Attached files
file | filename |
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EX-31.1 - Mobile Presence Technologies Inc. | v181081_ex31-1.htm |
EX-32.1 - Mobile Presence Technologies Inc. | v181081_ex32-1.htm |
EX-31.2 - Mobile Presence Technologies Inc. | v181081_ex31-2.htm |
EX-10.2 - Mobile Presence Technologies Inc. | v181081_ex10-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
one)
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2009
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _____ to_____
Commission
File Number: 333-147666
CHINA
SHANDONG INDUSTRIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
20-8545693
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
No. 2888
Qinghe Road
Development
Zone Cao County
Shandong
Province, China 274400
(Address
of principal executive offices) (Zip Code)
Registrant’s
Telephone Number, including area code: (86)
530-3431658
Securities
registered pursuant to Section 12(b) of the Exchange Act:
Title
of Each Class
|
Name
of Each Exchange on which Registered
|
None
|
Not
Applicable
|
Securities
registered pursuant to Section 12(g) of the Exchange Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer o Accelerated
Filer o Non-Accelerated
Filer o Smaller
Reporting Company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of voting and non-voting stock held by non-affiliates of
the registrant as of the last business day of the registrant’s most recently
completed second fiscal quarter was $73,640.
There
were 25,725,000 shares of common stock outstanding as of April 14,
2010.
DOCUMENTS
INCORPORATED BY REFERENCE
None
TABLE OF
CONTENTS
PART
I
|
3
|
ITEM
1. BUSINESS
|
3
|
|
|
ITEM
1A. RISK FACTORS
|
13
|
ITEM
1B. UNRESOLVED STAFF COMMENTS
|
27
|
ITEM
2. PROPERTIES
|
27
|
ITEM
3. LEGAL PROCEEDINGS
|
27
|
ITEM
4. (REMOVED AND RESERVED)
|
27
|
PART
II
|
28
|
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
|
28
|
ITEM
6. SELECTED FINANCIAL DATA
|
28
|
|
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
28
|
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
36
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
36
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
36
|
ITEM
9A (T). CONTROLS AND PROCEDURES
|
36
|
ITEM
9B OTHER INFORMATION
|
37
|
PART
III
|
38
|
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
38
|
ITEM
11. EXECUTIVE COMPENSATION
|
39
|
|
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
40
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
42
|
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
|
42
|
PART
IV
|
43
|
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
43
|
SIGNATURES
|
44
|
2
FORWARD-LOOKING
INFORMATION
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or our
future financial performance. We have attempted to identify forward-looking
statements by terminology including “anticipates”, “believes”, “expects”, “can”,
“continue”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”,
“potential”, “predict”, “should” or “will” or the negative of these terms or
other comparable terminology. These statements are only predictions;
uncertainties and other factors may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels or activity, performance or achievements expressed or implied by
these forward-looking statements. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Our
expectations are as of the date this Form 10-K is filed, and we do not intend to
update any of the forward-looking statements after the date this Annual Report
on Form 10-K is filed to confirm these statements to actual results, unless
required by law.
PART
I
ITEM
1. BUSINESS.
In
this Annual Report on Form 10-K, references to “dollars” and “$” are to United
States Dollars and references to “RMB” and “renminbi” are to Chinese
Renminbi (RMB).
Unless
otherwise specified or required by context, references to “we,” “our” and “us”
refer collectively to (i) China Shandong Industries, Inc., and our subsidiaries,
Tianwei International Development Corporation, an Oregon corporation and
Shandong Caopu Arts & Crafts Co., Ltd, a wholly foreign-owned enterprise
organized under the laws of the PRC. Specific discussions or comments relating
only to China Shandong Industries, Inc. will reference China Shandong Industries
and those relating only to Shandong Caopu Arts & Crafts Co., Ltd will
reference “Shandong.”
Overview
We are a
designer and contract manufacturer of household furniture in the Peoples
Republic of China (“PRC”). We produce a variety of indoor and outdoor
residential furniture and wicker products that are sold and exported to more
than 30 countries. Our products are sold through well known domestic and
international retailers such as Trade Point A/S Direct Container, Zara-Home,
Habitat UK Ltd., ABM Group Inc., and Fuji Boeki Co. Ltd. We believe that
the product depth and extensive style selections we offer allows us to be a
strong resource for global furniture, retail chains and retailers in the
discounted price range.
Our
operations are conducted through our subsidiary, Shandong, located in Shandong
Province, PRC. Through Shandong, we manufacture over 20,000 different
products. We focus on providing high quality products at competitive prices.
For the fiscal year ended December 31, 2009, approximately 5% of our
products were sold in the PRC and 95% of our products were sold to companies in
countries such as the United States, Germany, England, Italy, Sweden, Canada,
Taiwan.
Corporate
History and Organization
We were
incorporated in February 2007 in Delaware under the name Mobile Presence
Technologies, Inc. to develop and provide software and services to enhance the
use of cellular phones and other hand held communication devices. Since
our inception we had not generated any material revenues and determined to
change our business. In November 2009, we acquired all of the issued
and outstanding capital stock of Tianwei International Development Corporation,
which we refer to as Tianwei, pursuant to a Stock Exchange and Reorganization
Agreement. The transaction by which we acquired Tianwei is more
fully described below. Tianwei was incorporated under the laws of
Oregon on January 13, 2009 and is the owner of all of the issued and outstanding
capital stock of Shandong. Shandong was organized under the laws of the
PRC in August 2000 under the name Heze Caopu Arts & Crafts Co., Ltd.
In November 2000, it changed its name to Shandong Caopu Arts & Crafts.,
Ltd. Shandong has registered capital of $7.8 million, 96.79% of which was
owned by Shandong Cao County Changsheng Arts & Crafts Co., Ltd. and the
remaining 3.21% was owned by Japan Fit Co., Ltd. In March 2009,
Tianwei acquired Japan Fit’s 3.21% interest and in July 2009, Tianwei acquired
Shandong Cao County Changsheng Arts & Crafts Co., Ltd.’s 96.79% interest in
Shandong. As a result, Tianwei became the sole owner of Shandong and we
became the 100% owner of Tianwei. In addition, as a result of its new
ownership structure, Shandong became what is known as a “Wholly Foreign Owned
Enterprise” or “WFOE.” On December 3, 2009, we filed a certificate of
amendment to our Certificate of Incorporation changing our name to “China
Shandong Industries, Inc.”, to better align our name with our business,
increasing the authorized shares of our common stock to 100,000,000,
increasing our authorized blank check preferred stock to 5,000,000 shares, and
effectuating a 15 for 1 forward split of our common stock.
3
Stock
Exchange Agreement
On
November 6, 2009, pursuant to a Stock Exchange and Reorganization Agreement (the
“Exchange Agreement”), dated as of October 22, 2009, by and among us, Tianwei,
CAOPU, London Financial Group Ltd., a company organized under the laws of the
British Virgin Islands (“LFG”), Phoebus Vision Investment Developing Group,
Ltd., a company organized under the laws of the British Virgin Islands (“Phoebus”), and Timothy
Lightman (“TL”), we acquired all of the issued and outstanding capital stock of
Tianwei. Pursuant to the Exchange Agreement, we issued an aggregate of
22,226,400 shares of our common stock to CAOPU, LFG and Phoebus in exchange for
all of the issued and outstanding shares of Tianwei owned by each of CAOPU, LFG
and Phoebus.
Pursuant
to the terms of the Exchange Agreement, Mr. Lightman cancelled 13,125,000 shares
out of the total of 14,625,000 shares of our common stock owned by Mr. Lightman.
In addition, effective November 5, 2009, pursuant to a separate Assignment and
Assumption Agreement by and between us and Mr. Lightman, Mr. Lightman acquired
all our assets related to our prior business and assumed all our liabilities
outstanding prior to our acquisition of Tianwei.
Effective
as of the closing of our acquisition of Tianwei, (i) our prior officers and
directors resigned, and our current officers and directors were appointed, and
(ii) we adopted the fiscal year end of Shandong, thereby changing our fiscal
year end from September 30 to December 31.
The
following chart shows the ownership interests in our operating
subsidiaries.
4
(1) Of
the shares owned by CAOPU, shares representing 51% of our issued and outstanding
shares are held for the benefit of Mr. Jinliang Li and shares representing 35.4%
of our issued and outstanding shares are held for the benefit of nine other
minority shareholders (non of whom own more than 4.4% of our issued and
outstanding shares individually). The shares held by CAOPU for the benefit
of Mr. Li and the minority shareholders are held pursuant to the terms of
Agreements between CAOPU and each such shareholder, a form of which is attached
as an exhibit to this Form 10-K. Pursuant to the terms of such agreements,
CAOPU shall continue to hold such shares for the benefit of such shareholders
for a period of 15 months after we complete a public offering of our securities,
unless such time period is extended. Although Mr. Li has no pecuniary
interest in the shares held by CAOPU for the benefit of the nine minority
shareholders, by reason of his sole ownership of CAOPU, Mr. Li has sole voting
and dispositive power over such shares of our common stock.
(2) None
of the remaining shareholders has more than 5% shares of our common
stock.
Products
Historically,
our business has been primarily focused on straw-wicker, furniture and
handicrafts products. We produce over 20,000 different products. We believe our
wide variety of product categories, styles and finishes enable us to respond
quickly to changing consumer preferences. We believe we offer retailers a
comprehensive production line principally in the lower price range. Based
on our sales and large client base, we believe our products represent good
value, and that the style and quality of our furniture compares favorably with
more premium-priced products.
In 2009,
approximately 95% of our revenues resulted from sales of our products
internationally, with the remaining 5% resulting from sales in the
PRC.
The
following table lists our products by category and their respective contribution
to our sales for the 12 months ended December 31, 2009.
Product
Category
|
Certain Products
|
Main Target Market
|
Revenue ($)
|
Revenue
Percentage
(%)
|
||||
Furniture
|
Poplar
& paulownia furniture including: folding screens, stools, 3-tier
/5-tier bookshelves, coffee tables, bed cabinet
|
U.S.A.,
U.K., Germany, Japan, Italy, Spain
|
$29.8
million
|
50%
|
||||
Straw-wicker
|
Trunk,
wash baskets, baskets, drawers, folder boxes, storage chests, fruit trays,
bread baskets, vase covers
|
Spain,
Germany, Italy, Holland, Greece, Poland, Portugal, Austria, UK, Japan,
Malta, Malaysia, Australia, U.S.A.
|
$28.7
million
|
48%
|
||||
Wooden
Crafts
|
Christmas
gifts, photo frames, gift boxes, wood tubes, bottle boxes, decorative
wooden plates, toys, pet supplies
|
U.S.A.,
Japan, Malta, Malaysia, European country
|
$1.1 million
|
2%
|
Wood
Furniture
We
established our first wooden furniture production line in 2004 by producing
furniture made from poplar and paulownia. Poplar and paulownia wood generally
have distinctive characteristics of color, a smoother surface and lighter weight
than certain other types of wood. In addition, Cao County is the natural base
for the growth of both poplar and paulownia. The average time it takes poplar
and paulownia trees to grow to maturity in Cao County is 2 -3
years shorter than other kinds of trees generally used in wood
furniture in China. Over the past few years, revenues from wood
furniture products have increased substantially and have become a substantial
percentage of our overall product sales.
Japan and
Europe are the primary target markets for sales of such wood furniture.
For the fiscal year 2009, sales and net income were approximately $29.8
million and $5.3 million, respectively, from our furniture products,
approximately $28.7 and $4.7million from our straw and wicker products, and
$1.1 million and $0.2 million, respectively, from our crafts
products.
In fiscal
2009, wood furniture products accounted for $29.9 million and $5.3 million of
our overall revenues and net income, respectively, and 50% of our overall
sales.
5
Because
of the growing demand, higher gross margins and changing dynamics of the
international wood furniture industry, specifically, production moving away from
countries such as the United States and Italy toward developing countries with
cheaper labor, such as China and India, we have been and intend to focus
substantial resources and efforts on our wood furniture production.
Straw-wicker
products
Because
straw-wicker are easy to produce, do not require a significant investment in
technology or equipment, we do not produce such products in our manufacturing
facilities. Instead, we employ local residents to manufacture such products in
their homes in Cao County, Shandong Province, PRC. Although we have expanded our
business to wood furniture manufacturing, straw-wicker products are continue to
be an integral part of our overall business.
In fiscal
2009, straw-wicker products accounted for $28.8 million and $4.7 million of our
overall revenues and net income, respectively, and 48% of our overall
revenues.
Handicraft
Products
With the
advantage of having poplar and paulownia resources in Cao Country, in 2000 we
expanded our product mix to include wooden handicrafts. We are dedicated to
producing a wide variety of novel-designed wooden handicrafts. We produce
more than 800 kinds of wooden handicrafts varying from household articles, to
office appliance and pet supplies.
In fiscal
2009, handicraft products account for $1.1 million and $0.2 million of our
overall revenues and net income, respectively, and 2% of our overall
revenues.
Manufacturing
At
December 31, 2009, we operated approximately 200,000 square meters of
manufacturing and supply plant capacity in Shandong Province for furniture and
handicrafts production. These manufacturing and other facility are located
in our existing 4 industrial parks. We consider the machinery and equipment at
such location generally to be relatively up to date and well-maintained.
The manufacturing equipment at those locations include band saws, cut-to-size
saws, sanders, single-plate saws, multi-plate saws, thickness, matchers,
multiple-drillings, copying machines, engraving machines, routers, chilling
presses, roll coaters, and leaching paint machines.
Our
domestic manufacturing strategy includes:
|
•
|
More
frequent and cost-effective production
runs,
|
|
•
|
Identification
and recycle product waste, and
|
|
•
|
Improvement
of our relationships with suppliers by establishing primary
suppliers.
|
Production
Process
The
manufacturing process of each of our products generally involves various steps.
Following indicates the steps in manufacturing straw-wicker products, wooden
craft products and furniture products.
6
1. Steps
to manufacture straw-wicker products:
2. Steps
to manufacture wooden craft
products:
3. Steps
to manufacture furniture
products:
The
technology and procedures used in the above processes vary amongst the different
products that we manufacture and depend upon the product specifications
prescribed by a particular customer.
7
Intellectual
Property
As
of December 31, 2009, we have the following intellectual property
rights:
Patents
We have
applied for and obtained twenty-three (23) patents in the PRC for the following
products:
|
|
No.
|
Utility
Models
|
Certificate
No.
|
Utility
Models
No.
|
Designer
|
Application
Date
|
Authorized
Announcement
|
Owner (1)
|
|||||||
1
|
Altar
|
356906
|
ZL
033508127
|
Jinliang
Li
|
July
11, 2003
|
February
25, 2004
|
Jinliang
Li
|
|||||||
2
|
Coffin
(8)
|
358183
|
ZL
03350900X
|
Jinliang
Li
|
July
17, 2003
|
March
10, 2004
|
Jinliang
Li
|
|||||||
3
|
Coffin
(15)
|
357332
|
ZL
033506825
|
Jinliang
Li
|
July
17, 2003
|
March
3, 2004
|
Jinliang
Li
|
|||||||
4
|
Coffin
(1)
|
359654
|
ZL
033508364
|
Jinliang
Li
|
July
11, 2003
|
March
17, 2004
|
Jinliang
Li
|
|||||||
5
|
Coffin
(5)
|
360164
|
ZL
033506795
|
Jinliang
Li
|
July
17, 2003
|
March
24, 2004
|
Jinliang
Li
|
|||||||
6
|
Coffin
(4)
|
360912
|
ZL
033508372
|
Jinliang
Li
|
July
11, 2003
|
March
24, 2004
|
Jinliang
Li
|
|||||||
7
|
Coffin
(2)
|
360680
|
ZL
033508380
|
Jinliang
Li
|
July
11, 2003
|
March
24, 2004
|
Jinliang
Li
|
|||||||
8
|
Coffin
(10)
|
360682
|
ZL
033506884
|
Jinliang
Li
|
July
17, 2003
|
March
24, 2004
|
Jinliang
Li
|
|||||||
9
|
Coffin
(9)
|
360915
|
ZL
033506876
|
Jinliang
Li
|
July
17, 2003
|
March
24, 2004
|
Jinliang
Li
|
|||||||
10
|
Quilt
Bracket (1)
|
359910
|
ZL
03351173X
|
Jinliang
Li
|
August
20, 2003
|
March
24, 2004
|
Jinliang
Li
|
|||||||
11
|
Quilt
Bracket (2)
|
359455
|
ZL
033511748
|
Jinliang
Li
|
August
20, 2003
|
March
17, 2004
|
Jinliang
Li
|
|||||||
12
|
Quilt
Bracket (4)
|
359651
|
ZL
033511764
|
Jinliang
Li
|
August
20, 2003
|
March
17, 2004
|
Jinliang
Li
|
|||||||
13
|
Drying
Room
|
648544
|
ZL
03271093.3
|
Sheng
Wang, Yazhen Wang
|
September
12, 2003
|
October
13, 2004
|
Jinliang
Li
|
|||||||
14
|
Plank
Splicing Machine
|
648730
|
ZL
03271094.1
|
Sheng
Wang, Yazhen Wang
|
September
12, 2003
|
October
13, 2004
|
Jinliang
Li
|
|||||||
15
|
Device
Preventing Drawer Sliding Down
|
749252
|
ZL
200420053223.6
|
Jinliang
Li
|
August
23, 2004
|
December
28, 2005
|
Jinliang
Li
|
|||||||
16
|
Tea
Table with Folding Leg
|
749394
|
ZL
200420053224.0
|
Jinliang
Li
|
August
23, 2004
|
December
28, 2005
|
Jinliang
Li
|
|||||||
17
|
Disposal
Container (1)
|
685809
|
ZL
200630095723.0
|
Jinliang
Li
|
September
8, 2006
|
August
29, 2007
|
Jinliang
Li
|
|||||||
18
|
Disposal
Container (2)
|
685890
|
ZL
200630095724.5
|
Jinliang
Li
|
September
8, 2006
|
August
29, 2007
|
Jinliang
Li
|
|||||||
19
|
Chair
Container
|
685796
|
ZL
200630095733.4
|
Jinliang
Li
|
September
8, 2006
|
August
29, 2007
|
Jinliang
Li
|
|||||||
20
|
Chair
Disposal Container (intensive processing)
|
685866
|
ZL
200630095732.X
|
Jinliang
Li
|
September
8, 2006
|
August
29, 2007
|
Jinliang
Li
|
|||||||
21
|
Wine
Box (2)
|
685930
|
ZL
200630095722.6
|
Jinliang
Li
|
September
8, 2006
|
August
29, 2007
|
Jinliang
Li
|
|||||||
22
|
Wine
Box (1)
|
685850
|
ZL
200630095727.9
|
Jinliang
Li
|
September
8, 2006
|
August
29, 2007
|
Jinliang
Li
|
|||||||
23
|
Cabinet
with Eight Drawer
|
693607
|
ZL
200630095728.3
|
Jinliang
Li
|
September
8, 2006
|
September
19, 2007
|
Jinliang
Li
|
(1) Mr. Li, our majority shareholder and chief executive officer, is
the owner of the patents which he allows us to use on a royalty free
bases.
8
Trademarks
and Domain Names:
We have
registered five trademarks with the PRC Trademark Bureau under the State of
Administration for Industry & Commerce:
Trademark
|
Certificate
No.
|
Category
|
Registrant
|
Valid Term
|
||||||
3722006
|
28
|
Shandong
|
June
7, 2006 to June 6, 2016
|
|||||||
3722025
|
20
|
Shandong
|
February
14, 2006 to February 13, 2016
|
|||||||
3722007
|
20
|
Shandong
|
February
14, 2006 to February 13, 2016
|
|||||||
4900955
|
20
|
Shandong
|
Registered
in Japan
|
|||||||
904344
|
20,28
|
Shandong
|
January,
2007 to January, 2017
|
We have
registered the following domain names:
Domain Name
|
Owner
|
Registration Date
|
Expiration Date
|
|||
www.caopu.cn
|
Shandong
|
June
15, 2006
|
June
15, 2011
|
|||
www.cpgy.com
|
Shandong
|
April
27, 2002
|
April
27, 2012
|
|||
www.caopu.cc
|
Shandong
|
June
15, 2006
|
June
15, 2016
|
Customers
and Suppliers
We
believe we have successfully established long-term, stable business
relationships with over three hundred customers in over thirty countries. Our
products are sold in stores operated by such well known retailers as Zara-Home,
Habitat UK Ltd., ABM Group Inc., and Fuji Boeki Co. Ltd.
