Attached files
file | filename |
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EX-21 - EX-21 - A.G. Volney Center, Inc | v182501_ex21.htm |
EX-3.3 - EX-3.3 - A.G. Volney Center, Inc | v182501_ex3-3.htm |
EX-2.1 - EX-2.1 - A.G. Volney Center, Inc | v182501_ex2-1.htm |
EX-10.6 - EX-10.6 - A.G. Volney Center, Inc | v182501_ex10-6.htm |
EX-10.2 - EX-10.2 - A.G. Volney Center, Inc | v182501_ex10-2.htm |
EX-10.1 - EX-10.1 - A.G. Volney Center, Inc | v182501_ex10-1.htm |
EX-10.5 - EX-10.5 - A.G. Volney Center, Inc | v182501_ex10-5.htm |
EX-10.3 - EX-10.3 - A.G. Volney Center, Inc | v182501_ex10-3.htm |
EX-10.4 - EX-10.4 - A.G. Volney Center, Inc | v182501_ex10-4.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
Report (Date of Earliest event Reported): April 28, 2010
A.G.
Volney Center, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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000-52269
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13-4260316
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(State
or other jurisdiction of
incorporation
or organization)
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(Commission
File Number)
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(IRS
Employer Identification
No.)
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Dachang Hui Autonomous
County
Industrial Park
Hebei, 065300 People’s Republic of
China
(Address
of principal executive offices)
Telephone
– +86 316 8864783
(Former
Address)
124
Lincoln Avenue South
Liverpool,
New York 13088
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General Instruction A.2. below):
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a -12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d -2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e -4(c))
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
report contains forward-looking statements. The forward-looking statements are
contained principally in the sections entitled “Description of Business,” “Risk
Factors,” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. In some
cases, you can identify forward-looking statements by terms such as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar
expressions intended to identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. These forward-looking statements include, among other things,
statements relating to:
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·
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Our
ability to produce cold rolled steel at a profitable
margin;
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·
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the
impact that a downturn or negative changes in the steel market may have on
sales;
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·
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our
ability to obtain additional capital in future years to fund our planned
expansion;
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·
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economic,
political, regulatory, legal and foreign exchange risks associated with
our operations; or
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·
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the
loss of key members of our senior management and our qualified sales
personnel.
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Also,
forward-looking statements represent our estimates and assumptions only as of
the date of this report. You should read this report and the documents that we
reference and filed as exhibits to the report completely and with the
understanding that our actual future results may be materially different from
what we expect. Except as required by law, we assume no obligation to update any
forward-looking statements publicly, or to update the reasons actual results
could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the
future.
Use
of Certain Defined Terms
Except
where the context otherwise requires and for the purposes of this report
only:
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·
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the
“Company,” “we,” “us,” and “our” refer to the combined business of (i)
A.G. Volney Center, Inc. or “AG Volney,” a Delaware corporation, (ii) Gold
Promise Group (Hong Kong) Co., Limited, or “Gold Promise,” a Hong Kong
limited company and wholly-owned subsidiary of AG Volney, (iii)
Hebei Anbang Investment Consultation Co., Ltd., or “Hebei Consulting,” a
Chinese limited company and wholly-owned subsidiary of Gold Promise, and
(iv) Dachang Hui Autonomous County Baosheng Steel Products Co., Ltd., or
“Buddha,” a Chinese limited company which is effectively and substantially
controlled by Hebei Consulting through a series of captive agreements, as
the case may be;
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·
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“BVI”
refers to the British Virgin
Islands;
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·
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“Exchange
Act” refers to the Securities Exchange Act of 1934, as
amended;
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·
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“Hong
Kong” refers to the Hong Kong Special Administrative Region of the
People’s Republic of China;
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·
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“PRC,”
“China,” and “Chinese,” refer to the People’s Republic of China (excluding
Hong Kong and Taiwan);
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·
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“Renminbi”
and “RMB” refer to the legal currency of
China;
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·
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“Securities
Act” refers to the Securities Act of 1933, as amended;
and
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·
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“U.S.
dollars,” “dollars” and “$” refer to the legal currency of the United
States.
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In this
current report we are relying on and we refer to information and statistics
regarding the steel industry and economy in China and that we have obtained from
various cited government and institute research publications. Much of this
information is publicly available for free and has not been specifically
prepared for us for use or incorporation in this current report on Form 8-K or
otherwise. We have not independently verified such information, and you should
not unduly rely upon it.
ITEM
1.01
ENTRY
INTO A MATERIAL DEFINITIVE AGREEMENT
On April
28, 2010, we entered into and closed a share exchange agreement, or the Share
Exchange Agreement, with Gold Promise Group (Hong Kong) Co., Limited, or “Gold
Promise,” the shareholders of Gold Promise, Joseph C. Passalaqua, Carl E.
Worboys and Dachang Hui Autonomous County Baosheng Steel Products Co.,
Ltd., or “Buddha,” pursuant to which we acquired 100% of the issued and
outstanding capital stock of Gold Promise in exchange for 10,000 shares of our
Series A Convertible Preferred Stock (Series A Preferred Stock), which
constituted 98.75% of our issued and outstanding capital stock on an
as-converted to common stock basis as of and immediately after the consummation
of the transactions contemplated by the Share Exchange Agreement.
The
foregoing description of the terms of the Share Exchange Agreement is qualified
in its entirety by reference to the provisions of the agreement filed as Exhibit
2.1 to this report, which are incorporated by reference herein.
