Attached files
| file | filename |
|---|---|
| EX-4.2 - Granto, Inc. | v179169_ex4-2.htm |
| EX-4.1 - Granto, Inc. | v179169_ex4-1.htm |
| EX-4.3 - Granto, Inc. | v179169_ex4-3.htm |
| EX-4.5 - Granto, Inc. | v179169_ex4-5.htm |
| EX-3.1 - Granto, Inc. | v179169_ex3-1.htm |
| EX-2.1 - Granto, Inc. | v179169_ex2-1.htm |
| EX-4.4 - Granto, Inc. | v179169_ex4-4.htm |
| EX-4.6 - Granto, Inc. | v179169_ex4-6.htm |
| EX-10.2 - Granto, Inc. | v179169_ex10-2.htm |
| EX-10.4 - Granto, Inc. | v179169_ex10-4.htm |
| EX-10.3 - Granto, Inc. | v179169_ex10-3.htm |
| EX-10.7 - Granto, Inc. | v179169_ex10-7.htm |
| EX-10.1 - Granto, Inc. | v179169_ex10-1.htm |
| EX-10.6 - Granto, Inc. | v179169_ex10-6.htm |
| EX-10.5 - Granto, Inc. | v179169_ex10-5.htm |
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): March 29, 2010
Commission
File Number: 333-150388
|
Granto,
Inc.
|
|
(Exact
name of registrant as specified in its
charter)
|
|
Nevada
|
98-0655634
|
|
|
(State
or other jurisdiction of incorporation)
|
(IRS
Employer Identification Number)
|
Dongdu
Room 321, No. 475 Huanshidong Road, Guangzhou City, PRC 510075
(Address
of principal executive offices)
011-86-20-8762-1778
(Registrant’s
telephone number, including area code)
16
Monarch Way, Kinnelon, New Jersey 07405
(Former
name or former address if changed since the 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 communication pursuant to
Rule 425 under the Securities Act (17 CFR
230.425)
|
|
o
|
Soliciting material pursuant to
Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
|
o
|
Pre-commencement communications
pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
|
|
o
|
Pre-commencement communications
pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
|
EXPLANATORY
NOTE
This Current Report on Form 8-K is
being filed by Granto, Inc. We are reporting the acquisition of a new
business and providing a description of this business and its audited financials
below. In addition, on March 29, 2010 we consummated a private placement to 18
investors for an aggregate gross purchase price of $7,700,000 of our Series A
Preferred Stock, par value $.0001 per share (“Series A Stock”), five-year
warrants to purchase shares of our Common Stock for $3.47 per share and
five-year warrants to purchase shares of our Common Stock for $4.17 per share
pursuant to a Series A Preferred Stock Purchase Agreement (the “Purchase
Agreement”) with such investors (the “Private Placement”). Each share of Series
A Stock will automatically convert into one share of our Common Stock, par value
$.001 per share (“Common Stock”). The conversion ratio is subject to adjustment
to protect the holder of the Series A Stock from dilution in certain
circumstances immediately upon the happening of certain events described
herein.
USE
OF DEFINED TERMS
Except as otherwise indicated by the
context, references in this Report to:
|
|
·
|
"Granto," "the Company," "we,"
"us," or "our," are references to the combined business of Granto, Inc,
and its subsidiary, Rongfu Aquaculture, Inc., and Rongfu Aquaculture,
Inc.’s direct and indirect
subsidiaries.
|
|
|
·
|
"Rongfu" refers to Rongfu
Aquaculture, Inc., a Delaware corporation and our direct, wholly owned
subsidiary, and/or its direct and indirect subsidiaries, as the case may
be;
|
|
|
·
|
"China," "Chinese" and "PRC,"
refer to the People’s Republic of
China;
|
|
|
·
|
"RMB" refers to Renminbi, the
legal currency of China;
|
|
|
·
|
"U.S. dollar," "$" and "US$"
refer to the legal currency of the United
States;
|
|
|
·
|
"Securities Act" refers to the
Securities Act of 1933, as amended;
and
|
|
|
·
|
"Exchange Act" refers to the
Securities Exchange Act of 1934, as
amended.
|
Certain references to ownership and
other rights of the Company in this Current Report include the rights of Foshan
Nanhai Ke Da Heng Sheng Aquatic Co., Ltd. and Hainan Ke Da Heng Sheng,and and
Hainan Ke Da Heng Sheng Aquit Germchit Co., Ltd. which we are attributing to the
Company by virtue of the Contractual Agreements described below.
All of the financial information for
Rongfu for the fiscal year ended December 31, 2009 in this Current Report is
unaudited.
ITEM
1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
Share
Exchange Agreement
On March 29, 2010, we entered into a
Share Exchange Agreement with Rongfu, certain stockholders and warrantholders of
Rongfu (the “Rongfu Stockholders”) and a stockholder of Granto (the “Share
Exchange Agreement”). Pursuant to the Share Exchange Agreement, on March
29, 2010, 9 Rongfu Stockholders transferred 100% of the outstanding shares of
common stock and 100% of the warrants to purchase common stock of Rongfu held by
them, in exchange for an aggregate of 18,623,889 newly issued shares of our
Common Stock and warrants to purchase an aggregate of 666,666 shares of our
Common Stock. The shares of our Common Stock acquired by the Rongfu Stockholders
in such transactions constitute approximately 77.4% of our issued and
outstanding Common Stock on a fully-diluted basis giving effect to the share
exchange and the sale of our Series A Stock pursuant to the Purchase Agreement
discussed below, but not including any outstanding purchase warrants to purchase
shares of our common stock, including the warrants issued pursuant to the
Purchase Agreement. In connection with the closing of the Share Exchange
Agreement, the former principal stockholder agreed to and did cancel 1,150,000
of the 1,200,000 shares of Granto, Inc. Common Stock held by her.
The Share Exchange Agreement contains
representations and warranties by us, our former principal stockholder, Rongfu
and the Rongfu Stockholders which are customary for transactions of this type
such as, with respect to Granto, Inc.: organization, good standing and
qualification to do business; capitalization; subsidiaries, authorization and
enforceability of the transaction and transaction documents; financial
condition; valid issuance of stock, consents being obtained or not required to
consummate the transaction; litigation; compliance with securities laws; the
filing of required tax returns; and no brokers used, and with respect to
Rongfu: authorization, capitalization, and title to Rongfu securities
being exchanged. The former principal stockholder has agreed to indemnify
Granto, Inc., Rongfu and the Rongfu Stockholders and their affiliates against
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith arising out of or
based on misrepresentations by Granto, Inc. or such stockholder made in the
Share Exchange Agreement and breaches by Granto, Inc. or such stockholder of
covenants in the Share Exchange Agreement.
The foregoing description of the terms
of the Share Exchange Agreement is qualified in its entirety by reference to the
provisions of the Share Exchange Agreement which is included as Exhibit 2.1 of
this Current Report and is incorporated by reference herein.
Series
A Preferred Stock Purchase Agreement
On March 29, 2010 we entered into and
consummated a Series A Preferred Stock Purchase Agreement (the “Purchase
Agreement”) with 18 investors pursuant to which the investors agreed to and did
purchase for an aggregate of $7.7 million an aggregate of (a) 2,768,721 shares
of our Series A Stock, (b) five year warrants (“Series A Warrants”) to purchase
an aggregate of 1,730,451 shares of our Common Stock for $3.47 per share and (c)
five year warrants (“Series B Warrants”) to purchase an aggregate of
1,730,451shares of our Common Stock for $4.17 per share. Each share of Series A
Stock will automatically convert into one share of our Common Stock (subject to
adjustment in certain circumstances to protect the holder against dilution)
immediately upon all of the following being satisfied:
|
|
·
|
a
registration statement covering the resale of the shares of Common Stock
to be issued upon conversion shall have been filed by the Company and
declared effective by the Securities and Exchange Commission (the “SEC” or
the “Commission”), and such registration statement continues to be
effective up through and including the date of the
conversion;
|
|
|
·
|
our
shares of Common Stock are eligible for trading on one of the following
exchanges: the Nasdaq SmallCap Market, the American Stock Exchange, the
New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin
Board;
|
|
|
·
|
the
daily volume weighted average price of the Common Stock for ten
consecutive trading days immediately preceding the conversion is greater
than or equal to $5.56 per share (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares) on the primary trading market on which the Common Stock is then
listed or quoted; and
|
|
|
·
|
the
average daily dollar volume of the Common Stock on the primary trading
market on which the Common Stock is then listed or quoted is greater than
or equal to $100,000 for ten consecutive trading days at any time before
the conversion.
|
Representations
and
Warranties;
Indemnification :
The Purchase Agreement contains representations and warranties by us and the
investors which are customary for transactions of this type such as, with
respect to the Company: organization, good standing and qualification to do
business; capitalization and voting rights; subsidiaries, authorization and
enforceability of the transaction and transaction documents; financial
statements; valid issuance of stock, governmental and third party consents being
obtained or not required to consummate the transaction; litigation; intellectual
property; employee benefits, employment matters; filing of tax returns; full
disclosure; related party transactions; title to property and assets; and no
brokers used, and with respect to the investors: authorization, investment
intent and accredited investor status. The Company has agreed to indemnify the
investors and their affiliates against claims, costs, losses, damages, expenses
and obligations arising out of or based on material misrepresentations by the
Company made in the Purchase Agreement and breaches by the Company of material
covenants in the Purchase Agreement.
Covenants:
The Purchase Agreement contains certain covenants on our part, including the
following:
Registration:
we must file a registration statement covering the resale by the investors of
100% of our shares of Common Stock issuable to the investors upon the conversion
of all of the Series A Stock and exercise of the Series A Warrants and the
Series B Warrants (the “Resale Registration Statement”). The Resale Registration
Statement must be filed with the SEC by May 13, 2010 (within 45 days after the
March 29, 2010 closing date of the Purchase Agreement) and cause the
registration statement to be declared effective by August 26,
2010 (within 150 days after the closing date) or October 25, 2010
(210 days after the closing date), if the SEC determines to give the
registration statement a full review. The Purchase Agreement provides for
liquidated damages of 1% per month of the purchase price of the securities
purchased by the investors (with a cap of 6% of the purchase price in the
aggregate) if the filing or effectiveness of the registration is
delayed beyond the required deadlines or if after effectiveness is declared by
the SEC, effectiveness of the Resale Registration Statement is not
maintained.
Listing:
we have agreed to use our best efforts to list our Common Stock on the American
Stock Exchange, Nasdaq Capital Market, Nasdaq Global Market, Nasdaq Global
Select Market or New York Stock Exchange by March 29, 2011 (within one year
after the closing) If we do not do so by such deadline we are obligated to pay
the investors liquidated damages of .5% of the purchase price per month until
the Common Stock is listed, subject to a cap of 6% of the purchase price in the
aggregate).
Right of
first refusal: Until the second anniversary of the date that the Resale
Registration Statement is declared effective, the investors shall have a right
of first refusal in connection with any offer by the Company of its debt or
equity securities, except in certain limited situations
Appointment
of investor designee to the Company’s Board and approval of CFO: The Company has
agreed to appoint one person designated by certain of the investors as a
director of the Company. The Company has also agreed that such investors shall
have the right to approve the hiring of an English speaking Chief Financial
Officer after the closing.
Delivery of up to
2,768,721 shares of Granto, Inc. Common Stock from Escrow Based on Net Income
and Net Income Per
Share: At the closing, Kelvin Chan, our President and Chief Executive
Officer, delivered to an escrow agent 2,768,721 shares of Granto,
Inc. Common Stock (the “Make Good Escrow Stock”). If our consolidated net
income and net income per share for the year ended December 31, 2009 is less
than $13.0 million and $.54 per share, respectively (the “Fiscal 2009
Performance Threshold”), or our consolidated net income and net income per share
for the fiscal year ending December 31, 2010 is less than $14.8 million and $.62
per share, respectively (the “Fiscal 2010 Performance Threshold”),
then:
|
|
·
|
If
the Company does not achieve at least 50% of either amount set forth in
the Fiscal Year 2009 Performance Threshold, the escrow agent shall
transfer 100% of the escrowed shares to the investors pro rata based on
the number of shares of Series A Stock purchased by the investors under
the Purchase Agreement and still beneficially owned by such investor at
such date;
|
|
|
·
|
If
the Company achieves at least 50%, but less than 100% of either amount set
forth in the Fiscal Year 2009 Performance Threshold, the escrow agent
shall transfer an amount of the escrowed shares to the investors equal to
the product obtained by multiplying (i) two times the shortfall by (ii)
the total number of escrowed shares. Such shares will be
transferred pro rata based on the number of shares of Series A Stock
purchased under the Purchase Agreement by the investors and still
beneficially owned by such investors at such
date.
|
|
|
·
|
If
the Company does not achieve at least 50% of either amount set forth in
the Fiscal Year 2010 Performance Threshold, the escrow agent
shall transfer 100% of the escrowed shares to the investors pro rata based
on the number of shares of Series A Stock purchased by the investors under
the Purchase Agreement and still beneficially owned by such investor at
such date;
|
|
|
·
|
If
the Company achieves at least 50%, but less than 100% of either amount set
forth in the Fiscal Year 2010 Performance Threshold, then the escrow agent
shall transfer an amount of the escrowed shares to the investors equal to
the product obtained by multiplying (i) two times the shortfall by (ii)
the total number of escrowed shares.. Such shares will be transferred pro
rata based on the number of shares of Series A Stock purchased under the
Purchase Agreement by the investors and still beneficially owned by such
investors at such date.
|
For
purposes of the agreement, net income for any period means the consolidated net
income of the Company and its subsidiaries calculated in accordance with United
States generally accepted accounting principles consistently applied, plus, to
the extent such amounts were deducted in the calculation of consolidated net
income, the amount of any non-cash extraordinary charges relating solely to (a)
the release of the shares from escrow or (b) the value of the beneficial
conversion feature of the Series A Stock of the Company issued pursuant to the
Purchase Agreement. Net income for any period shall also not include
any charges or additions to net income of the Company in any period as a result
of any fluctuation in the value of the Company’s Common Stock.
ITEM
2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On March 29, 2010, we completed
the acquisition of Rongfu pursuant to the Share Exchange Agreement. The
acquisition was accounted for as a recapitalization effected by a share
exchange. Rongfu is considered the acquirer for accounting and financial
reporting purposes. The assets and liabilities of the acquired entity have
been brought forward at their book value and no goodwill has been
recognized.
As a result of this transaction, the
Company ceased being a “shell company” as that term is defined in Rule 12b-2
under the Securities and Exchange Act of 1934 (the “Exchange Act”).
Our
Corporate Structure
As set
forth in the following diagram, following our acquisition of Rongfu, Rongfu
became and currently is our direct, wholly-owned subsidiary.
Organizational
History of Rongfu Aquaculture, Inc. and Subsidiaries
Rongfu Aquaculture, Inc. was
incorporated in Delaware on January 13, 2009. Pursuant to a Share Exchange
Agreement, dated as of December 29, 2009 (the “December 2009 Agreement”), all of
the shareholders of Flourishing Blessing (Hong Kong) Co., Ltd., a Hong Kong
corporation (“Flourishing HK”), exchanged all of the outstanding shares of
Flourishing HK for shares of common stock of Rongfu and Rongfu became the owner
of 100% of the outstanding capital stock of Flourishing HK.
Flourishing HK owns 100% of the capital
stock of Guangzhou Flourishing Blessing Heng Seng Agriculture Technology Limited
(“Guangzhou Flourishing”). Guangzhou Flourishing is a wholly foreign-owned
enterprise, or “WFOE,” under the laws of the PRC by virtue of its status as a
wholly-owned subsidiary of a non-PRC company, Flourishing HK. In
connection with the closing of the December 2009 Agreement, Guangzhou
Flourishing entered into and consummated a series of agreements (the
“Contractual Agreements”), with Chen Zhisheng and Foshan Nanhai Ke Da Heng Sheng
Aquatic Co., Ltd. (“Nanhai Ke Da Heng Sheng”). Under the Contractual
Agreements, Guangzhou Flourishing agreed to assume control of the operations and
management of Nanhai Ke Da Heng Sheng in exchange for a management fee equal to
Nanhai Ke Da Heng Sheng’s earnings before taxes. As a result, the business of
Nanhai Ke Da Heng Sheng and Hainan Ke Da Heng Sheng Aquit Germchit
Co., Ltd., a PRC corporation (“Hainan Ke Da Heng Sheng”) , 70% of the
outstanding stock of which is owned by Nanhai Ke Da Heng Sheng, will
be conducted by Guangzhou Flourishing. We anticipate that Nanhai Ke Da Heng
Sheng and Hainan Ke Da Heng Sheng will continue to be the contracting parties
under their customer contracts, bank loans and certain other assets until such
time as those may be transferred to Guangzhou Flourishing.
Nanhai Ke Da Heng Sheng was formed in
the PRC on April 30, 2003 as a limited liability company (a company solely owned
by a natural person). Hainan Ke Da Heng Sheng was formed in the PRC on August 6,
2007 as a limited liability company. Guangzhou Flourishing was incorporated in
the PRC on January 9, 2009 as a wholly owned foreign
enterprise.
The
following is a summary of the material terms of each of the Contractual
Agreements, the English translation of each of which is annexed hereto as an
exhibit. All references to the Contractual Agreements and other agreements in
this Current Report are qualified, in their entirety, by the text of those
agreements. Certain references to ownership and other rights of the Company in
this Current Report include the rights of Nanhai Ke Da Heng Sheng and Hainan Ke
Da Heng Sheng, which we are attributing to the Company by virtue of the
Contractual Agreements.
Entrusted
Management Agreement. Pursuant to the entrusted management agreement
among Nanhai Ke Da Heng Sheng, Chen Zhisheng, a director of the Company and the
owner of 100% of the outstanding stock of Nanhai Ke Da Heng Sheng, and Guangzhou
Flourishing (the "Entrusted Management Agreement"), Nanhai Ke Da Heng
Sheng and Chen Zhisheng agreed to entrust the operations and management of
Nanhai Ke Da Heng Sheng to Guangzhou Flourishing Under the Entrusted
Management Agreement, Guangzhou Flourishing will manage Nanhai Ke Da
Heng Sheng ‘s operations and assets, control all of Nanhai Ke Da Heng Sheng ‘s
cash flow through an entrusted bank account, will be entitled to Nanhai Ke Da
Heng Sheng ‘s earnings before taxes as a management fee, and will be obligated
to pay all Nanhai Ke Da Heng Sheng’s payables and expenses, operating expenses,
payment of employee salaries and the purchase price for assets. The Entrusted
Management Agreement will remain in effect until Guangzhou
Flourishing acquires all of the assets or equity of Nanhai Ke Da Heng
Sheng (as more fully described below under “Exclusive Option Agreement”). We
anticipate that Nanhai Ke Da Heng Sheng and Hainan Ke Da Heng Sheng will
continue to be the contracting parties under their customer contracts, bank
loans and certain other assets until such time as those may be transferred to
Guangzhou Flourishing.
Shareholders’
Voting Proxy Agreement. Under the shareholders' voting proxy agreement
among Chen Zhisheng and Guangzhou Flourishing, Chen Zhisheng irrevocably and
exclusively appointed the members of Guangzhou Flourishing’s board of directors
as his proxies to vote on all matters that require approval by the shareholders
of Nanhai Ke Da Heng Sheng.
Exclusive
Option Agreement. Under the exclusive option agreement among Chen
Zhisheng, Guangzhou Flourishing and Nanhai Ke Da Heng Sheng (the “Exclusive
Option Agreement”), Chen Zhisheng has granted Guangzhou Flourishing an
irrevocable and exclusive purchase option (the “Option”) to acquire Nanhai Ke Da
Heng Sheng’s equity and Nanhai Ke Da Heng Sheng has granted Guangzhou
Flourishing an Option to purchase Nanhai Ke Da Heng Sheng’s assets and business,
but only to the extent that the acquisition does not violate limitations imposed
by PRC law on such transactions. The consideration for the exercise of the
Option is to be determined by the parties and memorialized in future, definitive
agreements setting forth the kind and value of such consideration. To the extent
that Chen Zhisheng receives any of such consideration, the Option requires him
to transfer (and not retain) the same to Guangzhou Flourishing.