In fiscal
2009, our top 10 purchasers of our products were as follows:
Major
customers
Name
|
12 months ended
December
31, 2009
(’000s)
|
Percentage of
Overall
Sales (%)
|
||||||
Trade
Point A/S Direct Container (Denmark)
|
$
|
17,998
|
44
|
%
|
||||
Zara-Home
(Spain)
|
$
|
4,209
|
10
|
%
|
||||
Bettenwelt
Gmbh & Co. KG (Germany)
|
$
|
4,307
|
10
|
%
|
||||
JYSK
SP. Zoo, Gdansk. (Poland)
|
$
|
3,792
|
9
|
%
|
||||
ABM
Group Inc. (USA)
|
$
|
2,700
|
7
|
%
|
||||
FIT
Co., Ltd.
|
$
|
2,477
|
6
|
%
|
||||
Axis
Imex, Inc. (USA)
|
$
|
1,731
|
4
|
%
|
||||
Fuji
Boeki Co., Ltd. (Japan)
|
$
|
1,449
|
4
|
%
|
||||
Habitat
UK Ltd. (England)
|
$
|
1,219
|
3
|
%
|
||||
Sofibo
China Limited
|
$
|
1,355
|
3
|
%
|
9
In fiscal
2009, our top 10 suppliers for raw materials used to manufacture our products
were as follows:
Suppliers
of Raw Materials
Name
|
Amount (USD)
12 months
ended December
31,
2009
(’000s)
|
Location
|
Percentage*
|
||||||
Shandong
Beier Chemical Co., Ltd.
|
$ | 90.9 |
Cao
County
|
2.3 | % | ||||
Cao
County Shengcheng Carton Plant
|
$ | 77.1 |
Cao
County
|
1.9 | % | ||||
Cao
County Minzu Carton Plant
|
$ | 45 |
Cao
County
|
1.1 | % | ||||
Xie
Shengli
|
$ | 30.9 |
Cao
County
|
* | % | ||||
Yu
Hongming
|
$ | 26.5 |
Cao
County
|
* | % | ||||
Zhang
Hongqing
|
$ | 24.3 |
Cao
County
|
* | % | ||||
Wang
Tengjian
|
$ | 22.1 |
Cao
County
|
* | % | ||||
Zhang
Enzhu
|
$ | 18.5 |
Cao
County
|
* | % | ||||
Wang
Qingping
|
$ | 16.5 |
Cao
County
|
* | % | ||||
Liu
Xiaoyou
|
$ | 15.4 |
Cao
County
|
* | % |
Quality
Control
Consistent
with our continuing commitment to quality, we impose rigorous quality control
standards at various stages of our production process. We strictly comply
with various national quality standards, established by the General
Administration of Quality Supervision, Inspection and Quarantine of China, with
respect to the hardware and paint used in the manufacture of furniture,
straw-wicker and handicraft products. We also strictly comply with various
quality standards based on the clients’ special quality requirements.
Research
and Development
Our
research and development (“R&D”) team has 26 employees, each of whom has
over 5 years of experience in furniture and craft production.
We
believe product innovation and technology advancement are vital for our business
expansion. In the past years, we mainly depended on in-house research. For
fiscal years 2009 and 2008, we spent approximately $ 0.5 million and $0.4
million, respectively on R&D.
Marketing
and Distribution
Marketing
and Sales
We have
developed a broad domestic and international network with our independent 3rd party
retailers and wholesalers who sell our products to their customers
after purchasing them directly from us. We believe this broad network helps
reduce exposure to regional recessions, and allows us to capitalize on emerging
channels of distribution.
We
believe general marketing practice followed in the furniture industry is to
exhibit products at international and regional furniture markets. In the spring
and fall of each year, a seven-day furniture market is held in High Point, North
Carolina, which is attended by most buyers and is regarded by the industry as
the international market. Generally, we follow the general marketing
practice followed by furniture manufacturers in the furniture industry by
exhibiting our products at international and regional furniture markets attended
by buyers for furniture retailers. We market our products by participating in
tradeshows and exhibitions in both the PRC and abroad. We believe that we have
built up a solid business reputation among numerous well-known retailers. We
sell our furniture through over 300 retailers and wholesalers of residential
home furnishings, who are broadly dispersed internationally, including: Trade
Point A/S Direct Container, Zara-Home, Bettenwelt Gmbh & Co.
KG, JYSK SP Zoo Gdansk, and Habitat UK Ltd. in Europe; ABM Group Inc. and
Axis Imex, Inc., in the US; Fuji Boeki Co. Ltd. in Japan.
* Means
less than 1%.
10
Generally,
we sell our finished products directly to 3rd party
retailers and wholesalers without any commission. We believe our broad network
of 3rd party
retailers and wholesalers reduces our exposure to regional recessions and allows
us to capitalize on emerging trends in channels of distribution.
We
believe no significant part of our business is dependent upon a single customer,
the loss of which would have a material effect on our business. However, the
loss of several of our larger customers could have a material impact on our
business. Approximately 95% of our net sales during fiscal year ended 2009
were to international customers.
Competition
Competitive
Environment
The
furniture industry is highly competitive and includes a large number of foreign
and domestic manufacturers and importers, none of which dominates the
market. Currently, the arts and crafts industry is a concentrated industry
in China. The majority of arts and crafts producers are located in southern and
eastern China. While the markets in which we compete include a large number of
relatively small and medium-sized manufacturers, certain competitors have
substantially greater sales volumes and financial resources than we do.
With
regard to the production scale and products categories, our main competitors are
as follows:
Existing Competitors for our wood
furniture products:
Pu yang Hongda Wooden Products Co.,
Ltd, a company specialized in wooden furniture and wooden handicrafts
production, focuses its business on producing paulownia products, mixed hard
wood products, and mahogany products. Depending on technological advantages and
advanced craftsmanship, we believe the company is attempting to expand into the
United States market, keeping Japan and Europe as its main export
countries.
Existing Competitors for straw-and-wicker and handicrafts
manufacturers:
Liaoning Chengda Industry
Co,Ltd, a subsidiary of Liaoning Chengda Co., Ltd. It is a public company
whose common stock is listed on Shanghai Stock Exchange. The company located in
Liaoning province and is a producer of wooden crafts over the last 10
years.
Artall Light Industry Co.,
Ltd, a subsidiary of Jiangsu Holly Corporation, a public company on the
Shanghai Stock Exchange. It is a manufacturing and trading corporation located
in Jiangsu Province with annual export value exceeding RMB200 million. Artall is primarily
engaged in producing gift products, handicrafts, kitchen applicants, travel
products, outdoor products, toys, pet supplies, and willow
products.
ShandongJiaxiangJinyiArts &
Crafts Co., Ltd, a company established in 1986, has a diversified product
line featuring straw and wicker products, ranging from stone
handicrafts, copper handicrafts, and iron handicrafts to Lu Brocade and
Straw/Reed/Kenaf products.
Government
Regulations
Insurance
Plans
We are
subject to a wide range of regulation covering our business. We are required to
provide to our employees the following state-mandated insurance
plans:
|
·
|
Retirement
insurance: We withhold a portion of each employee’s average monthly salary
from the prior year, as determined by the provincial government, generally
8%, and contribute an additional amount determined by law, up to
approximately 20% of such average monthly
salary.
|
|
·
|
Medical
insurance: We withhold approximately 1% of each employee’s average monthly
salary from the prior year and contribute an additional amount totaling
approximately 10% of such average monthly
salary.
|
|
·
|
Unemployment
insurance: We withhold approximately 1% of each employee’s average monthly
salary from the prior year, and contribute an additional amount totaling
approximately 2% of such average monthly
salary.
|
11
|
·
|
Industrial
injury insurance: we contribute an amount totaling approximately 0.5% of
each employee’s average monthly salary from the prior
year.
|
Circular
75 Compliance and Approval
SAFE
issued the Notice on Issues Relating to the Administration of Foreign Exchange
in Fund-raising and Reverse Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, or “Notice 75,” on October 21,
2005, which became effective as of November 1, 2005 and the operating procedures
in May 2007, collectively the SAFE Rules. According to the SAFE Rules, prior
registration with the local SAFE branch is required for PRC residents to
establish or to control an offshore company for the purposes of financing that
offshore company with assets or equity interests in an onshore enterprise
located in the PRC. An amendment to registration or filing with the local SAFE
branch by such PRC resident is also required for the injection of equity
interests or assets of an onshore enterprise in the offshore company or overseas
funds raised by such offshore company, or any other material change involving a
change in the capital of the offshore company. The SAFE rules define “PRC
residents” to include both legal persons and natural persons who either hold
legal PRC identification documents, or who habitually reside in China due to
economic interests or needs. If any PRC resident fails to file its SAFE
registration for an existing offshore enterprise, any dividends remitted by the
onshore enterprise to its overseas parent after October 21, 2005 will be
considered to be an evasion of foreign exchange purchase rules, and the payment
of the dividend will be illegal. As a result, both the onshore enterprise and
its actual controlling persons can be fined. In addition, failure to comply with
the registration procedures may result in restrictions on the relevant onshore
enterprise, including prohibitions on the payment of dividends and other
distributions to its offshore parent or affiliate and capital inflow from the
offshore enterprise. The PRC resident shareholders of the offshore enterprise
may also be subject to penalties under Chinese foreign exchange administration
regulations.
We have
requested our shareholders and beneficial owners who may be subject to SAFE
Rules to make the necessary applications, filings and amendments as required
under SAFE Rules. We have advised these shareholders and beneficial owners to
comply with the relevant requirements. It is our understanding that these
shareholders are in the process of making the required filings. However,
we cannot provide any assurance that all of our shareholders and beneficial
owners who may be PRC residents will comply with our request to make or obtain
any applicable registrations or comply with other requirements required by SAFE
Rules. The failure or inability of our PRC resident shareholders or beneficial
owners to make any required registrations or comply with other requirements may
subject such shareholders or beneficial owners to fines and legal sanctions and
may also limit our ability to contribute additional capital into or provide
loans to our PRC subsidiaries, limit the ability of our PRC subsidiaries to pay
dividends or otherwise distribute profits to us, or otherwise adversely affect
us.
Environmental
Compliance
We are
subject to China’s National Environmental Protection Law, as well as a number of
other national and local laws and regulations regulating air, water and noise
pollution and setting pollutant discharge standards. We believe that all our
manufacturing operations are in material compliance with all applicable
environmental laws. During 2009, we did not incur any costs to comply with
environmental laws.
Employees
As of
December 31, 2009, we had approximately 1,500 employees. In 2009, our average
compensation per employee per month was RMB 1,050 or approximately US$ 155. We
also paid social security insurance fees for employees who required such
insurance under PRC law.
We have a
human resource performance review system and series of incentive policies that
allow personnel reviews to be carried out monthly or bi-monthly, depending on
the length of employees’ service for Shandong.
The
following table shows a breakdown of our employees by function as of December
31, 2009:
Functions
|
Number
of
employees
|
%
of
total
|
||||||
Manufacturing
|
1329 | 88.6 | % | |||||
Sales
and Marketing
|
45 | 3 | % | |||||
General
Administration, Purchasing and Logistics
|
60 | 4 | % | |||||
Quality
Control, Technology and Research & Development
|
66 | 4.4 | % | |||||
Total
|
1,500 | 100 | % |
From time
to time, we also employ third-party auditors to issue Capital Verification
Reports once a year. We have not experienced any significant labor disputes and
consider our relationship with our employees to be good.
12
ITEM
1A. RISK FACTORS.
Our
current business operations are conducted in the PRC. Because China’s economy
and its laws, regulations and policies are different from those typically found
in the west and are continually changing, we face certain risks, including but
not limited to those summarized below.
Risks
Related to Our Business and Industry
The
current economic and credit environment could have an adverse effect on demand
for certain of our products and services, which would in turn have a negative
impact on our results of operations, our cash flows, our financial condition,
our ability to borrow and our stock price.
Since at
least 2008, global market and economic conditions have been disrupted and
volatile. Concerns over increased energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market and a declining
residential real estate market in the U.S. have contributed to this increased
volatility and diminished expectations for the economy and the markets going
forward. These factors, combined with volatile oil prices, declining business
and consumer confidence and increased unemployment, have precipitated a global
recession. It is difficult to predict how long the current economic conditions
will persist, whether they will deteriorate further, and which of our products,
if not all of them, will be adversely affected. These conditions, if they
continue, could cause a material decrease in our sales, net income and an
increase in the prices we pay for raw materials we use in producing our
furniture products and, thus, materially affect our operating results and
financial condition.
We
may be unable to maintain an effective system of internal control over financial
reporting, and as a result we may be unable to accurately report our financial
results.
Our
reporting obligations as a public company place a significant strain on our
management, operational and financial resources and systems. If we fail to
maintain an effective system of internal control over financial reporting, we
could experience delays or inaccuracies in our reporting of financial
information, or non-compliance with the SEC, reporting and other regulatory
requirements. This could subject us to regulatory scrutiny and result in a loss
of public confidence in our management, which could, among other things, cause
our stock price to drop.
An
increase in the cost of raw materials, or our failure to obtain enough raw
materials will adversely affect sales and revenues.
Raw
materials required for the crafts and furniture industry includes poplar,
paulownia and other natural sources. Any increase in the
prices of these raw materials in the future will affect the price at which we
can sell our products. In addition, as we expand our business, we may encounter
the problem of shortage of raw materials. If we are not able to raise our prices
to pass on increased costs or if we cannot get enough raw materials to meet the
expansion of our business, we would be unable to maintain our margins, which
would adversely affect our financial condition and profitability.
Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.
Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. A significant portion of our assets are in the form of cash
deposited with banks in the PRC, and in the event of bank failure, we may not
have access to, or may lose entirely, our funds on deposit. Depending upon the
amount of cash we maintain in a bank that fails, our inability to have access to
such cash deposits could impair our operations, and, if we are not able to
access funds to pay our suppliers, employees and other creditors, we may be
unable to continue in business.
We may be unable
to successfully expand our manufacturing capacity, which could result in
material delays, quality issues, increased costs and loss of business
opportunities, which may negatively impact our product margins and
profitability.
Part of
our future growth strategy is to increase our manufacturing capacity to meet
increasing demand for our existing products. Assuming we obtain sufficient
funding to increase our manufacture capacity, any projects undertaken by us to
increase such capacity may not be constructed on the anticipated timetable or
within budget. We may also experience quality control issues as we implement
these manufacturing upgrades and ramp up production. Any material delay in
completing these projects, or any substantial increase in costs or quality
issues in connection with these projects, could materially delay our ability to
bring our products to markets and adversely affect our business, reduce our
revenue, income and available cash, all of which could result in reducing
financial condition by a loss of business opportunities.
13
If
we fail to meet evolving demands and requirements of customers for our furniture
and other products, through product enhancements or introducing new products, or
if our products cannot compete effectively, our financial results may be
negatively affected.
The
market for our furniture and other products is characterized by changing design
and evolving demands and requirements of customers and industry. Our competitors
are continuously developing and designing new products, which, if successful,
could undermine the competitiveness of our products. Our current and future
research and development efforts will focus on developing and designing new
products, applications and technologies to enhance our existing products. If we
fail to timely develop new product enhancements and new products or if the
competitiveness of our products are greatly undermined, we may be unable to grow
our revenue as expected and may incur expenses relating to the development or
acquisition of new products and technologies that are not fully offset by the
revenue they generate, which could result in a substantial and material loss of
our current customers, future business opportunities and a decrease in revenues,
income and available cash.
Our
business and operations are experiencing rapid growth. If we fail to effectively
manage our growth, our business and operating results could be
harmed.
We have
experienced, and may continue to experience, rapid growth in our operations,
which has placed, and may continue to place, significant demands on our
management, operational and financial infrastructure. If we do not effectively
manage our growth, the quality of our products and services could suffer,
which could negatively affect our operating results. To effectively manage this
growth, we will need to continue to improve our operational, financial and
management controls and our reporting systems and procedures. These systems
enhancements and improvements may require significant capital expenditures and
management resources. Failure to implement these improvements could hurt our
ability to manage our growth and our financial position.
Failure
to enhance our brand recognition could have a material adverse effect on our
business and results of operations.
We
believe we will need to expend significant time, effort and resources to enhance
the recognition of our brands. We believe developing our brand is important to
our sales and marketing efforts. If we fail to enhance the recognition of our
brands, it could have a material adverse effect on our ability to sell our
product and thus affect our business and results of operations. If we fail
to develop a positive public image and reputation, our existing business with
our customers could decline and we may fail to develop additional business,
which could in turn adversely affect our prospects and results of
operations.
We
may face increased competition and, if we are unable to compete successfully,
our financial condition and results of operations may be adversely
affected.
We
believe the main factors that have and in the future that could negatively
impact our operating results are (i) cost of raw materials, (ii) the prices our
products are sold by third party retailers, (iii) research and development, (iv)
demand of our new products and (v) our capital requirements. Because we
believe we have an advantage over our competitors in the price at which we
obtain our raw materials and our research and development, we believe our
current products have an advantage over competitors’ products. We may not
be able to continue to compete effectively with our existing competitors, or
compete effectively with new competitors. In addition, some of our competitors
may acquire or have more financial and other resources than we do. If we fail to
compete effectively, our business operations and financial condition will
suffer.
Our
intellectual property rights are valuable, and any inability to adequately
protect, or uncertainty regarding validity, enforceability or scope of them
could undermine our competitive position and reduce the value of our products,
services and brand, and litigation to protect our intellectual property rights
may be costly.
We
attempt to strengthen and differentiate our product portfolio by developing new
and innovative products and product improvements. As a result, our patents,
trademarks, trade secrets, copyrights and other intellectual property rights are
important assets for us. Various events outside of our control pose a threat to
our intellectual property rights as well as to our products and services. For
example, effective intellectual property protection may not be available in
China and other countries in which our products are sold. Also, although we have
applied for the intellectual property protection of 23 patents of furniture and
have registered our trademark in China, Japan and the World Intellectual
Property Organization, the efforts we have taken to protect our proprietary
rights may not be sufficient or effective. Any significant impairment of our
intellectual property rights could harm our business or our ability to compete
and adversely affect our results of operation. Also, protecting our intellectual
property rights is costly and time consuming. Policing the unauthorized use of
our proprietary technology can be difficult and expensive. Litigation might be
necessary to protect our intellectual property rights. But due to the relative
unpredictability of the Chinese legal system and potential difficulties of
enforcing a court’s judgment in China, there is no guarantee that litigation
would result in an outcome favorable to us. Furthermore, any such litigation may
be costly and may divert our management’s attention away from our core business.
An adverse determination in any lawsuit involving our intellectual property is
likely to jeopardize our business prospects and reputation. Although currently
we are not aware of any of such litigation, we have no insurance coverage
against the litigation costs so we would be forced to bear all litigation costs
if we cannot recover them from other parties in the future. All of the foregoing
factors could harm our business, financial condition and results of operations.
Any increase in the unauthorized use of our intellectual property in the future
could make it more expensive to do business and harm our operating
results.
14
We may be exposed
to infringement or misappropriation claims by third parties, which, if
determined adversely against us, could adversely affect our business and subject
us to significant liability to third parties.
Our
success mainly depends on our ability to use and develop our technology and
product designs without infringing upon the intellectual property rights of
third parties. We may be subject to litigation involving claims of patent
infringement or violation of other intellectual property rights of third
parties. The holders of patents and other intellectual property rights
potentially relevant to our product offerings may be unknown to us or may
otherwise make it difficult for us to acquire a license on commercially
acceptable terms. There may also be technologies licensed to and relied on by us
that are subject to infringement or other corresponding allegations or claims by
third parties which may damage our ability to rely on such technologies. In
addition, although we endeavor to ensure that companies that work with us
possess appropriate intellectual property rights or licenses, we cannot fully
avoid the risks of intellectual property rights infringement created by
suppliers of components used in our products or by companies we work with in
cooperative research and development activities. Our current or potential
competitors may have obtained or may obtain patents that will prevent, limit or
interfere with our ability to make, use or sell our products in the world. The
defense of intellectual property claims, including patent infringement suits,
and related legal and administrative proceedings can be both costly and time
consuming, and may significantly divert the efforts and resources of our
technical and management personnel. These factors could effectively prevent us
from pursuing some or all of our business and result in our customers or
potential customers deferring, canceling or limiting their purchase or use of
our products, which may have a material adverse effect on our business,
financial condition and results of operations.
Problems with
product quality or product performance could result in a decrease in clients and
revenue, unexpected expenses and loss of market share.
We
believe our results of operations depend partly on our ability to deliver
quality products on a timely and cost effective basis. Although currently our
products need to pass our own quality test before being shipped to customers, as
we develop new products, it may become more difficult to guarantee the quality
of our products as we expand our operations. If we experience deterioration in
the performance or quality of any of our products, including as a result of the
expansion of our manufacturing capabilities, it could result in delays in
delivery, cancellations of orders or client returns and complaints, loss of
goodwill and harm to our brand and reputation. These problems may lead to a
decrease in customers and revenue, harm to our brand, unexpected expenses, loss
of market share, the incurrence of significant repair costs, diversion of the
attention of our personnel from our product development efforts or customer
relation problems, any one of which may materially and adversely affect our
business, financial condition and results of operations.
Environmental
claims or failure to comply with any present or future environmental laws or
regulations may require us to spend additional funds and may harm our results of
operations.
We are
subject to environmental, health and safety laws and regulations such as
Environmental Protection Law, Regulation on Work Safety Licenses, Production
Safety Law, etc. that affect our operations, facilities and products in China.
Any failure to comply with any present or future environmental, health and
safety laws and regulations could result in the assessment of damages or
imposition of fines against us, suspension of production, cessation of our
operations or even criminal sanctions. New laws and regulations could also
require us to acquire costly equipment or to incur other significant expenses.
Our failure to control the use of, or adequately restrict the discharge of,
hazardous substances could subject us to potentially significant monetary
damages and fines or suspension of our business operations, which may harm our
results of operations.
Because we depend on retailers or
wholesalers to market
our products in the international market, any problems encountered by these
third parties, or our failure to maintain relationships with these third parties
or to expand third parties could negatively affect our
sales.