ITEM
2.01
COMPLETION
OF ACQUISITION OR DISPOSITION OF ASSETS
On April
28, 2010, we completed an acquisition of Gold Promise pursuant to the Share
Exchange Agreement. The acquisition was accounted for as a recapitalization
effected by a share exchange, wherein Gold Promise is considered the acquirer
for accounting and financial reporting purposes. The assets and liabilities of
the acquired entity have been brought forward at their book value and no
goodwill has been recognized.
As a
result of the acquisition, our consolidated subsidiaries include Gold Promise,
our wholly-owned subsidiary which is incorporated under the laws of Hong Kong,
Hebei Anbang Investment Consultation Co., Ltd., or “Hebei Consulting,” a
wholly-owned subsidiary of Gold Promise which is incorporated under the laws of
the PRC, and Buddha, a limited liability company incorporated under the laws of
the PRC which is effectively and substantially controlled by Hebei Consulting
through a series of captive agreements.
FORM
10 DISCLOSURE
As
disclosed elsewhere in this report, on April 28, 2010, we acquired Gold Promise
in a reverse acquisition transaction. Item 2.01(f) of Form 8-K states that
if the registrant was a shell company like we were immediately before the
reverse acquisition transaction disclosed under Item 2.01, then the registrant
must disclose the information that would be required if the registrant were
filing a general form for registration of securities on Form 10.
Accordingly,
we are providing below the information that would be included in a Form 10 if we
were to file a Form 10. Please note that the information provided below
relates to the combined enterprises after the acquisition of Gold Promise,
except that information relating to periods prior to the date of the reverse
acquisition only relate to Gold Promise and its consolidated subsidiaries unless
otherwise specifically indicated.
DESCRIPTION
OF BUSINESS
Business
Overview
Dachang
Hui Autonomous County Baosheng Steel Products Co., Ltd. (Buddha) was established
in 1999 in Hebei province, Northern China. Buddha is a leading producer
and vendor of high value-added, ultra-thin precision cold rolled steel
products. Buddha’s cold rolled steel is specially engineered and
manufactured using state of the art machinery according to the highest quality
standards, and our premium products are tailor-made to customers’ individual
requirements. Buddha’s steel is further processed by downstream
manufacturers and incorporated into a wide variety of end products including
automobiles, home appliances, packaging, and specialized construction materials
among others. Buddha’s production facilities occupy more than 47 acres and
include 96 annealing furnaces and 17 lines: 13 cold-rolling mills, 1 tin-plate
sheet mill, and 3 leveler stretchers. We employ over 900
employees.
In 2009,
we produced 446,000 MT of steel products, a capacity utilization rate of
95%. As of 2009, we had the capacity to produce 465,000 MT of cold rolled
steel assuming our 2009 product mix. Our capacity tonnage can vary
significantly depending on the types of products produced, and we strive to
maximize profit by producing the largest tonnage of product with the highest
margin available to us. Our products range in thickness from fractions of
millimeters to 7.5mm and can be up to 1450 mm in width. The production
process begins with our major raw material, hot-rolled steel coils, which we
clean, anneal and then stretch in a cold-rolling mill to the desired
specifications.
We sell
products primarily in China, but our distribution network also covers a diverse
export market. Approximately 19% of 2009 sales were eventually further
processed abroad, and our major export markets include Africa and Southeast
Asia.
Our
Corporate History and Background
A.G.
Volney Center, Inc. was originally incorporated under the laws of the State of
Delaware on March 6, 1997 under the name Lottlink Technologies, Inc. From
December 1997 until July 2003, the Company’s charter was suspended for
non-payment of franchise taxes. In July 2003, the company’s charter was
renewed and its certificate of incorporation was amended to change its name to
A.G. Volney Center, Inc. Prior to our reverse acquisition of Gold Promise,
AG Volney was primarily in the business of purchasing and reselling clothing
overruns and excess inventory and was in the development stage and had commenced
only limited business operations, and was looking to find a suitable merger
candidate and/or alternative financing.
On
October 19, 2006, AG Volney filed a Registration Statement on Form 10SB (File
No.: 0-52269) with the Securities and Exchange Commission, or the SEC, to
register our common stock under Section 12(g) of the Exchange Act. The
Registration Statement went effective by operation of law on December 18, 2006,
at which point we became a reporting company under the Exchange
Act.
As a
result of our reverse acquisition of Gold Promise, we are no longer a shell
company and active business operations were revived. We plan to amend our
Certificate of Incorporation to change our name to “Buddha Steel, Inc.” to
reflect the current business of our company.
Acquisition
of Gold Promise Limited
On April
28, 2010, we completed a reverse acquisition transaction through a share
exchange with Gold Promise and its shareholders, or the Shareholders, whereby we
acquired 100% of the issued and outstanding capital stock of Gold Promise in
exchange for 10,000 shares of our Series A Preferred Stock which constituted
98.75% of our issued and outstanding capital stock on a as-converted basis as of
and immediately after the consummation of the reverse acquisition. As a result
of the reverse acquisition, Gold Promise became our wholly-owned subsidiary and
the former shareholders of Gold Promise became our controlling
stockholders. The share exchange transaction with Gold Promise and the
Shareholders was treated as a reverse acquisition, with Gold Promise as the
acquirer and AG Volney as the acquired party. Unless the context suggests
otherwise, when we refer in this report to business and financial information
for periods prior to the consummation of the reverse acquisition, we are
referring to the business and financial information of Gold Promise and its
consolidated subsidiaries.