Shares
Pledge Agreement. Under the shares pledge agreement among Chen Zhisheng,
Guangzhou Flourishing and Nanhai Ke Da Heng Sheng (the "Share Pledge
Agreement"), Chen Zhisheng has pledged to Guangzhou Flourishing all of the
equity interests in Nanhai Ke Da Heng Sheng, including the proceeds thereof, to
guarantee all of Nanhai Ke Da Heng Sheng ‘s rights and benefits under the other
Contractual Agreements. Prior to termination of the Share Pledge Agreement, the
pledged equity interests cannot be transferred without Guangzhou Flourishing’s
prior written consent.
DESCRIPTION
OF BUSINESS
Overview
Through its subsidiaries and the
Contractual Agreements, Rongfu Aquaculture, Inc. (the “Company”) is engaged in
commercial freshwater aquaculture in the PRC. Aquaculture is the cultivation
(“farming”) of fish under controlled conditions (as contrasted with the
harvesting of fish in the wild). The Company cultivates its fish in fresh water
(not marine (salt water) or brackish environments), sells fish and fish fry
(juvenile fish) and also acts as a dealer of freshwater fish (generating trading
profits from the purchase of fish from third party farmers and the immediate
re-sale of such fish to wholesalers and processors).
During the fiscal year ended December
31, 2009 (“fiscal 2009”) the Company sold more than 27,000 tons of adult fish to
frozen fish processors and wholesalers in Guangdong Province and Hainan
Province, People’s Republic of China (“PRC”) and the Company sold approximately
360 million fry to distributors, which in turn sold such fry to other farmers to
cultivate.
Based on unaudited information,
approximately 74.0% of the Company’s revenues for fiscal 2009 were from the sale
of adult fish farmed by the Company, approximately 13.7% of the Company’s 2009
revenues were from the re-sale of fish purchased by the Company from farmers and
approximately 12.3% of the Company’s 2009 revenues were generated from the sale
of fish fry. Approximately 67.9% of the Company’s net income for fiscal 2009 was
from the cultivation and sale of adult fish, approximately 30.3% of the
Company’s 2009 net income were from the breeding, incubation and sale of fish
fry and approximately 1.8% of the Company’s 2009 net income was profit from the
Company’s trading of freshwater adult fish. According to China Agriculture
Magazine, the Company is currently the largest seller of tilapia fry in the PRC
and the Company believes that it is also one of the three largest sellers of
adult tilapia in the PRC.
The Company operates 13 adult fish
breeding farms, covering a total area of 8,249 mu (a mu is a measure of land
area used in China equivalent to approximately 1/6 of an acre). Three of the
Company’s farms are located in Hainan Province, two in the town of Wenchang and
one in Nanling. The other 10 farms are located in Guangdong Province in the
towns or villages of Nanhai, Qinyuan, Taishan, Yangdong and Gaoyao. 9
of the farms consist of a series of man-made ponds dug to a depth of
approximately 2 meters with a surface area of 10-20 mu. A pond can be dug in two
days and is filled with fresh filtered water from local sources. Each pond is
outfitted with one or more oxygen aeration machines which float on the surface
and one or more feeding machines which provide food to the fish twice per day.
The aeration machines provide oxygen to the fish and enable the natural removal
of fish wastes so that the water does not become toxic for the
fish.
4 of the Company’s farms are each
comprised of a single lake created by damming a river. Oxygen aeration equipment
is not needed since the lakes have a much larger area than the ponds dug by the
Company. The land on which the farms are located is leased by the Company from
the village under leases for terms of 4 to 30 years.
For additional information concerning
the location and area of each of the Company’s fish farms and the terms under
which the real estate for each farm is leased, see “Description of Property”
herein.
In addition to its adult fish breeding
farms, the Company operates a breeding farm in Wenchang, Hainan Province in
which tilapia fry are produced from brood stock. (The warm climate in Hainan is
more conducive to the breeding of tilapia fry than the climate in Guangdong
Province.) The tilapia fry breeding farm in Wenchang covers an area of
approximately 1,800 mu. The Company breeds snakehead and crucian carp fry at its
facility in Nanhai.
At its facility in Nanhai (at which the
Company also maintains a fish clinic), the Company also has constructed and
maintains concrete tanks with a surface area of approximately 8,000 square
meters containing approximately 40 compartments where the Company incubates
tilapia, snakehead and crucian carp fry for approximately 10-25 days after such
fry is initially produced or purchased by the Company. Most of the tilapia fry
breeded by the Company in Wenchang is promptly flown by commercial air carrier
to Guangzhou (which is approximately 300 miles from Nanhai) and thereafter
transported by automobile to Nanhai. The Company also maintains an approximately
4,500 square meter incubation tank in Wenchang for tilapia fry that it will
incubate and sell in Hainan Province.
The
incubation tanks in Nanhai and Wenchang are lined with concrete as compared to
the Company’s adult fish breeding ponds and lakes, which are not. The concrete
lining of the incubation tank enables the Company to maintain better water
quality for the fry in the tank and also makes it easier for the small fry to be
seen and caught when it is time to harvest them. After the incubation period the
Company sells approximately 95% of the fry to distributors.
Based on unaudited information,
approximately 46.2% of the Company’s revenues from the sale of Company grown
adult fish in fiscal 2009 were from the sale of tilapia, approximately 20.2% was
from the sale of grass carp, approximately 9.5% was from the sale of snakehead,
approximately 8.8% was from the sale of bighead and the balance of the Company’s
revenues from the sale of Company grown adult fish during fiscal 2009 were from
sales of other varieties of freshwater fish, including catfish, bream, black
carp and crucian carp.
Based on unaudited information,
approximately 69.1%, 18.8% and 12.1% of the Company’s revenues during fiscal
2009 from sales of fish fry were from the sale of tilapia, snakehead and crucian
carp fry, respectively. The Company does not breed or incubate fry of the other
adult fish that it cultivates. Rather, it purchases the fry for such fish from
distributors.
In conjunction with Professor Sifa Li
and his team from Shanghai Fisheries University, during the period from 2006 to
2009 the Company developed a strain of Nile tilapia called “New Jifu” which has
received the approval and recommendation the PRC Ministry of Agriculture. New
Jifu tilapia is fatty and fleshy, relatively fast growing (taking 4 to 5 months
to grow to a saleable size), disease resistant and suitable to be raised in a
warm climate such as that of Hainan Province. The Company currently sells
approximately 17,000 tons of tilapia per year, approximately 60% of which is of
the New Jifu variety and 40% of which is oreochromis tilapia. Oreochromis
tilapia are more tolerant of lower temperatures, which enables the fish to be
cultivated in northern climates. However, such tilapia are slower to grow to a
saleable size, limiting production to at most three crops in two
years.
The Company sells approximately 90% of
its tilapia to the owners of 28 processing plants in Guangdong and Hainan
Provinces. The processors generally require that the tilapia be of a standard
weight of .75 kilograms. (Because of such weight requirement, the Company
generally sells most of its tilapia in the fourth quarter since the growing
season of approximately 6 months commences in March of each year.) The
processors freeze the tilapia and sell the frozen product for distribution
domestically in China and internationally. The balance of the Company’s tilapia,
as well as all of the other fish the Company sells, is sold under the Company’s
Hengshen brand name to fish brokers located in wholesale markets in Guangdong,
Hainan, Fujian and Xinjiang Provinces which brokers in turn market
the fresh fish nationwide in China though other wholesalers or at retail. In
2009 the top ten customers (including processors and wholesalers) for the
Company’s adult fish accounted for approximately 80% of the Company’s total
sales of adult fish. Hainan Ahe Food, Yangshi Frozen Fish Processing Factory and
Jiahong Frozen Fish Processing Factory accounted for 21%, 12% and 10%,
respectively, of total purchases from the Company of adult fish in
2009.
The Company is developing technology to
breed new strains of yellow catfish and California perch and anticipates making
sales of the fry of such fish strains in 2010. The Company is constructing a
facility in Nanhai, to breed fry. The Company anticipates that the total cost of
the facility will be approximately $500,000 and it anticipates completing the
facility in May 2010. This facility consists of a one-floor building with a
floor area of approximately 6,000 square meters, for the breeding of
new type of fry. The Company also intends to use some of the proceeds from the
March 2010 sale of its Series A Stock and Warrants described in Item 1.01 of
this Current Report to increase both the production capacity of and productivity
at its breeding farms, to develop new breeds of fry and to change its business
model in certain respects.
For example, instead of selling most of
its snakehead fry to distributors which in turn sell the fry to local third
party farmers, the Company intends to retain such third party farmers as
subcontractors to grow adult snakehead from fry supplied directly to them by the
Company. In such new business model the farmers will receive a fixed payment
from the Company for their service and, the Company will supply at its own cost
or reimburse the farmer for fish food and medicines. The Company anticipates
that this business model will generate greater profits to the Company than would
be the case if the Company merely sold snakehead fry to distributors because the
model will substantially increase the ability of farmers to cultivate high
quality fish and therefore substantially increase the Company’s capacity to
produce adult fish. The Company may also use this cooperative farmer business
model grow and sell other fish in addition to snakehead.
Farming
Operations
The various steps in the process of
producing adult fish for sale are described below:
Brood
stock production
The Company currently owns
approximately 400 to 600 male-female pairs of tilapia brood stock
(“grandparent fish”), of which 200-300 pair are of the “New Jifu”
strain and 200-300 pair are oreochromis tilapia. Grandparent fish are either
purchased by the Company or developed from ancestors by the Company in
conjunction with breeding experts such as personnel in academic institutions.
The grandparent fish are held at the Company’s headquarters in
Nanhai. Grandparent fish generally produce offspring (“parent fish”)
for a period of 5 to 8 years and each pair of grandparent fish generally will
produce approximately 600 pair of parent fish per year.
Parent
fish production
The parent tilapia are maintained at
the Company’s facility in Wenchang, Hainan Province. The warm climate in Hainan
Province is conducive to the production of tilapia fry. (The parent generation
of the other fish that the Company cultivates are maintained at the Company’s
facility in Nanhai.) The Company owns approximately 80,000 parent fish (one male
fish for each three female fish) of the New Jifu strain. The New Jifu parent
fish generally produce approximately 6,000-8,000 offspring (fry) per year for a
period of three years. The Company has a capacity to produce approximately 500
million “New Jifu” fry per year. The Company has a capacity to produce
approximately 300 million oreochromis tilapia fry per year.
Within 3 days after the tilapia fry is
first produced, using commercial air carrier transportation, the Company
transports the fry produced in Hainan to the Company’s facility in Nanhai,
Guangdong Province where the tilapia fry are incubated for up to 20 days before
being sold to distributors of moved by the Company to one of its adult breeding
farms. The Company also purchases fry for the growing of the other fish (except
tilapia) it grows. The Company also incubates snakehead and crucian carp fry at
its Nanhai facility.
Adult
fish production
Approximately 95% of the fry produced
by the Company are sold to distributors and 5% of the fry are raised to adults
by the Company. The Company cultivates the fry it does not sell at one of the 13
adult fish breeding farms the Company maintains. The fry are transported to such
farms from the Nanhai incubation facility by Company trucks. The Company
generally sells its tilapia when the tilapia has grown to a weight of 0.75 kg as
that is the size desired by the Company’s frozen fish processor customers. For
New Jifu , it takes 5 to 6 months to reach 0.75 kilograms (‘kg”) and for
oreochromis tilapia it takes about 7 to 8 months to reach 0.75kg. The
Company generally raises its grass carp and snakehead to weights of .50kg or
more (up to as much as 5 kg) before sale of such fish to wholesalers. The larger
the weight the longer the fish takes to grow. The Company may therefore
cultivate fish for a year or more before sale.
Approximately 80-85% of the variable
costs of producing adult fish is the cost of fish food. The other variable costs
include medicine and the cost of fry for those fish for which the Company does
not breed its own fry. The other significant costs borne by the Company in its
operations are of the rental of farmland, salaries of production personnel and
utilities and transportation costs.
Fish
clinic and educational services
At its Nanhai facility, the Company
maintains a clinic supported by the Agriculture Bureau of Guangdong Province.
Farmers may bring diseased fish to the clinic where Company personnel as well as
experts from the Agriculture Bureau (who are periodically present at the clinic
or available for consultation by telephone or internet) can diagnose problems
and determine courses of treatment.
At such facility the Company also
offers free classes to train farmers in the cultivation of fish. Classes are
generally given for three days twice a month. The Company’s cost for providing
such training is approximately $7,500 per year.
By offering such clinical services and
free training, the Company has been able to build a database of approximately
100,000 farmers who are or may become interested in purchasing fry, who may
become subcontractors for the Company in growing fry to adult fish or who may
sell fish to the Company for immediate resale by the Company to tilapia
processors or wholesalers.
Trading
Operations
The Company acts as an intermediary in
the sale of fish to tilapia processors and fish wholesalers. Such entities place
orders with the Company which the Company fills by dealing with farmers in the
Company’s data base. The processors and wholesalers rely on the Company, rather
than dealing directly with farmers, due to the Company’s reputation for quality
and the Company’s contacts with numerous sources of supply, which serve to
reduce the administrative costs of the processor or wholesaler. The Company
generally arranges for transactions, pays the farmer, assists the processor,
wholesaler and farmer in delivery operations (the cost of transportation is
generally borne by the processor of wholesaler) and receives payment from the
processor or wholesaler at a mark up over the Company’s purchase cost
(approximately 10% of the sales price).
Industry
Background
Aquaculture is the science, art, or
practice of cultivating and harvesting aquatic organisms, including fish,
mollusks, crustaceans, aquatic plants, and algae such as seaweed. Operating in
marine, brackish, and freshwater environments, aquaculture provides food for
people and in smaller amounts supplies fish for stocking lakes, bait for
fishing, and live specimens for home aquariums. According to a recent study by
the World Food and Agriculture Organization (“FAO”) published on March 2,
2009, world fisheries production reached a new high of 143.6 million metric
tons in 2006, including farmed and ocean caught product. The contribution of
aquaculture to the world fisheries production in 2006 was 51.7 million tons
of fish, which was 36 percent of world fisheries production in 2006, up from 3.6
percent in 1970. Global aquaculture accounted for 6 percent of the fish
available for human consumption in 1970. In 2006 global aquaculture accounted
for 47 percent of the fish available for human consumption according to the FAO.
The FAO report also describes that over half of the global aquaculture in 2006
was freshwater finfish. Based on the FAO’s projections, it is estimated that in
order to maintain the current level of per capita consumption, global
aquaculture production will need to reach in excess of 80 million tons of
fish by 2050.
Also according to the FAO, in 2006
China contributed approximately 67% of the total quantity and 49% of the total
value of worldwide aquaculture production. In China, approximately 90% of fish
production comes from aquaculture.
China has a long history of
aquaculture. However, large-scale production only began after the founding of
the PRC in 1949. More recently, after China opened up to the outside world in
the 1980's, the sector has been growing dramatically, becoming one of the
fastest growing sectors among the agriculture industries in China. In 2003 China
registered a total amount of 30.28 million tons of farmed fish, accounting for
64.34% of national fishery production . China’s total aquaculture production is
dominated by carp raised in inland ponds for local consumption. The four major
carp species — silver carp, grass carp, common carp, and bighead carp — account
for more than one third of world aquaculture production — nearly all of it in
China
China’s aquatic production for 2009 is
forecast to have reached 49.5 metric tons (“MMT”), an increase of
approximately two percent from the estimated 48.6 MMT of production
in 2008. China remains the world’s largest aquaculture producer. The rise in
aquatic production is attributed to the country’s rapid economic growth, rising
disposable incomes and greater consumption of aquatic products, together with
strong growth of aquatic exports. While official statistics are not yet
available, the 2008 aquatic production is estimated to have increased by
approximately two percent over the 47.5 MMT of production in 2007. According to
China’s Ministry of Agriculture (“MOA”), aquatic production for the first five
months of 2008 reached 15.6 MMT, up more than four percent over the previous
year to date figure. MOA expected a normal production growth for the remainder
of 2008. Industry sources also showed that total aquatic production in the first
eight months of 2008 reached 26.5 MMT, up three percent over the previous year.
The production growth is mainly attributable to freshwater production at 12.5
MMT, up seven percent over the same period in 2007, while sea catch production
stood at 6.9 MMT, down more than two percent. Another official media source
reported that total aquatic production for 2008 is expected to have reached 48.9
MMT and the total freshwater aquatic production reached 17.4 MMT as of the end
of October 2008. The devastating winter storms that hit south China from January
through February of 2008 had some impact on aquaculture production. However,
official data on damage is not available. Some industry sources reported losses
of more than 4,000 MT of tilapia and 48 million tilapia fingerlings in Guangdong
and Hainan provinces. MOA reported that the industry quickly
recovered.
Inland aquaculture is very important
part of China fishery industry. Freshwater aquaculture is carried out in fish
ponds, lakes, reservoirs, canals, pens, cages, and paddy fields. Freshwater
aquaculture production is dominated by finfish, particularly silver, grass and
other carps. Pond culture is the most important source of inland
aquaculture, with an estimated share of 73.9% in 1996. More than 4.5
million Chinese farmers are engaged in aquaculture, more than the rest of the
world combined.
In 2005, according to the American
Tilapia Association (“ATA”), tilapia production worldwide was second in volume
to carp, and it is projected by the ATA that tilapia will become the most
important aquaculture crop in the 21st
century. Commercial production of tilapia has become popular in many countries
around the world. Touted as the “new white fish” to replace the depleted ocean
stocks of cod, pollock, and hake, world tilapia production continues to rise and
at least 100 countries currently raise tilapia, with the PRC being the largest
producer. The American Tilapia Association further reports that world production
of tilapia products reached approximately 2.5 million metric tons in 2007,
of which China produced the dominant share of 45.0 percent.
The species of tilapia most commonly
grown as food fish in aquacultures are Nile tilapia, blue tilapia and Mozambique
tilapia). Today, hybrids of these species – sometimes with genetic material from
other species as well – are popular as well. Over 95 percent of the global
tilapia supply is imported to the United States where tilapia is an appreciated
food fish. The United States has its own domestic production as well, but it is
much too small to satisfy consumer demands. The rising standard of living and
fast-changing lifestyle in China have resulted in dramatically increasing
domestic demand for processed frozen Tilapia products.
Tilapias are also among the easiest and
most profitable fish to farm. This is due to their omnivorous diet, mode of
reproduction (the fry do not pass through a planktonic phase), tolerance of high
stocking density, and rapid growth.
The simplest system for raising fish is
in ponds or irrigation ditches. Fry are put into a pond and fed until they reach
market size. The fish are caught, either by draining the pond or by using large
nets. Food can be from natural sources—commonly zooplankton feeding on pelagic
algae, or benthic animals, such crustaceans and mollusks. Tilapia species feed
directly on phytoplankton, making higher production possible.
There are a number of factors that
determine the amount of fish that any given pond can produce. The first is the
size of the pond, which determines the amount of water available for the fish,
which in turn determines the amount of oxygen available for the fish. If there
are too many fish in the pond, there will not be enough oxygen, and the fish
will become stressed and begin to die. Another factor is the capacity of the
pond to digest waste from the fish and the uneaten feed. The waste that is toxic
to fish is mostly in the form of ammonia, nitrites, and nitrates.
The pond environment provides natural
ways to eliminate waste. For example, in one waste processing cascade, the
initiating bacteria convert available ammonia to available nitrites, which a
second bacteria converts to the available nitrates that plants and algae consume
as a growth nutrient. The viable density of fish in a pond is determined by the
balance between the amount of waste generated and natural processes for waste
elimination. If the fish release too much waste into the pond, the natural
processes cannot keep up and the fish will become stressed.
Fish density can be increased if fresh
water can be introduced to the pond to flush out wastes or if the pond can be
aerated, either with compressed air or mechanically by using paddle wheels.