We do not
have any sales offices outside of the PRC although most of our products are sold
to overseas companies and we depend on other companies to market our
products in the international market. As a result, we are dependent upon third
parties, over which we have no control, to develop and implement an
international marketing effort. Any problems encountered by these third parties,
including potential violations of laws of the PRC or other countries, or our
failure to maintain relationship with the third parties or to expand third
parties may adversely affect the sales of our products which would, in turn,
affect our net sales.
We
rely on highly skilled personnel and the continuing efforts of our executive
officers and, if we are unable to retain or motivate key personnel or hire
qualified personnel, our business may be severely disrupted if we lose their
services.
Our
performance largely depends on the talents and efforts of highly skilled
individuals and in particular, the technology and expertise held by our Chief
Executive Officer, Jinliang Li.
15
Our
future success depends on our continuing ability to identify, hire, develop,
motivate and retain highly skilled personnel for all areas of our organization.
Our continued ability to compete effectively depends on our ability to attract
new technology developers and to retain and motivate our existing
contractors.
Our chief
executive officer and chief financial officer have employment contracts with
certain of our operating subsidiaries as described elsewhere in this annual
report. However, if any disputes arise between any such person and us, we cannot
assure you, in light of uncertainties associated with the Chinese legal system,
the extent to which any of such agreements could be enforced in China, where
such persons reside and hold some of their assets.
If one or
more of our executive officers are unable or unwilling to continue in their
present positions, we may not be able to replace them readily, if at all.
Therefore, our business may be severely disrupted, and we may incur additional
expenses to recruit and retain new officers. In addition, if any of our
executives joins a competitor or forms a competing company, we may lose some of
our customers.
Our
financial and operating performance may be adversely affected by epidemics,
adverse weather conditions, natural disasters and other
catastrophes.
Our
financial and operating performance may be adversely affected by `epidemics,
adverse weather conditions, natural disasters and other catastrophes. For
example, in early 2003, several economies in Asia, including China, were
affected by the outbreak of severe acute respiratory syndrome, or SARS. During
May and June of 2003, many businesses in China were closed by the PRC government
to prevent transmission of SARS. In addition, some Asian countries, including
China, have recently encountered incidents of the H5N1 strain of bird flu, or
avian flu. Furthermore, the 2008 Sichuan earthquake also had a negative impact
on many businesses in the region. Losses caused by epidemics, adverse weather
conditions, natural disasters and other catastrophes, including SARS, avian flu,
swine flu, earthquakes or typhoons, will adversely affect our
operations.
Although we have insurance coverage
in the PRC, we are
not being protected from risks that are customarily covered
by insurance in the United States.
We have
purchased property insurance for our properties, including raw materials,
semi-manufactures, manufactures, house and buildings and machinery
equipments, for a
total insured amount of RMB 19,566,426.9, or approximately $2,861,890, for the
period from May 20, 2009 to May 19, 2010. After May 19, 2010, we intend to
attempt to and believe we will be able to obtain similar insurance. However,
this property insurance may not cover the full value of our property and
equipment, which leaves us with exposure in the event of loss or damage to our
properties or claims filed against us.
We
currently do not carry any product liability or other similar insurance. We cannot assure you that we
would not face liability in the event of the failure of any of our products.
This is particularly true given our plan to significantly expand our sales into
international markets, like the United States, where product liability claims
are more prevalent.
We do not
have business liability or business disruption insurance coverage for our
operations in the PRC.
We do not
maintain a reserve fund for warranty or defective products claims. Our costs
could substantially increase if we experience a significant number of warranty
claims. We have not established any reserve funds for potential warranty claims
since historically we have experienced few warranty claims for our products so
that the costs associated with our warranty claims have been low. If we
experience an increase in warranty claims or if our repair and replacement costs
associated with warranty claims increase significantly, it would have a material
adverse effect on our financial condition and results of
operations.
Under
PRC law, we are required to obtain permits and business licenses, and our
failure to do so would adversely impact our ability to conduct business in
China.
We hold
various permits, business licenses, and approvals authorizing our operations and
activities, which are subject to periodic review and reassessment by the Chinese
authorities. Standards of compliance necessary to pass such reviews change
from time to time and differ from jurisdiction to jurisdiction, leading to a
degree of uncertainty. If renewals, or new permits, business licenses or
approvals required in connection with existing or new facilities or activities,
are not granted or are delayed, or if existing permits, business licenses or
approvals are revoked or substantially modified, we may not be able to continue
to operate our facilities which would have a material adverse affect on our
operations . If new standards are applied to renewals or new applications, it
could prove costly to us to meet any new level of compliance.
If
we make any acquisitions, they may disrupt or have a negative impact on our
business.
Although
we have no present plans for any specific acquisition, in the event that we make
acquisitions, we could have difficulty integrating the acquired companies’
personnel and operations with our own. In addition, the key personnel of the
acquired business may not be willing to work for us. We cannot predict the
effect expansion may have on our core business. Regardless of whether we are
successful in making an acquisition, the negotiations could disrupt our ongoing
business, distract our management and employees and increase our expenses. In
addition to the risks described above, acquisitions are accompanied by a number
of inherent risks, including, without limitation, the
following:
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the
difficulty of integrating acquired products, services or
operations;
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the
potential disruption of the ongoing businesses and distraction of our
management and the management of acquired
companies;
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the
difficulty of incorporating acquired rights or products into our existing
business;
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difficulties
in disposing of the excess or idle facilities of an acquired company or
business and expenses in maintaining such
facilities;
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difficulties
in maintaining uniform standards, controls, procedures and
policies;
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the
potential impairment of relationships with employees and customers as a
result of any integration of new management
personnel;
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the
potential inability or failure to achieve additional sales and enhance our
customer base through cross-marketing of the products to new and existing
customers;
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the
effect of any government regulations which relate to the business
acquired;
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potential
unknown liabilities associated with acquired businesses or product lines,
or the need to spend significant amounts to retool, reposition or modify
the marketing and sales of acquired products or the defense of any
litigation, whether of not successful, resulting from actions of the
acquired company prior to our
acquisition.
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Our
business could be severely impaired if and to the extent that we are unable to
succeed in addressing any of these risks or other problems encountered in
connection with these acquisitions, many of which cannot be presently
identified, these risks and problems could disrupt our ongoing business,
distract our management and employees, increase our expenses and adversely
affect our results of operations.
Risks
Related to Doing Business in China
The
payment of dividends in the PRC is subject to limitations. We may not be able to
pay dividends to our stockholders.
We
conduct all of our business through our consolidated subsidiaries and affiliated
companies incorporated in the PRC. We rely on dividends paid by these
consolidated subsidiaries for our cash needs, including the funds necessary to
pay any dividends and other cash distributions to our stockholders, to service
any debt we may incur and to pay our operating expenses. The payment of
dividends by entities established in the PRC is subject to limitations.
Regulations in the PRC currently permit payment of dividends only out of
accumulated profits as determined in accordance with accounting standards and
regulations in the PRC, subject to certain statutory procedural requirements.
Our PRC subsidiary, even though it is a wholly foreign owned enterprises, is
also required to set aside at least 10.0% of their after-tax profit based on PRC
accounting standards each year to its general reserves or statutory reserve fund
until the aggregate amount of such reserves reaches 50.0% of its respective
registered capital. Our statutory reserves are not distributable as loans,
advances or cash dividends. In addition, if our PRC subsidiary incurs debt
on its own behalf in the future, the instruments governing the debt may restrict
its ability to pay dividends or make other distributions to us. Since the
aggregate amount of our general reserves equaled at least 50% of our registered
capital as of December 31, 2009, our PRC subsidiary was not required to allocate
any fund to these reserves. Any limitations on the ability of our PRC subsidiary
to transfer funds to us could materially and adversely limit our ability to
grow, make investments or acquisitions that could be beneficial to our business,
pay dividends and otherwise fund and conduct our business.
The
PRC economic cycle may negatively impact our operating results.
We
believe that the rapid growth of the PRC economy before 2008 generally led to
higher levels of inflation. We believe that the PRC economy has more
recently experienced a slowing of its growth rate. We believe that a
number of factors have contributed to this slow-down, including appreciation of
the RMB, the currency of China, which has adversely affected China’s
exports. In addition, we believe the slow-down has been exacerbated by the
recent global crisis in the financial services and credit markets, which has
resulted in significant volatility and dislocation in the global capital
markets. It is uncertain how long the global crisis in the financial
services and credit markets will continue and the significance of the adverse
impact it may have on the global economy in general, or the Chinese economy in
particular. Slowing economic growth in China could result in slowing growth and
demand for our products which could reduce our revenues and income. In the
event of a recovery in the PRC, renewed high growth levels may again lead to
inflation. Government attempts to control inflation may adversely affect
the business climate and growth of private enterprise. In addition, our
profitability may be adversely affected if prices for our products rise at a
rate that is insufficient to compensate for the rise in
inflation.
17
Fluctuation
in the value of the RMB may have a material adverse effect on your
investment.
The value of the RMB against the U.S.
dollar and other currencies may fluctuate and is affected by, among other
things, changes in China’s political and economic conditions. The
conversion of RMB into foreign currencies, including U.S. dollars, has
historically been set by the People’s Bank of China. On July 21, 2005, the
PRC government changed its policy of pegging the value of the RMB to the U.S.
dollar. Under the new policy, the RMB is permitted to fluctuate within a band
against a basket of certain foreign currencies, determined by the Bank of China,
against which it can rise or fall by as much as 0.3% each day. This change
in policy resulted in an approximately 17.5% appreciation in the value of the
RMB against the U.S. dollar between July 21, 2005 and October 28, 2009.
Since the adoption of this new policy, the value of RMB against the U.S. dollar
has fluctuated on a daily basis within narrow ranges, but overall has further
strengthened against the U.S. dollar. There remains significant
international pressure on the PRC government to further liberalize its currency
policy, which could result in a further and more significant appreciation in the
value of the RMB against the U.S. dollar. Appreciation or depreciation in
the value of the RMB relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying
change in our business or results of operations. In addition, if we decide
to convert our RMB into U.S. dollars for the purpose of making payments for
dividends on our common stock or for other business purposes, we believe
appreciation of the U.S. dollar against the RMB may have a negative effect on
the U.S. dollar amount available to us. Changes in foreign exchange
regulations in the PRC may affect our ability to pay dividends in foreign
currency or conduct other foreign exchange business.
The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the PRC. We receive
substantially all of our revenues in RMB, which is currently not a freely
convertible currency. Shortages in the availability of foreign currency may
restrict our ability to remit sufficient foreign currency to pay dividends, or
otherwise satisfy foreign currency-denominated obligations. Under existing
PRC foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange, or the SAFE, by complying with certain
procedural requirements. However, approval from appropriate governmental
authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies. The PRC government may also at
its discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay certain of our expenses as they come due. Also our
revenues denominated in RMB increase or expenses denominated in RMB decrease in
the future, we may need to convert a portion of our revenues into other
currencies to meet our foreign currency obligations, including, but not limited
to, payments of dividends declared, if any, in respect of our common stock.
Under the PRC’s existing foreign exchange regulations, we are able to pay
dividends in foreign currencies, without prior approval from the State
Administration of Foreign Exchange (“SAFE”), by complying with certain
procedural requirements. However, we cannot assure you that the Chinese
government will not take further measures in the future to restrict access to
foreign currencies for transactions.
Uncertainties
with respect to the PRC legal system could adversely affect us and we may have
limited legal recourse under PRC law if disputes arise under our contracts with
third parties.
Since
1979, we believe PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China.
However, China has not developed a fully integrated legal system and recently
enacted laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, the interpretation and enforcement of these laws and regulations
involve uncertainties. In addition, the PRC legal system is based in part
on government policies and internal rules (some of which are not published on a
timely basis or at all) that may have a retroactive effect. As a result,
sometimes we may not be aware of our violation of these policies and rules until
some time after violation.
The
Chinese government has enacted some laws and regulations dealing with matters
such as corporate organization and governance, foreign investment, commerce,
taxation and trade. However, their experience in implementing,
interpreting and enforcing these laws and regulations is limited, and our
ability to enforce commercial claims or to resolve commercial disputes is
unpredictable. The resolution of these matters may be subject to the
exercise of considerable discretion by agencies of the Chinese government, and
forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific
performance, or to seek an injunction under PRC law, in either of these cases,
are severely limited, and without a means of recourse by virtue of the Chinese
legal system, we may be unable to prevent these situations from occurring.
The occurrence of any such events could have a material adverse effect on our
business, financial condition and results of operations.
18
We
May Be Deemed A PRC Resident Enterprise For PRC Tax Purposes Under The New
Enterprise Income Tax Law, Which Could Result In The Imposition Of 25% PRC
Enterprise Income Tax Payable On Our Taxable Global Income.
On March
16, 2007, the National People’s Congress of the PRC passed the Enterprise Income
Tax Law of the PRC (‘‘New Income Tax Law’’), which took effect as of January 1,
2008. On December 6, 2007, the Implementation Rules of Enterprise Income Tax Law
of the PRC (‘‘Implementation Rules’’) were also enacted, and took effect as of
January 1, 2008. In accordance with the new laws and regulations, a unified
enterprise income tax rate of 25% and unified tax deduction standards will be
applied equally to both domestic enterprises and foreign-invested
enterprises.
Under the
New Income Tax Law and the Implementation Rules, enterprises established under
the laws of foreign jurisdictions other than the PRC may nevertheless be
considered as PRC-resident enterprises for tax purposes if these enterprises
have their ‘‘de facto management body’’ within the PRC. Under the Implementation
Rules, ‘‘de facto management body’’ is defined as a body that has material and
overall management and control over the manufacturing and business operations,
personnel and human resources, finances and treasury, and acquisition and
disposition of properties and other assets of an enterprise. At present, it is
unclear what factors will be used by the PRC tax authorities to determine
whether we are a ‘‘de facto management body’’ in China. A substantial number of
our management personnel are located in the PRC, and all of our revenues arise
from our operations in China. If the PRC tax authorities determine that we are a
PRC resident enterprise, we will be subject to PRC tax on our worldwide income
at the 25% uniform tax rate, which may have a material adverse effect on our
financial condition and results of operations. Notwithstanding the foregoing
provision, the New Income Tax Law also provides that, if a PRC resident
enterprise already invests in another PRC resident enterprise, the dividends
received by the investing resident enterprise from the invested resident
enterprise are exempt from income tax, subject to certain qualifications.
Therefore, if we are classified as a PRC resident enterprise, the dividends
received from our PRC subsidiaries may be exempt from income tax. However, due
to the short history of the New Income Tax Law, it is unclear as to (i) the
detailed qualification requirements for such exemption and (ii) whether dividend
payments by our PRC subsidiaries to us will meet such qualification
requirements, even if we are considered a PRC resident enterprise for tax
purposes.
We
face uncertainty from the Circular on Strengthening the Administration of
Enterprise Income Tax on Non-resident Enterprises' Share Transfer (“Circular
698”) released in December 2009 by China's State Administration of Taxation
(SAT), effective as of January 1, 2008.
Where a
foreign investor indirectly transfers equity interests in a Chinese resident
enterprise by selling the shares in an offshore holding company, and the latter
is located in a country (jurisdiction) where the effective tax burden is less
than 12.5% or where the offshore income of her residents is not taxable, the
foreign investor is required to provide the tax authority in charge of that
Chinese resident enterprise with the relevant information within 30 days of the
transfers.
Where a
foreign investor indirectly transfers equity interests in a Chinese resident
enterprise through the abuse of form of organization and there are no reasonable
commercial purposes such that the corporate income tax liability is avoided, the
tax authority has the power to re-assess the nature of the equity transfer in
accordance with the “substance-over-form” principle and deny the existence of
the offshore holding company that is used for tax planning
purposes.
“Income
derived from equity transfers” as mentioned in this circular refers to income
derived by non-resident enterprises from direct or indirect transfers of equity
interest in China resident enterprises, excluding share in Chinese resident
enterprises that are bought and sold openly on the stock exchange.
While the
term "indirectly transfer" is not defined, we understand that the relevant PRC
tax authorities have jurisdiction regarding requests for information over a wide
range of foreign entities having no direct contact with China. The relevant
authority has not yet promulgated any formal provisions or formally declared or
stated how to calculate the effective tax in the very country (jurisdiction) and
to what extent and the process of the disclosure to the tax authority in charge
of that Chinese resident enterprise. Meanwhile, there are not any formal
declarations with regard to how to decide “abuse of form of organization” and
“reasonable commercial purpose,” which can be utilized by us to balance if our
company complies with the Circular 698.
19
Failure to comply with PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents may materially adversely affect
us.
In
October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued
the Notice on Relevant Issues in the Foreign Exchange Control over Financing and
Return Investment Through Special Purpose Companies by Residents Inside China,
generally referred to as Circular 75. The policy announced in this notice
required PRC residents to register with the relevant SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in May 2007 (known
as Circular 106), expanded the reach of Circular 75. In the case of an SPV which
was established, and which acquired a related domestic company or assets, before
the implementation date of Circular 75, a retroactive SAFE registration was
required to have been completed before March 31, 2006; this date was
subsequently extended indefinitely by Circular 106, which also required that the
registrant establish that all foreign exchange transactions undertaken by the
SPV and its affiliates were in compliance with applicable laws and regulations.
Failure to comply with the requirements of Circular 75, as applied by SAFE in
accordance with Circular 106, may result in fines and other penalties under PRC
laws for evasion of applicable foreign exchange restrictions. Any such failure
could also result in the SPV’s affiliates being impeded or prevented from
distributing their profits and the proceeds from any reduction in capital, share
transfer or liquidation to the SPV, or from engaging in other transfers of funds
into or out of China.
We have
requested our shareholders who are PRC residents to make the necessary
applications, filings and amendments as required under Circular 75 and other
related rules. We attempt to comply, and attempt to ensure that our shareholders
who are subject to these rules comply, with the relevant requirements. However,
we cannot provide any assurances that our shareholders who are PRC residents
will comply with our request to make or obtain any applicable registrations or
comply with other requirements required by Circular 75 or other related rules or
that, if challenged by government agencies, the structure of our organization
fully complies with all applicable registrations or approvals required by
Circular 75. Moreover, because of uncertainty over how Circular 75 will be
interpreted and implemented, and how or whether SAFE will apply it to us, we
cannot predict how it will affect our business operations or future
strategies. A failure by such PRC resident shareholders or future PRC resident
shareholders to comply with Circular 75 or other related rules, if SAFE requires
it, could subject these PRC resident shareholders to fines or legal
sanctions, restrict our overseas or cross-border investment activities, limit
our subsidiaries’ ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and
prospects.
Adverse
changes in political and economic policies of the Chinese government could have
a material adverse effect on the overall economic growth of China, which could
reduce the demand for our products and materially and adversely affect our
competitive position.
Our
business, financial condition, results of operations and prospects are affected
significantly by economic, political and legal developments in China. The
Chinese economy differs from the economies of most developed countries in many
respects, including:
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the
amount of government involvement;
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the
level of development;
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the
growth rate;
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the
control of foreign
exchange; and
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the
allocation of resources.
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While the
Chinese economy has grown significantly in the past 20 years, we believe
the growth has been uneven, both geographically and among various sectors of the
economy. The Chinese government has implemented various measures to
encourage economic growth and guide the allocation of resources. We believe some
of these measures benefit the overall Chinese economy, but may also have a
negative effect on us. For example, our financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to
us.
The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years the Chinese government
has implemented measures emphasizing the utilization of market forces for
economic reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the
Chinese government. The Chinese government also exercises significant
control over Chinese economic growth through the allocation of resources,
controlling payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular
industries or companies.
Contract
drafting, interpretation and enforcement in China involve significant
uncertainty.
We have
entered into numerous contracts governed by PRC law, many of which are material
to our business. As compared with contracts in the United States, contracts
governed by PRC law tend to contain less detail and are not as comprehensive in
defining contracting parties’ rights and obligations. As a result, contracts in
China are more vulnerable to disputes and legal challenges. In addition,
contract interpretation and enforcement in China is not as developed as in the
United States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be subject to
disputes under our material contracts, and if such disputes arise, we cannot
assure you that we will prevail.
20
The
application of PRC regulations relating to the overseas listing of PRC domestic
companies is uncertain, and we may be subject to penalties for failing to
request approval of the PRC authorities prior to listing our shares in the
U.S.
On August
8, 2006, six PRC government agencies, namely, the Ministry of Commerce
(“MOFCOM”), the State Administration for Industry and Commerce,(”SAIC”), the
China Securities Regulatory Commission (“CSRC”), SAFE, the State-Owned Assets
Supervision and Administration Commission,(“SASAC”), and the State
Administration for Taxation (“SAT”), jointly issued the Regulations on Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors (the “ New M&A
Rules ”), which became effective on September 8, 2006. The New M&A Rules
purport, among other things, to require offshore “special purpose vehicles”,
that are (1) formed for the purpose of overseas listing of the equity interests
of PRC companies via acquisition and (2) are controlled directly or indirectly
by PRC companies and/or PRC individuals, to obtain the approval of the CSRC
prior to the listing and trading of their securities on overseas stock
exchanges. On September 21, 2006, pursuant to the New M&A Rules
and other PRC Laws, the CSRC published on its official website relevant
guidance with respect to the listing and trading of PRC domestic enterprises’
securities on overseas stock exchanges (the “Related Clarifications”), including
a list of application materials regarding the listing on overseas stock
exchanges by special purpose vehicles. We were and are not required to obtain
the approval of CSRC under the New M&A Rules in connection with this
transaction due to that (i) we were and are not a special purpose vehicle
formed or controlled by PRC individuals; and (ii) Conversion of
Shandong from a joint venture to a wholly foreign owned enterprise was and
is not subject to the New M&A Rules in accordance with the New M&A Rules
and Guidance Manual on Administration of Entry of Foreign Investment issued by
the Department of Foreign Investment Administration of the MOFCOM in December
2008.