Immediately
prior to the Share Exchange, the common stock of Gold Promise was owned by the
following persons in the indicated percentages: Crowning Elite Limited (a BVI
company) (66.44%); Meng Li (9.62%); Yonghe Guo (5.01%); Shaochen Hu (5.01%);
William H. Luckman (6.96%); and Joseph J. Meuse (6.96%). Xi Chen, a
Canadian passport holder, owns 100% of the capital stock of Crowning Elite
Limited. Hongzhong Li, our Chief Executive Officer and the majority
shareholder and chairman of Buddha, is also the sole director of Crowning Elite
Limited.
Hongzhong
Li has entered into a call option agreement (the “Call Option Agreement”) with
Xi Chen, a Canadian passport holder and the sole shareholder of Crowning Elite
Limited, our principal shareholder after the reverse acquisition. Under
the Call Option Agreement, Mr. Li has the right to acquire up to 100% or the
shares of Crowning Elite Limited for fixed consideration, with such option
vesting over three years. The Call Option Agreement also provides that Mr.
Chen shall not dispose any of the shares of Crowning Elite Limited without Mr.
Li’s consent.
Hongzhong
Li has also entered into an entrustment agreement (“Entrustment Agreement”) with
Xi Chen, the sole owner of Crowning Elite Limited, under which Mr. Li is
authorized to exercise all shareholders’ and voting rights with respect to
Crowning Elite Limited in accordance with its Memorandum and Articles of
Association and the parameters of BVI law. In addition, pursuant to the
Entrustment Agreement, the Mr. Li has the right to operate and manage, and
designate and appoint all of the directors and senior officers of, Crowning
Elite Limited, and Xi Chen has agreed to waive all the voting and related rights
associated with his shareholdings in Crowning Elite Limited and to procure the
consent of Mr. Li before taking certain actions which would affect Mr. Li’s
interest under the Entrustment Agreement.
As a
result of his control of Crowning Elite Limited, Hongzhong Li, our Chief
Executive Officer, may be considered the beneficial owner of a majority of the
capital stock and voting power of AG Volney, as well as Buddha.
Immediately
following closing of the reverse acquisition of Gold Promise, the shareholders
of Gold Promise transferred 128 of the 10,000 shares of Series A Preferred Stock
issued to them in the Share Exchange to certain persons who provided services to
Gold Promise and its subsidiary and controlled affiliate.
Upon the
closing of the reverse acquisition, David F. Stever, our President, CEO, CFO and
a director, and Samantha M. Ford, our Secretary and a director, each submitted a
resignation letter pursuant to which they resigned from all offices that they
held effective immediately and from their positions as our directors that will
become effective on the tenth day following the mailing by us of an information
statement, or the Information Statement, to our stockholders that complies with
the requirements of Section 14f-1 of the Exchange Act. In addition, our
board of directors on April 28, 2010, increased the size of our board of
directors to three directors and appointed Hongzhong Li, Zhenqi Chen and Xianmin
Meng to fill the vacancies created by such resignations and increase in the size
of the board, which appointments will become effective upon the effectiveness of
the resignations of David F. Stever and Samantha M. Ford on the tenth day
following the mailing by us of the Information Statement to our
stockholders. In addition, our executive officers were replaced by
Buddha’s executive officers upon the closing of the reverse acquisition as
indicated in more detail below.
As a
result of our acquisition of Gold Promise, we now own all of the issued and
outstanding capital stock of Gold Promise, which in turn owns all of the issued
and outstanding capital stock of Hebei Consulting. In addition, we
effectively and substantially control Buddha through a series of captive
agreements with Hebei Consulting. Buddha is principally engaged in the
production of cold-rolled steel products in the PRC.
Gold
Promise was established in Hong Kong on January 8, 2010 to serve as an
intermediate holding company. Hebei Consulting was established in the PRC
on April 2, 2010. Buddha, our operating affiliate, was established in the
PRC on September 9, 1999. On March 29, 2010, the local government of the
PRC issued a certificate of approval regarding the foreign ownership of Hebei
Consulting by Gold Promise, a Hong Kong entity.
On April
2, 2010, prior to the reverse acquisition transaction, Hebei Consulting and
Buddha and its shareholders entered into a series of agreements known as
variable interest agreements (the “VIE Agreements”) pursuant to which Buddha
became Hebei Consulting’s contractually controlled affiliate. The use of
VIE agreements is a common structure used to acquire PRC corporations,
particularly in certain industries in which foreign investment is restricted or
forbidden by the PRC government. The VIE Agreements included:
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(1)
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A
Consulting Services Agreement through which Hebei Consulting has the right
to advise, consult, manage and operate Buddha and collect and own all of
the net profits of Buddha;
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(2)
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an
Operating Agreement through which Hebei Consulting has the right to
recommend director candidates and appoint the senior executives of Buddha,
approve any transactions that may materially affect the assets,
liabilities, rights or operations of Buddha, and guarantee the contractual
performance by Buddha of any agreements with third parties, in exchange
for a pledge by Buddha of its accounts receivable and
assets;
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(3)
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a
Voting Rights Proxy Agreement under which the owners of Buddha have vested
their collective voting control over Buddha to Hebei Consulting and will
only transfer their equity interests in Buddha to Hebei Consulting or its
designee(s);
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(4)
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an
Option Agreement under which the owners of Buddha have granted to Hebei
Consulting the irrevocable right and option to acquire all of their equity
interests in Buddha or, alternatively, all of the assets of Buddha;
and
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(5)
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an
Equity Pledge Agreement under which the owners of Buddha have pledged all
of their rights, titles and interests in Buddha to Hebei Consulting to
guarantee Buddha’s performance of its obligations under the Consulting
Services Agreement.