Adding oxygen to the water not only increases the amount of oxygen in the water
available for the fish, it also improves the processes involved in removing the
wastes.
Advantages of pond culture include its
simplicity, and relatively low labor requirements (apart from the harvesting of
the fish). It also has low energy requirements. A major disadvantage is that the
farm operation is more dependent on weather and other natural factors that are
beyond the farmer’s control. Another disadvantage concerns the marketing of the
fish. Generally, ponds are only harvested when most of the fish are at market
size. This means the farmer has many fish to market at the same time, requiring
a market that can absorb large quantities of fish at a time and still give a
good price to the farmer. Usually this means there is a need for some kind of
processing and large-scale marketing, with several fish farms in the same area
to provide the processing plant with a constant supply of fish. If this kind of
marketing infrastructure is not available, then it is difficult for the fish
farmer.
Raw
Materials and Suppliers
Approximately 80-85% of the cost of
sales of fish is for fish food. The balance is for fish medicine and the cost of
fry for fish for which the Company does not breed its own fry. The Company
purchases over 90% of its food for the feeding of adult fish from Ke Da Heng
Sheng Fish Food Factory, a company which is wholly owned by the sister of the
Company’s Chairman, Zhisheng Chen. The Company also purchases over 60% of its
food for the feeding of fry from Ke Da Heng Sheng Fish Food Factory. In 2009 the
Company spent approximately $11.9 million and $334,000 for the purchase of adult
and fry food, respectively.
Marketing,
Sales, and Distribution
The Company has a staff of 13 employees
who take orders and provide customer service to processors and wholesalers in
assigned geographical areas. The Company sells fry to approximately 110
distributors, sells tilapia to 28 frozen tilapia processors and sells fish to
approximately 50-60 fish brokers in wholesale markets.
The Company promotes its Hengshen brand
to farmers by advertisements in newspapers and magazines. The purpose of such
promotion is to attract potential purchasers of fry, as well as potential
subcontractors for the Company in growing snakehead and also potential sources
for the Company’s fish trading operations. The Company also conducts free
training sessions for farmers to build a database for the same
purposes.
Employees
As of March 19, 2010 Rongfu had 155
full-time employees, including 39 management and supervisory personnel, 84
production workers, 13 sales and marketing personnel and 19 technological
support, training and operations personnel. Over 100 of the Company’s
employees hold at least a junior college degree. The Company also had 65
part-time employees, of which 53 were interns from various colleges. Interns are
not paid but Rongfu gives interns a subsidy in a nominal amount and provides
food and housing for such interns without charge.
Seasonality
Approximately 50% of the Company’s
sales of fry are made in the second quarter as fish produce most of the fry in
March of each year. The Company’s sale of fry are lowest in the fourth quarter .
The Company’ s sales of adult fish are greatest in the fourth quarter. The first
quarter is the next busiest. Sales of grown fish follow the pattern of fry
production in the spring and then a six month growing season to maturity and
sale.
Competition
There are more than 2 million fish
farmers in the PRC. Most farmers grow fish on a small scale. The Company
believes its sales place it in the top 10 producers in the PRC. The Company
competes against the small fish farmers, but believes it has advantages over
most of its competition by virtue of its capital, technology and research and
development. The Company competes against smaller scale breeding farms in the
sale of fry.
Research
and Development
The Company has its own technicians to
research fish growing technologies, including methods to grow fish faster,and to
maintain water quality and use appropriate fish foods. The Company maintains a
big database for fish diseases and cures for the most commonly raised
fishes.
Intellectual
Property
The Company does not own any
patents.
In conjunction with Professor Sifa Li
and his team from Shanghai Fisheries University, from 2006 the Company developed
a new strain of tilapia called “New Jifu” which has received the
approval and recommendation the PRC Ministry of Agriculture. Based on the
agreement between Professor Li and Nanhai Ke Da Heng Sheng Heng Sheng, Nanhai Ke
Da Heng Sheng may exclusively use the technology of “New Jifu” in Hainan
Province and use the technology on a non-exclusive basis elsewhere.
Nanhai Ke Da Heng Sheng has a trademark
“Ke Da Heng Sheng” registered with the PRC Trademark bureau. The term of the
trademark is from October 28, 2004 to October 27, 2014.
Regulation
According to the Law of the PRC on the
Prevention and Control of Water Pollution, effective on June 1, 2008, to engage
in the aquaculture industry, a business owner shall be responsible for
protecting the waters and the ecological environment. As a food processing
business , the Company must be in compliance with the Food Safety Law of the
PRC, effective on June 1, 2009, which lists several enforceable mandatory
standards as food safety standards. Based on the law, an aquaculture business
should have suitable production and management facility to protect aquatic food
from being harmfully affected.
According to Regulations of Quality and
Safety of Aquaculture of the Ministry of Agriculture, effective on September 1,
2003, water used in aquaculture should be consistent with requested standards of
Ministry of Agriculture. Aquaculture can not violate relevant national or local
specifications of cultivation, which include equipment placement, sales of
farmed aquatic products, as well as the use of feed materials and aquaculture
drugs.
Additionally, the aquaculture industry
is also subject to the control and management of the Fishery Law of the PRC, the
Management Methods of Pollution-Free Agriculture Products, and the Aquatic
Germchit Managing Regulations.
DESCRIPTION
OF PROPERTY
Set forth below is a table containing
certain information concerning the location and are of each of the Company’s
fish farms and the terms under which such properties are leased.
|
Name of
Farm
|
Area
(Mu)/(Square
Meters)
|
Location
|
Landlord
|
Tenant
|
Lease
Commencement
Date
|
Lease
Expiration
Date
|
Rent per Year ($)
|
||||||||||
|
Lugang
Pond
|
251.99/167,994.17
|
Eastern
Xianlu Road,
Nanhai,
Guangdong
|
Lu’er
Villager Group of Lugang Village
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
1/1/2006
|
12/31/2010
|
$ | 25,940.15 | |||||||||
|
Lugang
Pond
|
85.00/56,666.95
|
Hengling,
Shagang
village,
Nanhai,
Guangdong
|
Xuehao
Tu
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
1/1/2006
|
12/31/2012
|
$ | 16,750 | |||||||||
|
Lugang
Pond
|
98.00/65,333.66
|
Xianliao
Village,
Nanhai,
Guangdong
|
Santuan
Villager Group of Xianliao Village of Heshun Town
|
Nanhai
Keda
Hengsheng
Aquiculture
Co.,Ltd.
|
1/1/2002
|
12/31/2011
|
$ | 11,529.41 | |||||||||
|
Nanzhou
Pond
|
71.33/47,553.57
|
Jianshui,Tantou,
Nanhai,
Guangdong
|
Sanhong
Village Economic Cooperative of Xianliao Village of Heshun
Town
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
1/1/2005
|
12/31/2014
|
$ | 13,426.82 | |||||||||
|
Nanzhou
Pond
|
803.04/535,362.68
|
Dapu,
Nanhai,
Guangdong
|
Xianliao
Village of Heshun Town
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
1/1/2005
|
12/312014
|
$ | 101,560.94 | |||||||||
|
Wan
Qing Yang
|
734.65/489,769.12
|
Eastern
Gongyong,
Wanqingyang,
Heshun
Town,
Nanhai
|
Tangcun
Group Co., Ltd. of Nanhai District
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
2/11/2004
|
2/10/2015
|
$ | 71,304.26 | |||||||||
|
Qingyuan
Artificial Lake
|
500.00/333,335
|
Laohuchong
Artificial Lake,
Qingyuan,
Guangdong
|
Zhishen
Luo
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
3/1/2006
|
12/31/2013
|
$ | 33,823.53 | |||||||||
|
Taishan
Artificial
Lake
|
1,000.00/666,670
|
Guanchong
Artificial Lake,
Shenjing
Town,
Taishan,
Guangdong
|
Weiqiang
Fan, Weiqiang Hu
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
10/20/2005
|
12/31/2016
|
1,691.18 | ||||||||||
|
Yangdong
Artificial
Lake
|
2,500.00/1,666,675
|
Shawan
Artificial Lake,
Yangdong
County,
Guangdong
|
Huazhan
Zhuo
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
1/13/2007
|
12/31/2014
|
$ | 5,698.53 | |||||||||
|
Gaoyao
Artificial
Lake
|
30.00/20,000.1
|
Shangdong
Village,
Baizhu
Town,
Gaoyao
City,
Guangdong
|
Xinlong
Villager Group of Shangdong village committee of Baizhu Town
in Gaoyao City
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
1/10/2007
|
1/10/2013
|
$ | 5,264.71 | |||||||||
|
Hainan
Adult Fish Pond
|
375.00/250,001.25
|
Fupo
Village,
Baoluo
Town,
Wenchang
City,
Hainan
|
Jianzhong
Fan
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
2/28/2005
|
2/28/2015
|
$ | 24,816.18 | |||||||||
|
Hainan
Adult
Fish
Pond
|
200.00/133,334
|
Nanling
Artificial Lake,
Hainan
|
Maoshan
Village Economic Cooperative of Wengtian Town in Wenchang
City
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
1/12/2005
|
1/11/2020
|
$ | 514.71 | |||||||||
|
Hainan
Adult
Fish
Pond
|
1,600.00/1,066,672
|
Wenglong
Artificial Lake,
Wenchang,
Hainan
|
People’s
Government of Wengtian Town of Wenchang City
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
1/1/2005
|
12/31/2035
|
$ | 5,882.35 | |||||||||
|
Wenchang
Fish Fry Pond
|
1,800.00/1,200,006
|
Wenchang,
Hainan
|
Kuangshan
Group of Shandong Province
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
10/13/2006
|
12/15/2018
|
$ | 44,117.65 | |||||||||
|
10,049.01/6699373.50
|
2,463,778.80/362,320.41 | ||||||||||||||||
The Company leases from Guangzhou
Chuangshi Trading Co., Ltd approximately 50 square meters of administrative
office space at No.329 Qingnian Road 301-17, Economic Development District,
Guangzhou City, PRC for a monthly rental of 3,000 RMB for a three year term
expiring in January 2012. The rental includes water, electricity and
administrative fees. The Company also leases from Guangzhou Dongdu Big World
Co., Ltd. approximately 240 square meters of office space at Dongdu Room 321,
No.475 Huanshidong Road, Guangzhou City, PRC for a monthly rental of 16,500 RMB
for a three year term expiring on December 15, 2012. The rental includes water,
electricity and administrative fees. Nanhai Ke Da Heng Sheng leases from Tangcun
Group Co., Ltd. approximately 11,307 square meters of office space used for its
headquarters for an annual rental of 484,869 RMB for a ten year term expiring
February 10, 2015. Hainan Ke Da Heng Sheng leases from Shandong Kuangshan Group
approximately 720,000 square meters of land (including a building located on the
land which covers an area of 8,170 square meters) for an annual rental of 50,000
RMB for a 15 year term expiring December 31,2018.
The Company believes that the foregoing
properties are adequate for its present needs.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION ANF
FINANCIAL
CONDITION
The following discussion and analysis
of the consolidated financial condition and results of operations should be read
in conjunction with the consolidated financial statements and related notes of
Rongfu Aquaculture,, Inc. appearing elsewhere in this report. This discussion
and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Actual results may differ materially from those
anticipated in these forward-looking statements.
Overview
The Company is engaged in commercial
freshwater aquaculture in the PRC. It sells fish and fish fry and also acts as a
freshwater fish dealer (generating trading profits from the purchase of fish
from third party farmers and the immediate sale of such fish to
wholesalers).
During the fiscal year ended December
31, 2009 (“fiscal 2009”) the Company sold more than 27,000 tons of
adult fish to frozen fish processors and wholesalers in Guangdong Province and
Hainan Province, PRC and sold approximately 360 million fry to distributors,
which in turn sold such fry to other farmers to cultivate.
Approximately 74.0% of the Company’s
revenues for fiscal 2009 were from the sale of adult fish farmed by the Company,
approximately 13.7% of the Company’s 2009 revenues were from the re-sale of fish
purchased by the Company from farmers and approximately 12.3% of the Company’s
2009 revenues were generated from the sale of fish fry. Approximately 67.9% of
the Company’s net income for fiscal 2009 was from the cultivation and sale of
adult fish, approximately 30.3% of the Company’s 2009 net income were from the
breeding, incubation and sale of fish fry and approximately 1.8% of the
Company’s 2009 net income was profit from the Company’s trading of freshwater
adult fish. According to China Agriculture Magazine, the Company is currently
the largest seller of tilapia fry in the PRC and the Company believes that it is
also one of the three largest sellers of adult tilapia in the PRC.
The Company operates 13 adult fish
breeding farms, covering a total area of 8,249 mu Three of the Company’s farms
are located in Hainan Province, two in the town of Wenchang and one in Nanling.
The other 10 farms are located in Guangdong Province in the towns or villages of
Nanhai, Qinyuan, Taishan, Yangdong and Gaoyao. 9 of the farms consist
of a series of man-made ponds. Each pond is outfitted with one or more oxygen
aeration machines which float on the surface and one or more feeding machines
which provide food to the fish twice per day. The aeration machines provide
oxygen to the fish and enable the natural removal of fish wastes so that the
water does not become toxic for the fish.
4 of the Company’s farms are each
comprised of a single lake created by damming a river. Oxygen aeration equipment
is not needed since the lakes have a much larger area than the ponds dug by the
Company. The land on which the farms are located is leased by the Company from
the village under leases for terms of 4 to 30 years.
In addition to its adult fish breeding
farms, the Company operates a breeding farm in Wenchang, Hainan Province in
which tilapia fry are produced from brood stock.
At its facilities in Nanhai (at which
the Company’s fish clinic is also located) and Wenchang, the Company also has
constructed and maintains concrete tanks where the Company incubates tilapia.
The Company also incubates snakehead and crucian carp fry in its tank in Nanhai.
After the incubation period the Company sells approximately 95% of the fry to
distributors.
Based on unaudited information,
approximately 45.9% of the Company’s revenues from the sale of Company grown
adult fish in fiscal 2009 were from the sale of tilapia, approximately 21.2% was
from the sale of grass carp, approximately 9.6% was from the sale of snakehead,
approximately 8.3% was from the sale of bighead and the balance of the Company’s
revenues from the sale of adult fish during fiscal 2009 were from sales of other
varieties of freshwater fish, including catfish, bream, black carp and crucian
carp.
Based on unaudited information,
approximately 77.6%, 15.9% and 6.5% of the Company’s revenues during fiscal 2009
from sales of fish fry were from the sale of tilapia, snakehead and crucian carp
fry, respectively. The Company does not incubate fry of the other adult fish
that it cultivates. Rather it purchases the fry for such fish from
distributors.
In conjunction with Professor Sifa Li
and his team from Shanghai Fisheries University, during the period from 1994 to
2006 the Company developed a strain of Nile tilapia called “New Jifu” which has
received the approval and recommendation the PRC Ministry of Agriculture. The
Company currently produces approximately 17,000 tons of tilapia per year,
approximately 60% of which is of the New Jifu variety and 40% of which is
oreochromis tilapia.
The Company sells approximately 90% of
its tilapia to the owners of 28 processing plants in Guangdong and Hainan
Provinces. The processors generally require that the tilapia be of a standard
weight of .75 kiligrams. (Because of such weight requirement, the Company
generally sells most of its tilapia in the fourth quarter since the growing
season of approximately 6 months commences in March of each year.) The
processors freeze the tilapia and sell the frozen product for distribution
domestically in China and internationally. The balance of the Company’s tilapia,
as well as all of the other fish the Company sells, is sold under the Company’s
Hengshen brand name to fish brokers located in wholesale markets in Guangdong
Province, Hainan Province, Fujian, Xinjiang Province etc. which in turn market
the fresh fish nationwide in China though other wholesalers or at
retail.
Comparison
of three and nine months ended September 30, 2009 and September 30,
2008
Results of Operations and
Business Outlook
The Company’s consolidated financial
information for the three and nine months ended September 30, 2009 and September
30, 2008 should be read in conjunction with its consolidated financial
statements and the notes thereto.
The following table presents the
Company’s consolidated net sales for its lines of business for the three and
nine months ended September 30, 2009 and 2008, respectively:
|
Three Months Ended September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||||||||
|
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
% Change
|
||||||||||||||||
|
Farm
growing
|
2,230,948
|
1,205,637
|
85.0
|
% |
13,407,185
|
9,494,466
|
41.2
|
% | ||||||||||||||
|
Breeding
|
837,051
|
1,136,934
|
|
-26.4
|
% |
4,369,794
|
6,032,124
|
-27.6
|
% | |||||||||||||
|
Trading
|
1,695,651
|
1,836,352
|
-7.7
|
% |
3,954,948
|
3,727,727
|
6.1
|
% | ||||||||||||||
|
Consolidated
|
$
|
4,763,650
|
$
|
4,178,923
|
14.0
|
% |
$
|
21,731,927
|
$
|
19,254,317
|
12.9
|
% | ||||||||||
Three
Months Ended September 30, 2009 as Compared to three Months Ended September 30,
2008
Net sales for the three months ended
September 30, 2009 were $4,763,650, an increase of $584,728 or 14%, when
compared to the same period in 2008. Such increase is mainly attributed to the
increase in sales of adult fish, which increased $1,025,311 while the sales of
fish fry decreased $299,883 compared to the same period of 2008, when the cold
weather caused the death rate of adult fish increased significantly and
stimulated the sales of fish fry on consequence. Cost of goods sold for the
three months ended September 30, 2009 were $3,135,757, an increase of $746,998
or 31.3%, when compared to the same sales period of the prior year. This was
primarily due to the increase of cost of adult fish farming. Gross
profit for the three months ended September 30, 2009 was $1,627,893, a decrease
of $162,271or -9.1%, when compared to the same period in 2008. The main reason
that the Company’s gross profit decreased was because the sales of fish fry,
which contributed higher gross margin, decreased compared to the same period of
the prior year, while the cost of farming adult fish increased compared to the
same period of the prior year. Therefore the increase of gross profit generated
by the adult fish farming business did not cover the decrease in gross profit
from the fish fry business.
Selling, general and administrative
expenses for the three months ended September 30, 2009 were $529,896, an
increase of $64,398 or 13.8%, when compared to the same period in 2008, mainly
due to an increase in selling expense for the adult fish growing business and
the increased general and administrative expenses of the Company
Income from operations for the three
months ended September 30, 2009 was $1,097,997, a decrease of $226,669 or 17.1%,
when compared to the same period in 2008, primarily due to the decrease of gross
profit and increased general and administrative expenses of the
Company
Interest income for the three months
ended September 30, 2009 was $14,670, a decrease of $4,977 or 25.3%, when
compared to the same period in 2008. Interest expense for the three months ended
September 30, 2009 was $86,652, an increase of $72,631or 518.0%, when compared
to the same period in 2008. This is primarily because the Company increased its
bank loans in the first three months of 2009. Other expense for the three months
ended September 30, 2009 was $334 as compared to other expense of $13,537 for
same period in 2008.
The provision for income taxes for the
three months ended September 30, 2009 was $67,667, an increase of 32,893 or
94.6%, as compared to a provision for income taxes of $34,774 for the three
months ended September 30, 2008, which was due to the increase of profit before
tax in adult fish farming business. Because the Company’s fish fry breeding
business enjoys the income tax free policy, the decrease of profit before tax
generated from fish fry business did not affect the Company’s provision for
income tax for the three months ended September 30, 2009.
Net income for the three months ended
September 30, 2009 was $958,014, a decrease of $323,967 or 25.3%, when compared
to the same period in 2008, primarily due to increases in cost of
sales, interest expense and provision for income tax.