However,
there are substantial uncertainties regarding the interpretation, application
and enforcement of these rules, and CSRC has yet to promulgate any written
provisions or formally to declare or state whether the overseas listing of a
PRC-related company structured similar to ours is subject to the approval of
CSRC. Any violation of these rules could result in fines and other penalties on
our operations in China, restrictions or limitations on remitting dividends
outside of China, and other forms of sanctions that may cause a material and
adverse effect to our business, operations and financial
conditions.
The New
M&A Rules also established additional procedures and requirements that are
expected to make merger and acquisition activities by foreign investors more
time-consuming and complex, including requirements in some instances that the
Ministry of Commerce be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise that owns
well-known trademarks or China’s traditional brands. We may grow our business in
part by acquiring other businesses. Complying with the requirements of the New
M&A Rules in completing this type of transaction could be time-consuming,
and any required approval processes, including CSRC approval, may delay or
inhibit our ability to complete such transactions, which could affect our
ability to expand our business or maintain our market share.
Capital
outflow policies in the PRC may hamper our ability to remit income to the United
States.
The PRC
has adopted currency and capital transfer regulations. These regulations may
require that we comply with complex regulations for the movement of capital and
as a result we may not be able to remit all income earned and proceeds received
in connection with our operations or from the sale of our operating subsidiary
to the U.S. or to our stockholders.
Our
operations and assets in the PRC are subject to significant political and
economic uncertainties.
Government
policies are subject to rapid change and the government of the PRC may adopt
policies which have the effect of hindering private economic activity and
greater economic decentralization. There is no assurance that the government of
the China will not significantly alter its policies from time to time
without notice in a manner with reduces or eliminates any benefits from its
present policies of economic reform. In addition, a substantial portion of
productive assets in China remains government-owned. For instance, all
lands are state or rural collective economic organizations owned and leased to
business entities or individuals through governmental granting of the land use
rights. The granting process is typically based on government policies at the
time of granting, which could be lengthy and complex. This process may adversely
affect our business. The government of China also exercises significant control
over China’s economic growth through the allocation of resources, controlling
payment of foreign currency and providing preferential treatment to
particular industries or companies. Uncertainties may arise with changing
of governmental policies and measures. In addition, changes in laws and
regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency, the nationalization or other expropriation of private
enterprises, as well as adverse changes in the political, economic or social
conditions in China, could have a material adverse effect on our business,
results of operations and financial condition.
Because Chinese law governs almost
all of our material agreements, we may not be able to enforce our legal rights
within China or elsewhere, which could result in a
significant loss of business, business opportunities, or capital.
Chinese
law governs almost all of our material agreements. We cannot assure you that we
will be able to enforce any of our material agreements or that remedies will be
available outside of China. The system of laws and the enforcement of existing
laws in China may not be as certain in implementation and interpretation as in
the United States. The inability to enforce or obtain a remedy under any of our
current or future agreements could result in a significant loss of business,
business opportunities or capital. It will be extremely difficult to
acquire jurisdiction and enforce liabilities against our officers, directors and
assets based in China.
21
Substantially
all of our assets will be located in the PRC and all of our officers and our
present directors reside outside of the United States. As a result, it may
not be possible for United States investors to enforce their legal rights, to
effect service of process upon our directors or officers or to enforce judgments
of United States courts predicated upon civil liabilities and criminal penalties
of our directors and officers under Federal securities laws. Moreover, we have
been advised that China does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts with the United States.
Further, it is unclear if extradition treaties now in effect between the United
States and China would permit effective enforcement of criminal penalties of the
Federal securities laws.
Imposition of trade barriers and taxes may reduce
our ability to do business internationally, and the resulting loss of revenue
could harm our
profitability.
We may
experience barriers to conducting business and trade in our targeted emerging
markets in the form of delayed customs clearances, customs duties and tariffs.
In addition, we may be subject to repatriation taxes levied upon the exchange of
income from local currency into foreign currency, substantial taxes on profits,
revenues, assets and payroll, as well as value-added tax. The markets in
which we plan to operate may impose onerous and unpredictable duties, tariffs
and taxes on our business and products, and there can be no assurance that this
will not reduce the level of sales that we achieve in such markets, which would
reduce our revenues and profits.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC. We can make
no assurance, however, that our employees or other agents will not engage in
such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our
business, financial condition and results of operations.
New
labor laws in the PRC may adversely affect our results of
operations.
On
June 29, 2007, the PRC government promulgated a new labor law, namely, the
Labor Contract Law of the PRC, or the New Labor Contract Law, which became
effective on January 1, 2008. The New Labor Contract Law imposes greater
liabilities on employers and significantly affects the cost of an employer’s
decision to reduce its workforce. Further, it requires certain terminations be
based upon seniority and not merit. In the event we decide to significantly
change or decrease our workforce, the New Labor Contract Law could adversely
affect our ability to enact such changes in a manner that is most advantageous
to our business or in a timely and cost-effective manner, thus materially and
adversely affecting our financial condition and results of
operations.
We
Face Risks Related To Health Epidemics.
Our
business could be materially and adversely affected by the effects of H1N1 flu
(swine flu), avian flu, severe acute respiratory syndrome or other epidemics or
outbreaks. In April 2009, an outbreak of H1N1 flu first occurred in Mexico and
quickly spread to other countries, including the U.S. and China. In the last
decade, China has suffered health epidemics related to the outbreak of avian
influenza and severe acute respiratory syndrome. Any prolonged occurrence or
recurrence of H1N1 flu (swine flu), avian flu, severe acute respiratory syndrome
or other adverse public health developments in China may have a material adverse
effect on our business and operations. These health epidemics could result in
severe travel restrictions and closures that would restrict our ability to ship
our products. Potential outbreaks could also lead to temporary closure of our
manufacturing facilities, our suppliers’ facilities and/or our end-user
customers’ facilities, leading to reduced production, delayed or cancelled
orders, and decrease in demand for our products. Any future health epidemic or
outbreaks that could disrupt our operations and/or restrict our shipping
abilities may have a material adverse effect on our business and results of
operations.
22
Risks
Related to Ownership of our Common Stock
Volatility
in our common stock price may subject us to securities litigation.
Stock
markets, in general, have experienced in recent months, and continue to
experience, significant price and volume volatility, and the market price of our
common stock may continue to be subject to similar market fluctuations unrelated
to our operating performance or prospects. This increased volatility,
coupled with depressed economic conditions, could continue to have a depressing
effect on the market price of our common stock. The following factors,
many of which are beyond our control, may influence our stock
price:
•
|
the
status of our growth strategy;
|
|
|
•
|
announcements
of technological or competitive
developments;
|
|
•
|
regulatory
developments in the PRC affecting us, our customers or our
competitors;
|
|
•
|
announcements
regarding patent or other intellectual property litigation or the issuance
of patents to us or our competitors or updates with respect to the
enforceability of patents or other intellectual property rights generally
in the PRC or internationally;
|
|
•
|
actual
or anticipated fluctuations in our quarterly operating
results;
|
|
•
|
changes
in financial estimates by securities research
analysts;
|
|
•
|
changes
in the economic performance or market valuations of our
competitors;
|
|
•
|
additions
or departures of our executive
officers;
|
|
•
|
release
or expiration of lock-up or other transfer restrictions on our outstanding
common stock; and
|
|
•
|
sales
or perceived sales of additional shares of our common
stock.
|
In
addition, the securities market has, from time to time, experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. Any of these factors could result in large and sudden
changes in the volume and trading price of our common stock and could cause our
stockholders to incur substantial losses. In the past, following periods
of volatility in the market price of a company’s securities, stockholders have
often instituted securities class action litigation against that company.
If we were involved in a class action suit or other securities litigation, it
would divert the attention of our senior management, require us to incur
significant expense and, whether or not adversely determined, could have a
material adverse effect on our business, financial condition, results of
operations and prospects.
We
do not anticipate paying cash dividends on our common stock in the foreseeable
future.
We do not
anticipate paying cash dividends in the foreseeable future on shares of our
common stock. Presently, we intend to retain all of our earnings, if any, to
finance development and expansion of our business. PRC capital and currency
regulations may also limit our ability to pay dividends. Consequently, your only
opportunity to achieve a positive return on your investment in us will be if the
market price of our common stock appreciates.
Your
ability to bring an action against us or against our directors and officer, or
to enforce a judgment against us or them, will be limited because we conduct
substantially all of our operations in the PRC and because the majority of our
directors and officers reside outside of the United States.
We are a
Delaware holding company and substantially all of our assets are located outside
of the United States. Substantially all of our current operations are
conducted in the PRC. In addition, most of our directors and officers are
nationals and residents of countries other than the United States. A
substantial portion of the assets of these persons are located outside the
United States. As a result, it may be difficult for you to effect service
of process within the United States upon these persons. It may also be
difficult for you to enforce in U.S. courts judgments on the civil liability
provisions of the U.S. federal securities laws against us and our officers and
directors, most of whom are not residents in the United States and the
substantial majority of whose assets are located outside of the United
States. In addition, there is uncertainty as to whether the courts of the
PRC would recognize or enforce judgments of U.S. courts. Our counsel as to
PRC law has advised us that the recognition and enforcement of foreign judgments
are provided for under the PRC
Civil Procedures Law. Courts in the PRC may recognize and enforce
foreign judgments in accordance with the requirements of the PRC Civil Procedures Law
based on treaties between the PRC and the country where the judgment is
made or on reciprocity between jurisdictions. The PRC does not have any
treaties or other arrangements that provide for the reciprocal recognition and
enforcement of foreign judgments with the United States. In addition,
according to the PRC Civil
Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment
violates basic principles of PRC law or national sovereignty, security or the
public interest. So it is uncertain whether a PRC court would enforce a judgment
rendered by a court in the United States.
Anti-takeover
provisions of the Delaware General Corporation Law and some provisions in our
certificate of incorporation and bylaws could have a material adverse effect on
the rights of holders of our common stock.
We are
subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder,
unless:
|
•
|
prior
to such date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
|
23
|
•
|
upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85.0%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
officers and by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer;
or
|
|
•
|
on
or subsequent to such date, the business combination is approved by the
Board of Directors and authorized at an annual meeting or special meeting
of stockholders and not by written consent, by the affirmative vote of at
least 66.7% of the outstanding voting stock that is not owned by the
interested stockholder.
|
Section
203 defines a business combination to include:
|
•
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
|
•
|
any
sale, transfer, pledge or other disposition of 10.0% or more of the assets
of the corporation involving the interested
stockholder;
|
|
•
|
subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
|
•
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
|
|
•
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
|
In
general, Section 203 defines an “interested stockholder” as any entity or person
beneficially owning 15.0% or more of the outstanding voting stock of a
corporation, or an affiliate or associate of the corporation and was the owner
of 15.0% or more of the outstanding voting stock of a corporation at any time
within three years prior to the time of determination of interested stockholder
status; and any entity or person affiliated with or controlling or controlled by
such entity or person.
Anti-takeover
provisions of the Delaware General Corporation Law, may make it more difficult
to acquire our company or effect a change in control of our company, even if an
acquisition or change in control would be in the interest of our stockholders or
if an acquisition or change in control would provide our stockholders with a
premium for their shares over then current market prices.
Our
certificate of incorporation and bylaws contain provisions that could have the
effect of discouraging potential acquisition proposals or tender offers or
delaying or preventing a change in control of our company, including changes a
stockholder might consider favorable. In particular, our certificate of
incorporation and bylaws, as applicable, among other things, provide
that:
|
•
|
our
Board of Directors shall have the ability to alter our bylaws without
stockholder approval;
|
|
•
|
an
advance notice procedure with regard to the nomination of candidates for
election as directors and with regard to business to be brought before a
meeting of stockholders; and
|
|
•
|
vacancies
on our Board of Directors may be filled by a majority of directors in
office, although less than a
quorum.
|
Such
provisions may have the effect of discouraging a third party from acquiring our
company, even if doing so would be beneficial to its stockholders. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of our board of directors and in the policies formulated by
them, and to discourage some types of transactions that may involve an actual or
threatened change in control of our company. These provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal and to
discourage some tactics that may be used in proxy fights.
However,
these provisions could have the effect of discouraging others from making tender
offers for our shares. These provisions also may have the effect of preventing
changes in our management.
One
of our directors and officers controls a majority of our common stock and his
interests may not align with the interests of our other
stockholders.
Jinliang
Li, our chairman, chief executive officer and president, through CAOPU, a
private BVI entity, which Mr. Li controls, beneficially owns in excess of 50.1%
of our issued and outstanding common stock. This significant concentration
of share ownership may adversely affect the trading price of our common stock
because investors often perceive a disadvantage in owning shares in a company
with one or several controlling stockholders. Furthermore, our directors
and officers, as a group, have the ability to significantly influence or control
the outcome of all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions, such
as mergers, consolidations or the sale of substantially all of our assets.
This concentration of ownership may have the effect of delaying or preventing a
change in control of our company which could deprive our stockholders of an
opportunity to receive a premium for their shares as part of a sale of our
company and might reduce the price of our common stock. In addition, without the
consent of Mr. Li or CAOPU Enterprise Limited, we could be prevented from
entering into transactions that could be beneficial to us. Mr. Li or CAOPU
Enterprise Limited may cause us to take actions that are opposed by other
stockholders as his interests may differ from those of other
stockholders.
24
Future
issuances of capital stock may depress the trading price of our common
stock.
We may
issue additional shares of our common stock in the future for a number of
reasons, including financing our operations and business strategy (including in
connection with acquisitions, strategic collaborations or other transactions).
Any issuance of shares of our common stock (or common stock equivalents) could
dilute the interests of our existing stockholders and could substantially
decrease the trading price of our common stock.
Sales of
a substantial number of shares of our common stock in the public market could
depress the market price of our common stock, and impair our ability to raise
capital through the sale of additional equity securities. We cannot
predict the effect that future sales of our common stock or other equity-related
securities would have on the market price of our common stock. .
Our common stock is subject to the U.S. “Penny Stock” Rules, investors who purchase our
common stock
may have difficulty
re-selling
their shares
of our common stock
as the liquidity of the
market for our shares may be adversely affected by the impact of the
“Penny
Stock”
Rules.
We
believe our common stock is subject to the U.S. “Penny
Stock” Rules, investors
who purchase our common
stock may
have difficulty re-selling their shares
of
our common stock as
the liquidity of the market for our shares may be adversely affected by the
impact of the “Penny
Stock” Rules. A
“Penny
Stock” is generally defined by regulations of the U.S. Securities and
Exchange Commission ("SEC") as an equity security with a market price of less
than US$5.00 per share. However, an equity security with a market price under
US$5.00 will not be considered a penny stock if it fits within any of the
following exceptions:
|
(i)
|
the
equity security is listed on a national securities
exchange;
|
|
(ii)
|
the
issuer of the equity security has been in continuous operation for less
than three years, and either has (a) net tangible assets of at least
US$5,000,000, or (b) average annual revenue of at least US$6,000,000;
or
|
|
(iii)
|
the
issuer of the equity security has been in continuous operation for more
than three years, and has net tangible assets of at least
US$2,000,000.
|
Our
common stock does not currently fit into any of the above
exceptions.
If an
investor buys or sells a penny stock, SEC regulations require that the investor
receive, prior to the transaction, a disclosure explaining the penny stock
market and associated risks. Furthermore, trading in our common stock is
currently subject to Rule 15g-9 of the Exchange Act, which relates to non-NASDAQ
and non-exchange listed securities. Under this rule, broker/dealers who
recommend our securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale.
The low
price of our common stock has a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock also limits our ability to raise additional capital by issuing additional
shares. There are several reasons for these effects. First, the internal
policies of certain institutional investors prohibit the purchase of low-priced
stocks. Second, many brokerage houses do not permit low-priced stocks to be used
as collateral for margin accounts or to be purchased on margin. Third, some
brokerage house policies and practices tend to discourage individual brokers
from dealing in low-priced stocks. Finally, broker's commissions on low-priced
stocks usually represent a higher percentage of the stock price than commissions
on higher priced stocks. As a result, our shareholders may pay transaction
costs that are a higher percentage of their total share value than if our
share price were substantially higher.
As an issuer of “penny stock” the protection provided by the federal
securities laws relating to forward-looking statements do not apply to us and as a result we could be subject to
legal action.
Although
federal securities laws provide a safe harbor for forward-looking statements
made by a public company that files reports under the federal securities laws,
this safe harbor is not available to issuers of penny stocks. As a result, if we
are a penny stock, we will not have the benefit of this safe harbor protection
in the event of any legal action based upon a claim that the material provided
by us contained a material misstatement of fact or was misleading in any
material respect because of our failure to include any statements necessary to
make the statements not misleading. Such an action could hurt our financial
condition.
25
The issuance of any of our equity securities pursuant
to equity compensation plans we intend to adopt may dilute the value of existing
stockholders and may affect the market price of our
stock.
In the
future, we may issue to our officers, directors, employees and/or other people’s
equity based compensation under an equity based compensation plan we intend to
adopt to provide motivation and compensation to our officers, employees and key
independent consultants. The award of any such incentives could result in an
immediate and potentially substantial dilution to our existing stockholders and
could result in a decline in the value of our stock price. The exercise of these
options and the sale of the underlying shares of common stock and the sale of
stock issued pursuant to stock grants may have an adverse effect upon the price
of our stock.
If we fail to comply with
Section 404 of the Sarbanes-Oxley Act of 2002 our business could be harmed and
our stock price could decline
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of this assessment by our company's independent registered public
accountants. The SEC extended the date to comply with the attestation
requirements for non-accelerated filers, as defined by the SEC. Accordingly, we
are subject to the rules requiring an annual assessment of our internal controls
and the requirement to provide an attestation of management's assessment by our
independent registered public accountants will first apply to our annual report
for the 2010 fiscal year. The standards that must be met for management to
assess the internal control over financial reporting as effective are complex,
and require significant documentation, testing and possible remediation to meet
the detailed standards. The attestation process by our independent registered
public accountants is new and we may encounter problems or delays in completing
the implementation of any requested improvements and receiving an attestation of
our assessment by our independent registered public accountants. If we cannot
assess our internal control over financial reporting as effective, or our
independent registered public accountants are unable to provide an unqualified
attestation report on such assessment, investor confidence and share
value may be negatively impacted.
26
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Not
applicable.
ITEM
2. PROPERTIES.
There is
no private land ownership in PRC. Land in the PRC is owned by the government and
cannot be sold to any individual or entity. Instead, the government grants or
allocates landholders a “land use right,” which is sometimes referred to
informally as land ownership. Land use rights are granted for specific
purposes and for limited periods. Each period may be renewed at the
expiration of the initial and any subsequent terms. Granted land use
rights are transferable and may be used as security for borrowings and other
obligations. Generally speaking, there are four primary ways of obtaining
land use rights in the PRC:
|
·
|
Grant
of the right to use land;
|
|
·
|
Assignment
of the right to use land;
|
|
·
|
Lease
of the right to use land; and
|
|
·
|
Allocated
land use rights.
|
Our
executive offices and manufacturing facilities are located in Shandong, China,
on approximately 130,000 square meters. We have been issued a Land Use Right
Certificate for such property until 2056 by the municipal government of
Shandong, which may be renewed upon our application and the municipal
governments’ approval. We currently have land use rights for
18 buildings on such property as listed below. We believe that our existing
facilities are well maintained and in good operating condition.
Our land
use rights are set forth below:
Land
Use Rights through Grants from Land Management Authority
Land Use Right
Certificate No.
|
Address
|
Area
|
Usage
|
Land Nature
|
Expiration
Date
|
|||||
Cao
Count, China (2006) No.176
|
Zhongkou
Village, Pulianji Town, Cao County
|
68,329.32 ㎡
|
Industrial
Land
|
State-owned
land of transfer
|
October
2056
|
|||||
Cao
Count, China (2003) No.80
|
Zhongkou
Village, Pulianji Town
|
41,572.46㎡
|
Industrial
land
|
State-owned
land of transfer
|
June
2053
|
|||||
Cao
Count, China (2006) No.189
|
Zhongkou
Village, Pulianji Town ,Cao County
|
98,435.32㎡
|
Industrial
land
|
State-owned
land of transfer
|
December
2056
|
|||||
Cao
Count, China (2001) No.0106
|
Longhuadian
Village, Pulianji Town, Cao County
|
13,150㎡
|
Industrial
land
|
State-owned
land of transfer
|
July
2053
|
|||||
Cao
Count, China (2001) No. 0105
|
ZhaocaiyuanVillage,
Pulianji Town, Cao County
|
39,637.04㎡
|
Industrial
land
|
State-owned
land of transfer
|
March
2051
|
Premises
Our
operating facilities consist of 16 plants located in our existing four
industrial parks in Cao County, Shandong Province, PRC. The existing industrial
parks have a total area of 200,000 square meters, of which 110,000 square meters
consists of buildings that house our production lines, warehouses, executive
offices and related business items.