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The
foregoing description of the terms of the Consulting Services Agreement, the
Operating Agreement, the Voting Rights Proxy Agreement, the Option Agreement and
the Equity Pledge Agreement is qualified in its entirety by reference to the
provisions of the agreements filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5
to this report, respectively, which are incorporated by reference
herein.
See
“Related Party Transactions” for further information on our contractual
arrangements with these parties.
Because
of the common control between Gold Promise, Hebei Consulting and Buddha, for
accounting purposes, the acquisition of these entities has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities. The restructuring has been accounted for using the “as if”
pooling method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated financial
statements.
Our
Corporate Structure
All of
our business operations are conducted through our Hong Kong and Chinese
subsidiaries and controlled affiliate. The chart below presents our
corporate structure:
Our
Industry:
The
following industry information has been obtained from various market research
reports and publicly available sources. We believe this information to be
current and reliable.
The
Chinese Economy
Demand
for our products is driven in line with macroeconomic industrial growth both
globally and in the PRC. As our end products range from automobiles to
appliances, general economic growth underlies our success, especially in
China. PRC macroeconomic growth has been strong and positive in recent
years, and GDP grew at a rate of 8.7% in 2009, reaching US$4.9
trillion. Due to job creation and wage increases from various economic
stimulus packages and increased lending in 2009, The Economist Corporate Network
forecasts growth in the PRC economy will reach 9.3% in 2010.
The
secondary sector of the economy in which we operate has maintained strong
positive growth as well:
The
Steel Market:
China is
the largest steel producing country in the world. According to the World
Steel Association, in 2008, global steel output was 1.3B tons, of which China
accounted for 38%.
The pie
chart below shows shares of global output by production region for
2008.
Growth in
the steel market has recently been driven by PRC demand, and China has been the
largest producing steel country since the mid 1990s. The PRC accounted for
roughly 34% of total global steel demand in 2006, and PRC demand for steel has
grown at a CAGR of 19.18% in recent history. Chinese steel production is
forecast to grow by 7.3% in 2010, reaching new all time highs through 2011, and
maintain positive growth in the future.
Cold
Rolled Steel Market:
Our
products, custom ultra thin cold-rolled steel sheets and coils, are a
vital component in a variety of industrial products, including but not
limited to roofing, appliances, telecommunications equipment, motor
vehicles and motor vehicle parts and accessories. Demand for high
precision steel in PRC end product manufacturing markets is projected to
grow in the foreseeable future, and we believe we are well positioned to
benefit from this growth.
Due to
lack of quality manufacturing facilities and capability, the PRC has been a net
importer of ultra thin cold-rolled steel products. To meet demand,
manufacturers have imported precision steel products from countries with more
developed high end steel capacity. China’s production of cold rolled steel
has responded to market demand by growing robustly as domestic producers have
moved up the value chain. Market research reports estimate that the market
for cold rolled steel has grown at nearly 20% per annum in recent years.
PRC cold rolled production is anticipated to experience sustained strong growth
in the near future.
Our
Competitive Advantages
We
believe that we posses the following competitive advantages that allow us to
maintain our strong market position and will aid our profit growth in the
future:
Excellent
reputation and rich experience as Hebei’s leading manufacturer of precision
cold-rolled narrow strip steel:
We are
the largest manufacturer in Hebei of high precision cold-rolled narrow strip
steel. Hebei is the largest steel producing province in China. We have a
majority of repeat and long term customers and are recognized as a market leader
in top quality, competitive price, reliability and consistent delivery. We
constantly strive to move up the value chain and provide our customers tailor
made products at their specifications and quality they demand. We believe
we will continue to solidify this position and consolidate market
share.
We
have strong historical growth:
From 2007
through 2009, our revenues have grown at an annualized rate of 28% and we have
increased sales of more profitable product lines so that our profit nearly
doubled from 2008 to 2009. We intend to continue this growth by expanding
our processing capacity of only the highest margin products and increasing our
bottom line.
Lower
than industry average cost structure:
The steel
industry in China is dominated by small lower end private manufacturers and
large State Owned Enterprises with large pension and employment
obligations. Our status as a leading private manufacturer of customized,
high-end niche product affords us higher than industry margins and what we
believe to be long term sustainability and growth opportunities.
Capital
intensive industry presents barriers to competitor entry:
Ultra-thin,
high-precision cold-rolled steel products require a significant investment of
capital and technical know-how in order to be profitably exploited.
Potential new competitors would be subject to the requirements of a highly
technical and capital intensive industry in order to be successful.
Diverse
customer and end product base:
Our
products serve a broad range of markets and industries which insulate us from
concentration risk. We serve the automotive, construction, appliance
manufacturing, and telecommunications industries among others. Market
pressures in one segment of our downstream customers may be softened by
sustained demand in the others.
Superior
management of commodity price fluctuations:
Our
principal raw material, hot-rolled steel, accounts for the vast majority of our
COGS. Due to our inventory systems and controls and sales model, we are able to
protect ourselves to some degree from commodity exposure. We believe we
are able to mitigate the results of a volatile commodity market on our profits
through our diligent management and low inventory.
