorporated herein by reference to Exhibit
3.1 to the Company's Form SB-2 filed on August 30, 2007 (SEC reference no.
333-145798) (the "Form SB-2"))
|
||
3(i).2
|
Certificate
of Amendment to the Articles of Incorporation of
Everest
|
||
3(ii).1
|
By-Laws
of Everest (Incorporated herein by reference to Exhibit 3.2 to the Form
SB-2)
|
||
3(ii).2
|
Amendment
to Bylaws of Everest
|
||
4.1
|
Specimen
Stock Certificate
|
||
10.1
|
Termination
Agreement, dated as of December 24, 2009, by and between Gary Sidhu and
Everest
|
||
10.2
|
Share
Cancellation and Loan Agreement, dated December 24, 2009, by and between
Covenant Holdings and Gary Sidhu
|
||
10.3
|
Stock
Acquisition and Reorganization Agreement, dated as of June 24, 2009, by
and between Covenant Holdings and Chongqing
Sysway
|
||
10.4
|
Stock
Acquisition and Reorganization Agreement, dated as of June 24, 2009, by
and between Covenant Holdings and Hainan Jien
|
||
10.5
|
Resignation
Letter from Mohan Singh
|
||
10.6
|
Promissory
Note of Covenant Holdings in favor of Gary Sidhu in the principal amount
of $190,000
|
||
16.1
|
Letter
from Manning Elliott LLP
|
||
99.1(a)
|
Audited
Financial Statements, together with Notes to Financial Statements, of
Chongqing Sysway for the years ended December 31, 2008 and
2007
|
||
99.1(b)
|
Audited
Financial Statements, together with Notes to Financial Statements, of
Hainan Jien for the years ended December 31, 2008 and
2007
|
||
99.2(a)
|
Unaudited
Condensed Financial Statements, together with Notes to Condensed Financial
Statements, of Chongqing Sysway for the six months ended June 30, 2009 and
2008
|
||
99.2(b)
|
Unaudited
Condensed Financial Statements, together with Notes to Condensed Financial
Statements, of Hainan Jien for the six months ended June 30, 2009 and
2008
|
||
99.3
|
Unaudited
Consolidated Financial Statements, together with Notes to Consolidated
Financial Statements, of Covenant Holdings for the period from inception
through September 30, 2009
|
||
99.4
|
Unaudited
Pro-forma Combined Financial Statements of Covenant Holdings and Everest
as of September 30, 2009 and December 31,
2008
|
66