ITEM
3. LEGAL PROCEEDINGS.
We are
not a party to any material pending legal proceedings.
ITEM
4. (REMOVED AND RESERVED)
27
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASERS OF EQUITY SECURITIES.
Market
Prices of Common Stock
Our
common stock is traded over-the-counter on the OTCBB under the symbol
“CSNH”. We intend to apply for listing of our common stock on the NASDAQ
Capital Market. Our common stock became eligible for quotation on the OTCBB on
February 14, 2008. Since such date, there has been extremely limited trading in
our common stock.
The
following table sets forth the high and low bid prices, on the OTCBB, as
reported and summarized by the OTCBB, for each fiscal quarter during the fiscal
year ended December 31, 2009 and for the first quarter of 2010. As of
April 14, 2010, the last reported sale price of our common stock was $2.5 per
share.
Quarter
Ended
|
High
|
Low
|
||||||
2010:
|
||||||||
First
Quarter
|
$ | 2.2 | $ | 0.07 | ||||
2009:
|
||||||||
First
Quarter
|
$ | 0.6 | $ | 0.56 | ||||
Second
Quarter
|
0.56 | 0.56 | ||||||
Third
Quarter
|
1.06 | 0.56 | ||||||
Fourth
Quarter
|
1.05 | 1.01 |
Stockholders
As of
April 14, 2010, there were 32 shareholders of record of our common stock. This
does not reflect the number of persons or entities who hold stock in nominee or
“street” name through various brokerage firms.
Dividend
Policy
Our board
of directors does not intend to declare cash dividends on our common stock for
the foreseeable future.
Securities
Authorized for Issuance Under Equity Compensation Plans
None.
ITEM
6. SELECTED FINANCIAL DATA.
Not
applicable.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING
STATEMENTS:
The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The words or phrases “would be,” “will allow,” “expect to”,
“intends to,” “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimate,” “project,” or similar expressions are intended to
identify “forward-looking statements”. Such statements include those concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently and
operate profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel
or that management will be able to successfully manage and exploit existing
and potential market opportunities, and (c) whether we are able to generate
sufficient revenues or obtain financing to sustain and grow our operations.
Statements made herein are as of the date of the filing of this Form 10-K with
the Securities and Exchange Commission and should not be relied upon as of any
subsequent date.
28
Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date
of such statement.
Overview
We are
engaged in the business of manufacturing and marketing wood furniture, straw and
wicker products, and wood handicraft products. Our wood furniture products
include items such as coffee tables, cabinets, bed frames, stools. Our
straw and wicker products include items such as wicker baskets, bottle holders
and planters. Our wood handicraft products include items such as
decorative boxes, wood baskets and various storage cabinets.
We
produce over 20,000 different products which are sold in more than thirty
countries and places, including the PRC, United States, Germany, England,
Holland, Italy, Sweden, Japan, Canada, Denmark, Hong Kong, and Taiwan. Our
products are sold through well known retailers such as Trade Point A/S Direct
Container, Zara-Home, Habitat UK Ltd., ABM Group Inc., and Fuji Boeki Co.
Ltd. We believe that our products offer competitive prices and high
quality.
Our
operations are conducted in the PRC through our subsidiary, Shandong Caopu Arts
& Crafts Co., Ltd. For the 2009 fiscal year, we generated sales and
net income of approximately $59.5 million, and $10.0 million respectively, and
for the 2008 fiscal year we generated sales and net income of approximately
$42.2 million and $5.7 million, respectively.
For
fiscal year 2009, sales of our wood furniture products, straw-wicker products
and handicraft products accounted for $30 million, $29 million and $1 million,
respectively, and for fiscal 2008, $21 million, $22 million and $1 million
respectively.
Our straw
and wicker products as well as our wood handicraft products are high margin
products as such products generally are manufactured by local persons in their
homes, the raw material costs are low and the production of such products does
not require advanced technology.
Based
upon our perceived and historical growing demand for our wood furniture product
and the changing demographics of the wood furniture industry, we believe we have
a unique opportunity to substantially increase our revenues, net income and
gross margins by not only expanding the manufacturing capacity of our existing
wood furniture business but also producing different types of wood furniture
products that we believe there is a large and increasing international demand
for.
As a
result, while we intend to continue manufacturing and sell our straw, wicker and
handicraft products, we intend to devote substantial financial and other
resources on our wood furniture products by not only producing new products but
also increasing our current manufacturing capacity by renovating and upgrading
our current production facilities.
Important
Factors Affecting our Results of Operations
We
believe significant factors that could affect our operating results are the (i)
cost of raw materials, (ii) prices of our products to our international
retailers and wholesalers and their markup to the end users, (iii) consumer
acceptance of our new wood furniture line, and (iv) general economic conditions
in China and global markets.
Results
of Operations
The
following tables set forth key components of our results of operations for the
periods indicated, in dollars and as a percentage of revenue.
29
(All
amounts in thousands of U.S. dollars, except for the percentages)
Statements of Operations
|
For the year ended December 31, 2009
|
For the year ended December 31,
2008
|
||||||||||||||
USD
|
% of
Revenue
|
USD
|
% of
Revenue
|
|||||||||||||
Revenues
|
$ | 59,549,572 | - | % | $ | 42,197,393 | - | % | ||||||||
Cost
of Sales
|
$ | (42,186,937 | ) | 71 | % | $ | (31,570,829 | ) | 75 | % | ||||||
Gross
profit
|
$ | 17,362,635 | 29 | % | $ | 10,626,565 | 25 | % | ||||||||
Operating
expenses
|
$ | 2,797,647 | 4 | % | $ | 2,553,694 | 6 | % | ||||||||
Income
from operations
|
$ | 14,564,988 | 25 | % | $ | 8,072,871 | 19 | % | ||||||||
Other
expense
|
$ | (1,161,581 | ) | 2 | % | $ | (356,959 | ) | 1 | % | ||||||
Net
income before income taxes
|
$ | 13,403,408 | 23 | % | $ | 7,715,912 | 18 | % | ||||||||
Net
income
|
$ | 9,987,430 | 17 | % | $ | 5,761,994 | 14 | % |
Comparison of the fiscal year ended December 31, 2009
and fiscal year ended December 31, 2008
Revenues
Our
revenues consist of the sale price our products are sold at less returns and
allowances. As we do not currently have our own sales force, we sell our
products directly to non-related retailers and wholesalers (such as IKEA Group)
who then sell such products to the ultimate end users. To date, returns and
allowances have been virtually non-existent and as such have had no material
effect on our revenues.
Revenue
for the fiscal year ended December 31, 2009 was approximately $60 million,
increasing by approximately $18 million, or 41%, from approximately $42
million for the comparable period in 2008. During 2009, our main products,
straw-wicker, wood furniture and handicraft products, generated sales of
approximately $29 million, $30 million, and $1million, respectively,
approximately 48%, 50% and 2% of our total revenues during the 2009 fiscal
year. Sales of our straw-wicker, wood furniture and handicraft products
contributed $22 million, $21million and $1 million, respectively, in
the revenues of 2008, approximately 50%, 48%, and 2%, respectively, of our total
revenues in such period.
The
increase in our revenues in 2009 compared to 2008 was primarily attributable to
the increase in our new clients and the improvement in quality and design of our
existing products based upon our clients’ demands and suggestions. We also
believe the increase in our revenues during 2009 is a result of the
increase in consumer spending as a whole due to the recovery
of global economic conditions. In addition, the international export
commodities trade fair assists us to obtain more new clients. We also continue
to receive orders from the previous clients due to our continuous effort on
developing new products to meet the needs in
the global markets.
Cost
of Goods Sold
Our cost
of goods sold consists of salaries for employees involved in the production of
our products, the cost of raw materials and an allocation of our manufacturing
facilities overhead used to manufacture our products. Cost of goods sold for the
fiscal year ended December 31, 2009 was approximately $42 million, an increase
of approximately $10 million, or approximately 34%, from approximately $32
million for the comparable period in 2008. Such increase was due to the increase
of our sales and a decrease of the price of the main raw material used by us in
making our wood products called Poplar which dropped approximately 26% from
RMB 1,150/cubic meter to RMB850/cubic meter during 2009.
Gross
profit
Our gross
profit is obtained based upon our total revenues minus our cost of goods sold
for a particular period. Gross profit for the fiscal year ended December 31,
2009 was approximately $17.4 million, an increase of approximately $7 million or
63% compared to approximately $10.6 million for the comparable period in
2008. This was primarily attributable to increased revenues and decreased costs
that the price of the main raw material, Poplar as mention
above.
Selling
and marketing expenses
Generally,
our selling and marketing expenses consist of the local transportation costs of
delivering our products to ports in Qingdao City, Shandong Province, from which
our products are then shipped to the retailers and wholesalers who purchase our
products internationally. Substantially all the costs of shipping our products
internationally to such retailers and wholesalers are borne by the retailers and
wholesalers. Our selling and marketing costs also include costs incurred by us
to market and show our products internationally at trade shows and similar
industry exhibitions. Such costs include the costs to set up exhibition booths
for our products, transportation costs to bring our products and representatives
to the trade shows and exhibitions, and similar related costs and
expenses.
30
Our
selling and marketing expenses for the fiscal year ended December 31, 2009 was
approximately $0.83 million, an increase of approximately
$0.14 million or 21% compared to approximately $0.69 for the comparable
period in 2008. Such increase resulted
from transportation fee, port incidental charges and trade inspection fee, which
increased along with the revenue.
General
and administrative expenses
Our
general and administrative expenses are principally comprised of 3 items
including salaries of our employees not involved in the actual manufacturing of
our products, such as our executive officers and internal accounting and book
keeping personnel; depreciation of our fixed assets such as our manufacturing
facilities, offices and warehouses as well as certain expenses such as land use
rights granted to us by PRC government agencies; and insurance payments
paid by us to the PRC government to cover such items as disability, retirement
and medical benefits for our employees.
Our
general and administrative expenses for the fiscal year ended December 31, 2009
was approximately $1.97 million, an increase of approximately
$0.1 million or 5% compared to approximately $1.87 million for the
comparable period in 2008. Such increase in expenses
resulted from an increase in legal, professional and audit fees attributable to
becoming and maintaining publicly traded reporting status in the United States
of America.
We expect
our general and administrative expenses to increase in 2010 and thereon as a
result of the increase in professional fees in connection with being a publicly
reporting company in the United States of America.
Our
research and development expenditures, which were included in general and
administrative expenses, totaled approximately $0.5 million in 2009, an
increase of approximately $0.1 million, or 25% as compared to approximately
$ 0.4 million in 2008. The increase was due to our growing investment in
research and development of new products, including our proposed new furniture
line. We expect our research and development expenditures to increase as we
attempt to diversify our product lines in the future.
Interest
expense
Interest
expense for the fiscal year ended December 31, 2009 was $753,093,
an increase of $1,227 or 0.2% compared to $751,865 for the comparable
period in 2008. Although total amount of debt decreased from 2008 to 2009, two
particular notes payable to local banks in 2008 that carried low interest rates
were paid off in 2009. In addition, short-term borrowings in 2009, that carried
higher interest rates, increased in 2009 compared to 2008.
Other
Income
Other
income for the fiscal year ended December 31, 2009 was $202,851, a decrease
of $164,248 or 45% compared to $367,099 for the comparable period in 2008.
The decrease is attributable to the subsidy income earned from the government’s
tax incentive fund during 2009 was less than the income generated from sources
outside our normal business operations during 2008.
Income
Tax Expense
Income
tax expense for the fiscal year ended December 31, 2009 and 2008
was approximately $3.42 million and approximately $1.95 million,
respectively, an increase of approximately $1.46 million or 74.8% for
fiscal year 2009 compared to fiscal year 2008, which was primarily attributable
to the increase in our taxable profits in 2009. The income taxes are based on a
statutory 25% effective tax rate in both years.
Net income
Net
income for fiscal 2009 was approximately $10.0 million, an increase of $4.24
million, or 73.6% as compared to $5.76 million in 2008. Net income as a
percentage of our sales revenues increased 3.1% in 2009 from 13.7% in
fiscal 2008. The
increase was primarily attributable to the increase in sales during
2009.
31
Liquidity
and Capital Resources
The
following table sets forth a summary of our net cash flow information for the
periods indicated:
(All
amounts in thousands of U.S. dollars)
Years
Ended December 31,
|
||||||||
2009*
|
2008*
|
|||||||
(Consolidated,
audited)
|
(Consolidated,
audited)
|
|||||||
Net
cash provided by (used in) operating activities
|
$ | 9,066,819 | $ | (940,455 | ) | |||
Net
cash provided by (used in) investing activities
|
$ | (8,053,319 | ) | $ | (899,781 | ) | ||
Net
cash provided by (used in) financing activities
|
$ | (523,509 | ) | $ | 2,858,907 | |||
Net
cash inflow (outflow)
|
$ | 433,842 | $ | 1,175,421 |
* The above financial data
have been derived from our audited consolidated financial statements for the
years ended December 31, 2009 and 2008.
Operating
Activities
Net
cash provided by (used in) operating activities
Net cash
provided by operating activities was approximately $9 million for the year ended
December 31, 2009, compared to net cash of approximately $1 million used in
operations for the year ended December 31, 2008, an increase of
approximately $8 million, which was due to the increase in net income as a
result of increased new customer base. In addition, we shortened our
customers’ credit limits to increase the turnover of trade accounts
receivable, inventories and other receivables. We are subject to the regulations
of the PRC which restricts the transfer of cash from China, except under certain
specific circumstances. Accordingly, such funds may not be readily available to
us to satisfy future obligations which may be incurred outside the PRC, if
applicable.
Investing
Activities
Cash used
in investing activities mainly consists of capital expenditures, expenditures
for property, plant, and equipment, and additions to construction in
progress.
Net cash
used in investing activities was approximately $8 million for the year ended
December 31, 2009, an increase in cash outflow of approximately $7.1 million
during 2009 from approximately $0.9 million for the comparable period in 2008,
which was primarily attributable to the expansion and improvement of our current
facilities, including construction in progress, in order to fulfill the demand
of increasing orders. We incurred $1,121,964 in expenditures for property, plant
and equipment in 2009 compared to $1,094,614 in such expenditures in 2008,
increasing by $27,350 in 2009. We also had $6,931,355 incurred in construction
in progress in 2009 compared to the decrease by $125,685 in such expenditures in
2008. In 2008, we paid dividends of $224,755 to our shareholders and disposed
property, plant and equipment that generated proceeds of $293,904. We had no
such activities in 2009.
Our
ability to pay dividends may be restricted due to the foreign exchange control
policies and availability of cash balance of our Chinese operating subsidiary. A
majority of our revenue being earned and currency received are denominated in
RMB, which is subject to the exchange control regulation in China, and, as a
result, we may unable to distribute any dividends outside of China due to PRC
exchange control regulations that restrict our ability to convert RMB into US
Dollars. Accordingly, our subsidiaries’ funds may not be readily available
to us to satisfy obligations which have been incurred outside the PRC, which
could adversely affect our business and prospects or our ability to meet our
cash obligations.
Financing
Activities
Net cash
(used) in financing activities was approximately ($0.5) million for
the year ended December 31, 2009, compared to net cash provided by financial
activities of approximately $2.9 million for the same period in 2008.
The difference was primarily attributable to the repayment of approximately $2.6
million in notes payables to banks in 2009 compared to approximately
$4.9 million in 2008. We had proceeds of short-term borrowings of approximately
$5.8 million in 2009 compared to approximately $1.8 million in 2008. In 2008, we
had proceeds from borrowing on notes payable of approximately $6.4 million and
principal repayments to short term borrowings of $360,969. In 2009, we had $3.7
million in repayments of short-term borrowings. We had no borrowings of notes
payable in 2009, rather we only had proceeds from short-term borrowings, a
different classification between the two but essentially similar in
nature.
32
Based
upon our present plans, we believe that cash on hand, cash flow from operations
and funds available to us through financing will be sufficient to fund our
capital needs for at least the next 12 months. We expect that our primary
sources of funding for our operations for the upcoming 12 months and thereafter
will result from our cash flow from operations to fund our operations during the
upcoming 12 months and thereafter, in addition to the proposed equity
financing. However, our ability to maintain sufficient liquidity depends
partially on our ability to achieve anticipated levels of revenue, while
continuing to control costs. If we did not have sufficient available cash, we
would have to seek additional debt or equity financing through other external
sources, which may not be available on acceptable terms, or at all. Failure to
maintain financing arrangements on acceptable terms would have a material
adverse effect on our business, consolidated results of operations and financial
condition.
Loan
Facilities
We
believe that we currently maintain a good business relationship with our bank
loans. As of December 31, 2009, our outstanding bank loans that were
classified as short term borrowings on the accompanying consolidated balance
sheet were as follows:
(All
Amounts in U.S. Dollars)
Name
|
Amount
|
Expiration
Date
|
||||
Bank
of China, Cao County Branch
|
$ | 219,677 |
11/17/2010
|
|||
Bank
of China, Cao County Branch
|
$ | 585,805 |
1/17/2010
|
|||
Bank
of China, Cao County Branch
|
$ | 234,321 |
4/15/2010
|
|||
Bank
of China, Cao County Branch
|
$ | 512,580 |
10/21/2010
|
|||
Bank
of China, Cao County Branch
|
$ | 439,351 |
9/21/2010
|
|||
Bank
of China, Cao County Branch
|
$ | 351,484 |
4/21/2010
|
|||
Bank
of China, Cao County Branch
|
$ | 439,351 |
1/22/2010
|
|||
Bank
of China, Cao County Branch
|
$ | 292,903 |
2/17/2010
|
|||
Bank
of China, Cao County Branch
|
$ | 439,351 |
3/05/2010
|
|||
Laishang
Bank (AKA Commercial Bank (Heze Branch)
|
$ | 1,171,612 |
7/20/2010
|
|||
Laishang
Bank (AKA Commercial Bank (Heze Branch)
|
$ | 439,351 |
12/07/2010
|
|||
Laishang
Bank (AKA Commercial Bank (Heze Branch)
|
$ | 2,196,772 |
4/29/2010
|
|||
Laishang
Bank (AKA Commercial Bank (Heze Branch)
|
$ | 732,257 |
8/31/2010
|
|||
Total
|
$ | 8,054,831 |
We
anticipate rollovers of all current facilities coming due in the 2010 fiscal
year and do not foresee a squeeze on the availability of credit to fund our
operations and meet our growth objectives.
Capital Expenditures
We
believe that substantially all of our capital expenditures going forward will be
related to our furniture business as we diversify our product base, build
component manufacturing facilities and renovate our existing manufacturing
facilities.
We
believe that our existing cash, cash equivalents and cash flows from operations,
and our credit lines will be sufficient to meet our anticipated cash needs over
the next 12 months. We will, however, require substantial additional cash
resources to implement the balance of our growth strategy discussed elsewhere,
including any acquisitions we may decide to pursue.
We intend
to expand our operations as quickly as reasonably practicable to capitalize on
our perceived demand for our wood furniture products. Our expansion plans will
be implemented in phases based upon the availability of funds. Such expansion
plans include establishing 2 new production lines to manufacture new products as
well as increasing our existing production capacity by upgrading and renovating
our existing facilities.
33
We
regularly review our cash funding requirements and attempt to meet those
requirements through a combination of cash on hand, cash provided by operations
and private financing.
We do not
use derivative financial instruments in our investment portfolio and have no
foreign exchange contracts. Our financial instruments consist of cash and cash
equivalents, trade accounts receivable and accounts payable. We consider
investments in highly-liquid instruments purchased with a remaining maturity of
90 days or less at the date of purchase to be cash equivalents.
Critical
Accounting Policies
We
prepare financial statements in conformity with U.S. GAAP, which requires us to
make estimates and assumptions that affect the amounts reported in our combined
and consolidated financial statements and related notes. We periodically
evaluate these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Since the use of
estimates is an integral component of the financial reporting process, actual
results could differ from those estimates. Some of our accounting policies
require higher degrees of judgment than others in their application. We
believe the following accounting policies involve the most significant judgments
and estimates used in the preparation of our financial statements.
Revenue
recognition
Our
revenue represents the invoiced value of goods sold recognized upon the delivery
of goods to customers, after allowances for returns and discounts and the value
of services rendered. Revenue is recognized when the following four criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred, the
selling price is fixed or determinable, and collectability is reasonably
assured.
Accounts
Receivable
Most of
our sales were conducted on pre-payment or COD basis. However, during the
normal course of business, we extend to some of our customers interest-free,
unsecured credit for a term of 90 days depending on a customer’s credit history,
as well as local market practices. We reviewed our accounts receivables
quarterly and determined the amount of allowances, if any, necessary for
doubtful accounts. Historically, we have not had any material bad debt
write-offs and, however, we provide an arbitrary reserve amount for possible bad
debts based upon 5% of the accounts receivable balances per year. Rather, we
review our accounts receivable balances to determine whether specific reserves
are required due to such issues as disputed balances with distributors, declines
in distributors’ credit worthiness, or unpaid balances exceeding agreed-upon
terms. Based upon the results of these reviews, we determine whether a specific
provision should be made to provide a reserve for possible bad debt write-offs.
We determined that no additional bad debt write offs were necessary or required
in 2009 or 2008.