Our
Growth Strategy
Chinese
demand for cold-rolled steel products has increased at a rate of nearly 20%
annually in recent years. We believe demand for high quality cold-rolled
steel products will continue to grow domestically and globally, thus affording
us opportunity to grow and expand our business operations. Our growth
strategy is primarily focused on increasing production capacity of highest
margin products, ultra thin cold rolled strips and sheets.
We intend
to pursue the following strategies to achieve our goal:
1)
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According
to capital availability, expand new production lines that will
increase capacity of ultra-thin cold-rolled
steel.
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2)
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Identify
and acquire high quality producers at favorable valuations to capitalize
on economies of scale, as well as increasing our market
share.
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3)
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Expand
export revenues to emerging markets including but not limited
to Southeast Asia, Africa and Latin
America.
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4)
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Focus
research and development on advancing processing techniques to develop
more sophisticated products that command higher margins, and continue to
improve margins through increased efficiencies in our production
process.
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Our
Products:
Our major
products include cold-rolled sheet, tin-plate sheet, and narrow cold-rolled
steel strip. Products are typically made to meet the custom size
specifications of our clients. Our production facilities have the capacity
to produce a large range of different widths and thicknesses, ranging from 350
mm up to 1450 mm and as thin as 0.15 mm up to 0.6 mm respectively.
Buddha’s
Products
We have
steadily increased margins of our products and production of higher margin
products:
2009
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2008
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2007
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||||||||||||||||||||||
Product Category
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Margin
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% of
Sales
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Margin
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% of
Sales
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Margin
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% of
Sales
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||||||||||||||||||
Black
Strip
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4.4 | % | 13.1 | % | 5.3 | % | 22.2 | % | 4.3 | % | 42.3 | % | ||||||||||||
Welded
Pipe
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3.7 | % | 0.1 | % | 3.8 | % | 0.7 | % | 2.5 | % | 1.7 | % | ||||||||||||
Bright
Strip
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4.2 | % | 11.0 | % | 5.5 | % | 13.8 | % | 4.1 | % | 15.1 | % | ||||||||||||
Cold
Rolled Sheet
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8.1 | % | 15.1 | % | 7.5 | % | 14.4 | % | 5.1 | % | 8.6 | % | ||||||||||||
Cold
Rolled Coil
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8.5 | % | 53.8 | % | 8.5 | % | 43.6 | % | 5.8 | % | 27.6 | % | ||||||||||||
Tin-Plated
Sheet
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8.9 | % | 5.3 | % | 8.6 | % | 4.1 | % | 6.8 | % | 1.8 | % | ||||||||||||
Others
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3.8 | % | 1.5 | % | 3.7 | % | 1.2 | % | 2.8 | % | 2.9 | % | ||||||||||||
Total
|
7.4 | % | 100.0 | % | 7.2 | % | 100.0 | % | 4.7 | % | 100.0 | % |
Welded
pipe production has been phased out, and we are pursuing new techniques to
produce a variety of higher margin alloyed and plated ultra thin
products.
Our end
customers further process the cold rolled sheet to produce a diverse range of
products and product components including automobile parts, farm equipment,
shipping harnesses, air conditioners, refrigerators, washing machines, and other
home appliances. We estimate that the end products manufactured from our
steel are roughly distributed as follows:
Raw
Materials
The
principal raw material used in our products is hot-rolled coil and hot-rolled
steel strips. In 2009, hot rolled coil and hot rolled steel strips
accounted for more than 80% of our production costs. We purchase our
hot-rolled coil and hot-rolled steel strips from a number of sources and are not
dependent on any single supplier.
Supplier
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Raw Material
Purchase (USD)
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|||
Sinosteel
Company
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66,731,453 | |||
Tangshan
Guofeng Steel Company
|
45,019,911 | |||
Sinolight
Materials Company
|
11,187,376 | |||
Hebei
Jinxi Steel Company
|
7,439,541 | |||
Shandong
Haixin Board Industrial Co.
|
3,491,968 | |||
Tangshan
Ruifeng Steel Company
|
2,254,575 |
With
larger suppliers, we often secure yearly contracts to ensure a steady supply of
hot rolled raw materials, with flexible pricing based on movements in the spot
price. Smaller suppliers are generally on an as needed basis with
purchases made at market price for the day.
Sales
Channels
We sell
our products based on customer specifications and demand. Currently we
have more than 400 customers of which more than 50% are repeat buyers.
These customers can be divided into two groups, direct manufacturers and trading
companies. Margins for sales to direct manufacturers are higher than to
distributers. Roughly 40% of our sales in 2009 were through distributers
while the remaining 60% were direct to end user sales. Our top five direct
manufacturer customers account for 9% of our total revenue, while our top five
distributor clients account for 12%.
The
following table details our top 5 direct manufacturing customers:
Top 5 Direct Manufacturing
Customers
|
Sales
|
% of Total
|
||||||
Hongyuan
Caituban Co.
|
$ | 9,620,295 | 3.5 | % | ||||
Tianjin
Soudragon Steel Co.
|
$ | 5,590,835 | 2.0 | % | ||||
Xianghe
Xingang Wuzi Trading Co.
|
$ | 4,583,128 | 1.7 | % | ||||
Tangshan
Jiajia Door Industrial Co.
|
$ | 2,818,739 | 1.0 | % | ||||
Chendu
Xinhete Door Industrial Co.
|
$ | 2,426,937 | 0.9 | % | ||||
$ | 25,039,933 | 9.1 | % |
And our
top five distribution customers by revenue:
Top 5 Distributors
|
Sales
|
% of Total
|
||||||
Jiangsu
Sumeida International Tech. Trade Co.