Nine
Months Ended September 30, 2009 as Compared to Nine Months Ended September 30,
2008
Net sales for the nine months ended
September 30, 2009 were $21,731,927, an increase of $2,477,610 or 12.9%, when
compared to the same period in 2008. Such increase was mainly attributed to the
increase in sales of adult fish, which increased $3,912,718, due to the
enhancement of breeding capacity. For the nine months ended September 30, 2009,
the sales of fish fry decreased $1,662,329 compared to the same period of the
prior year. Sale of fry was high in 2008 because the cold winter in
Southern China killed some grown fish and farmers needed to re-grow their fish
and as a result purchased more fry in the later months of 2008. .In 2009, the
sale of fry was back to normal levels. Cost of goods sold for the nine months
ended September 30, 2009 were $13,323,764, an increase of $3,117,785 or 30.5%,
when compared to the same sales period of the prior year, which consisted of an
increase of $2,903,482 for breeding adult fish, an increase of $240,969 for
trading business, and a decrease of $26,666 for breeding fish
fry. Gross profit for the nine months ended September 30, 2009
was $8,408,163, a decrease of $640,175 or 7.1%, when compared to the same period
in 2008. The main reason for the decrease of gross profit for the nine months
ended September 30, 2009 was a decrease of $1,635,664 in gross profit from sales
of fish fry, while the gross profit from sales of adult fish increased
$1,009,236 compared to the same period of last year. The gross margin of fish
fry is much higher than the gross margin of adult fish, therefore the decrease
of sales of fish fry significantly effect the Company’s gross margin for the
nine months ended September 30, 2009
Selling, general and administrative
expenses for the nine months ended September 30, 2009 were $1,836,400, a
decrease of $188,344 or 9.3%, when compared to the same period in 2008, mainly
attributed to the decrease of selling expense of $387,069 for fish fry breeding
business, which caused the decrease of selling expense of $359,030
totally.
Income from operations for the nine
months ended September 30, 2009 was $6,571,763, a decrease of $451,831 or 6.4%,
when compared to the same period in 2008. The mainly reason for decrease of
income from operation was the income from operation generated by the fish fry
business has decreased $1,344,996, while the income from operation generated by
adult fish business increased $992,472.
Interest income for the nine months
ended September 30, 2009 was $35,510, a decrease of $17,556 or 33.1%, when
compared to the same period in 2008, primarily because the Company used a part
of its interest earning funds to pay dividends, which decreased the Company’s
interest income as a consequence. Interest expense for the nine
months ended September 30, 2009 was $86,652, an increase of $72,631 or 518.0%
due to the increase in the Company’s short term bank loans, when compared to the
same period in 2008. Other expense for the nine months ended
September 30, 2009 was $784 as compared to other expense of $0 for the same
period in 2008.
Provision for income taxes for the nine
months ended September 30, 2009 was $446,572, an increase of $174,136, or 63.9%
when compared to the same period in 2008. In 2009 less fry was sold and fry was
tax exempt while farmed fish was subject to a 12.5% income tax. Trading revenue
from grown fish was taxed at a rate of 25%. In 2009, more revenue was
contributed by farming and trading and therefore the provision for income taxes
was higher than that of 2008. Income for the nine months ended September 30,
2009 was $6,073,265, a decrease of $717,075 or 10.6%, when compared to the same
period in 2008 because of the lower gross margin recorded and higher interest
expenses incurred.
During
the nine months ended September 30, 2009, total assets decreased by $12,364,992,
or 41.5%, from $29,745,548 at December 31, 2008 to $17,407,726 at September 30,
2009. The majority of the decrease was in cash and accounts
receivable, which decreases were partially offset by an increase in
inventories.
During the nine months ended September
30, 2009, cash decreased by $13,234,660, or 89.3%, to $1,589,086 as compared to
$14,823,746 as of December 31, 2008. This is mainly attributed to the payment of
dividends to shareholders.
At
September 30, 2009, the accounts receivable balance decreased by $4,318,769, or
97.9%, from the balance at December 31, 2008. Generally, accounts receivable are
higher at the end of the fourth quarter, which is the Company’s highest sales
quarter
The
Company’s inventory as of September 30, 2009 was $14,514,394, an increase of
$5,621,483, or 63.2%, compared to inventory at December 31, 2008. Inventory
mainly consists of adult tilapia, snakehead, crucian carp and other varieties of
freshwater fish. The main reason of the increase of inventory is the Company
increased its breeding capacity in the nine months ended September 30,
2009.
At
September 30, 2009 fixed assets was $420,978, mainly consisting of aerators,
feeding machine and other equipments used in fish farms, representing a decrease
of $24,887, or 5.6%, compared to fixed assets as of December 31,
2008.
At
September 30, 2009 biological assets was $535,022, a decrease of $306,603, or
36.4%, compared to fixed as of December 31, 2008. The decrease of biological
assets was due to the annual amortization of biological assets, and Biological
assets consist of tilapia, snakehead, crucian carp.
At
September 30, 2009 accounts payable were $2,165,778, an increase of $1,084,133,
or 100.2%, compared to accounts payable as of December 31, 2008.The increase of
accounts payable was due to the fish food used in fish farm and fish fry
breeding, which amount to $1,334,601.
At
September 30, 2009 other payable were $0 as compared to an other payable of
$873,401 as of December 31, 2008 because the only item included in
other payable is personal income tax payable, and as of September 30, 2009 there
is no personal income tax unpaid.
At
September 30, 2009 due to shareholder was $1,308,164, a decrease of
$7,210,982, or 84.6%, compared to due to shareholder as of December 31, 2008.
This is attributed to the repayment to shareholders in the nine months ended
September 30, 2009.
At
September 30, 2009 advance from clients was $508,016 as compared to no advance
from clients as of December 31, 2008. This increase came from several clients in
fish farming segment.
At
September 30, 2009 current portion of bank loan was $643,501 as compared to no
current portion of bank loan as of December 31, 2008 since there was no bank
loans as of December 31, 2008.
At
September 30, 2009 dividend payable was $0 as compared to a dividend payable of
$3,493,603 as of December 31, 2008 since the dividend was paid in the nine
months ended September 30, 2009 and there was no dividend payable as of
September 30, 2009.
At
September 30, 2009 income tax payable was $191,435, a decrease of $588,617, or
75.5%, compared to income tax payable as of December 31, 2008. This is mainly
because the fourth season is the peak season of sales normally, and therefore
the income tax for the nine months ended September 30, 2009 is lower than the
income tax for the whole 2008 fiscal year.
At
September 30, 2009 long-term bank loan was $1,170,001, as compared to no long
term bank loan as of December 31, 2008, because the Company successfully got a
long term bank loan in the nine months ended September 2009.
Fiscal
Year Ended December 31, 2008 as Compared to Fiscal Year Ended December 31,
2007
The
following table presents the Company’s consolidated net sales for its lines of
business for the fiscal years ended December 31, 2008 and 2007,
respectively:
|
Fiscal Year Ended December 31,
|
||||||||||
|
|
2008
|
2007
|
%
Change
|
|||||||
|
Farm
growing
|
23,577,694
|
18,509,803
|
27.4
|
%
|
||||||
|
Breeding
|
6,928,674
|
—
|
—
|
|||||||
|
Trading
|
5,086,201
|
4,484,126
|
13.4
|
% | ||||||
|
Consolidated
|
$
|
35,592,569
|
$
|
22,993,929
|
54.8
|
% | ||||
Net sales for the fiscal year ended
December 31, 2008 (“fiscal 2008”) were $35,592,569, an increase of $12,598,640
or 54.8%, when compared to net sales for the fiscal year ended December 31, 2007
(“fiscal 2007”). This increase was the result of the $6,928,674 increase of
sales of fish fry, a $5,067,890 increase of sales of adult fish, and a $602,075
increase in trading. Cost of goods sold for fiscal 2008 were
$20,043,897, an increase of $3,566,878 or 21.6%, when compared to the same sales
period of the prior year. The cost of goods did not increase in line with sales
mainly because the fish fry business, which contributed most to the
increase in sales, did not require corresponding increases in cost of goods
sold. Gross profit for fiscal 2008 was $15,548,672, an increase of
$9,031,762 or 138.6%, when compared to fiscal 2007, mainly due to the higher
than average gross margin of fish fry
Selling, general and administrative
expenses for fiscal 2008 were $2,217,796, an increase of $1,079,101 or 65.9%,
when compared to fiscal 2007 due to the expansion of the Company’s
business.
Income from operations for fiscal 2008
was $12,830,876, an increase of $7,952,661 or 163.0%, when compared to fiscal
2007 as a result of increase of sales of fish fry and sales of adult fish
simultaneously.
Interest income for fiscal 2008 was
$71,087, an increase of $29,824 or 72.3%, when compared to fiscal 2007 as a
result of increase of cash and deposits in banks. Interest
expense for fiscal 2008 was $12,733, and there was no interest expense in fiscal
2007; Other expense, which is bank charge, for fiscal 2008 was $1,954, a
decrease of $1,216 as compared to other expense in fiscal 2007.
Provision for income taxes for fiscal
2008 was $1,027,781, an increase of $958,255, or 1378.3% when compared to fiscal
2007. The Corporate Income Tax Law of the People’s Republic of China (the “new
CIT law”) went into effect on January 1, 2008. In accordance with the relevant
tax laws and regulations of the PRC, the applicable income tax for fish farming
increased. The Company was entitled income tax free for fish farming for fiscal
2007, and a 50% income tax holiday for fiscal 2008.
Net income for fiscal 2008 was
$11,859,495, an increase of $7,012,712 or 144.7%, when compared to fiscal
2007.
During
fiscal 2008, total assets increased by $12,230,000, or 69.8%, from $17,515,548
at December 31, 2007 to $29,745,548 at December 31, 2008. The
majority of the increase was in cash, accounts receivable, with additional
increases in inventories, fixed assets and biological assets.
During fiscal 2008, cash increased by
$9,020,117, or 155.4%, to $14,823,746 as compared to $5,803,629 as of December
31, 2007, which is mainly attributed to the development of our
business.
At
December 31, 2008, the accounts receivable balance increased by $1,735,697, or
64.8%, from the balance at December 31, 2007 due to the increase of
sales.
The
Company’s inventory as of December 31, 2008 was $8,892,911, an increase of
$401,280, or 4.7%, compared to inventory at December 31, 2007. Inventory
consists of tilapia, bream, crucian carp, grass carp and other varieties of
freshwater fish. The main reason of the increase of inventory is to meet the
needs of expanding of business.
At
December 31, 2008 fixed assets was $434,927, an increase of $298,817, or 219.5%,
compared to fixed assets as of December 31, 2007, primarily due to the new
equipments the Company purchased for fish fry business . Fixed assets consist of
aerators, feeding machine, variety of equipments used in fish farms and office
equipments.
At
December 31, 2008 biological assets was $841,625. There were no biological
assets as of December 31, 2007 Biological assets, consisting of the
parent fish of tilapia, snakehead and crucian carp fry, are used in
the Company’s fish fry business.
At
December 31, 2008 accounts payable were $1,081,645, an increase of $380,939, or
54.4% as a result of business expansion, compared to accounts payable as of
December 31, 2007.
At
December 31, 2008 other payable was $873,401, consisting of the personal income
tax payable. There was no other payable as of December 31,
2007.
At
December 31, 2008 due to shareholders was $8,519,146 , a decrease of
$1,883,047, or 18.1%, compared to due to shareholders as of December 31, 2007,
this was attributed to the repayment to shareholders.
At
December 31, 2008 dividends payable was $3,493,603 as compared to no dividends
payable as of December 31, 2007, since the Company believed it was
appropriate to pay dividends to shareholders for fiscal 2008.
At
December 31, 2008 income tax payable was $780,052, an increase of $708,086, or
983.9% as compared to income tax payable as of December 31, 2007. The Company
was entitled to a income tax free policy for its fish farming business for
fiscal 2007, while it was entitled to 50% income tax rate tax holiday for fiscal
2008.
Fiscal
Year Ended December 31, 2007 as Compared to Fiscal Year Ended December 31,
2006
The following table presents the
Company’s consolidated net sales for its line of business for the fiscal years
ended December 31, 2007 and 2006, respectively:
|
Fiscal Year Ended December 31,
|
||||||||||
|
|
2007
|
2006
|
%
Change
|
|||||||
|
Farm
growing
|
$
|
18,509,803
|
$
|
9,471,818
|
95.4
|
%
|
||||
|
Breeding
|
0
|
0
|
N/A
|
|||||||
|
Trading
|
4,484,126
|
0
|
N/A
|
|||||||
|
Consolidated
|
$
|
22,993,929
|
$
|
9,471,818
|
142.8
|
% | ||||
Net sales for fiscal 2007 were
$22,993,929, an increase of $13,522,111 or 142.8%, when compared to net sales
for the fiscal year ended December 31, 2006 (“fiscal 2006”) This is mainly
attributed to the increase of trading business, which has an increase
in sales of $4,484,126, as well as an increase in sales of adult fish, of
$9,037,985. Cost of goods sold for fiscal 2007 were $16,477,019, an increase of
$8,416,306 or 104.4%, when compared to the same sales period of the prior year,
consisting of the increase of cost of trading of $3,972,092, and the increase of
cost of adult fish of $4,444,214. Gross profit for fiscal 2007 was
$6,516,910, an increase of $5,105,805 or 361.8%, when compared to fiscal 2006,
as a result that the gross profit of trading increased $512,034, and the gross
profit of sales of adult fish increased $4,593,771.
Selling, general and administrative
expenses for fiscal 2007 were $1,638,696, an increase of $1,012,046 or 161.5%,
when compared to fiscal 2006. This is primarily due to the increase of expense
related to trading, which increased $296, 671, and the increase of expenses for
the expansion of our adult fish business, which increased $255,150.
Income from operations for fiscal 2007
was $4,878,215, an increase of $4,093,759 or 521.9%, when compared to fiscal
2006 as a result of expansion of adult fish farming business and the
introduction of trading business.
Interest income for fiscal 2007 was
$41,264, an increase of $29,005 or 236.6%, when compared to fiscal 2006 as a
result of increased cash and deposit in banks generated by expansion of
business. Other expense, which only includes bank charges, for fiscal
2007 was $3,170, an increase of $2,935 or 1,248.9% over fiscal 2006
Provision for income taxes
for fiscal 2007 was $69,526. There was no provision for income taxes in fiscal
2006 because the Company was entitled income tax free policy for fiscal
2006.
Net income for fiscal 2007 was
$4,846,783, an increase of $4,050,303 or 508.5%, when compared to fiscal
2006.
During
fiscal 2007, total assets increased by $6,566,022, or 60.0%, from $10,949,526 at
December 31, 2006 to $17,515,548 at December 31, 2007. The majority
of the increase was in cash, accounts receivable, with additional increases in
inventories, fixed assets and construction in progress.
Liquidity
and Capital Resources
The Company has typically financed its
operations and expansion from cash flows from operations and loans from our
shareholders and banks. We consummated the reverse merger transaction and raise
approximately $7.7 million in gross proceeds in a private placement financing on
March 29, 2010.
Nanhai Ke Da Heng Sheng has entered
into two credit line agreements with Foshan Nanhai Allied Rural Credit Union
Danzhao Credit Association, one with a credit line of RMB 5,000,000 and the
other with a credit line of RMB 14,800,000. The credit lines are secured
by real estate owned by the sister-in-law of Chen Zhishen, our
Chairman of the Board.. As of March 29, 2010, an aggregate principal amount of
RMB 9,400,000 of loans were outstanding under the two credit lines. The
outstanding loans are all due in January 2011. Outstanding loans under the
credit lines bear interest at a rate of 0.45% per month. Interest is
payable monthly
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth
information regarding beneficial ownership of Granto, Inc. common stock as
of March 31, 2010 (i) by each person who is known by us to
beneficially own more than 5% of our Common Stock; (ii) by each of the officers
and directors of Granto, Inc.; and (iii) by all of officers and directors of
Granto, Inc. as a group.
|
Address of
Beneficial Owner (1)
|
Positions with the
Company
|
Title of Class
|
Amount and
Nature
of Beneficial
Ownership (2)
|
Percent of
Class (2)
|
||||||||
|
Officers and Directors
|
||||||||||||
|
Kelvin
Chan (3)(4)
|
Director,
CEO, and President
|
Common
stock, $0.001 par value
|
17,400,556 | 81.7 | % | |||||||
|
Chen
Zhisheng (3)
|
Director
and Chairman of the Board
|
Common
stock, $0.001 par value
|
0 | 0 | ||||||||
|
Fong
Heung Sang
|
Director
|
Common
Stock,$.001 par value
|
0 | |||||||||
|
All
officers and directors
as a
group (3 persons
named
above)
|
Common
stock, $0.001 par value
|
17,400,556 | 81.7 | % | ||||||||
|
5%
Securities Holders
|
||||||||||||
|
Hua-Mei
21st
Century Partners, L.P.
237 Park Avenue,
9th
Floor
New
York, New York
10017
|
Common
stock, $0.001 par value
|
2,025,519 | (5) | 8.7 | % | |||||||
|
Guerilla
Partners, L.P.
237 Park Avenue,
9th
Floor
New
York, New York
10017
|
Common
stock, $.001 par value
|
1,267,410 | (6) | 5.6 | % | |||||||
(1) Unless
otherwise provided, the address of each person is Dongdu Room 321, No. 475
Huanshidong Road, Guangzhou City, PRC 510075.
(2) Beneficial
Ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. The percent of
class has also been determined in accordance with rules of the SEC. For purposes
of computing such percentage, as of March 31, 2010, there were
21,286,789 shares of Granto, Inc. Common Stock outstanding.
(3)
Pursuant to certain Call Option Agreements between Mr. Chan and the following
persons, each of the following persons has been granted an option, subject to
the satisfaction of certain conditions, to purchase from Mr. Chan over the
course of approximately three years for $.001 per share, the total number of
shares of our Common Stock held by Mr. Chan set forth after the name of the
person: Chen Zhi Sheng - 9,000,000; Pan Haicheng – 2,700,000; Zhao Ping –
1,800,000; and Zheng Songkui – 900,000. The conditions and the percentage of the
total number of shares subject to the option that would vest upon satisfaction
of the condition are as follows:
|
|
·
|
entry by the person and the
Company into a binding employment agreement for a term of not less than
five years for the person to serve as an officer of the Company
– 50%
|
|
|
·
|
the Company and its subsidiaries
achieving not less than $1,000,000 in after-tax net income, as determined
under United States Generally Accepted Accounting Principles consistently
applied (“US GAAP”) for the fiscal year ending December 31,
2010;
|
|
|
·
|
the Company and its subsidiaries
achieving not less than $1,500,000 in after-tax profits, as determined
under US GAAP, for the fiscal year ending December 31,
2011;
|
|
|
·
|
the Company and its subsidiaries
achieving not less than $2,000,000 in after-tax profits, as determined
under US GAAP, for the fiscal year ending December 31,
2012.
|
(4) Mr.
Chan has deposited 2,768,721 shares of Granto, Inc. common stock in escrow with
The Crone Law Group, as escrow agent under an Escrow Agreement dated as of March
29, 2010 between Mr. Chan and The Crone Law Group. The terms of the escrow
agreement are described in the subsection entitled “Delivery of up to 2,768,721
shares of Granto, Inc. Common Stock from Escrow Based on Net Income and Net
Income Per Share” in Item 1.01 herein.
(5) Includes
855,786 shares of Common Stock which may be issued upon conversion of Series A
Stock, 534,867 shares of Common Stock which may be issued upon exercise of Class
A Warrants, 534,867 shares of Common Stock which may be issued upon exercise of
Class B Warrants, 33,333 shares of Common Stock which may be issued upon
exercise of Class C Warrants and 33,333 shares of Common Stock which may be
issued upon exercise of Class D Warrants held by Hua-Mei 21st Century
Partners, L.P.
(6) Includes
539,361 shares of Common Stock which may be issued upon conversion of Series A
Stock, 337,101 shares of Common Stock which may be issued upon exercise of Class
A Warrants, 337,101 shares of Common Stock which may be issued upon exercise of
Class B Warrants, 17,949 shares of Common Stock which may be issued upon
exercise of Class C Warrants and 17,949 shares of Common Stock which may be
issued upon exercise of Class D Warrants held by Guerilla Partners,
L.P.