As of
December 31, 2009 and 2008, we had outstanding gross accounts receivables
totaling approximately $7.3 million and approximately $6.7 million,
respectively, and allowance for bad debts of $370,582 and $333,656,
respectively. We believe that these outstanding amounts will be collected
pursuant to the terms, conditions, and within the time frames agreed upon
between our customers. During the reported periods, we did not experience
any material problems relating to distributor payments and had no specific
additional bad debt write-offs. In terms of our liquidity, we reflect the
extended interest-free unsecured credit in our cash flows for the reported
periods. Therefore, we anticipate no changes from past cash flow
patterns.
Inventories
We state
inventories, consisting of work in process, raw materials and packaging
materials, at the lower of cost or market. Cost is determined on a first in
first out basis which includes an appropriate share of production overheads
based on normal operating capacity and includes all expenditures incurred in
bringing the goods to the point of sale and putting them in a saleable
condition. Work in progress includes direct materials, direct production cost
and an allocated portion of production overhead. Our accounting for inventory is
described in Note 2 to our Notes to Consolidated Financial Statements for
December 31, 2009 included elsewhere in this annual report. We evaluate
inventory periodically for possible obsolescence of our raw materials to
determine if a provision for obsolescence is necessary. Our estimates for
determining the provision for obsolescence may be affected by technological
changes and developments to our product offerings and changes in governmental
regulations.
As of
December 31, 2009 and 2008, we had inventory balance of approximately $17.5
million and $17.3 million,
respectively.
34
Recently
Issued Accounting Standards
FASB Accounting
Standards Codification
(Accounting Standards Update (“ASU”)
2009-01)
In
June 2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the
Company’s financial statements as all future references to authoritative
accounting literature will be referenced in accordance with the Codification.
There have been no changes to the content of our consolidated financial
statements or disclosures as a result of implementing the Codification during
the fiscal year ended December 31, 2009.
As a
result of our implementation of the Codification during the fiscal year ended
December 31, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current annual financial statements,
we will provide reference to both new and old guidance to assist in
understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.
Subsequent
Events
(Included in Accounting Standards
Codification (“ASC”) 855 “Subsequent Events”, previously SFAS No. 165
“Subsequent Events”)
SFAS
No. 165 established general standards of accounting for and disclosure of
events that occur after the balance sheet date, but before the financial
statements are issued or available to be issued (“subsequent events”). An entity
is required to disclose the date through which subsequent events have been
evaluated and the basis for that date. For public entities, this is the date the
financial statements are issued. SFAS No. 165 does not apply to subsequent
events or transactions that are within the scope of other GAAP and did not
result in significant changes in the subsequent events reported by us. SFAS
No. 165 became effective for interim or annual periods ending after
June 15, 2009 and did not impact our consolidated financial statements. We
evaluated for subsequent events through the issuance date of our consolidated
financial statements. No recognized or non-recognized subsequent events were
noted.
Determination of
the Useful Life of Intangible Assets
(Included in ASC 350 “Intangibles —
Goodwill and Other”, previously FSP SFAS No. 142-3 “Determination of the
Useful Lives of Intangible Assets”)
FSP SFAS
No. 142-3 amended the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under previously issued goodwill and intangible
assets topics. This change was intended to improve the consistency between the
useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the asset under topics related to
business combinations and other GAAP. The requirement for determining useful
lives must be applied prospectively to intangible assets acquired after the
effective date and the disclosure requirements must be applied prospectively to
all intangible assets recognized as of, and subsequent to, the effective date.
FSP SFAS No. 142-3 became effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The adoption of FSP SFAS No. 142-3 did not impact our
consolidated financial statements.
Noncontrolling
Interests
(Included in ASC 810
“Consolidation”, previously SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB
No. 51”)
SFAS
No. 160 changed the accounting and reporting for minority interests such
that they will be recharacterized as noncontrolling interests and classified as
a component of equity. SFAS No. 160 became effective for fiscal years
beginning after December 15, 2008 with early application prohibited. We
implemented SFAS No. 160 at the start of fiscal 2009 and no longer record
an intangible asset when the purchase price of a noncontrolling interest exceeds
the book value at the time of buyout. The adoption of SFAS No. 160 did not
have any other material impact on our consolidated financial
statements.
35
Consolidation of
Variable Interest Entities — Amended
(To be included in ASC 810
“Consolidation”, SFAS No. 167 “Amendments to FASB Interpretation No.
46(R)”)
SFAS
No. 167 amends FASB Interpretation No. 46(R) “Consolidation of
Variable Interest Entities regarding certain guidance for determining whether an
entity is a variable interest entity and modifies the methods allowed for
determining the primary beneficiary of a variable interest entity. The
amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should
consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. SFAS
No. 167 is effective for the first annual reporting period beginning after
November 15, 2009, with earlier adoption prohibited. We will adopt SFAS
No. 167 in fiscal 2010 and do not anticipate any material impact on our
consolidated financial statements.
Seasonality
Our
operating results and cash flows historically have not been subject to seasonal
variations. Although we do not currently anticipate any changes, this
pattern may change, however, as a result of new market opportunities or new
product introductions.
Off-Balance
Sheet Arrangements
We have
not entered into, nor do we expect to enter into, any off-balance sheet
arrangements. We also have not entered into any financial guarantees or
other commitments to guarantee the payment obligations of third parties.
In addition, we have not entered into any derivative contracts that are indexed
to our equity interests and classified as shareholders’ equity.
Furthermore, we do not have any retained or contingent interest in assets
transferred to an unconsolidated entity that serves as credit, liquidity or
market risk support to such entity. We do not have any variable interest
in any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or that engages in leasing, hedging or research and
development services with us.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
financial statements required by this item can be found following the signature
page of this Annual Report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not
applicable.
Item
9A (T) Controls and Procedures.
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of our principal executive officer and
principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange
Act). Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Act is accumulated
and communicated to the issuer’s management, including its principal executive
and principal financial officers, or persons performing similar functions as
appropriate to allow timely decisions regarding required disclosure. We
concluded that our disclosure controls and procedures as defined in Rule
13a-15(e) under the Exchange Act were effective as of December 31, 2009 to
ensure that information required to be disclosed in reports we file or submit
under the Exchange Act is recorded, processed, and summarized and reported
within the time periods specified in SEC rules and forms.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under
the Exchange Act. Our internal control over financial reporting are designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with U.S. generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures
that:
36
(i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
(ii) provide
reasonable assurance that transactions are recorded as necessary to permit the
preparation of our consolidated financial statements in accordance with U.S.
generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
directors; and
(iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the consolidated financial statements.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009. In making this assessment, management
used the criteria set forth in Internal Control Over Financial Reporting —
Guidance for Smaller Public Companies issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Subject
to the inherent limitations described in the following paragraph, our management
has concluded that our internal control over financial reporting was effective
as December 31, 2009 at the reasonable assurance level.
Inherent
Limitations Over Internal Controls
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations, including
the possibility of human error and circumvention by collusion or overriding of
controls. Accordingly, even an effective internal control system may not prevent
or detect material misstatements on a timely basis. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate.
Accordingly, our internal controls and procedures are designed to provide
reasonable assurance of achieving their objectives.
Changes
in Internal Control over Financial Reporting
We have
made no change in our internal control over financial reporting during the last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Attestation
Report of the Registered Public Accounting Firm
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our independent
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report in this annual report on Form
10-K.
ITEM
9B OTHER INFORMATION.
Not
applicable.
37
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
following table sets forth the name, age and position of each of our directors
and executive officers.
Name
|
Age
|
Position
|
||
Mr.
Jinliang Li
|
51
|
Chief
Executive Officer and Director
|
||
Mr.
Jiawei Li
|
28
|
Director
and Chief Marketing Manager of Shandong
|
||
Ms.
Yuhong Lei
|
33
|
Chief
Financial Officer
|
||
Ms.
Aihua Li
|
47
|
General
Counsel and Corporate Secretary
|
||
Mr.
Zhiyu Wang
|
47
|
Chief
Financial Officer of
Shandong
|
The
business experience for the past five years (and, in some instances, for prior
years) of each of our executive officers and directors is as
follows:
Jinliang
Li, became our
Chief Executive Officer (“CEO”) and a director in November 2009. Since
August 2000, Mr. Li has served, and he continues to serve, as the President and
General Manager of Shandong. From 1981 to August 2000, he served as a
manager of Shandong. Mr. Li has 30 years experience in sales and
production of handicrafts and furniture. In addition, from January 2008 to
present, Mr. Li served as a member of National People’s Congress of Shandong
Province, Executive director of the National Association of township
entrepreneurs, Executive director of the National Association of Young
Entrepreneurs, Executive director of National Furniture Association, and
Chairman of Heze City Import Association. Mr. Li graduated from Shandong
Agricultural University in 2006.
Jiawei
Li, became a
director in November 2009. Mr. Li joined Shandong in 2006, and he has
served, and continues to serve, as the Chief Marketing Manager of Shandong since
then. Mr. Li graduated from Peking University Founder Technology
College in 2006 where he received a degree in computer network technology. Mr. Jinliang Li, our
Chief Executive Officer and a director, is the father of Mr. Jiawei
Li.
Yuhong
Lei, became our
Chief Financial Officer (“CFO”) on March 30, 2010. Prior to her
appointment as our CFO, Ms. Lei was a Senior Financial Analyst with J&R
Investment Service Limited commencing in 2009, where her responsibilities
included monitoring financial markets on behalf of J&R’s senior
management. From 2008 to 2009, Ms. Lei acted as a Financial Analyst with
Linear Capital Asia Limited, where she provided consulting services to the
firm’s clients. From 2003 to 2006, Ms. Lei was a Business Analyst with
PetroChina Jiangxi Region Sales Company, where she provided business analysis to
the company’s sales and marketing division. Ms. Lei received a MBA from
the University of Bradford in 2007 and a BA in Insurance from Liaoning
University in 1999. Ms. Lei is a candidate for the Level 3 exam given by
the CFA Institute.
Aihua Li,
became our General Counsel and Corporate Secretary in March 2010. From 2005 to
2009, Ms. Li served as a general counsel for various private and public
companies. Ms. Li is the founder and senior partner of Shandong Dingjian Law
Office, and has practicing law in China for approximately 17 years. Ms. Li
is a part-time law professor in Heze University, serves as a member of Chinese
People’s Political Consultative Conference of Heze City, and has been working as
the chief general counsel for China Council of the Promotion for International
Trade, Heze Branch since 2006. Ms. Li is also the vice director of Heze Lawyer
Association Foreign Trade Department. Ms. Li received a master of law degree
from Peking University in 2003.
Zhiyu
Wang, became our
Chief Financial Officer in November 2009. Mr. Wang joined Shandong in 1986
and served as its Financial Manager and since August 2000, he has served, and
continues to serve, as Shandong’s Chief Financial Officer. He has over 20-years
of experience in finance management. Mr. Wang received his accountant
certificate in 1978. Mr. Wang is responsible for our financial operation and
accounting treatment. Mr. Zhiyu Wang resigned as our Chief Financial
Officer on March 30, 2010, but will continue to be the Chief Financial Officer
for Shandong Caopu Arts & Crafts, Inc.
All of
our directors hold their positions on the board until our next annual meeting of
the shareholders and until their successors have been qualified after being
elected or appointed. Officers serve at the discretion of the board of
directors.
Board
Committees
We intend
to establish the following committees: an Audit Committee, a Compensation
Committee, and a Nominating and Corporate Governance Committee. Members will
serve on these committees until their resignation or until otherwise determined
by our Board of Directors.
38
Family
Relationships
Mr.
Jinliang Li, our Chief Executive Officer and a director, is the father of
Mr. Jiawei Li, one
of our directors. Other than such
relationship, there
are no other family relationships among our directors and executive officers.
There is no arrangement or understanding between or among our executive officers
and directors pursuant to which any director or officer was or is to be selected
as a director or officer, and there is no arrangement, plan or understanding as
to whether non-management shareholders will exercise their voting rights to
continue to elect the current board of directors.
ITEM
11. EXECUTIVE COMPENSATION.
Compensation
Discussion and Analysis
The
following Summary Compensation Table shows the compensation awarded to or earned
by our Chief Executive Officer and other two most highly-compensated executive
officers for fiscal 2009 and 2008. Also shown is the compensation awarded to or
earned by our former President and Chief Executive Officer due to the fact that
he held such positions during a portion of fiscal 2009. The persons listed in
the following Summary Compensation Table are referred to herein as the “Named
Executive Officers.”
Name and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||
Timothy
Lightman
|
2009
|
-0- | -0- | -0- | -0- | |||||||||||||
(former
President CEO and Director)(1)
|
2008
|
1,000 | -0- | -0- | 1000 | |||||||||||||
Jinliang
Li
|
2009
|
12,302 | -0- | -0- | 12,302 | |||||||||||||
(CEO
and Director) (2)
|
2008
|
12,302 | -0- | -0- | 12,302 |
(1) Mr. Lightman resigned as
a president, CEO and Director, effective November 5, 2009.
(2) Mr.
Jinliang Li was appointed our Chief Executive Officer and Director on November
5, 2009, Mr. Li’s base salary is RMB 7,000/month, or RMB 84,000 per annum
year. Compensation for 208 and 2009 includes compensation earned as Chief
Executive of the operating company prior to the reverse merger in November
2009.
Compensation
Discussion and Analysis
It is
intended that each member of our board of directors who is not our employee (a
“non-employee director”) will receive an annual retainer in cash and/or shares
of common stock as determined by our board of directors and all directors will
be reimbursed for costs and expenses related to attendance at meetings of the
board of directors.
Our
employee directors will not receive any additional compensation for serving on
our board of directors or any committee of our board of directors, and our
non-employee directors will not receive any compensation from us for their roles
as directors other than the retainer, attendance fees and stock option grants
described above.
It is not
uncommon for PRC private companies in China to have base salaries as the sole
form of compensation. The base salary level is established and reviewed
based on the level of responsibilities, the experience and tenure of the
individual and the current and potential contributions of the individual.
The base salary is compared to the list of similar positions within comparable
peer companies and consideration is given to the executive’s relative experience
in his or her position. Base salaries are reviewed periodically and at the
time of promotion or other changes in responsibilities.
We plan
to implement a more comprehensive compensation program, which takes into account
other elements of compensation, including, without limitation, short and long
term compensation, cash and non-cash, and other equity-based compensation such
as stock options. We expect that this compensation program will be
comparable to the programs of our peer companies and aimed to retain and
attract talented individuals.
As
discussed above, we also have formed a compensation committee to oversee the
compensation of our named executive officers. The majority of the members of the
compensation committee are independent directors.
39
Director
Compensation
During
the fiscal year ended December 31, 2009, we did not pay our directors
compensation for their service on our Board of Directors.
Indemnification
of Officers and Directors
Our
amended certificate of incorporation limits the personal liability of directors
for breach of fiduciary duty to the maximum extent permitted by the General
Corporation Law of the State of Delaware, referred to herein as the “DGCL”. Our
amended certificate of incorporation provides that no director will have
personal liability to us or to our stockholders for monetary damages for breach
of fiduciary duty or other duty as a director. However, these provisions do not
eliminate or limit the liability of any of our directors for any of the
following:
|
·
|
any
breach of their duty of loyalty to us or our
stockholders;
|
|
·
|
acts
or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
|
|
·
|
voting
or assenting to unlawful payments of dividends or other distributions;
or
|
|
·
|
any
transaction from which the director derived an improper personal
benefit.
|
Any
amendment to or repeal of these provisions will not eliminate or reduce the
effect of these provisions in respect of any act or failure to act, or any cause
of action, suit or claim that would accrue or arise prior to any amendment or
repeal or adoption of an inconsistent provision. If the DGCL is amended to
provide for further limitations on the personal liability of directors of
corporations, then the personal liability of our directors will be further
limited in accordance with the DGCL.
In
addition, our amended certificate of incorporation provides that we must
indemnify our directors and officers and we must advance expenses, including
attorneys’ fees, to our directors and officers in connection with legal
proceedings, subject to very limited exceptions.
Employment
Agreements
Tianwei
International Limited, our wholly owned subsidiary, entered into an
employment agreement with Jinliang Li on August 15, 2009, pursuant to which
Mr. Jinliang Li was hired as the chairman of Tianwei International Limited and
received an annual salary of $12,302 per year in 2009. Shandong entered into an
employment agreement with each of Jiawei Li, Zhiqiang Zhong, Zhiyu Wang,
pursuant to which such persons were employed by Shandong as its marketing
manager, production manager and chief financial officer, respectively. Messrs.
Jiawei Li, Zhong and Wang received an annual salary of $5,273per year, pursuant
to such employment agreements. All such employment agreements are
“at-will” agreements.
In March
2010, Mr. Zhiyu Wang resigned as the CFO for China Shandong Industries, but will
continue to serve as the CFO of Shandong.
We
entered into an employment agreement with Ms. Yuhong Lei on March 30, 2010,
pursuant to which Ms. Lei was hired as our CFO and would receive an annual
salary of RMB 360,000, or approximately $52,738.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The
following table sets forth certain information, as of April 14, 2010 with
respect to the beneficial ownership of our common stock by (i) each of our
directors and named executive officers, (ii) all of our directors and executive
officers as a group, and (iii) each person, or group of affiliated persons,
known to us to beneficially own more than 5% of our common stock.
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. Unless otherwise
indicated, the stockholders listed in the table have sole voting and investment
power with respect to the shares indicated.
The table
below lists the number of shares of our common stock and percentage of shares
beneficially owned based on 25,725,000 shares of our common stock issued and
outstanding as of April 14, 2010.
For
purposes of the table below, we treat shares of our common stock subject to
options or warrants that are currently exercisable or exercisable within 60 days
after April 14, 2010 to be outstanding and to be beneficially owned by the
person holding the options or warrants for the purpose of computing the
percentage ownership of the person, but we do not treat the shares as
outstanding for the purpose of computing the percentage ownership of any other
stockholder.
40
Except as
otherwise set forth below, the address of each of the persons or entities listed
in the table is c/o China Shandong Industries, Inc., No. 2888 Qinghe Road,
Development Zone Cao County, Shandong Province, 274400 China.
Shares Beneficially Owned
|
||||||
Name
|
Number
|
Percentage
|
||||
Named
Executive Officers and Directors:
|
|
|||||
Jinliang
Li (Director and CEO) (1)
|
22,226,400
|
86.4
|
%
|
|||
Jiawei
Li (Director) (1)
|
1,080,450
|
4.2
|
%
|
|||
Yuhong
Lei (CFO)
|
20,000
|
*
|
%
|
|||
Aihua
Li (General Counsel and Corporate Secretary)
|
0
|
0
|
%
|
|||
Zhiyu
Wang (CFO of Shandong)
|
1,106,175
|
4.3
|
%
|
|||
All
executive officers and directors as a group (5 persons)
|
24,413,025
|
86.4
|
%
|
|||
5%
Stockholders:
|
|
|
||||
CAOPU
Enterprise Limited (1)
Mill
Mall, Suite 6, Wickhams Cay 1
PO
Box 3085, Road Town
Tortola,
British Virgin Islands
|
22,226,400
|
86.4
|
%
|
* Less
than one percent
(1)
Includes 22,226,400 shares of our common stock owned by CAOPU Enterprise
Limited. CAOPU Enterprise Limited acquired such shares pursuant to the
Stock Exchange and Reorganization Agreement dated as of October 22, 2009.
Mr. Jinliang Li is the sole shareholder of CAOPU Enterprise Limited and may be
deemed to beneficially own the shares of common stock owned by CAOPU. Such
number of shares also includes 1,080, 450 shares of our common stock owned by
Jiawei Li, the son of Mr. Jinliang Li, and 8,026,200 shares of our common stock
owned by other eight (8) persons (including, but not limited to, Zhiyu Wang, the
CFO of Shandong) pursuant to agreements between CAOPU Enterprise Limited and
each of such persons as described elsewhere herein. Although Mr. Li has no
pecuniary interest in such 9,106,650 shares of our common stock beneficially
owned by such 9 minority shareholders, by reason of Mr. Li’s sole ownership of
CAOPU Enterprise Limited. Mr. Li has sole voting and dispositive power over such
9,106,650 shares.
41
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Director
Independence
We intend
to appoint three independent directors as required by Rule 5605(a)(2) of the
NASDAQ Capital Market.
Transactions
with Related Parties
Our
founder, Timothy Lightman, purchased 14,775,000 shares of our common stock, upon
our formation, for an aggregate price of $98.50, and on November 6, 2009, he
cancelled 13,125,000 shares of our common stock and acquired all of our assets
related to our prior business and assumed all of our liabilities.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
On
January 14, 2010, the Board appointed Bongiovanni & Associates, C.P.A.
(“B&A”) as our independent auditor to audit our financial statements for the
fiscal year ended December 31, 2009. From December 23, 2008 to January 14,
2010, B&A was the independent auditor for Shandong Arts & Crafts Co.,
Ltd, our wholly owned subsidiary. Prior to January 14, 2010, Li & Company,
PC (“Li & Co”) had served as our independent auditor since
2007.
Audit
Fees
The
aggregate fees billed for professional services rendered by Li & Co for the
audit of our annual financial statements for the fiscal year ended December 31,
2009 and December 31, 2008 were $11,000and $13,500, respectively.
The
aggregate fees billed for professional services rendered by B&A for the
audit of our annual financial statements for the fiscal year ended December 31,
2009 and December 31, 2008 were $75,000 and $37,500, respectively.