|
$ | 9,973,299 | 3.6 | % | ||||
Xianghe
Kuntai Steel Processing Co.
|
$ | 8,174,849 | 3.0 | % | ||||
Wenhan
Xinfeng Steel Business Co.
|
$ | 7,172,211 | 2.0 | % | ||||
Wenhan
Xueza Steel Business Co.
|
$ | 5,278,553 | 1.9 | % | ||||
Hangzhou
Relian Import and Export Co.
|
$ | 3,363,474 | 1.2 | % | ||||
$ | 33,962,386 | 11.7 | % |
Though we
have customers in nearly every province in China, local sales in Hebei, Tianjin
and Beijing represent nearly half of our domestic sales volume:
Province
|
Domestic
Sales
2009
%
|
|||
Hebei
|
29.61 | % | ||
Tianjin
|
11.72 | % | ||
Jiangsu
|
10.80 | % | ||
Zhejiang
|
9.98 | % | ||
Beijing
|
7.34 | % | ||
Shandong
|
7.25 | % | ||
Shanghai
|
5.47 | % | ||
Sichuan
|
4.41 | % | ||
Liaoning
|
3.03 | % | ||
Guangdong
|
2.28 | % | ||
Others
|
8.10 | % | ||
Total
|
100.00 | % |
We also
export products to Africa and Southeast Asia, which comprise roughly 19% of our
revenues.
We have a
sales staff of around 23 individuals who are responsible for generating sales,
attending sales fairs and trade shows. Our sales staff is compensated on a
salary plus commission basis. Our customers often seek us out directly as
we are well known in the industry as a top reliable provider of quality cold
rolled products.
Customers
are responsible for all costs associated with product pickup and transport
arrangements. Our products are manufactured on an on-demand basis and we
generally require full-payment for each order prior to production.
Occasionally, we extend more flexible payment terms to a selected group of
our repeat buyers. These terms typically allow the buyer to pay a 5-20%
deposit to start the production of their order, and require payment in full
prior to delivery. These payment terms ensure that we better control our
inventory and manage our raw material costs.
Employees
We
currently employ a staff of 957 employees, the majority of which are factory
workers. We have a sales staff of 23. We believe we are in material
compliance with all applicable labor and safety laws and regulations in the PRC,
including the PRC Labor Contract Law, the PRC Unemployment Insurance Law,
the PRC Provisional Insurance Measures for Maternity of Employees, PRC Interim
Provisions on Registration of Social Insurance, PRC Interim Regulation on the
Collection and Payment of Social Insurance Premiums and other related
regulations, rules and provisions issued by the relevant governmental
authorities for our operations in the PRC. According to the PRC Labor
Contract Law, we are required to enter into labor contracts with our employees
and to pay them no less than the local minimum wage.
Department
|
Employee #
|
|
Cold
Rolled Strip Workshop
|
269
|
|
Cold
Rolled Sheet Workshop
|
244
|
|
Tin
Plating Workshop
|
34
|
|
Power
Department
|
34
|
|
Mechanical
Department
|
115
|
|
Warehouse
|
127
|
|
Sales
Department
|
23
|
|
Finance
Department
|
9
|
|
Administrative, Support and
Logistics
|
102
|
|
Total
|
|
957
|
Intellectual
Property Rights
We
protect our intellectual property primarily by maintaining strict control over
the use of production processes. All our employees, including key
employees and engineers, have signed our standard form of labor contracts,
pursuant to which they are obligated to hold in confidence any of our
trade secrets, know-how or other confidential information and not to
compete with us. In addition, for each project, only the personnel
associated with the project have access to the related intellectual
property. Access to proprietary data is limited to authorized personnel to
prevent unintended disclosure or otherwise using our intellectual property
without proper authorization. We will continue to take steps to protect
our intellectual property rights.
We have
registered the brand name, logo and trademark Baosheng in the PRC for steel
products:
The
trademarks are registered through 2018.
Our
Facilities and Property
Our
facilities are in located in Dachang Hui Autonomous County in Northern
Hebei. We are approximately 50 miles from Beijing. In total, we have
leasehold rights to land comprising an area of more than 46 acres. Our
lease is with the local authorities and is valid through 2025.
Our
production facilities occupy 24.7 acres, and we have an office building and
cafeteria on a 1.5 acre plot. Our production facilities include 13
cold-rolling mills, 1 tin-plate sheet mill, and 3 leveler
stretchers.
Buddha
Facilities:
Competition
Competition
within the steel industry in the PRC is intense. There is an
estimated capacity of 40MMT of high precision cold rolled steel capacity in
China. Our competitors range from small private enterprises to extremely
large state owned enterprises. Our operating affiliate Buddha is
located in northern Hebei. Hebei is the largest producer of steel by
province in the PRC, therefore we are located nearby numerous
facilities. We are one of the largest non state owned ultra-thin
high-precision cold-rolled steel manufacturers by capacity in
China.
The table
below details our 2 major competitors in our market:
Company
|
Est.
Capacity
|
|
Hebei
Dachang Jinming Accurate Cold-Rolling
Steel
Plate Company
|
150,000
MT
|
|
Langfang
Jinhua Industry Co. Ltd
|
|
150,000
MT
|
Our
production capacity is higher than these two competitors and we believe we are
able to outperform them in both price and quality. Private steel product
manufacturers in China generally focus on low-end products. Many of our
competitors are significantly smaller than we are and use outdated equipment and
production techniques. Due to our high quality equipment, economies of
scale and management experience, we produce steel at higher efficiencies and
lower prices than these competitors. The larger state owned
enterprises with whom we compete often have oversized, unionized labor forces
and associated pension and healthcare liabilities and cannot match our
production efficiency. We distinguish ourselves in the market based on our
extremely fast turnaround, high quality and low prices.