Changes
in Control
Except as
described herein, there are currently no arrangements which may result in a
change in control of the Company.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors
and Executive Officers
The following table sets forth the name
and position of each of our current executive officers and
directors.
|
Name
|
Age
|
|
Position
|
|||
|
|
||||||
|
Chen
Zhisheng
|
47
|
Chairman
of the Board and Director
|
||||
|
Kelvin
Chan
|
36
|
Chief
Executive Officer, President and Director
|
||||
|
Fong
Heung Sang
|
51
|
Director
|
||||
Chen Zhisheng, became our Chairman and
director on March 29, 2010. Mr. Chen is the CEO of Hainan Keda Hengsheng
Aquaculture Germchit Co., Ltd. since August, 2007. He is also the
Chairman and CEO of Foshan Nanhai Keda Hengsheng Aquaculture Co., Ltd. since
April, 2003. Mr. Chen is an expert in the aquaculture industry, who has been
engaged in this area for almost 30 years. Due to his achievements and
contributions to the aquaculture industry, he is in charge of the Foshan Nanhai
Aquaculture Association as the Chairman. Mr. Chen got his MBA in Agriculture
Administration from the Continue Education School of Qinghua University on July,
2006.
Ying Shan (Kelvin) Chan became our
director, President and CEO on March 29, 2010. Mr. Chan is the Chairman of
Flourishing Blessing (Hong Kong) Co., Ltd. since August, 2008. He is
also a consultant to Nanhai Ke Da Heng Sheng since September 2005. Mr. Chan was
a managing director of SUPERBRAND Company from September, 2002 to August, 2005,
where he was responsible for the company’s strategic development and operational
management. From July, 1998 to August, 2002, Mr. Chan was the manager of the
Greater China District of Applied Biosystem, a NASDAQ listed company. Mr. Chan
got his bachelor’s degree in biology from the Biology Department of Hong Kong
University of Science and Technology in June 1998.
Fong
Heung Sang (Dexter) became our director on March 26, 2010. Mr. Fong was CFO of
Apollo Solar Energy, Inc (OTC: ASOE) from February 2009 to March 2010. Between
December 2006 to January 2009, he was the Executive Vice President of Corporate
Development of Fuqi International Inc (Nasdaq: FUQI). He helped guide the
company in its IPO in October 2007 and raise $72M. From January 2004 to November
2006, Mr. Fong served as the managing partner of Iceberg Financial Consultants,
a financial advisory firm based in China that advises Chinese clients in capital
raising activities in the United States. From December 2001 to December 2003,
Mr. Fong was the Chief Executive Officer of Holley Communications, a Chinese
company that engaged in CDMA chip and cell phone design. Mr. Fong is a U.S. CPA
and has held various positions in such capacity with accounting firms in the
United States and Hong Kong, including Deloitte and Touche, Ernst and Young, and
KPMG Peat Marwick. Mr. Fong also currently serves as director of China Electric
Motor, Inc (Nasdaq: CELM), and an independent director and audit committee
member of a Hong Kong public company, Universal Technology Inc. (HK:8091). Mr.
Fong also serves as a director and audit committee chairman, for each of Diguang
International Development Co., Ltd. (OTCBB: DGNG) and Kandi Technology Corp.
(NASDAQ-CM: KNDI), both U.S. publicly-traded companies. Mr. Fong graduated from
the Hong Kong Baptist College with a diploma in History in 1982. He also
received an MBA from the University of Nevada at Reno in 1989 and a Masters
degree in Accounting from the University of Illinois at Urbana Champaign in
1993.
Employment
Agreements
The Company has not entered into
employment agreements with any of its officers or other key
employees.
Compensation
of Officers and Directors
Since 2004 Chen Zhisheng has received a
salary of 5,000 RMB (approximately $732 based on the exchange rate as of March
29, 2010) per month from Nanhai Ke Da Heng Sheng
The Company does not currently pay any
compensation to its non-officer directors.
TRANSACTIONS
WITH RELATED PERSONS, PROMOTERS AND CONTROL PERSONS;
CORPORATE
GOVERNANCE
Transactions
with related persons
During the fourth quarter of 2009,
Nanhai Ke Da Heng Sheng loaned an aggregate of RMB 21,900,000 (approximately
$3,220,588) to Mr. Zhisheng Chen, the Company’s Chairman of the
Board. Mr. Chen invested the entire proceeds of the loan in the
construction of Foshan Nanhai Guanyao Processing Industrial Park, which has a
total area of 108,000 square meters with the construction area of 85,000 square
meters. The loan proceeds constitute only a portion of the construction costs,
which will total RMB 120,000,000 (approximately $17,647,058). Out of the total
construction cost, about RMB 25,000,000 (approximately $3,676,470) has not yet
been funded. The loan made to Mr. Chen not bear any interest and may
be paid off by deducting Zhisheng Chen’s allocation of shareholders’ dividends
or other means. After the construction has been completed, Nanhai Ke Da Heng
Sheng has a first option to rent Foshan Nanhai Guanyao Processing Industrial
Park on terms to be determined.
Nanhai Ke Da Heng Sheng has entered
into two credit line agreements with Foshan Nanhai Allied Rural Credit Union
Danzhao Credit Association, one with a credit line of RMB 5,000,000 and the
other with a credit line of RMB14,800,000. The credit lines are secured
by real estate owned by the sister-in-law of Chen Zhishen, our
Chairman of the Board.. As of March 29, 2010, an aggregate principal amount of
RMB 9,400,000 of loans were outstanding under the two credit lines. The
outstanding loans are all due in January 2011. Outstanding loans under the
credit lines bear interest at a rate of 0.45% per month. Interest is
payable monthly
The Company purchases over 90% of its
food for the feeding of adult fish from Ke Da Heng Sheng Fish Food Factory, a
company which is wholly owned by the sister of the Company’s Chairman, Zhisheng
Chen. The Company also purchases over 60% of its food for the feeding of fry
from Ke Da Heng Sheng Fish Food Factory. During the year ended December 31, 2009
the Company purchased from Ke Da Heng Sheng Fish Food Factory adult
fish food for an aggregate purchase price of $10,848,894 and fish fry food for
an aggregate purchase price of $204,048. The Company’s purchases from Ke Da Heng
Sheng Fish Food Factory accounted for 91.2% and 61.1%, respectively, of the
Company’s total adult and fish fry food purchases during the year ended December
31, 2009. The Company believes that the amounts paid to Ke Da Heng Sheng Fish
Food Factory for the purchases of fish food are equal to or better than the
amounts that would have been charged for the same sales by persons not
affiliated with the Company.
Director
Independence
We currently do not have any
independent directors, as the term “independent” is defined by the rules of the
Nasdaq Stock Market.
Board
Composition and Committees
The Company’s board of directors is
currently composed of three members, Chen Zhisheng, Kelvin Chan and Fong
Heung Sang.
We currently do not have standing
audit, nominating or compensation committees. Currently, our entire board
of directors is responsible for the functions that would otherwise be handled by
these committees. We intend, however, to establish an audit committee, a
nominating committee and a compensation committee of the board of directors as
soon as practicable. We envision that the audit committee will be
primarily responsible for reviewing the services performed by our independent
auditors, evaluating our accounting policies and our system of internal
controls. The nominating committee would be primarily responsible for
nominating directors and setting policies and procedures for the nomination of
directors. The nominating committee would also be responsible for
overseeing the creation and implementation of our corporate governance policies
and procedures. The compensation committee will be primarily responsible
for reviewing and approving our salary and benefit policies (including stock
options), including compensation of executive officers.
Our board of directors has not made a
determination as to whether any member of our board of directors is an audit
committee financial expert. Upon the establishment of an audit committee,
the board will determine whether any of the directors qualify as an audit
committee financial expert.
Code
of Ethics
Our board of directors will adopt a new
code of ethics that applies to all of our directors, officers and employees,
including our principal executive officer, principal financial officer and
principal accounting officer. The new code will address, among other things,
honesty and ethical conduct, conflicts of interest, compliance with laws,
regulations and policies, including disclosure requirements under the federal
securities laws, confidentiality, trading on inside information, and reporting
of violations of the code.
LEGAL
PROCEEDINGS
From time to time, we may become
involved in various lawsuits and legal proceedings which arise in the
ordinary course of business. However, litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from
time to time that may harm our business. We are currently not aware of any
such legal proceedings or claims that we believe will have a material adverse
affect on our business, financial condition or operating results.
MARKET
PRICE OF AND DIVIDENDS ON OUR COMMON
EQUITY
AND RELATED STOCKHOLDER MATTERS
Prior to the share exchange transaction
described above, Rongfu was a privately held company and there was no trading in
its common stock. Rongfu has become a wholly owned subsidiary of the Company as
a result of the share exchange transaction.
RECENT
SALES OF UNREGISTERED SECURITIES;
USE
OF PROCEEDS FROM REGISTERED SECURITIES
Reference is made to the disclosure set
forth under Item 3.02 of this report, which disclosure is incorporated herein by
reference.
DESCRIPTION
OF SECURITIES
Rongfu is authorized to issue up to
50,000,000 shares of common stock, par value $.001 per share and has no
preferred stock authorized. Each outstanding share of common stock entitles the
holder thereof to one vote per share on all matters. Rongfu’s bylaws
provide that elections for directors shall be by a majority of votes.
Stockholders do not have preemptive rights to purchase shares in any
future issuance of our common stock. Upon its liquidation, dissolution or
winding up, and after payment of creditors the assets of Rongfu will be divided
pro-rata on a share-for-share basis among the holders of the shares of its
common stock.
The holders of shares of Rongfu common
stock are entitled to dividends out of funds legally available when and as
declared by our board of directors. The board of directors of Rongfu has
never declared a dividend and does not anticipate declaring a dividend in the
foreseeable future. However, certain subsidiaries of Rongfu declared and paid
dividends to their shareholders prior to such subsidiaries’ acquisitions by
Rongfu. Should Rongfu decide in the future to pay dividends, as a
holding company, its ability to do so and meet other obligations depends upon
the receipt of dividends or other payments from its operating subsidiaries and
other holdings and investments, and such payments may be restricted under the
laws of the PRC. In addition, Rongfu’s operating subsidiaries, from time
to time, may be subject to restrictions on their ability to make distributions
to Rongfu, including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions. In the event of Rongfu’s
liquidation, dissolution or winding up, holders of its common stock are entitled
to receive, ratably, the net assets available to stockholders after payment of
all creditors.
All of the issued and outstanding
shares of Rongfu’s common stock are duly authorized, validly issued, fully paid
and non-assessable. To the extent that additional shares of Rongfu’s
common stock are issued, the relative interests of existing stockholders will be
diluted.
Rongfu is a privately held company and
has no transfer agent.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Rongfu’s Articles of Incorporation do
not provide for the indemnification of its directors, officer or agents. Article
V, Section 1 of Ronfu’s By-laws provide that Rongfu may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of Rongfu) by reason
of the fact that he or she is or was a director, officer, employee or agent of
Rongfu, or is or was serving at the request of Rongfu as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of Rongfu, and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his or her conduct was
unlawful.
Reference
is made to Section 145 of the Delaware general Corporation Law, which
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation (a
“derivative action”)), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interest of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys’ fees) incurred in connection with the
defense or settlement of such action, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation’s
charter, bylaws, disinterested director vote, stockholder vote, agreement or
otherwise.
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore unenforceable.
At the present time, there is no
pending litigation or proceeding involving a director, officer, employee or
other agent of ours in which indemnification would be required or permitted.
We are not aware of any threatened litigation or proceeding which may
result in a claim for such indemnification.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Please
see Item 9.01 - “Financial Statements and Exhibits” of this Current
Report.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the Commission , located on 100 F Street NE, Washington, D.C. 20549,
Current Reports on Form 8-K, Quarterly Reports on Form 10-QSB, Annual Reports on
Form 10-KSB, and other reports, statements and information as required under the
Securities Exchange Act of 1934, as amended.
The
reports, statements and other information that we have filed with the
Commission may be read and copied at the Commission's Public
Reference Room at 100 F Street NE, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330.
The Commission maintains a web site
(http://www.sec.gov.) that contains the registration statements, reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission such as us. You may access our Commission
filings electronically at this Commission website. These Commission filings are
also available to the public from commercial document retrieval
services.
ITEM
3.02 UNREGISTERED SALES OF EQUITY SECURITIES
On March 29, 2010, we consummated a
Share Exchange Agreement with Rongfu and 9 stockholders and warrantholders of
Rongfu (the “Rongfu Stockholders”) (the “Share Exchange Agreement”).
Pursuant to the Share Exchange Agreement, the Rongfu Stockholders transferred
100% of the outstanding shares of common stock and 100% of the warrants to
purchase shares of common stock of Rongfu held by them, in exchange for an
aggregate of 18,623,889 and warrants to purchase an aggregate of
666,666 shares of our Common Stock. The shares of our Common Stock issued to the
Rongfu Stockholders constitute approximately 77.4% of our issued and outstanding
Common Stock on a fully-diluted basis giving effect to the share exchange and
the sale of our Series A Stock pursuant to the Purchase Agreement discussed
above, but not including any outstanding purchase warrants to purchase shares of
our common stock, including the warrants issued pursuant to the Purchase
Agreement or the warrants issued pursuant to the Share Exchange Agreement. The
shares of our Common Stock and warrants to purchase our Common Stock were issued
in accordance with a safe harbor from the registration requirements of the
Securities Act under Regulation S thereunder or an exemption from the
registration requirements of the Securities Act under Section 4(2) by virtue of
compliance with the provisions of Regulation D under the Securities
Act.
On March 29, 2010 we consummated the
sale to 18 investors of an aggregate of (a) 2,768,721 shares of our Series A
Stock, (b) five year Series A Warrants to purchase an aggregate of 1,730,451
shares of our Common Stock for $3.47 per share and (c) five year Series B
Warrants to purchase an aggregate of 1,730,451 shares of our Common Stock for
$4.17 per share, for an aggregate purchase price of $7.7 million. Each share of
Series A Stock will automatically convert into one share of our Common Stock
(subject to adjustment in certain circumstances to protect the holder against
dilution) immediately all of the following being satisfied:
|
|
·
|
a
registration statement covering the resale of the shares of Common Stock
to be issued upon conversion shall have been filed by the Company and
declared effective by the SEC, and such registration statement continues
to be effective up through and including the date of the
conversion;
|
|
|
·
|
our
shares of Common Stock are eligible for trading on one of the following
exchanges: the Nasdaq SmallCap Market, the American Stock Exchange, the
New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin
Board;
|
|
|
·
|
the
daily volume weighted average price of the Common Stock for ten
consecutive trading days immediately preceding the conversion is greater
than or equal to $5.56 per share (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares) on the primary trading market on which the Common Stock is then
listed or quoted; and
|
|
|
·
|
the
average daily dollar volume of the Common Stock on the primary trading
market on which the Common Stock is then listed or quoted is greater than
or equal to $100,000 for ten consecutive trading days at any time before
the conversion.
|
The
issuances of the shares of Series A Stock, Series A Warrants and Series B
Warrants were exempt from registration under the Securities Act by virtue of
compliance with Section 4(2) of the Securities Act and Regulation D thereunder
and Regulation S.
ITEM
5.01 CHANGES IN CONTROL OF REGISTRANT
Reference is made to the disclosure set
forth under Item 2.01 of this report, which disclosure is incorporated herein by
reference.
As a result of the closing of the share
exchange with the Rongfu Stockholders, the Rongfu Stockholders now own
approximately 77.4% of the total outstanding shares of our Common Stock on a
fully-diluted basis giving effect to the share exchange and the sale of our
Series A Stock, but not including any outstanding purchase warrants to purchase
shares of our common stock, including the warrants issued pursuant to the
Purchase Agreement or the warrants issued pursuant to the Share Exchange
Agreement
ITEM
5.02 DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF
DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN
OFFICERS
In connection with the closing of the
Share Exchange Agreement on March 29, 2010, Janet Gargiulo resigned as President
and Director of Granto, Inc. Such person resigned voluntarily with no
disagreement regarding Granto, Inc.
Also on March 29, 2010, in connection
with the closing of the Share Exchange Agreement and the reverse
acquisition, Chen Zhisheng, Kelvin Chan and Fong Heung Sang were appointed as
directors of Grantio, Inc., Kelvin Chan was elected by the board of directors to
be President and Chief Financial Officer of Granto, Inc. and Chen Zhisheng was
elected as Chairman of the Board of Granto, Inc.
For certain biographical and other
information regarding the newly appointed officers and directors, see the
disclosure under Item 2.01 of this Current Report, which disclosure is
incorporated herein by reference.
|
ITEM 5.03
|
AMENDMENTS
TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL
YEAR
|
Pursuant to the Company’s Articles of
Incorporation, our Board of Directors is authorized to fix the voting powers,
designations, preferences, and relative, participating, optional, or other
special rights, and the qualifications, limitations, or restrictions relating to
any wholly unissued series of Preferred Stock and the number of shares
constituting any series and the designation thereof. On March 26, 2010, pursuant
to the written consent of the sole director of the Board of Directors of the
Company, the Company filed with the Secretary of State of the state of Nevada, a
Certificate of Designations, Preferences and Rights of Series A Preferred Stock
to designate out of the 10,000,000 authorized shares of the Company’s Preferred
Stock, par value $0.001 per share, a series of 3,000,000 shares of Series A
Preferred Stock.
|
ITEM
9.01
|
FINANCIAL
STATEMENTS AND EXHIBITS
|
(a)
Financial Statements
The
financial statements of Rongfu are appended to this Current Report beginning on
page F-1.
(d)
Exhibits
EXHIBIT
INDEX
|
Exhibit
Number
|
|
Description
|
|
2.1
|
Share
Exchange Agreement by and among Granto, Inc., Rongfu, the Rongfu
Stockholders and Janet Gargiulo, dated March 29,
2010
|
|
|
3.1
|
Certificate
of Designations, Preferences and Rights of Series A Preferred Stock of
Granto, Inc.
|
|
|
4.1
|
Series
A Preferred Stock Purchase Agreement between Granto, Inc. and certain
investors, dated March 29, 2010.
|
|
|
4.2
|
Form
of Class A Warrant of Granto, Inc. issued on March 29, 2010 pursuant to
Series A Preferred Stock Purchase Agreement
|
|
|
4.3
|
Form
of Class B Warrant of Granto, Inc. issued on March 29, 2010 pursuant to
Series A Preferred Stock Purchase Agreement
|
|
|
4.4
|
Escrow
Agreement between Granto, Inc., certain officers of Granto, Inc. and The
Crone Law Group, dated March 29, 2010.
|
|
|
4.5
|
Form
of Class C Warrant issued on March 29, 2010 pursuant to Share Exchange
Agreement.
|
|
|
4.6
|
Form
of Class D Warrant issued on March 29, 2010 pursuant to Share Exchange
Agreement.
|
|
|
10.1
|
Form
of Call Option Agreement between Kelvin Chan and various call optionees,
dated as December 29, 2009 and Amendment No. 1 thereto dated March 29,
2010.
|
|
|
10.2
|
Memorandum
between Zhisheng Chen and Nanhai Ke Da Heng Sheng dated December
2009
|
|
|
10.3
|
Technological
Cooperation Agreement Regarding the Propogation of Fish Fry of Nile
Tilapia between Nanhai Ke Da Heng Sheng and Sifa Li dated December 18,
2009.
|
|
|
10.4
|
Entrusted
Management Agreement dated December 26, 2009 among Chen Zhisheng, Nanhai
Ke Da Heng Sheng and Guangzhou Flourishing.
|
|
|
10.5
|
Exclusive
Option Agreement dated December 26, 2009 among Chen Zhisheng, Nanhai Ke Da
Heng Sheng and Guangzhou Flourishing.
|
|
|
10.6
|
Shareholder’s
Voting Proxy Agreement between Chen Zhisheng and Guangzhou
Flourishing.
|
|
|
10.7
|
Shares
Pledge Agreement between Chen Zhisheng, Nanhai Ke Da Heng Sheng and
Guangzhou Flourishing.
|
RONGFU
AQUACULTURE, INC
CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
TABLE
OF CONTENTS
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheets
|
F-2
|
|
|
Consolidated
Statements of Income
|
F-3
|
|
|
Consolidated
Statements of Cash Flows
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-5
|
|
|
Notes
to consolidated Financial Statements
|
|
F-6
- F-15
|
ACSBAcquavella, Chiarelli,
Shuster, Berkower & Co., LLP
|
517
Route one
|
1
Penn Plaza
|
|
Iselin,
New Jersey, 08830
|
36the
Floor
|
|
732.855.9600
|
New
York, NY 10119
|
Report of Independent
Registered Public Accounting Firm
Board of
Directors and Stockholders of
Rongfu
Aquaculture, Inc.