Audit-Related
Fees
During
the fiscal year ended December 31, 2009 and December 31, 2008, our principal
accountant did not render assurance and related services reasonably related to
the performance of the audit or review of financial statements.
Tax
Fees
The
aggregate fees billed for professional services rendered by Li & Co for the
tax compliance for the fiscal years ended December 31, 2009 and December 31,
2008 were $750 and $750, respectively.
The
aggregate fees billed for professional services rendered by B&A for the tax
compliance for the fiscal years ended December 31, 2009 and December 31, 2008
were $4,000 and $0, respectively.
All
Other Fees
During
the fiscal years ended December 31, 2009 and December 31, 2008 there were no
fees billed for products and services provided by the principal accountant other
than those set forth above.
Audit
Committee Approval
We
currently do not have an audit committee. However, our board of directors
has approved the services described above.
42
PART
IV
Item
15. Exhibits, Financial Statement Schedules.
(A)
|
Financial
Statements
|
See index
to Financial Statements on Page F-1.
(B)
Exhibits.
Exhibit Number
|
Exhibit Description
|
|
3.1
|
Certificate
of Incorporation. (1)
|
|
3.1(a)
|
Certificate
of Amendment of Certificate of Incorporation. (2)
|
|
3.2
|
Bylaws
(1)
|
|
10.1
|
Stock
Exchange and Reorganization Agreement dated October 22, 2009.
(3)
|
|
10.
2
|
Form
of Share Holding Agreement, dated September 14, 2009, between us and each
of nine other shareholders.
|
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002
|
(1)
Incorporated by reference to registration statement on Form SB-2 filed with the
SEC on November 28, 2007.
(2)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC
on January 6, 2010.
(3)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC
on November 12, 2009.
(C)
Financial Statement Schedules - None
43
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHINA SHANDONG INDUSTRIES, INC. | |||
April 15, 2010 | |||
By:
|
/s/Jinliang
Li
|
||
Jinliang Li, Chief Executive Officer
|
|||
(Principal Executive Officer)
|
|||
By :
|
/s/
Yuhong Lei
|
||
Yuhong
Lei, CFO
|
|||
(Principal Accounting and Financial Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name
|
Signature
|
Date
|
Capacities
|
Jinlang
Li
|
/s/ Jinliang Li
|
April 15, 2010
|
Director and CEO
|
Yuhong
Lei
|
/s/ Yuhong Lei
|
April
15, 2010
|
CFO
|
Jiawei
Li
|
/s/
Jiawei Li
|
April
15, 2010
|
Director
|
44
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
Audited
Consolidated Financial Statements
For
The Years Ended December 31, 2009 And 2008
(With
Report of Independent Registered Public Accounting Firm
Thereon)
|
Index to Audited
Consolidated Financial Statements
Pages
|
||
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets
|
F-2
|
|
Consolidated
Statements of Income and Comprehensive Income
|
F-3
|
|
Consolidated
Statement of Stockholders’ Equity
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
F-4
|
|
Notes
to Audited Consolidated Financial Statements
|
F-6
– F-18
|
BONGIOVANNI
& ASSOCIATES, C.P.A.’s
19720
Jetton Road, 3rd
Floor
Cornelius,
North Carolina 28031 (USA)
To the Board of Directors of
China Shandong Industries, Inc. (FKA
Mobile Presence Technologies, Inc.)
We have audited the accompanying
consolidated balance sheets of China Shandong Industries, Inc. and it wholly
owned subsidiaries (FKA Mobile Presence Technologies,
Inc.) (“The Company”) as of December 31, 2009 and 2008, and the consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the years ended December 31, 2009 and 2008. These
consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits 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 audits 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 for the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the
consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of China Shandong Industries, Inc. and its wholly owned
subsidiaries (FKA Mobile Presence Technologies, Inc.)
as of December 31, 2009 and 2008, and the consolidated results of its operations and its consolidated cash flows for the years ended
December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States
of America.
/s/ Bongiovanni &
Associates
Bongiovanni & Associates
Certified Public
Accountants
Cornelius, North
Carolina
The United States of
America
January 22, 2010, except for Note
19,
for which the date is April 13, 2010
F-1
China
Shandong Industries, Inc. and Subsidiaries
(FKA
Mobile Presence Technologies, Inc.)
Consolidated
Balance Sheets
As
of December 31, 2009 and
2008
|
ASSETS
|
2009
|
2008
|
||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 2,185,839 | $ | 1,751,997 | ||||
Trade
accounts receivable
|
6,948,326 | 6,339,459 | ||||||
Inventories
|
17,527,584 | 17,336,566 | ||||||
Prepaid
expenses
|
375,493 | 107,128 | ||||||
Deposits
|
767,204 | - | ||||||
Other
receivables
|
295,752 | 22,499 | ||||||
TOTAL
CURRENT ASSETS
|
$ | 28,100,198 | $ | 25,557,649 | ||||
FIXED
ASSETS
|
||||||||
Property,
plant, and equipment
|
10,755,341 | 10,374,947 | ||||||
Accumulated
depreciation
|
(3,331,407 | ) | (2,453,851 | ) | ||||
NET
FIXED ASSETS
|
$ | 7,423,934 | $ | 7,921,096 | ||||
OTHER
ASSETS
|
||||||||
Construction
in progress
|
6,940,632 | 6,372 | ||||||
TOTAL
OTHER ASSETS
|
$ | 6,940,632 | $ | 6,372 | ||||
TOTAL
ASSETS
|
$ | 42,464,764 | $ | 33,485,117 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Short-term
borrowings
|
$ | 8,054,831 | $ | 5,946,962 | ||||
Current
portion of notes payable
|
- | 2,638,136 | ||||||
Accounts
payable
|
240,289 | 362,549 | ||||||
Other
payables and accrued liabilities
|
731,330 | 1,118,408 | ||||||
Deposits
received in advance
|
56,849 | 160,074 | ||||||
Taxes
payable
|
643,476 | 266,907 | ||||||
TOTAL
CURRENT LIABILITIES
|
$ | 9,726,775 | $ | 10,493,036 | ||||
TOTAL
LIABILITIES
|
$ | 9,726,775 | $ | 10,493,036 | ||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Preferred
stock ($.0001 par value, 5,000,000 authorized, none issued and
outstanding)
|
$ | - | $ | - | ||||
Common
stock ($.0001 par value, 100,000,000 authorized, 25,725,000 issued and
outstanding)
|
2,573 | 2,573 | ||||||
Additional
paid in capital
|
7,797,427 | 7,797,427 | ||||||
Statutory
and discretionary surplus reserve
|
3,608,243 | 3,608,243 | ||||||
Accumulated
other comprehensive income (loss)
|
(25,022 | ) | 216,500 | |||||
Retained
earnings
|
21,354,768 | 11,367,338 | ||||||
TOTAL
STOCKHOLDERS' EQUITY
|
$ | 32,737,989 | $ | 22,992,081 | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 42,464,764 | $ | 33,485,117 |
See
accompanying notes to these consolidated financial statements and auditors'
report.
F-2
China
Shandong Industries, Inc. and Subsidiaries
(FKA
Mobile Presence Technologies, Inc.)
Consolidated
Statements of Income and Comprehensive Income
For
the years ended December 31, 2009 and
2008
|
2009
|
2008
|
|||||||
Revenues
|
||||||||
Sales
|
$ | 59,549,572 | $ | 42,197,393 | ||||
Cost
of sales
|
42,186,937 | 31,570,829 | ||||||
Gross
profits
|
17,362,635 | 10,626,565 | ||||||
Operating
expenses
|
||||||||
Selling
and marketing
|
$ | 831,245 | $ | 686,104 | ||||
General
and administrative
|
1,966,402 | 1,867,589 | ||||||
Total
Operating Expenses
|
2,797,647 | 2,553,694 | ||||||
Income
from continuing operations
|
14,564,988 | 8,072,871 | ||||||
Other
income (expenses)
|
||||||||
Finance
income (costs)
|
$ | (753,093 | ) | $ | (751,865 | ) | ||
Other
income
|
202,851 | 367,099 | ||||||
Non-operating
income (expense)
|
(611,339 | ) | 27,807 | |||||
Total
other income (expense)
|
(1,161,580 | ) | (356,959 | ) | ||||
Income
from operations before income taxes
|
13,403,408 | 7,715,912 | ||||||
Income
taxes
|
(3,415,978 | ) | (1,953,918 | ) | ||||
Net
income
|
9,987,430 | 5,761,994 | ||||||
Other
comprehensive income
|
||||||||
Foreign
currency translation adjustment
|
(241,552 | ) | 746,119 | |||||
Comprehensive
income
|
$ | 9,745,878 | $ | 6,508,112 |
See
accompanying notes to these consolidated financial statements and auditors'
report.
F-3
China
Shandong Industries, Inc. and Subsidiaries
(FKA
Mobile Presence Technologies, Inc.)
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2009 and
2008
|
2009
|
2008
|
|||||||
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
||||||||
Net income
|
9,987,430 | 5,761,994 | ||||||
Adjustments to reconcile net
income to net cash
provided by (used in) operating
activities:
|
||||||||
Depreciation
|
813,394 | 661,993 | ||||||
Loss
on disposal of property, plant and equipment
|
626,258 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Trade
accounts receivable
|
(613,437 | ) | (1,576,587 | ) | ||||
Prepaid
expenses
|
(268,063 | ) | 520,539 | |||||
Inventories
|
(204,136 | ) | (6,440,180 | ) | ||||
Other
receivables
|
(274,030 | ) | 182,387 | |||||
Deposits
|
(767,204 | ) | - | |||||
Accounts
payable
|
(121,932 | ) | (493,591 | ) | ||||
Taxes
payable
|
376,615 | 592,864 | ||||||
Other
payables and accrued liabilities
|
(385,017 | ) | (303,540 | ) | ||||
Deposits
received in advance
|
(103,060 | ) | 153,666 | |||||
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
|
9,066,819 | (940,455 | ) | |||||
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
||||||||
Dividend
distribution
|
- | (224,755 | ) | |||||
Disposals of property, plant, and
equipment
|
- | 293,904 | ||||||
Expenditures for property, plant,
and equipment
|
(1,121,964 | ) | (1,094,614 | ) | ||||
Additions to construction in
progress
|
(6,931,355 | ) | 125,685 | |||||
NET CASH (USED IN) INVESTING
ACTIVITIES
|
(8,053,319 | ) | (899,781 | ) | ||||
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
||||||||
Principal repayments of short term
borrowings
|
(3,676,471 | ) | (360,969 | ) | ||||
Proceeds from short term
borrowings
|
5,787,983 | 1,754,245 | ||||||
Borrowings of notes
payable
|
- | 6,359,126 | ||||||
Repayments of notes
payable
|
(2,635,020 | ) | (4,893,495 | ) | ||||
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
|
(523,508 | ) | 2,858,907 | |||||
Foreign currency
adjustment
|
(56,149 | ) | 156,750 | |||||
NET INCREASE IN CASH AND CASH
EQUIVALENTS
|
433,843 | 1,175,421 | ||||||
CASH AND CASH
EQUIVALENTS:
|
||||||||
Beginning of year
|
1,751,997 | 576,575 | ||||||
End of year
|
$ | 2,185,839 | $ | 1,751,997 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
|
||||||||
Cash paid during the year
for:
|
||||||||
Interest
|
$ | 621,619 | $ | 566,289 | ||||
Taxes
|
$ | 3,415,978 | $ | 1,953,918 |
See
accompanying notes to these consolidated financial statements and auditors'
report.
F-4
China
Shandong Industries, Inc. and Subsidiaries
(FKA
Mobile Presence Technologies, Inc.)
Consolidated
Statement of Stockholders' Equity
For
the years ended December 31, 2009 and
2008
|
Common
Stock
|
Preferred
Stock
|
Additional
Paid
in
|
Discretionary Surplus |
Other Comprehensive |
Retained
|
Total Stockholders' |
||||||||||||||||||||||||||||||
(Shares)
|
(Amount)
|
(Shares)
|
(Amount)
|
Capital
|
Reserve
|
Income
(loss)
|
Earnings
|
Equity
|
||||||||||||||||||||||||||||
Balances
as of January 1, 2008
|
25,725,000 | $ | 2,573 | - | $ | 0 | $ | 7,797,427 | $ | 3,608,243 | $ | (529,618 | ) | $ | 5,605,344 | $ | 16,483,969 | |||||||||||||||||||
Net
income for the year ended
December
31, 2008
|
- | - | - | - | - | - | - | 5,761,994 | 5,761,994 | |||||||||||||||||||||||||||
Foreign
currency translation gain for 2008
|
- | - | - | - | - | - | 746,118 | - | 746,118 | |||||||||||||||||||||||||||
Balances
as of December 31, 2008
|
25,725,000 | $ | 2,573 | - | $ | 0 | $ | 7,797,427 | $ | 3,608,243 | $ | 216,500 | $ | 11,367,338 | $ | 22,992,081 | ||||||||||||||||||||
Net
income for the year ended
December
31, 2009
|
- | - | - | - | - | - | 9,987,430 | 9,987,430 | ||||||||||||||||||||||||||||
Foreign
currency translation loss for 2009
|
- | - | - | - | - | - | (241,522 | ) | (241,522 | ) | ||||||||||||||||||||||||||
Balances
as of December 31, 2009
|
25,725,000 | $ | 2,573 | - | $ | 0 | $ | 7,797,427 | $ | 3,608,243 | $ | (25,022 | ) | $ | 21,354,768 | $ | 32,737,989 |
See
accompanying notes to these consolidated financial statements and auditors'
report.
F-5
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
1. ORGANIZATION
AND BUSINESS BACKGROUND
China
Shandong Industries Inc. (the
“Company”) was incorporated on February
13, 2007 under the laws of the State of Delaware as “Mobile Presence
Technologies, Inc”. On December 3, 2009, the Company changed its name to
China Shandong Industries, Inc.
On October 22, 2009, the Company entered a Stock
Exchange and Reorganization Agreement (the “Agreement”), by and among the
Company, Tianwei International Development Corporation, an Oregon Corporation
(“TIDC”), CAOPU Enterprise Limited, a company organized under the laws of the
British Virgin Islands (“Caopu”), London Financial Group Ltd., a company
organized under the laws of the British Virgin Islands (“LFG”), Phoebus Vision
Investment Developing Group, Ltd., a company organized under the laws of the
British Virgin Islands (“Phoebus”), and Timothy
Lightman (“TL”), pursuant to which the Company acquired all of the issued and
outstanding capital stock of TIDC owned by each of CAOPU, LFG and Phoebus in
exchange for an issuance by the Company of an aggregate of 1,543,500 shares of
Common Stock of the Company, with a par value of $0.0001 per share (the“MBPI
Common Stock”), to Caopu, LFG and Phoebus. The shares of MBPI Common Stock were
issued pursuant to the exemption from registration provided under Section 4(2)
of the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder.
In
addition, TL, the owner of 975,000 shares of MBPI Common Stock (“TL’s MBPI
Shares”), representing approximately 93% of the 1,046,500 issued and outstanding
shares of the Company’s Common Stock, delivered a stock certificate or stock
certificates representing 875,000 of TL’s MBPI Shares to the Company for
cancellation.
On
November 5, 2009, pursuant to a separate Assignment and Assumption Agreement by
and between the Company and TL, the Company sold to TL all of the assets of the
Company and TL assumed all the liabilities of the Company.
The transaction was effectively completed
on November 6, 2009, which
has been accounted for as a reverse acquisition and recapitalization of
the Company, through a wholly-owned subsidiary, TIDC, whereby TIDC is deemed to
be the ultimate accounting acquirer (legal acquiree) and the Company to be the
ultimate accounting acquiree (legal acquirer). The accompanying consolidated financial
statements are in substance those of TIDC, with the assets and liabilities, and
revenues and expenses, of the Company being included effective from the date of
stock exchange transaction. The Company is deemed to be a continuation of the business of
TIDC, through its wholly-owned subsidiary, Shandong Caopu Arts &
Crafts Co., Ltd. (“SCAC”), a PRC-based company incorporated on August 15, 2000
under the laws of the PRC. Accordingly, the accompanying
consolidated financial statements include the
following:
(1)
|
the balance sheet consists of the
net assets of the accounting acquirer at historical cost and
the net assets of the accounting acquiree at historical
cost;
|
(2)
|
the financial position, results of
operations, and cash
flows of the
accounting
acquirer for all periods presented as
if the
recapitalization had occurred at the beginning of the earliest period
presented and the
operations of the accounting acquiree from the date
of stock exchange transaction.
|
On
November 6, 2009, concurrent with the Stock Exchange with TIDC, the Company
adopted the fiscal year end of SCAC, the wholly-owned subsidiary of TIDC,
thereby changing the fiscal year end from September 30 to December 31. The
consolidated audited financial statements for the new fiscal year will be
reflected in the Company’s Form 10-K for the year ending December 31,
2009.
China
Shandong Industries Inc., TIDC and SCAC are hereinafter referred to as (the
“Company”).
F-6
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
1.
|
ORGANIZATION
AND BUSINESS BACKGROUND (CONT’D)
|
The Company is located in the Cao Xian Development
Zone, which is near the Beijing-Kowloon railway with the DeShang Highway to the
East and Qinghe Road to the West. There are three production areas including
sixteen production workshops and staff who work on willow products,
craft and wooden furniture.
The Company undertakes joint production
with local farmers by purchasing the processing products from them and then by
proceeding to finish the products in order to generate sales. The
Company has numerous
products, such as grass willow products, wooden crafts, indoor/outdoor wooden
furniture, office furniture, different kinds of frames and craftwork. The
Company also has numerous national patterns for design and utility
models.
The Company’s products are sold in various countries
and regions, including the United States of America, Germany, the United
Kingdom, the Netherlands, Italy, Sweden, Japan, Canada, Denmark, Hong Kong and
Taiwan.
The Company’s business model is original equipment
manufacture (OEM) for North
American and European manufacturers.
A majority of the Company’s sales were from exports. In order to
adapt to the international market, the Company passed the ISO9001 international
quality management system certification, ISO14001 environmental management system
certification, OHSMS18001 Occupational Health and Safety Management System
Certification, as well as the CE certification for access to the EU
market.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis of presentation
The accompanying consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America
under the accrual basis of accounting.
Use of estimates
In preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the dates of
the consolidated financial statements, as well as the
reported amounts of revenues and expenses during the reporting periods. These
accounts and estimates include, but are not limited to, the valuation of trade
receivables, other
receivables, inventories, income taxes and the estimation on useful lives of
property, plant and equipment. Actual results could differ from these
estimates.
Concentrations of credit
risk
Financial instruments that potentially
subject the Company to
significant concentrations of credit risk consist principally of cash and cash
equivalents, and trade and
other receivables. As of
December 31, 2009 and 2008, substantially all of the
Company’s cash and cash equivalents were held by
financial institutions
located in the PRC, which the Company’s management believes are of high credit
quality. With respect to trade receivables, the Company extends credit based on
an evaluation of the customer’s financial condition. The Company
generally does not require
collateral for trade and other receivables and maintains an allowance for
doubtful accounts of trade and other receivables.
F-7
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(CONT’D)
|
Cash and cash equivalents
The Company’s cash equivalents are short-term, highly liquid investments
that are both readily convertible to known amounts of cash and that have
insignificant risk of change in value because of changes in interest rates. The
Company’s cash and cash equivalents, as of
December 31, 2009 and 2008, were principally denominated in Renminbi (“RMB”) and were placed with banks in the PRC.
They are not freely convertible into foreign currencies and the remittance of
these funds out of the PRC is subject to exchange control restrictions imposed
by the PRC
government.
For
purposes of the Consolidated Statements of Cash
Flows, the Company considers highly liquid investments with an original maturity
of three months or less to be cash equivalents. In accordance with SFAS No. 95,
the consolidated Statements
of Cash Flows are prepared based on the change in the RMB functional currency
for each account and converted into U.S. dollars at the various exchange rates
at the time.
Allowance for doubtful
accounts
The Company establishes an allowance for
doubtful accounts based on
managements’ assessment of the trade
receivables
collectibles. Judgment is required in assessing the
amount of the allowance. The Company considers the historical level of credit
losses and applies percentages to different receivables categories. The Company makes
judgments about the creditworthiness of each customer based on ongoing credit
evaluations, and monitors current economic trends that might impact the level of
credit losses in the future. If the financial condition of the customers were to deteriorate, resulting
in their inability to make payments, a larger allowance may be
required.
Based on the above assessment, during
the reporting periods, management establishes the general provisioning policy to
make an allowance equivalent to 5% of the gross amount of trade
receivables. Additional specific provision is made
against trade receivables to the extent which they are considered to be
doubtful.
Bad debts are written off when
identified. The Company
does not accrue interest
on trade
receivables.
Historically, losses from uncollectible
accounts have not significantly deviated from the general allowance estimated by
management and no significant additional bad debts have been written off
directly to net
income. This general
provisioning policy has not
changed in the past since establishment and management considers that the
aforementioned general provisioning policy is adequate,
not excessive and does not
expect to change this established policy in the near future.
Inventories
Inventories (finished goods, work in process, raw materials and packaging materials) are stated at the lower of cost or
market. Cost is determined on a first in first out basis which includes an appropriate share of
production overheads based on normal operating capacity and includes all expenditures
incurred in bringing the goods to the point of sale and putting them in a
saleable condition. In
assessing the ultimate realization of inventories, management makes judgments as
to future demand requirements compared to current or committed inventory levels.