Regulation
Because
our principal operating affiliate, Buddha, is located in the PRC, our business
is regulated by the national and local laws of the PRC. We believe our conduct
of business complies with existing PRC laws, rules and regulations.
The PRC
government has in the past provided a subsidy by means of a value added tax, or
VAT, rebate to exporters of steel products. This rebate was reduced in April
2007 in response to international pressure on China to curb its exports. A
5% tax rebate currently applies to our high value-add cold-rolled steel
products.
General
Regulation of Businesses
We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Production Safety Law, the PRC Regulation for Insurance for Labor Injury, the
PRC Unemployment Insurance Law, the PRC Provisional Insurance Measures for
Maternity of Employees, PRC Interim Provisions on Registration of Social
Insurance, PRC Interim Regulation on the Collection and Payment of Social
Insurance Premiums and other related regulations, rules and provisions
issued by the relevant governmental authorities from time to time, for our
operations in the PRC.
According
to the PRC Labor Contract Law, we are required to enter into labor contracts
with our employees. We are required to pay no less than local minimum wages to
our employees. We are also required to provide employees with labor safety and
sanitation conditions meeting PRC government laws and regulations and carry out
regular health examinations of our employees engaged in hazardous
occupations.
Foreign
Currency Exchange
The
principal regulation governing foreign currency exchange in China is the Foreign
Currency Administration Rules (1996), as amended (2008). Under these Rules, RMB
is freely convertible for current account items, such as trade and
service-related foreign exchange transactions, but not for capital account
items, such as direct investment, loan or investment in securities outside China
unless the prior approval of, and/or registration with, the State Administration
of Foreign Exchange of the People’s Republic of China, or SAFE, or its local
counterparts (as the case may be) is obtained.
Pursuant
to the Foreign Currency Administration Rules, foreign invested enterprises, or
FIEs, in China may purchase foreign currency without the approval of SAFE for
trade and service-related foreign exchange transactions by providing commercial
documents evidencing these transactions. They may also retain foreign exchange
(subject to a cap approved by SAFE) to satisfy foreign exchange liabilities or
to pay dividends. In addition, if a foreign company acquires a company in China,
the acquired company will also become an FIE. However, the relevant PRC
government authorities may limit or eliminate the ability of FIEs to purchase
and retain foreign currencies in the future. In addition, foreign exchange
transactions for direct investment, loan and investment in securities outside
China are still subject to limitations and require approvals from, and/or
registration with, SAFE.
Regulation
of Income Taxes
On April
16, 2007, the National People’s Congress of China passed a new Enterprise Income
Tax Law, or the New EIT Law, and its implementing rules, both of which became
effective on January 1, 2008. Before the implementation of the New EIT Law, FIEs
established in the PRC, unless granted preferential tax treatments by the PRC
government, were generally subject to an earned income tax, or EIT, rate of
33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The
New EIT Law and its implementing rules impose a unified EIT rate of 25.0% on all
domestic-invested enterprises and FIEs, unless they qualify under certain
limited exceptions.
In
addition to the changes to the current tax structure, under the New EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25% on its global income. The implementing rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of 25%. For
detailed discussion of PRC tax issues related to resident enterprise status, see
“Risk Factors – Risks Related to Our Business – Under the New EIT Law, we may be
classified as a ‘resident enterprise’ of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC
stockholders.”
Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will timely adjust our effective income tax rate when
necessary.
For the
years ended December 31, 2009 and 2008, as approved by the local tax authority
of Dachang County, the Company's income tax was assessed annually at a
pre-determined fixed rate as an incentive to stimulate local economy and
encourage entrepreneurship. Although the possibility exists for reinterpretation
of the application of the tax regulations by higher tax authorities in the PRC,
potentially overturning the decision made by the local tax authority, the
Company has not experienced any reevaluation of the income taxes for prior
years. Management believes that the possibility of any reevaluation of income
taxes is remote based on the fact that the Company has obtained the written tax
clearance from the local tax authority.
Dividend
Distribution
Under
applicable PRC regulations, FIEs in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a FIE in China is required to set aside
at least 10.0% of its after-tax profit based on PRC accounting standards each
year to its general reserves until the accumulative amount of such reserves
reach 50.0% of its registered capital. These reserves are not distributable as
cash dividends. The board of directors of a FIE has the discretion to allocate a
portion of its after-tax profits to staff welfare and bonus funds, which may not
be distributed to equity owners except in the event of liquidation.
The New
EIT Law and its implementing rules generally provide that a 10% withholding tax
applies to China-sourced income derived by non-resident enterprises for PRC
enterprise income tax purposes unless the jurisdiction of incorporation of such
enterprises’ shareholder has a tax treaty with China that provides for a
different withholding arrangement. Hebei Consulting is considered a FIE and is
directly held by our subsidiary Gold Promise in Hong Kong. According to a
2006 tax treaty between the Mainland and Hong Kong, dividends payable by a FIE
in China to the company in Hong Kong who directly holds at least 25% of the
equity interests in the FIE will be subject to a no more than 5% withholding
tax. We expect that such 5% withholding tax will apply to dividends paid
to Gold Promise by Hebei Consulting, but this treatment will depend on our
status as a non-resident enterprise.