We have
reviewed the accompanying consolidated balance sheets of Rongfu Aquaculture,
Inc. as of September 30, 2009 and 2008 and the consolidated statements of
operations for the nine months ended September 30, 2009 and 2008 and
consolidated statements of cash flows for the nine months then
ended. These financial statements are the responsibility of the
Company's management.
We
conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on
our reviews, we are not aware of any material modifications that should be made
to the accompanying interim financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have
previously audited, in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Rongfu Aquaculture, Inc. as of December 31, 2008 and the related consolidated
statements of income, retained earnings and comprehensive income,
and consolidated statement of cash flows for the year then ended; and
in our report dated January 29, 2010 we expressed an unqualified opinion on
those financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheets as of December 31, 2008, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
Acquavella,
Chiarelli, Shuster, Berkower & Co., LLP
Certified
Public Accountants
New York,
N.Y.
January
29, 2010
F-1
RONGFU
AQUACULTURE, INC
CONSOLIDATED
BALANCE SHEETS
AS
OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
|
9/30/2009
|
12/31/2008
|
|||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
|
$ | 1,589,086 | $ | 14,823,746 | ||||
|
Accounts
receivable, net
|
94,187 | 4,412,956 | ||||||
|
Inventories
|
14,514,394 | 8,892,911 | ||||||
|
Other
receivable
|
21,206 | 21,193 | ||||||
|
Prepaid
expenses
|
232,853 | 307,252 | ||||||
|
Total
Current Assets
|
16,451,726 | 28,458,058 | ||||||
|
Fixed
assets
|
420,978 | 445,865 | ||||||
|
Biological
assets
|
535,022 | 841,625 | ||||||
|
Total
Assets
|
$ | 17,407,726 | $ | 29,745,548 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 2,165,778 | $ | 1,081,645 | ||||
|
Other
payable
|
- | 873,401 | ||||||
|
Due
to shareholder
|
1,308,164 | 8,519,146 | ||||||
|
Advance
from clients
|
508,016 | - | ||||||
|
Short-term
bank loan
|
643,501 | - | ||||||
|
Dividend
payable
|
- | 3,493,603 | ||||||
|
Income
tax payable
|
191,435 | 780,052 | ||||||
|
Total
Current Liabilities
|
$ | 4,816,894 | $ | 14,747,847 | ||||
|
Long-term
Liabilities
|
||||||||
|
Long-term
bank loan
|
1,170,001 | - | ||||||
|
Total
liabilities
|
5,986,895 | 14,747,847 | ||||||
|
Stockholders'
Equity
|
||||||||
|
Common
stock, par value, $0.001 per share, 22,373,434 shares authorized,
1,118,672 and 1,118,672 shares issued and outstanding
|
1,119 | 1,119 | ||||||
|
Additional
paid in capital
|
817,432 | 817,432 | ||||||
|
Subscription
receivables
|
(1,119 | ) | (1,119 | ) | ||||
|
Statutory
reserve
|
665,852 | 665,852 | ||||||
|
Other
comprehensive income
|
879,258 | 861,166 | ||||||
|
Retained
earnings
|
9,058,289 | 12,653,251 | ||||||
|
Total
Stockholders' Equity
|
11,420,831 | 14,997,701 | ||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 17,407,726 | $ | 29,745,548 | ||||
The
accompanying notes are an integral part of these financial
statements.
F-2
RONGFU
AQUACULTURE, INC
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Sales,
net
|
$ | 4,763,650 | $ | 4,178,923 | $ | 21,731,927 | $ | 19,254,317 | ||||||||
|
Cost
of sales
|
3,135,757 | 2,388,759 | 13,323,764 | 10,205,979 | ||||||||||||
|
Gross
profit
|
1,627,893 | 1,790,164 | 8,408,163 | 9,048,338 | ||||||||||||
|
Selling,
general and administrative expenses
|
529,896 | 465,498 | 1,836,400 | 2,024,744 | ||||||||||||
|
Income
from operations
|
1,097,997 | 1,324,666 | 6,571,763 | 7,023,594 | ||||||||||||
|
Other
Income (Expense)
|
||||||||||||||||
|
Interest
income
|
14,670 | 19,647 | 35,510 | 53,066 | ||||||||||||
|
Interest
expense
|
(86,652 | ) | (14,021 | ) | (86,652 | ) | (14,021 | ) | ||||||||
|
Other
expense
|
(334 | ) | (13,537 | ) | (784 | ) | - | |||||||||
|
Total
other Income (Expense)
|
(72,316 | ) | (7,911 | ) | (51,926 | ) | 39,045 | |||||||||
|
Income
before income taxes
|
1,025,681 | 1,316,755 | 6,519,837 | 7,062,639 | ||||||||||||
|
Provision
for income taxes
|
67,667 | 34,774 | 446,572 | 272,436 | ||||||||||||
|
Net
income
|
$ | 958,014 | $ | 1,281,981 | $ | 6,073,265 | $ | 6,790,203 | ||||||||
|
Net
income per common share
|
||||||||||||||||
|
Basic
|
$ | 0.86 | $ | 1,15 | $ | 5.43 | $ | 6.07 | ||||||||
|
Weighted
average common shares outstanding
|
||||||||||||||||
|
Basic
|
1,118,672 | 1,118,672 | 1,118,672 | 1,118,672 | ||||||||||||
The
accompanying notes are an integral part of these financial
statements.
F-3
RONGFU
AQUACULTURE, INC
CONSOLDIATED
STATEMENTS OF CASH FLOWS
FOR
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
|
2009
|
2008
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net
Income
|
$ | 6,073,265 | $ | 6,790,203 | ||||
|
Adjustments
to reconcile net income to net cash
|
||||||||
|
provided
by operating activities:
|
||||||||
|
Depreciation
|
74,168 | 35,340 | ||||||
|
Amortization
of biological assets
|
306,603 | 222,662 | ||||||
|
(Increase)
/ decrease in assets:
|
||||||||
|
Accounts
receivables
|
4,319,397 | 2,113,258 | ||||||
|
Inventories
|
(5,612,888 | ) | (3,954,712 | ) | ||||
|
Prepaid
expense
|
74,559 | 72,084 | ||||||
|
Increase
/ (decrease) in current liabilities:
|
||||||||
|
Accounts
payable
|
1,082,883 | 1,816,021 | ||||||
|
Other
payable
|
(706,103 | ) | ||||||
|
Advances
from clients
|
507,756 | |||||||
|
Income
taxes payable
|
(588,817 | ) | (74,193 | ) | ||||
|
Net
cash provided by operating activities
|
5,530,823 | 7,020,663 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Purchased
fixed assets
|
(60,219 | ) | (170,306 | ) | ||||
|
Biological
assets
|
- | (1,010,458 | ) | |||||
|
Construction
in progress
|
- | (8,493 | ) | |||||
|
Net
cash used by investing activities
|
(60,219 | ) | (1,189,257 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Due
to shareholder
|
(7,380,100 | ) | (1,963,821 | ) | ||||
|
Borrowings
(payment) of short-term loan, net
|
643,171 | |||||||
|
Borrowings
from long-term bank loan
|
1,754,104 | |||||||
|
Payment
of long-term bank loan
|
(584,701 | ) | ||||||
|
Dividend
paid
|
(13,162,289 | ) | ||||||
|
Capital
contribution
|
- | 423,968 | ||||||
|
Net
cash used by financing activities
|
(18,729,815 | ) | (1,539,853 | ) | ||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
24,551 | 393,969 | ||||||
|
Net
change in cash and cash equivalents
|
(13,234,660 | ) | 4,685,522 | |||||
|
Cash
and cash equivalents, beginning balance
|
14,823,746 | 5,803,629 | ||||||
|
Cash
and cash equivalents, ending balance
|
$ | 1,589,086 | $ | 10,489,151 | ||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
|
Cash
paid during the year for:
|
||||||||
|
Income
tax payments
|
$ | 1,035,528 | $ | 346,029 | ||||
|
Interest
payments
|
$ | 86,652 | $ | 14,021 | ||||
The
accompanying notes are an integral part of these financial
statements.
F-4
RONGFU
AQUACULTURE, INC
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
FOR
NINE MONTHS ENDED SEPTEMBER 30, 2009
(Unaudited)
|
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||
|
Common Stock
|
Subscription
|
Paid-in
|
Comprehensive
|
Statutory
|
Retained
|
Stockholders
|
||||||||||||||||||||||
|
Amount
|
Receivables
|
Capital
|
Income
|
Reserves
|
Earnings
|
Equity
|
||||||||||||||||||||||
|
Balance
December 31, 2008
|
1,119 | (1,119 | ) | 817,432 | 861,166 | 665,852 | 12,653,251 | 14,997,701 | ||||||||||||||||||||
|
Foreign
currency translation adjustments
|
18,092 | 18,092 | ||||||||||||||||||||||||||
|
Dividend
paid or declared
|
(9,668,227 | ) | (9,668,227 | ) | ||||||||||||||||||||||||
|
Income
for the nine months ended September 30, 2009
|
6,073,265 | 6,073,265 | ||||||||||||||||||||||||||
|
Balance
September 30, 2009
|
$ | 1,119 | $ | (1,119 | ) | $ | 817,432 | $ | 879,258 | $ | 665,852 | $ | 9,058,289 | $ | 11,420,831 | |||||||||||||
The
accompanying notes are an integral part of these financial
statements
F-5
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
1 - ORGANIZATION
Rongfu
Aquaculture, Inc., (the “Company” or “Rongfu”) was incorporated in the United
States in Delaware on January 8, 2009. The Company formed Flourishing
Blessing (Hongkong) Co., Ltd. (“Hongkong Rongfu”) on November 11, 2008. The
Company formed Guangzhou Flouring Blessing Heng Seng Agriculture Technology Ltd.
(“Guangzhou Rongfu”) on January 9, 2009. Guangzhou Rongfu is a
wholly-owned subsidiary of Rongfu Aquaculture, Inc. organized under the laws of
the People’s Republic of China(PRC). Foshan Nanhai Keda Heng Send Aquatic Co.,
Ltd. (“Foshan”) was incorporated in Foshan, Guangdong Province on April 30,
2003. Foshan formed Hainan keda hengsheng Aquatic fry Co., LTD. in
Hainan province on August 6, 2007.
On
December 26, 2009, Guangzhou Rongfu entered into a series of agreements
including a Management Entrustment Agreement, a Shareholders’ Voting Proxy
Agreement, an Exclusive Option Agreement and a Share Pledge Agreement (the
“Agreements”) with Foshan and its shareholders (the “Transaction”). Foshan
Nanhai Keda Heng Seng Aquatic Co. Ltd. is a corporation formed under the laws of
the PRC. According to these Agreements, Guangzhou Rongfu acquired management
control of Foshan whereby Guangzhou Rongfu is entitled to all of the earnings
before tax of Jiali, as a management fee, and is obligated to fund Foshan
operations and pay all of the debts.
The
contractual arrangements completed on December 26, 2009 provide that Guangzhou
Rongfu has controlling interest in Foshan under FASB Accounting Standards
Codification “Consolidation of Variable Interest Entities”, an Interpretation of
an Accounting Research Bulletin, which requires Guangzhou Rongfu to consolidate
the financial statements of Foshan and ultimately consolidate with its parent
company, Rongfu Aquaculture, Inc.
The
Company, through its subsidiary, and exclusive contractual arrangement with
Foshan Nanhai Keda Heng Seng Aquatic Co. Ltd. is engaged in integrated business
of aquaculture including Tilapia brood stock, Tilapia fry, Tilapia farming, and
marketing for Tilapia. It is specializing in the production of the Hengsheng
Brand Nile Tilapia and the new licensed New Jifu Tilapia.
In the
opinion of the management of Rongfu, the accompanying consolidated interim
financial statements contain all material adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the consolidated financial
position of Rongfu at September 30, 2009 and the results of its operations for
the three and nine month periods ended September 30, 2009 and 2008 and its cash
flows for the nine month periods September 30, 2009 and 2008. Actual results may
differ from these estimates as a result of different assumptions or
conditions.
Consolidated
financial statements present as if the Company and its subsidiaries have been
together since January 1, 2006.
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and represent the pro forma historical results of the consolidated group. The
Company adopted the new accounting guidance (“Codification”) on July 1, 2009.
For the year ended December 31, 2009, all reference for periods subsequent to
July 1, 2009 are based on the codification. The Company's functional currency is
the Chinese Renminbi, however the accompanying consolidated financial statements
have been translated and presented in United States Dollars.
F-6
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of
Consolidation
The
consolidated financial statements include the accounts of the Company, its
subsidiary and variable interest entity (“VIE”) for which the Company is the
primary beneficiary. All inter-company accounts and transactions have
been eliminated in consolidation. The Company has adopted the
Consolidation Topic of the FASB Accounting Standards Codification which requires
a VIE to be consolidated by a company if that company is subject to a majority
of the risk of loss for the VIE or is entitled to receive a majority of the
VIE’s residual returns.
.
Translation
Adjustment
As of
September 30, 2009 and December 31, 2008, the accounts of the Company were
maintained, and its financial statements were expressed, in Chinese Yuan
Renminbi (“CNY”). Such financial statements were translated into U.S.
Dollars (“USD”) in accordance with the Foreign Currency Matters Topic of the
Codification, with the CNY as the functional currency. According to
the Codification, all assets and liabilities were translated at the current
exchange rate, stockholders’ equity are translated at the historical rates and
income statement items are translated at the average exchange rate for the
period. The resulting translation adjustments are reported under other
comprehensive income in accordance with the Comprehensive Income Topic of the
Codification, as a component of shareholders’ equity. Transaction
gains and losses are reflected in the income statement.
Statement of Cash
Flows
In
accordance with the Statement of Cash Flows Topic of the Codification, cash
flows from the Company’s operations are based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Comprehensive
Income
The
Company follows the Comprehensive Income Topic of the Codification.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income.
Risks and
Uncertainties
The
Company’s operations are carried out in the PRC. Accordingly, the
Company’s business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, by the
general state of the PRC’s economy. The Company’s business may be
influenced by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
F-7
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought. There
were no contingencies of this type on September 30, 2009.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be
disclosed.
There
were no contingencies of this type on September 30, 2009.
Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer
credit worthiness, current economic trends and changes in customer payment
patterns to evaluate the adequacy of these reserves. Reserves are
recorded primarily on a specific identification basis. There were no
allowances for doubtful accounts as of September 30, 2009 and December 31, 2008,
respectively.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. The Management compares the cost of inventories with the market value
and allowance is made for writing down their inventories to market value, if
lower. As of September 30, 2009 and December 31, 2008, inventories consist of
the following:
|
9/302009
|
12/312008
|
|||||||
|
Raw
materials
|
$ | 3,184,155 | $ | 27,725 | ||||
|
Work
in process and finished goods
|
11,330,239 | 8,865,186 | ||||||
|
Total
|
$ | 14,514,394 | $ | 8,892,911 | ||||
F-8
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant &
Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings 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 estimated lives of:
|
Buildings
|
10-20
years
|
|
Fishing
gear
|
5-10years
|
|
Transportation
equipment
|
5-10
years
|
|
Office
equipment
|
3-5
years
|
As of
September 30, 2009 and December 31, 2008, Property, Plant & Equipment
consist of the following:
|
9/30/2009
|
12/31/2008
|
|||||||
|
Buildings
|
$ | 73,630 | $ | 60,230 | ||||
|
Fishing
gear
|
424,937 | 408,197 | ||||||
|
Transportation
equipment
|
37,330 | 37,155 | ||||||
|
Office
equipment
|
31,091 | 1,187 | ||||||
|
Construction
in progress
|
- | 10,938 | ||||||
|
Total
|
566,988 | 517,707 | ||||||
|
Accumulated
depreciation
|
(146,010 | ) | (71,842 | ) | ||||
| $ | 420,978 | $ | 445,865 | |||||
Depreciation
expense for the nine months ended September 30, 2009 and 2008 was $74,168 and
$17,820, respectively.
Long-Lived
Assets
Since
April 30, 2003, the Company adopted the Property, Plant and Equipment Topic of
the Codification, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes previous accounting
guidance, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of,” and “Reporting the Results of Operations for a
Disposal of a Segment of a Business.” The Company periodically evaluates the
carrying value of long-lived assets to be held and used, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal. Based on its
review, the Company believes that, as of September 30, 2009, there were no
impairments of its long-lived assets.
F-9
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial
Instruments
The
Financial Instrument Topic of the Codification requires that the Company
disclose estimated fair values of financial instruments. The carrying amounts
reported in the statements of financial position for current assets and current
liabilities qualifying as financial instruments are a reasonable estimate of
fair value.
.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with the Revenue
Recognition Topic of the Codification. Sales 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 collectability is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue.
Advertising
Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred. Advertising expense for the nine months ended September 30,
2009 and 2008 were $18,867 and $ 7,925, respectively.
Income
Taxes
The
Company utilizes the accounting guidance, “Accounting for Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
It is the
Company’s intention to permanently reinvest earnings from activity with china.
And thereby indefinitely postpone repatriation of these funds to the US.
Accordingly, no domestic deferred income tax provision has been made fro US
income tax which could result from paying dividend to the Company.
There
were no deferred tax difference in 2009 and 2008
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, all are in China. The Company controls credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures.
The Company routinely assesses the financial strength of its customers and,
based upon factors surrounding the credit risk, establishes an allowance, if
required, for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is
limited.
F-10
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Subsequent
Events
The
Company evaluated subsequent events through the time of filing this year-end
report for items effecting three-year ended 2008, 2007 and 2006 through January
29, 2010. No
significant events occurred subsequent to the balance sheet date but prior to
the filing of this report that would have a material impact on our consolidated
financial statements.
Recent Accounting
Pronouncements
In May
2009, the FASB issued accounting guidance for “Subsequent Events”, which is
included in ASC Topic 855, Subsequent Events. ASC Topic 855 established
principles and requirements for evaluating and reporting subsequent events and
distinguishes which subsequent events should be recognized in the financial
statements versus which subsequent events should be disclosed in the financial
statements. ASC Topic 855 also required disclosure of the date through which
subsequent events are evaluated by management. ASC Topic 855 was effective for
interim periods ending after June 15, 2009 and applies prospectively. Because
ASC Topic 855 impacted the disclosure requirements, and not the accounting
treatment for subsequent events, the adoption of ASC Topic 855 did not impact
our results of operations or financial condition.
Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting
Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
All guidance contained in the Codification carries an equal level of authority.
The Codification superseded all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not
included in the Codification is non-authoritative. The FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”). The FASB will
not consider ASUs as authoritative in their own right. ASUs will serve only to
update the Codification, provide background information about the guidance and
provide the bases for conclusions on the change(s) in the Codification.
References made to FASB guidance throughout this document have been updated for
the Codification.
In August
2009, the FASB issued, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, an entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value measurements. This ASU is effective
October 1, 2009. The Company is currently evaluating the impact of this
standard, but would not expect it to have an impact on the Company’s
consolidated results of operations or financial condition.
F-11
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In
September 2009, the FASB issued, Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC
820 to provide guidance on measuring the fair value of certain alternative
investments such as hedge funds, private equity funds and venture capital funds.