The Company estimates the demand requirements based on market conditions,
forecasts prepared by its customers, sales contracts and orders in
hand.
In addition, the Company estimates net
realizable value based on
intended use, current market value and contract terms. The Company writes down
the inventories for estimated obsolescence, slow moving or unmarketable inventories equal to
the difference between the cost of inventories and the estimated market value
based upon assumptions
about future demand and market conditions.
F-8
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(CONT’D)
|
Property, plant and equipment
Property, plant and equipment are comprised of buildings, machinery, equipment and furniture. Property, plan t and equipment are stated at cost less accumulated
depreciation. Cost
represents the purchase price of the respective fixed asset and other costs
incurred to bring the fixed asset into its existing use. Depreciation is computed over the
estimated useful lives of
the respective fixed
assets utilizing the
straight-line basis method. Buildings are depreciated over a period of twenty years with a residual value of
10%. Machinery, equipment and furniture are depreciated over a period of ten years with a residual value of
10%. Maintenance or repairs are
charged to expense as incurred. Upon sale or disposition, the applicable amounts
of the fixed asset’s cost and related accumulated depreciation are removed from
the accounts and the net amount less proceeds from the disposal is charged or
credited to operations.
The
Company recognizes an impairment loss on property, plant and equipment when
evidence, such as the sum of expected future cash flows (undiscounted and
without interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including depreciation,
and when the carrying amount of the asset cannot be realized through sale.
Measurement of the impairment loss is based on the fair value of the
assets.
Impairment of Long-lived assets
The
Company evaluated the recoverability of its property, plant, equipment, and
other assets in accordance with FASB Accounting Standards Codification 360
“Property, Plant and Equipment” (formerly SFAS 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”), which requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceed the estimated future undiscounted cash flows attributable to such assets
or the business to which such intangible assets relate.
Earnings per share
The
Company reports earnings (loss) per share in accordance with FASB Accounting
Standards Codification 260 “Earnings per Share” (formerly SFAS 128, “Earnings
per Share”). This statement requires dual presentation of basic and diluted
earnings (loss) with a reconciliation of the numerator and denominator of the
loss per share computations. Basic earnings per share amounts are based on the
weighted average shares of common outstanding. If applicable, diluted earnings
per share assume the conversion, exercise or issuance of all common stock
instruments such as options, warrants and convertible securities, unless the
effect is to reduce a loss or increase earnings per share. Accordingly, this
presentation has been adopted for the periods presented. There were no
adjustments required to net income for the period presented in the computation
of diluted earnings per share. There were no common stock equivalents (CSE)
necessary for the computation of diluted loss per share.
Construction in
progress
Construction in progress is
recorded using the cost method, which later transfers to fixed assets in achieving the
expected usable condition. Interest costs on borrowings related to construction in progress are capitalized before
achieving the expected usable condition.
Dividends
The Company has not yet adopted any
policy regarding payment of dividends. $224,755 in dividends was paid in
2008.
F-9
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT’D)
|
Revenue recognition
Revenue is recognized when the risks and
rewards of ownership and title to the product have transferred to the customers, the selling price is fixed or
determinable, and collection is reasonable
assured. The Company first confirms the revenue when the customs information
is available after the export application to customs. The
Company offers varying terms for its customers and is responsible for paying the
delivery cost of
its
products.
Cost of goods sold
Cost of goods sold consists primarily of costs of
raw materials and direct labor, and other costs directly attributable
to the production of
products. Write-down of
inventories to lower of cost or market is also recorded in cost of goods
sold.
Selling expenses
Selling expenses mainly consist of
advertising, shipping and handling costs and exhibition expenses which are expensed as incurred during the selling
activities.
General and administrative
expenses
General and administrative expenses
consist of
office expenses, depreciation, staff
welfare, utilities, labor
protection and salaries which are expensed as incurred at the administrative
level.
Income taxes
Income
taxes are provided in accordance with FASB Accounting Standards Codification 740
“Income Taxes” (formerly SFAS No. 109 “Accounting for Income Taxes”). Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the consolidated financial statements
carrying amounts of existing assets and liabilities and loss carry forwards and
their respective tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or the entire deferred tax asset will not be realized. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
Comprehensive income
The Company adopted FASB Accounting Standards Codification
220 “Comprehensive Income” (formerly SFAS No. 130, Reporting
Comprehensive income”,
which establishes standards for reporting and display of comprehensive
income, and its components in the consolidated financial statements. Components of comprehensive
income include net income and foreign currency translation
adjustments. The Company
has presented consolidated statements of income which includes
other comprehensive income
or loss.
Fair value of financial
instruments
The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, trade accounts and other receivables, inventories, prepaid
expenses, accounts payable, other payables and accrued liabilities, deposits
received in advance, dividends payable, taxes payable, short term borrowings and
current portion of notes payable approximate their fair values due to the
short-term maturity of such instruments.
F-10
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(CONT’D)
|
Fair value of financial instruments (cont’d)
It is
managements’ opinion that the Company is not exposed to significant price,
credit, foreign currency or interest rate risks arising from these financial
instruments.
Advertising expense
Advertising
is charged to expense as incurred. The Company does not incur any
direct-response costs.
Advertising
expenses were $-0- for the two years ended December 31, 2009 and 2008,
respectively.
Commitments and
contingencies
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and
penalties and other sources, if applicable, are recorded when it is probable
that a liability has been incurred and the amount of the assessment can be
reasonably estimated.
Foreign currency
translation
The functional currency of the Company is the Renminbi
(“RMB”) and RMB is not freely convertible into
foreign currencies. The Company maintains its consolidated financial statements in the functional
currency. Monetary assets and liabilities denominated in currencies other
than the functional
currency are translated into the functional currency at rates of exchange
prevailing at the balance sheet date. Transactions denominated in currencies
other than the functional currency are translated into the functional currency
at the exchanges rates prevailing at the dates
of the transaction. Exchange gains or losses arising from foreign currency
transactions are included in the determination of net income for the respective
periods.
For financial reporting purposes, the
consolidated financial statements of the
Company, which are prepared using the functional
currency, have been translated into United States
dollars. Current assets and liabilities are translated at the exchange rates at
the balance sheet dates and revenue and expenses are translated at the average exchange
rates while fixed assets and stockholders’ equity is translated at historical
exchange rates. Any translation adjustments resulting are not
included in determining net income but are included in foreign exchange
adjustment to other comprehensive income, a
component of stockholders’ equity. The exchange rates in effect as of
December 31, 2009 and 2008 were RMB1 for $0.1465 and $0.1466, respectively. The average exchange
rates for the two years ended December 31, 2009 and 2008 were RMB1 for $0.1464 and $0.1439, respectively. There is no significant
fluctuation in exchange rate for the conversion of RMB to US dollars after the
balance sheet date.
Off-balance sheet
arrangements
The Company does not have any
off-balance sheet
arrangements.
Recent Accounting
Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.
F-11
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(CONT’D)
|
Recent Accounting
Pronouncements
(cont’d)
FASB Accounting
Standards Codification
(Accounting Standards Update (“ASU”)
2009-01)
In
June 2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the
Company’s consolidated
financial statements as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. There have
been no changes to the content of the Company’s financial statements or
disclosures as a result of implementing the Codification during the fiscal year
ended December 31, 2009.
As a
result of the Company’s implementation of the Codification during the fiscal
year ended December 31, 2009, previous references to new accounting standards
and literature are no longer applicable. In the current annual consolidated financial
statements, the Company will provide reference to both new and old guidance to
assist in understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.
Subsequent
Events
(Included in Accounting Standards
Codification (“ASC”) 855 “Subsequent Events”, previously SFAS No. 165
“Subsequent Events”)
SFAS
No. 165 established general standards of accounting for and disclosure of
events that occur after the balance sheet date, but before the consolidated financial statements
are issued or available to be issued (“subsequent events”). An entity is
required to disclose the date through which subsequent events have been
evaluated and the basis for that date. For public entities, this is the date the
consolidated financial
statements are issued. SFAS No. 165 does not apply to subsequent events or
transactions that are within the scope of other GAAP and did not result in
significant changes in the subsequent events reported by the Company. SFAS
No. 165 became effective for interim or annual periods ending after
June 15, 2009 and did not impact the Company’s consolidated financial
statements. The Company evaluated for subsequent events through the issuance
date of the Company’s consolidated financial
statements. No recognized or non-recognized subsequent events were
noted.
Determination of
the Useful Life of Intangible Assets
(Included in ASC 350 “Intangibles —
Goodwill and Other”, previously FSP SFAS No. 142-3 “Determination of the
Useful Lives of Intangible Assets”)
FSP SFAS
No. 142-3 amended the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under previously issued goodwill and intangible
assets topics. This change was intended to improve the consistency between the
useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the asset under topics related to
business combinations and other GAAP. The requirement for determining useful
lives must be applied prospectively to intangible assets acquired after the
effective date
F-12
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(CONT’D)
|
Recent Accounting
Pronouncements
(cont’d)
and the
disclosure requirements must be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. FSP SFAS No. 142-3
became effective for consolidated financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The adoption of FSP SFAS No. 142-3 did not
impact the Company’s consolidated financial
statements.
Noncontrolling
Interests
(Included in ASC 810
“Consolidation”, previously SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB
No. 51”)
SFAS
No. 160 changed the accounting and reporting for minority interests such
that they will be recharacterized as noncontrolling interests and classified as
a component of equity. SFAS No. 160 became effective for fiscal years
beginning after December 15, 2008 with early application prohibited. The
Company implemented SFAS No. 160 at the start of fiscal 2009 and no longer
records an intangible asset when the purchase price of a noncontrolling interest
exceeds the book value at the time of buyout. The adoption of SFAS No. 160
did not have any other material impact on the Company’s financial
statements.
Consolidation of
Variable Interest Entities — Amended
(To be included in ASC 810
“Consolidation”, SFAS No. 167 “Amendments to FASB Interpretation No.
46(R)”)
SFAS
No. 167 amends FASB Interpretation No. 46(R) “Consolidation of
Variable Interest Entities regarding certain guidance for determining whether an
entity is a variable interest entity and modifies the methods allowed for
determining the primary beneficiary of a variable interest entity. The
amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should
consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. SFAS
No. 167 is effective for the first annual reporting period beginning after
November 15, 2009, with earlier adoption prohibited. The Company will adopt
SFAS No. 167 in fiscal 2010 and does not anticipate any material impact on
the Company’s financial statements.
3.
|
RESTRICTED CASH AND CASH
EQUIVALENTS
|
According to the contract between the Company and the bank in which it has loans payable to, $-0- and $1,407,006 at December 31, 2009 and 2008, respectively, is invested into certain designated accounts related to guaran tees for notes payable.
4.
|
TRADE ACCOUNTS
RECEIVABLE
|
Trade accounts receivable is comprised of the following amounts at the respective dates:
As of December
31,
|
||||||||
2009
|
2008
|
|||||||
Gross trade accounts receivable
from customers
|
$ | 7,318,908 | $ | 6,673,115 | ||||
Allowance for doubtful customer
accounts
|
(370,582 | ) | (333,656 | ) | ||||
$ | 6,948,326 | $ | 6,339,459 |
F-13
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
4.
|
TRADE ACCOUNTS
RECEIVABLE
(CONT’D)
|
Bad debt expense of $36,926 and $99,506 was recognized during the years ended December 31, 2009 and 2008, respectively, in the accompanying consolidated income statements.
5.
|
INVENTORIES
|
Inventories are comprised of the following amounts at the respective dates:
As of December
31,
|
||||||||
2009
|
2008
|
|||||||
Raw
materials
|
1,462,682 | $ | 546,420 | |||||
Packaging
materials
|
23,813 | 23,316 | ||||||
Work in
process
|
2,191,570 | 1,529,163 | ||||||
Finished
goods
|
13,849,519 | 15,237,667 | ||||||
17,527,584 | 17,336,566 | |||||||
Provision for obsolete
inventories
|
-0- | -0- | ||||||
$ | 17,527,584 | $ | 17,336,566 |
6.
|
PROPERTY, PLANT AND
EQUIPMENT
|
Property, plant and equipment are
comprised of the following amounts at the respective dates:
As of December
31,
|
||||||||
2009
|
2008
|
|||||||
Cost:
|
||||||||
Buildings
|
$ | 6,257,774 | $ | 6,997,805 | ||||
Machinery, equipment and
furniture
|
4,497,567 | 3,377,142 | ||||||
10,755,341 | 10,374,947 | |||||||
Accumulated
depreciation
|
(3,331,407 | ) | (2,453,851 | ) | ||||
Net
|
$ | 7,423,934 | $ | 7,921,096 |
During the reporting periods,
depreciation
expense is included in
the following
accounts on the accompanying consolidated income statements:
Year ended December
31,
|
||||||||
2009
|
2008
|
|||||||
General and administrative
expenses
|
$ | 813,394 | $ | 661,993 | ||||
$ | 813,394 | $ | 661,993 |
F-14
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
7.
|
SHORT-TERM
BORROWINGS
|
The Company’s outstanding principal balances on its
short-term borrowings are
payable as follows:
As of December
31,
|
||||||||
2009
|
2008
|
|||||||
Puliangji Credit
Cooperative, .9%
interest rate, due August 31, 2009
|
$ | -0- | $ | 278,470 | ||||
Bank of China, 5.832% to 6.372% interest rates, due no later than November 17,
2010
|
3,514,835 | 4,423,010 | ||||||
Commercial Bank (Heze
branch), 7.965% interest rate, due no later than September 28, 2010
|
4,539,996 | 1,172,505 | ||||||
Various other loans, interests
rates ranging from .612% to 1.1826%,
|
||||||||
due in various dates
within upcoming 12 month operating cycle
|
-0- | 72,977 | ||||||
$ | 8,054,831 | $ | 5,946,962 |
The effects of imputed
interest on the aforementioned below market interest rates are immaterial to the consolidated financial statements taken as a
whole.
8.
|
NOTES
PAYABLE
|
The Company’s outstanding principal balances for its
notes payable are payable as follows:
As of December
31,
|
||||||||
2009
|
2008
|
|||||||
ICBC Caoxian branch, .684%
interest rate, due September 27, 2009
|
$ | -0- | $ | 1,758,757 | ||||
CCB Caoxian branch, .612% interest
rate, due March 10, 2009
|
-0- | 879,379 | ||||||
$ | -0- | $ | 2,638,136 |
The effects of imputed interest
on the aforementioned below market interest rates are immaterial to the consolidated financial statements taken as a
whole.
9.
|
OTHER PAYABLES AND ACCRUED
LIABILITIES
|
As of December
31,
|
||||||||
2009
|
2008
|
|||||||
Salary
and welfare payable
|
$ | 105,246 | $ | 304,675 | ||||
Accrued
expenses
|
21,818 | 12,308 | ||||||
Other
payables
|
604,266 | 801,425 | ||||||
$ | 731,330 | $ | 1,118,408 |
Staff
welfare payable represents accrued staff medical, industry injury claims; labor
and unemployment insurances, all of which are third parties insurance and the
insurance premiums are based on certain percentage of salaries. The obligations
of the Company are limited to those premiums contributed by the
Company.
F-15
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
10.
|
REGISTERED AND PAID UP
CAPITAL
|
The Company is a Sino-foreign joint enterprise and
therefore the capital
stock, consistent with most of the PRC enterprises, is not divided into a
specific number of shares having a stated nominal amount.
The Company’s registered capital of $7,800,000 was fully paid up on April 28,
2008.
11.
|
STATUTORY AND DISCRETIONARY SURPLUS
RESERVE
|
In accordance with the relevant laws and
regulations of the PRC and articles of association, the Company is required to
appropriate 10% and a certain other percentage of the net profit as reported in
the Company’s PRC statutory consolidated financial statements to the statutory
reserve fund and the discretionary surplus reserve fund, respectively, after
offsetting prior year’s losses.
When the balance of the statutory
reserve fund reaches 50% of the registered capital, and further appropriation is optional. Upon
approval from the board of directors or members, the statutory reserve can be
used to offset accumulated losses or to increase registered
capital.
12.
|
INCOME
TAXES
|
The Company is subject to the foreign investment
enterprise income
tax at the statutory rate
of 15% on the profits as reported in the Company’s PRC statutory consolidated financial statements as adjusted by
profit and loss items that are not taxable or deductible before
2008.
PRC’s legislative body, the National People’s Congress, adopted the unified EIT Law
on March 16, 2007. This new tax law replaces the existing separate income
tax laws for domestic enterprises and foreign-invested enterprises and became
effective on January 1, 2008. Under the new tax law, a unified income tax rate is set at
25% for both domestic enterprises and foreign-invested enterprises.
Thus, the Company is subject to corporate
income tax at the statutory rate of 25%
commencing in 2008.
Income
taxes in the accompanying consolidated statements of income
for the reporting periods represent provision for EIT for the Company’s
continuing operations in the PRC.
Year ended December
31
|
||||||||
2009
|
2008
|
|||||||
EIT rate in effect for the
year
|
25 | % | 25 | % | ||||
Profits before income tax
|
$ | 13,403,408 | $ | 7,715,912 | ||||
Income tax
|
$ | 3,415,978 | $ | 1,953,918 |
The
effective income taxes differ from the above PRC statutory EIT rates as
follows:-
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Provision
for income taxes at statutory EIT rate
|
$ | 3,350,852 | $ | 1,928,978 | ||||
Non-deductible
items for tax purposes
|
65,126 | 24,940 | ||||||
Income
taxes
|
$ | 3,415,978 | $ | 1,953,918 |
F-16
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
13.
|
DEFINED CONTRIBUTION
PLAN
|
The Company has a defined contribution
plan for all of its
qualified employees in the PRC. The employer and the employees are each required to make
contributions to the plan at the rates specified in the plan. The obligation of
the Company with respect to
retirement is to make the
required contributions under the plan. No forfeited contributions are available to reduce the contribution
payable in the future years. The defined contribution plan contributions were
charged to expense in the
accompanying consolidated statements of income. The Company contributed $153,624 and $460,307 for the years ended December 31,
2009 and 2008, respectively, which are included in general and
administrative expenses in
the accompanying consolidated income statements.
14.
|
CONTINGENCIES
|
The Company had no contingencies
existing as of December 31, 2009 and 2008.
15.
|
RELATED PARTY
TRANSACTIONS
|
The Company had no material transactions
carried out with its related parties during 2009 and 2008.
16.
|
INCOME PER
SHARE
|
The following table sets forth the
computation of basic earnings per share for the years indicated:
For
the years ended
|
||||||||
2009
|
2008
|
|||||||
Numerator:
|
||||||||
Total
comprehensive income
|
$ | 9,745,878 | $ | 6,508,112 | ||||
Denominator:
|
||||||||
Weighted
average number of shares outstanding
|
||||||||
Basic
|
25,725,000 | 25,725,000 | ||||||
Earnings
(loss) per share
|
||||||||
Basic
and fully diluted
|
$ | 0.38 | $ | 0.25 |
The basic earnings per share were
calculated using the comprehensive income and the weighted average number of
shares outstanding during the reporting periods. All share and per share data have been
adjusted to reflect the recapitalization of the Company in the Exchange and the forward stock split.
The
Company had no dilutive instruments as of December 31, 2009 and 2008 due to no preferred
shares issued and outstanding.
F-17
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
17.
|
CAPITAL
TRANSACTIONS
|
1)
|
On
November 6, 2009, the Company completed a stock exchange transaction with
the equity owners of TIDC. 1,543,500 shares of common stock were issued by
the Company in exchange for 100% interest in TIDC, representing 90.0% of
the Company’s outstanding common
stock.
|
2)
|
On
November 6, 2009, Timothy Lightman, the owner of 975,000 shares of the
Company’s Common Stock delivered a stock certificate or stock certificates
representing 875,000 shares of the Company’s Common Stock to the Company
for cancellation.
|
3)
|
On
November 20, 2009, the Board of Directors of the Company adopted a
resolution approving a one for fifteen forward split of the Company’s
Common Stock. Accordingly, the Company’s outstanding Common Stock on the
basis of 1 outstanding share being changed to 15 outstanding shares. Each
shareholder’s percentage ownership in the Company (and relative voting
power) will remain essentially unchanged as a result of the forward split.
The forward split took effective on December 3,
2009.
|
The consolidated statement of equity
and the earnings per share numbers in the financial statements have been
restated per FASB 128 paragraph 134.
18.
|
CONCENTRATIONS AND
RISKS
|
During
2009 and 2008, all of the
Company’s assets were located in the PRC.
During
2009 and 2008, certain
customers accounted for greater than 10% in revenues. In 2009, there were three
major customers that accounted for 44%, 10% and 10% of revenues, respectively.
In 2008, there were three major customers that accounted for 29%, 14% and 14% of
revenues, respectively.
As of
December 31, 2009, these customers accounted for 27%, 10% and 4% of accounts
receivable, respectively.
18.
|
SUBSEQUENT
EVENT
|
Subsequent
to year end, the Company entered into an agreement to issue 300,000 warrants
among other items and recorded a related expense of $334,702, equal to the estimated fair value of
the warrants at the date of the grant to an unrelated shareholder of the
Company. The fair market
value was calculated using the Black-Scholes options pricing model,
assuming approximately 5.15% risk-free interest, 0% dividend yield,
65% volatility, and a life of two years.
F-18