The ASU indicates that, under certain circumstance, the fair value of such
investments may be determined using net asset value (NAV) as a practical
expedient, unless it is probable the investment will be sold at something other
than NAV. In those situations, the practical expedient cannot be used and
disclosure of the remaining actions necessary to complete the sale is required.
The ASU also requires additional disclosures of the attributes of all
investments within the scope of the new guidance, regardless of whether an
entity used the practical expedient to measure the fair value of any of its
investments. This ASU is effective October 1, 2009. The Company is
currently evaluating the impact of this standard, but would not expect it to
have an impact on the Company’s consolidated results of operations or financial
condition.
In
October 2009, the FASB issued, Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force, that
provides amendments to the criteria for separating consideration in
multiple-deliverable arrangements. As a result of these amendments,
multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The ASU does this by establishing a
selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. A
vendor will be required to determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. This ASU also eliminates the residual method
of allocation and will require that arrangement consideration be allocated at
the inception of the arrangement to all deliverables using the relative selling
price method, which allocates any discount in the overall arrangement
proportionally to each deliverable based on its relative selling price. Expanded
disclosures of qualitative and quantitative information regarding application of
the multiple-deliverable revenue arrangement guidance are also required under
the ASU. The ASU does not apply to arrangements for which industry specific
allocation and measurement guidance exists, such as long-term construction
contracts and software transactions. This is effective beginning January 1,
2011. The Company is currently evaluating the impact of this standard on its
consolidated results of operations and financial condition.
In
October 2009, the FASB issued, Certain Revenue Arrangements That
Include Software Elements—a consensus of the FASB Emerging Issues Task
Force, that reduces the types of transactions that fall within the
current scope of software revenue recognition guidance. Existing software
revenue recognition guidance requires that its provisions be applied to an
entire arrangement when the sale of any products or services containing or
utilizing software when the software is considered more than incidental to the
product or service. As a result of the amendments, many tangible products and
services that rely on software will be accounted for under the multiple-element
arrangements revenue recognition guidance rather than under the software revenue
recognition guidance. Under the amendments, the following components would be
excluded from the scope of software revenue recognition guidance: the
tangible element of the product, software products bundled with tangible
products where the software components and non-software components function
together to deliver the product’s essential functionality, and undelivered
components that relate to software that is essential to the tangible product’s
functionality. The ASU also provides guidance on how to allocate transaction
consideration when an arrangement contains both deliverables within the scope of
software revenue guidance (software deliverables) and deliverables not within
the scope of that guidance (non-software deliverables). This amendment is
effective beginning January 1, 2011. The Company is currently evaluating
the impact of this standard on its consolidated results of operations and
financial condition.
F-12
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
3 –OTHER
RECEIVABLES
Other
receivables mainly consist of cash advances to rent deposit. As of September 30,
2009 and December 31, 2008, the other receivables were $21,206 and $21,193,
respectively.
Note 4 – BIOLOGICAL
ASSETS
As of
September 30, 2009, December 31, 2008, Biological assets consist of the
following:
|
9/30/2009
|
12/312008 | |||||||
|
Carp
|
$ | 20,562 | $ | 20,562 | ||||
|
Tilapia
|
959,561 | 959,561 | ||||||
|
Snakeheads
|
178,204 | 178,204 | ||||||
|
Total
|
1,158,327 | 1,158,327 | ||||||
|
Accumulated
depreciation
|
(623,305 | ) | (316,702 | ) | ||||
| $ | 535,022 | $ | 841,625 | |||||
Note
5 – RELATED
PARTY
The
Company buys fish feed from a related party supplier. The Company also borrowed
money from a shareholder of the Company.
Note
6 – DUE TO
SHAREHOLDER
The
Company has a payable due to a shareholder. As of September 30, 2009
and December 31, 2008, due to a shareholder were $ 1,308,164 and $ 8,519,146,
respectively. Amounts due are payable upon demand with no stated
interest.
Note
7 – CONCENTRATIONS
At
September 30 2009, 87% of account payable due to one related party vendor. For
the nine months ended September 30, 2009, the Company had one related party
vendor who accounted for 89% of total purchases.
Note
8 – COMPENSATED
ABSENCES
Regulation
45 of the local labor law of the People’s Republic of China (“PRC”) entitles
employees to annual vacation leave after 1 year of service. In
general, all leave must be utilized annually, with proper
notification. Any unutilized leave is cancelled.
Note
9- DEBT
As of
September 30, 2009, the Company had debt as follows:
|
Amount
|
Interest rate
|
Due
|
|||||||||
|
Short
tem bank loan
|
$ | 643,501 | 4.425 | % |
Feb
13,2010
|
||||||
|
Long
term bank loan
|
$ | 1,170,001 | 4.50 | % |
Feb
13 and 14, 2011
|
||||||
The
Company is using these loans for working capital purposes and secured by certain
real estate and property insurance.
F-13
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
10 - INCOME
TAXES
The
Company operates in more them one jurisdiction with complex regulatory
environments subject to different interpretations by the taxpayer and the
respective governmental taxing authorities, we evaluate our tax positions and
establish liabilities, if required. For uncertain tax position which may be
challenged by local tax authorities and may not be fully sustained despite our
belief that the underlying tax positions maybe be fully supportable. At this
time the Company is not able to make a reasonable estimate of the impact on the
effective tax rate related these items which could be challenged.
Pursuant
to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) through December
31, 2007 is at a
statutory rate of 33%, which is comprised of 30% national income tax and 3%
local income tax. As of January
1, 2008, the EIT is at a statutory rate of 25%. The Company is an
agriculture enterprise and under PRC Income Tax Laws, it is entitled to an
exemption for 2006. Starting from January 1, 2008, it is entitled to
have new PRC tax policy for the agriculture enterprise.
The
Company’s income come from three parts including fish breeding, fish cultivation
and selling adult fish. For income from fish breeding, it is entitled to an
exemption. For income from fish cultivation, EIT is a discount rate of 12.5%.
For income from selling adult fish, EIT is a rate of 25%.
|
The
following is a reconciliation of income tax expense:
|
||||||||
|
9/30/2009
|
International
|
Total
|
||||||
|
Current
|
$ | 446,572 | $ | 446,572 | ||||
|
Deferred
|
- | - | ||||||
|
Total
|
$ | 446,572 | $ | 446,572 | ||||
|
9/30/2008
|
International
|
Total
|
||||||
|
Current
|
$ | 272,436 | $ | 272,436 | ||||
|
Deferred
|
- | - | ||||||
|
Total
|
$ | 272,436 | $ | 272,436 | ||||
Note
11– COMMITMENTS &
CONTINGENCIES
The
Company leases facilities under operating leases, which expire on different
dates. It pays for on an annual basis and accrues for throughout the
year. For nine months ended September 30, 2009, rent expense
was $ 315,903. Future payments under these leases are as
follows: 2010 - $75,280; 2011 - $65,925; 2012 - $65,925; 2013 -
$46,979.
Note
12 – STATUTORY
RESERVE
In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprises income, after the payment of the PRC income taxes, shall be
allocated to the statutory surplus reserves and statutory public welfare fund.
Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent
of the profit after tax to the surplus reserve fund and additional 5-10 percent
to the public affair fund. The public welfare fund reserve was limited to 50
percent of the registered capital. Effective January 1, 2006, there
is now only one fund requirement. The reserve is 10 percent of income after tax,
not to exceed 50 percent of registered capital. Statutory Reserve funds are
restricted for set off against losses, expansion of production and operation or
increase in register capital of the respective company. Statutory public welfare
fund is restricted to the capital expenditures for the collective welfare of
employees. These reserves are not transferable to the Company in the form
of cash dividends, loans or advances. These reserves are therefore not available
for distribution except in liquidation. As of September 30, 2009 and December
31, 2008, the Company had allocated $ 665,852, to these non-distributable
reserve funds.
F-14
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Note
13- OTHER
COMPREHENSIVE INCOME
Balances
of related after-tax components comprising accumulated other comprehensive
income, included in stockholders’ equity, at September 30, 2009 and December 31,
2008, are as follows:
|
Foreign
Currency
Translation
Adjustment
|
Accumulated
Other
Comprehensive
Income
|
|||||||
|
Balance
at December 31, 2008
|
$ | 861,166 | $ | 861,166 | ||||
|
Change
for 2009
|
18,092 | 18,092 | ||||||
|
Balance
at September 30, 2009
|
$ | 879,258 | $ | 879,258 | ||||
Note
14- SUBSEQUENT
EVERNTS
On
December, 2009, a shareholder borrowed RMB 21,900,000 ($ 3,203,019 translated at
$1=RMB 6.8373) from the Company. The shareholder invested this amount of money
in construction of Foshan Nanhai Guanyao Processing Industrial Park that has a
total area of 108,000 square meters with the construction area of 84,000 square
meters. The loan is no stated interest. The company has priority
right to use it once its construction has been completed. The rent incurred from
using this property will be agreed on by the shareholder and the
Company.
On
January 5, 2010, the Company entered into A Security Purchase
Agreement to make available to investors: (1)124,113 shares of common stock; (2)
Series A common stock purchase warrants to purchase 124,113 shares common stock
with exercise of $3.53;(3) Series B common stock purchase warrants and together
with Series A warrants to purchase 124,113 shares common stock, exercise price
of $4.23. The Company had equity financing of $ 350,000 from this
agreement.
On
January 12, 2010, the Company entered into A Security Purchase
Agreement to make available to investors: (1)70,922 shares of common stock; (2)
Series A common stock purchase warrants to purchase 70,922 shares common stock
with exercise of $3.53;(3) Series B common stock purchase warrants and together
with Series A warrants to purchase 70,922 shares common stock, exercise price of
$4.23. The company had equity financing of $ 200,000 from this
agreement.
On
January 21, 2010, the Company entered into A Security Purchase
Agreement to make available to investors: (1)35,461 shares of common stock; (2)
Series A common stock purchase warrants to purchase 35,461 shares common stock
with exercise of $3.53;(3) Series B common stock purchase warrants and together
with Series A warrants to purchase 35,461 shares common stock, exercise price of
$4.23. The Company had equity financing of $ 100,000 from this
agreement.
F-15
RONGFU
AQUACULTURE, INC
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2008
TABLE
OF CONTENTS
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheets
|
F-2
|
|
|
Consolidated
Statements of Income
|
F-3
|
|
|
Consolidated
Statements of Cash Flows
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-5
|
|
|
Notes
to consolidated Financial Statements
|
|
F-6
- F-15
|
ACSBAcquavella, Chiarelli,
Shuster, Berkower & Co., LLP
|
517
Route one
|
1
Penn Plaza
|
|
Iselin,
New Jersey, 08830
|
36the
Floor
|
|
732.855.9600
|
New
York, NY 10119
|
Report of Independent
Registered Public Accounting Firm
Board of
Directors and Stockholders of
Rongfu
Aquaculture, Inc.
We have
audited the accompanying consolidated balance sheets of Rongfu Aquaculture, Inc.
as of December 31, 2008 and 2007, and the related consolidated statements of
income, stockholders’ equity and comprehensive income, and cash flows for each
of the years in the three-year period ended December 31, 2008. Rongfu
Aquaculture, Inc.’s management is responsible for these financial statements.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that out audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Rongfu Aquaculture
Inc. as of December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.
Acquavella,
Chiarelli, Shuster, Berkower & Co., LLP
Certified
Public Accountants
New York,
N.Y.
January
29, 2010
F-1
RONGFU
AQUACULTURE, INC
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2008 AND DECEMBER 31,2007
|
12/31/2008
|
12/31/2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
|
$ | 14,823,746 | $ | 5,803,629 | ||||
|
Accounts
receivable, net
|
4,412,956 | 2,677,259 | ||||||
|
Inventories
|
8,892,911 | 8,491,631 | ||||||
|
Other
receivable
|
21,193 | 19,877 | ||||||
|
Prepaid
expenses
|
307,252 | 360,547 | ||||||
|
Total
Current Assets
|
28,458,058 | 17,352,943 | ||||||
|
Fixed
assets
|
445,865 | 162,605 | ||||||
|
Biological
assets
|
841,625 | - | ||||||
|
Total
Assets
|
$ | 29,745,548 | $ | 17,515,548 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 1,081,645 | $ | 700,706 | ||||
|
Other
payable
|
873,401 | - | ||||||
|
Due
to shareholders
|
8,519,146 | 10,402,193 | ||||||
|
Dividends
payable
|
3,493,603 | - | ||||||
|
Income
tax payable
|
780,052 | 71,966 | ||||||
|
Total
Current Liabilities
|
$ | 14,747,847 | $ | 11,174,865 | ||||
|
Stockholders'
Equity
|
||||||||
|
Common
stock, par value, $0.001 per share, 22,373,434 shares authorized,
1,118,672 and 1,118,672 shares issued and outstanding
|
1,119 | 1,119 | ||||||
|
Additional
paid in capital
|
817,432 | 393,014 | ||||||
|
Subscription
receivables
|
(1,119 | ) | (1,119 | ) | ||||
|
Statutory
reserve
|
665,852 | 200,666 | ||||||
|
Other
comprehensive income
|
861,166 | 260,992 | ||||||
|
Retained
earnings
|
12,653,251 | 5,486,011 | ||||||
|
Total
Stockholders' Equity
|
14,997,701 | 6,340,683 | ||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 29,745,548 | $ | 17,515,548 | ||||
The
accompanying notes are an integral part of these financial
statements.
F-2
RONGFU
AQUACULTURE, INC
CONSOLIDATED
STATEMENTS OF INCOME
FOR
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
2008
|
2007
|
2006
|
||||||||||
|
Sales,
net
|
$ | 35,592,569 | $ | 22,993,929 | $ | 947,1818 | ||||||
|
Cost
of sales
|
20,043,897 | 16,477,019 | 8,060,713 | |||||||||
|
Gross
profit
|
15,548,672 | 6,516,910 | 1,411,105 | |||||||||
|
Selling,
general and administrative expense
|
2,717,796 | 1,638,695 | 626,649 | |||||||||
|
Income
from operations
|
12,830,876 | 4,878,215 | 784,456 | |||||||||
|
Interest
income
|
71,087 | 41,264 | 12,259 | |||||||||
|
Interest
expenses
|
(12,733 | ) | - | - | ||||||||
|
Other
expense
|
(1,954 | ) | (3,170 | ) | (235 | ) | ||||||
|
Total
Other Income (Expense)
|
56,400 | 38,094 | 12,024 | |||||||||
|
Income
before income taxes
|
12,887,276 | 4,916,309 | 796,480 | |||||||||
|
Provision
for income taxes
|
1,027,781 | 69,526 | - | |||||||||
|
Net
income
|
$ | 11,859,495 | $ | 4,846,783 | $ | 796,480 | ||||||
|
Net
income for common share
|
||||||||||||
|
Basic
|
$ | 10.60 | $ | 4.33 | $ | 0.71 | ||||||
|
Weighted
average common shares outstanding
|
||||||||||||
|
Basic
|
1,118,672 | 1,118,672 | 1,118,672 | |||||||||
The
accompanying notes are an integral part of these financial
statements.
F-3
RONGFU
AQUACULTURE, INC
CONSOLDIATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
2008
|
2007
|
2006
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
Income
|
$ | 11,859,495 | $ | 4,846,783 | $ | 796,480 | ||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||
|
provided
by operating activities:
|
||||||||||||
|
Depreciation
|
52,572 | 17,520 | 1,750 | |||||||||
|
Amortization
of biological assets
|
316,702 | - | - | |||||||||
|
Obsolescence
reserve
|
||||||||||||
|
(Increase)
/ decrease in assets:
|
||||||||||||
|
Accounts
receivables
|
(1,508,501 | ) | (1,901,991 | ) | (511,615 | ) | ||||||
|
Inventory
|
155,782 | 1,146,196 | (7,274,630 | ) | ||||||||
|
Prepaid
expense
|
74,694 | (76,605 | ) | (173,017 | ) | |||||||
|
Other
receivable
|
- | - | (5,806 | ) | ||||||||
|
Increase
/ (decrease) in current liabilities:
|
||||||||||||
|
Accounts
payable
|
323,825 | (92,011 | ) | 289,083 | ||||||||
|
Other
payable
|
845,414 | - | - | |||||||||
|
Income
taxes payable
|
680,784 | 69,526 | - | |||||||||
|
Net
cash provided by operating activities
|
12,800,767 | 4,009,418 | (6,877,755 | ) | ||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Purchased
fixed assets
|
(351,389 | ) | (125,561 | ) | (29,819 | ) | ||||||
|
Biological
assets
|
(1,158,327 | ) | - | - | ||||||||
|
Construction
in progress
|
(8,493 | ) | (28,884 | ) | (5,910 | ) | ||||||
|
Net
cash used by investing activities
|
(1,518,209 | ) | (154,445 | ) | (35,729 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Due
to shareholder
|
(2,489,354 | ) | 448,153 | 7,704,942 | ||||||||
|
Capital
contribution
|
424,418 | 331,082 | - | |||||||||
|
Net
cash provided by financing activities
|
(2,064,936 | ) | 779,235 | 7,704,942 | ||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(197,505 | ) | 227,240 | 44,920 | ||||||||
|
Net
change in cash and cash equivalents
|
9,020,117 | 4,861,448 | 836,378 | |||||||||
|
Cash
and cash equivalents, beginning balance
|
5,803,629 | 942,181 | 105,803 | |||||||||
|
Cash
and cash equivalents, ending balance
|
$ | 14,823,746 | $ | 5,803,629 | $ | 942,181 | ||||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Dividend
payments
|
$ | 845,414 | $ | - | $ | - | ||||||
|
Income
tax payments
|
$ | 346,997 | $ | - | $ | - | ||||||
|
Interest
payments
|
$ | 12,733 | $ | - | $ | - | ||||||
The
accompanying notes are an integral part of these financial
statements.
F-4
RONGFU
AQUACULTURE, INC
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007AND 2006
|
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||
|
Common Stock
|
Subscription
|
Paid-in
|
Comprehensive
|
Statutory
|
Retained
|
Stockholders
|
||||||||||||||||||||||
|
Amount
|
Receivables
|
Capital
|
Income
|
Reserves
|
Earnings
|
Equity
|
||||||||||||||||||||||
|
Balance
December 31, 2005
|
$ | 1,119 | $ | (1,119 | ) | $ | 61,932 | $ | - | $ | - | $ | 43,414 | $ | 105,346 | |||||||||||||
|
Foreign
currency translation adjustments
|
30,887 | 30,887 | ||||||||||||||||||||||||||
|
Transferred
to Statutory reserve
|
80,695 | (80,695 | ) | - | ||||||||||||||||||||||||
|
Income
for the year ended December 31, 2006
|
796,480 | 796,480 | ||||||||||||||||||||||||||
|
Balance
December 31, 2006
|
1,119 | (1,119 | ) | 61,932 | 30,887 | 80,695 | 759,199 | 932,713 | ||||||||||||||||||||
|
Foreign
currency translation adjustments
|
230,105 | 230,105 | ||||||||||||||||||||||||||
|
Capital
contribution
|
331,082 | 331,082 | ||||||||||||||||||||||||||
|
Transferred
to Statutory reserve
|
119,971 | (119,971 | ) | |||||||||||||||||||||||||
|
Income
for the year ended December 31, 2007
|
4,846,783 | 4,846,783 | ||||||||||||||||||||||||||
|
Balance
December 31, 2007
|
1,119 | (1,119 | ) | 393,014 | 260,992 | 200,666 | 5,486,011 | 6,340,683 | ||||||||||||||||||||
|
Foreign
currency translation adjustments
|
600,174 | 600,174 | ||||||||||||||||||||||||||
|
Capital
contribution
|
424,418 | 424,418 | ||||||||||||||||||||||||||
|
Transferred
to Statutory reserve
|
465,186 | (465,186 | ) | - | ||||||||||||||||||||||||
|
Dividend
paid or declared
|
(4,227,069 | ) | (4,227,069 | ) | ||||||||||||||||||||||||
|
Income
for the year ended December 31, 2008
|
11,859,495 | 11,859,495 | ||||||||||||||||||||||||||
|
Balance
December 31, 2008
|
$ | 1,119 | $ | (1,119 | ) | $ | 817,432 | $ | 861,166 | $ | 665,852 | $ | 12,653,251 | $ | 14,997,701 | |||||||||||||
The
accompanying notes are an integral part of these financial
statements
F-5
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
1 - ORGANIZATION
Rongfu
Aquaculture, Inc., (the “Company” or “Rongfu”) was incorporated in the United
States in Delaware on January 8, 2009. The Company formed Flourishing
Blessing (Hongkong) Co., Ltd. (“Hongkong Rongfu”) on November 11, 2008. The
Company formed Guangzhou Flouring Blessing Heng Seng Agriculture Technology Ltd.
(“Guangzhou Rongfu”) on January 9, 2009. Guangzhou Rongfu is a
wholly-owned subsidiary of Rongfu Aquaculture, Inc. organized under the laws of
the People’s Republic of China (PRC). Foshan Nanhai Keda Heng Send Aquatic Co.,
Ltd. was incorporated in Foshan, Guangdong Province on April 30, 2003. Foshan
formed Hainan keda hengsheng Aquatic fry Co., LTD. in Hainan province on August
6, 2007.
On
December 26, 2009, Guangzhou Rongfu entered into a series of agreements
including a Management Entrustment Agreement, a Shareholders’ Voting Proxy
Agreement, an Exclusive Option Agreement and a Share Pledge Agreement (the
“Agreements”) with Foshan Nanhai Keda Heng Seng Aquatic Co. Ltd. . (“Foshan")
and its shareholders (the “Transaction”). Foshan Nanhai Keda Heng Seng Aquatic
Co. Ltd. is a corporation formed under the laws of the PRC. According to these
Agreements, Guangzhou Rongfu acquired management control of Foshan whereby
Guangzhou Rongfu is entitled to all of the earnings before tax of Jiali, as a
management fee, and is obligated to fund Foshan operations and pay all of the
debts.
The
contractual arrangements completed on December 26, 2009 provide that Guangzhou
Rongfu has controlling interest in Foshan as defined by FASB Interpretation
No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), an
Interpretation of Accounting Research Bulletin No. 51, which requires
Guangzhou Rongfu to consolidate the financial statements of Foshan and
ultimately consolidate with its parent company, Rongfu Aquaculture,
Inc.
The
Company, through its subsidiary, and exclusive contractual arrangement with
Foshan Nanhai Keda Heng Seng Aquatic Co. Ltd. is engaged in integrated business
of aquaculture including Tilapia brood stock, Tilapia fry, Tilapia farming, and
marketing for Tilapia. It is specializing in the production of the Hengsheng
Brand Nile Tilapia and the new licensed New Jifu Tilapia.
Consolidated
financial statements present as if the Company and its subsidiaries have been
together since January 1, 2006.
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and represent the pro forma historical results of the consolidated group. The
Company adopted the new accounting guidance (“Codification”) on July 1, 2009.
For the year ended December 31, 2009, all reference for periods subsequent to
July 1, 2009 are based on the codification. The Company's functional currency is
the Chinese Renminbi; however the accompanying consolidated financial statements
have been translated and presented in United States Dollars.
Principles of
Consolidation
The
consolidated financial statements include the accounts of the Company, its
subsidiary and variable interest entity (“VIE”) for which the Company is the
primary beneficiary. All inter-company accounts and transactions have
been eliminated in consolidation. The Company has adopted FIN 46R
which requires a VIE to be consolidated by a company if that company is subject
to a majority of the risk of loss for the VIE or is entitled to receive a
majority of the VIE’s residual returns.
F-6
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Translation
Adjustment
As of
December 31, 2008, 2007 and 2006, the accounts of the Company were maintained,
and its financial statements were expressed, in Chinese Yuan Renminbi
(“CNY”). Such financial statements were translated into U.S. Dollars
(“USD”) in accordance with Statement of Financial Accounting Standards No. 52,
“Foreign Currency Translation” (“SFAS No. 52”), with the CNY as the functional
currency. According to SFAS No. 52, all assets and liabilities were
translated at the current exchange rate, stockholders’ equity are translated at
the historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, “Reporting
Comprehensive Income,” as a component of shareholders’
equity. Transaction gains and losses are reflected in the income
statement.
Statement of Cash
Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are based upon the local currencies. As a result, amounts
related to assets and liabilities reported on the statement of cash flows will
not necessarily agree with changes in the corresponding balances on the balance
sheet.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Comprehensive
Income
The
Company follows the Statement of Financial Accounting Standards No. 130,
“Reporting Comprehensive Income.” Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income.
Risks and
Uncertainties
The
Company’s operations are carried out in the PRC. Accordingly, the
Company’s business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, by the
general state of the PRC’s economy. The Company’s business may be
influenced by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
F-7
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be
sought.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be
disclosed.
Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
There
were no contingencies of this type at December 31, 2008 and 2007.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer
credit worthiness, current economic trends and changes in customer payment
patterns to evaluate the adequacy of these reserves. Reserves are
recorded primarily on a specific identification basis. There were no
allowances for doubtful accounts as of December 31, 2008 and 2007,
respectively.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. The Management compares the cost of inventories with the market value
and allowance is made for writing down their inventories to market value, if
lower. As of December 31, 2008 and December 31, 2007, inventories consist of the
following:
|
2008
|
2007
|
|||||||
|
Raw
materials
|
$ | 27,725 | $ | 6,784 | ||||
|
Work
in process and finished goods
|
8,865,186 | 8,484,847 | ||||||
|
Total
|
$ | 8,892,911 | $ | 8,491,631 | ||||
F-8
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant &
Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings 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 estimated lives of:
|
Buildings
|
10-20
years
|
|
Fishing
gear
|
5-10years
|
|
Transportation
equipment
|
5-10
years
|
|
Office
equipment
|
3-5
years
|
As of
December 31, 2008 and 2007 Property, Plant & Equipment consist of the
following:
|
2008
|
2007
|
|||||||
|
Buildings
|
$ | 60,230 | $ | 36,180 | ||||
|
Fishing
gear
|
408,197 | 107,097 | ||||||
|
Transportation
equipment
|
37,155 | 12,103 | ||||||
|
Office
equipment
|
1,187 | - | ||||||
|
Construction
in progress
|
10,938 | 26,495 | ||||||
|
Total
|
517,707 | 155,380 | ||||||
|
Accumulated
depreciation
|
(71,842 | ) | (19,270 | ) | ||||
| $ | 445,865 | $ | 162,605 | |||||
Depreciation
expense for the years ending December 31, 2008, 2007, and 2006 was $52,572,
$17,520, and
$1,750, respectively
Long-Lived
Assets
Since
April 30, 2003, Foshan adopted Statement of Financial Accounting Standards No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No.
144”), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment
of a Business.” The Company’ management periodically evaluates the carrying
value of long-lived assets to be held and used in accordance with SFAS 144. SFAS
144 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets
carrying amounts. In that event, a loss is recognized based on the amount by
which the carrying amount exceeds the fair market value of the long-lived
assets. Loss on long-lived assets to be disposed of is determined in a similar
manner, except that fair market values are reduced for the cost of disposal.
Based on its review, the Company believes that, as of December 31, 2008 and
2007, there were no impairments of its long-lived assets.
F-9
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial
Instruments
Statement
of Financial Accounting Standard No. 107, “Disclosures about Fair Value of
Financial Instruments,” requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104, “Revenue Recognition.” Sales 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 collectability is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition
are satisfied are recorded as unearned revenue.
Advertising
Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred. Advertising expense for the year ended 2008, 2007 and 2006
were $28,801, $ 0 and $ 0, respectively.
Income
Taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
It is the
Company’s intention to permanently reinvest earnings from activity with china.
And thereby indefinitely postpone repatriation of these funds to the US.
Accordingly, no domestic deferred income tax provision has been made fro US
income tax which could result from paying dividend to the Company.
There
were no deferred taxes difference in 2008, 2007 and 2006.
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, all are in China. The Company controls credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures.
The Company routinely assesses the financial strength of its customers and,
based upon factors surrounding the credit risk, establishes an allowance, if
required, for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is
limited.
F-10
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Subsequent
Events
The
Company evaluated subsequent events through the time of filing this year-end
report for items effecting three-year ended 2008, 2007 and 2006 through January
29, 2010. No significant events occurred subsequent to the balance
sheet date but prior to the filing of this report that would have a material
impact on our consolidated financial statements.
Recent Accounting
Pronouncements
On
February 16, 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments.” SFAS No. 155 amends SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and SFAF No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.” SFAS No. 155 permits fair value re-measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006. As of December 31, 2008, the Company has not incurred
any hybrid financial instruments.
In March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets – an amendment to FASB Statement No. 140.” SFAS No. 156 requires
that an entity recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a service
contract under certain situations. The new standard is effective for fiscal
years beginning after September 15, 2006. The adoption of this new standard
did not have an impact on the Company’s financial position, results of
operations or cash flows.
In July
2006, the FASB released FASB interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of SFAS No. 109,” (FIN No.
48). FIN No. 48 clarifies the accounting and reporting for
uncertainties in income tax law. This interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation, and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. This Statement is effective for fiscal
years beginning after December 15, 2006. As a result of implementing
FIN No. 48, there has been no adjustments to the Company’s financial
statements.
In
September, 2006, FASB issued SFAS No. 157, “Fair Value
Measurements.” This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(“GAAP”), and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair
value measurements. However, for some entities, the application of
this Statement will change current practice. This Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those
fiscal years. The adoption of this new standard did not have an
impact on the Company’s financial position, results of operations or cash
flows.
F-11
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 (“SAB 108”). SAB 108 was issued to provide
interpretive guidance on how the effects of the carryover reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The provisions of SAB 108 are effective for the Company for its December 31,
2006 year-end. The adoption of SAB 108 had no impact on the Company’s
consolidated financial statements.
In
February, 2007, FASB issued SFAS 159, ‘The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115.” This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This Statement is
expected to expand the use of fair value measurement, which is consistent with
the Board’s long-term measurement objectives for accounting for financial
instruments. This Statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. The
adoption of this new standard did not have a material impact on the Company’s
financial position, results of operations or cash flows.
In
December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(“SFAS 141R”). SFAS 141R 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. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. This statement is
effective for the Company beginning January 1, 2009. The adoption of
this standard had no impact on the Company’s consolidated financial
statement.
In
December 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in
consolidated Financial Statements.” This Statement amends ARB 51 to
establish accounting and reporting standards for the non-controlling (minority)
interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS No.
160 is effective for the Company’s fiscal year beginning October 1,
2009. Adoption of this standard is not expected to have an impact on
the consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities.” The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. The new standard also improves transparency
about the location and amounts of derivative instruments in an entity’s
financial statements; how derivative instruments and related hedged items are
accounted
for under Statement 133: and how derivative instruments and related hedged items
affect its financial position, financial performance, and cash
flows. The Company does not expect the impact of this adoption to be
material.
In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the
Useful Life of Intangible Assets,” which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
“Goodwill and Other Intangible Assets.” This Staff Position 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. Application of this
FSP is not expected to have a significant impact on the financial
statements.
F-12
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement will provide a framework for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles (GAAP) for nongovernmental entities. With the issuance of
SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from
auditing literature to accounting literature. The Company is
currently assessing the impact of SFAS No. 162 on its financial position and
results of operations.
In
June 2008, the FASB ratified the consensus reached on Emerging Issues Task
Force (“EITF”) Issue No. 07-05, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF
No. 07-05”). EITF No. 07-05 clarifies the determination of whether an
instrument (or an embedded feature) is indexed to an entity’s own stock, which
would qualify as a scope exception under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. EITF No. 07-05 is effective
for financial statements issued for fiscal years beginning after
December 15, 2008. The Company is in the process of review this consensus
and has not reached a conclusion as to the impact if any at this
time.
Note
3 –OTHER
RECEIVABLES
Other
receivables mainly consist of cash advances to rent deposit. As of December 31,
2008 and December 31, 2007, the other receivables were $21,193 and $19,877,
respectively.
Note 4 – BIOLOGICAL
ASSETS
As of
December 31, 2008, Biological assets consist of the following:
|
2008
|
||||
|
Carp
|
$
|
20,562
|
||
|
Tilapia
|
959,561
|
|||
|
Snakeheads
|
178,204
|
|||
|
Total
|
1,158,327
|
|||
|
Accumulated
depreciation
|
(316,702
|
) | ||
|
$
|
841,625
|
Note
5 – RELATED
PARTY
The
Company buys fish feed from a related party. The Company also borrowed money
from a shareholder of the Company.
Note
6 – DUE TO
SHAREHOLDER
The
Company has a payable due to a shareholder. As of December 31, 2008
and December 31, 2007, due to a shareholder were $ 8,519,146 and $ 10,402,193,
respectively. Amounts due are payable upon demand with no stated
interest.
Note
7 – CONCENTRATIONS
At
December 31, 2008 and 2007, 78% and 100% of accounts payable were due
to one related party vendor. For the year ended December 31, 2008 and 2007, the
Company had one related party vendor who accounted for 93% and 100% of total
purchases.
F-13
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
8 – COMPENSATED
ABSENCES
Regulation
45 of the local labor law of the People’s Republic of China (“PRC”) entitles
employees to annual vacation leave after 1 year of service. In
general, all leave must be utilized annually, with proper
notification. Any unutilized leave is cancelled.
Note
9 - INCOME
TAXES
The
Company operates in more them one jurisdiction with complex regulatory
environments subject to different interpretations by the taxpayer and the
respective governmental taxing authorities, we evaluate our tax positions and
establish liabilities, if required. For uncertain tax position which may be
challenged by local tax authorities and may not be fully sustained despite our
belief that the underlying tax positions maybe be fully
supportable.
Pursuant
to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) through December
31, 2007 is at a statutory rate of 33%, which is comprised of 30% national
income tax and 3% local income tax. As of January 1, 2008, the EIT is
at a statutory rate of 25%. The Company is an agriculture enterprise
and under PRC Income Tax Laws, it is entitled to an exemption for
2006. Starting from January 1, 2008, it is entitled to have new PRC
tax policy for the agriculture enterprise.
The
Company’s income come from three parts including fish breeding, fish cultivation
and selling adult fish. For income from fish breeding, it is entitled to an
exemption. For income from fish cultivation, EIT is a discount rate of 12.5%.
For income from selling adult fish, EIT is a rate of 25%.
|
The
following is a reconciliation of income tax expense:
|
||||||||
|
12/31/2008
|
International
|
Total
|
||||||
|
Current
|
$ | 1,027,781 | $ | 1,027,781 | ||||
|
Deferred
|
- | - | ||||||
|
Total
|
$ | 1,027,781 | $ | 1,027,781 | ||||
|
12/31/2007
|
International
|
Total
|
||||||
|
Current
|
$ | 69,526 | $ | 69,526 | ||||
|
Deferred
|
- | - | ||||||
|
Total
|
$ | 69,526 | $ | 69,526 | ||||
|
12/31/2006
|
International
|
Total
|
||||||
|
Current
|
$ | - | $ | - | ||||
|
Deferred
|
- | - | ||||||
|
Total
|
$ | - | $ | - | ||||
Note
10– COMMITMENTS &
CONTINGENCIES
The
Company leases facilities under operating leases, which expire on different
dates. It pays for on an annual basis and accrues for throughout the
year. For the years ended December 31, 2008 and 2007, rent
expense was $334,705, and $357,552, respectively. Future payments
under these lease is as follows: 2009-63,804; 2010- 63,804; 2011- 63,804; 2012-
63,804; 2013- 55,401.
F-14
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
Note
11 – STATUTORY
RESERVE
In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprises income, after the payment of the PRC income taxes, shall be
allocated to the statutory surplus reserves and statutory public welfare fund.
Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent
of the profit after tax to the surplus reserve fund and additional 5-10 percent
to the public affair fund. The public welfare fund reserve was limited to 50
percent of the registered capital. Effective January 1, 2006, there
is now only one fund requirement. The reserve is 10 percent of income after tax,
not to exceed 50 percent of registered capital. Statutory Reserve funds are
restricted for set off against losses, expansion of production and operation or
increase in register capital of the respective company. Statutory public welfare
fund is restricted to the capital expenditures for the collective welfare of
employees. These reserves
are not transferable to the Company in the form of cash dividends, loans or
advances. These reserves are therefore not available for distribution except in
liquidation. As of December 31, 2008 and December 31, 2007, the Company had
allocated $ 665,852 and $200,666, respectively, to these non-distributable
reserve funds.
Note
12- OTHER
COMPREHENSIVE INCOME
Balances
of related after-tax components comprising accumulated other comprehensive
income, included in stockholders’ equity, at December 31, 2008, 2007, and 2006,
are as follows:
|
Foreign
Currency
Translation
Adjustment
|
Accumulated
Other
Comprehensive
Income
|
|||||||
|
Balance
at December 31, 2005
|
$ | - | $ | - | ||||
|
Change
for 2006
|
30,887 | 30,887 | ||||||
|
Balance
at December 31, 2006
|
30,887 | 30,887 | ||||||
|
Change
for 2007
|
230,105 | 230,105 | ||||||
|
Balance
at December 31, 2007
|
260,992 | 260,992 | ||||||
|
Change
for 2008
|
600,174 | 600,174 | ||||||
|
Balance
at December 31, 2008
|
$ | 861,166 | $ | 861,166 | ||||
F-15
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
|
GRANTO,
INC.
|
|
|
Date:
March 31, 2010
|
|
|
/s/ Kelvin
Chan
|
|
|
President
|
EXHIBIT
INDEX
|
Exhibit
Number
|
|
Description
|
|
2.1
|
Share
Exchange Agreement by and among Granto, Inc., Rongfu, the Rongfu
Stockholders and Janet Gargiulo, dated March 29,
2010
|
|
|
3.1
|
Certificate
of Designations, Preferences and Rights of Series A Preferred Stock of
Granto, Inc.
|
|
|
4.1
|
Series
A Preferred Stock Purchase Agreement between Granto, Inc. and certain
investors, dated March 29, 2010.
|
|
|
4.2
|
Form
of Class A Warrant of Granto, Inc. issued on March 29, 2010 pursuant to
Series A Preferred Stock Purchase Agreement
|
|
|
4.3
|
Form
of Class B Warrant of Granto, Inc. issued on March 29, 2010 pursuant to
Series A Preferred Stock Purchase Agreement
|
|
|
4.4
|
Escrow
Agreement between Granto, Inc., certain officers of Granto, Inc. and The
Crone Law Group, dated March 29, 2010.
|
|
|
4.5
|
Form
of Class C Warrant issued on March 29, 2010 pursuant to Share Exchange
Agreement.
|
|
|
4.6
|
Form
of Class D Warrant issued on March 29, 2010 pursuant to Share Exchange
Agreement.
|
|
|
10.1
|
Form
of Call Option Agreement between Kelvin Chan and various call optionees,
dated as December 29, 2009 and Amendment No. 1 thereto dated March 29,
2010.
|
|
|
10.2
|
Memorandum
between Zhisheng Chen and Nanhai Ke Da Heng Sheng dated December
2009
|
|
|
10.3
|
Technological
Cooperation Agreement Regarding the Propogation of Fish Fry of Nile
Tilapia between Nanhai Ke Da Heng Sheng and Sifa Li dated December 18,
2009.
|
|
|
10.4
|
Entrusted
Management Agreement dated December 26, 2009 among Chen Zhisheng, Nanhai
Ke Da Heng Sheng and Guangzhou Flourishing.
|
|
|
10.5
|
Exclusive
Option Agreement dated December 26, 2009 among Chen Zhisheng, Nanhai Ke Da
Heng Sheng and Guangzhou Flourishing.
|
|
|
10.6
|
Shareholder’s
Voting Proxy Agreement between Chen Zhisheng and Guangzhou
Flourishing.
|
|
|
10.7
|
Shares
Pledge Agreement between Chen Zhisheng, Nanhai Ke Da Heng Sheng and
Guangzhou Flourishing.
|