Environmental
Matters
Our
manufacturing facilities are subject to various pollution control regulations
with respect to noise, water and air pollution and the disposal of waste and
hazardous materials. We are also subject to periodic inspections by local
environmental protection authorities. Our operating affiliate has received
certifications from the relevant PRC government agencies in charge of
environmental protection indicating that its business operations are in material
compliance with the relevant PRC environmental laws and regulations. We are not
currently subject to any pending actions alleging any violations of applicable
PRC environmental laws.
Insurance
Insurance
companies in China offer limited business insurance products. While business
interruption insurance is available to a limited extent in China, we have
determined that the risks of interruption, cost of such insurance and the
difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. As a result, we could
face liability from the interruption of our business as summarized under “Risk
Factors – Risks Related to Our Business – We do not carry business interruption
insurance so we could incur unrecoverable losses if our business is
interrupted.”
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below, together with all of the other
information included in this report, before making an investment decision. If
any of the following risks actually occurs, our business, financial condition or
results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment. You
should read the section entitled “Special Notes Regarding Forward-Looking
Statements” above for a discussion of what types of statements are
forward-looking statements, as well as the significance of such statements in
the context of this report.
RISKS
RELATED TO OUR BUSINESS
We
have a short operating history.
We were
founded in 1999. We may not succeed in implementing our business plan
successfully because of competition from domestic and foreign market entrants,
failure of the market to accept our products, or other reasons. Therefore, you
should not place undue reliance on our past performance as they may not be
indicative of our future results.
We
face risks related to general domestic and global economic conditions and to the
current credit crisis.
Our
current operating cash flows provide us with stable funding capacity. However,
the current uncertainty arising out of domestic and global economic conditions,
including the recent disruption in credit markets, poses a risk to the PRC
economy, and may impact our ability to manage normal relationships with our
customers, suppliers and creditors. If the current situation deteriorates
significantly, our business could be materially negatively impacted, as demand
for our products and services may decrease from a slow-down in the general
economy, or supplier or customer disruptions may result from tighter credit
markets.
Our
business is subject to the health of the PRC economy and our growth may be
inhibited by the inability of potential customers to fund purchases of our
products and services.
Our
products are dependent on the continued growth of infrastructure and
construction projects in the PRC. There is no guarantee that the PRC will
continue to invest in infrastructure and construction.
In
order to grow at the pace expected by management, we will require additional
capital to support our long-term growth strategies. If we are unable to obtain
additional capital in future years, we may be unable to proceed with our plans
and we may be forced to curtail our operations.
We will
require additional working capital to support our long-term growth strategies,
which includes identifying suitable points of market entry for expansion growing
the number of points of sale for our products, so as to enhance our product
offerings and benefit from economies of scale. Our working capital requirements
and the cash flow provided by future operating activities, if any, may vary
greatly from quarter to quarter, depending on the volume of business during the
period. We may not be able to obtain adequate levels of additional financing,
whether through equity financing, debt financing or other sources. Additional
financings could result in significant dilution to our earnings per share or the
issuance of securities with rights superior to our current outstanding
securities. In addition, we may grant registration rights to investors
purchasing our equity or debt securities in the future. If we are unable to
raise additional financing, we may be unable to implement our long-term growth
strategies, develop or enhance our products and services, take advantage of
future opportunities or respond to competitive pressures on a timely
basis.
If
we are unable to attract and retain senior management and qualified technical
and sales personnel, our operations, financial condition and prospects will be
materially adversely affected.
Our
future success depends in part on the contributions of our management team and
key technical and sales personnel and our ability to attract and retain
qualified new personnel. In particular, our success depends on the
continuing employment of our Chief Executive Officer, Mr. Hongzhong Li, our
Chief Technology Officer, Mr. Hongzhi Fang, and our Chief Financial Officer, Mr.
Zhenqi Chen. There is significant competition in our industry for
qualified managerial, technical and sales personnel and we cannot assure you
that we will be able to retain our key senior managerial, technical and sales
personnel or that we will be able to attract, integrate and retain other such
personnel that we may require in the future. If we are unable to attract and
retain key personnel in the future, our business, operations, financial
condition, results of operations and prospects could be materially adversely
affected.
We
do not carry business interruption or other insurance, so we have to bear losses
ourselves.
We are
subject to risk inherent to our business, including equipment failure, theft,
natural disasters, industrial accidents, labor disturbances, business
interruptions, property damage, product liability, personal injury and death. We
do not carry any business interruption insurance or third-party liability
insurance or other insurance to cover risks associated with our business. As a
result, if we suffer losses, damages or liabilities, including those caused by
natural disasters or other events beyond our control and we are unable to make a
claim again a third party, we will be required to bear all such losses from our
own funds, which could have a material adverse effect on our business, financial
condition and results of operations.
Our
quarterly operating results are likely to fluctuate, which may affect our stock
price.
Our
quarterly revenues, expenses, operating results and gross profit margins vary
from quarter to quarter. As a result, our operating results may fall below the
expectations of securities analysts and investors in some quarters, which could
result in a decrease in the market price of our common stock. The reasons our
quarterly results may fluctuate include:
|
·
|
variations
in the price of hot- and cold-rolled
steel;
|
|
·
|
changes
in the general competitive and economic conditions;
and
|
|
·
|
delays
in, or uneven timing in the delivery of, customer
orders.
|
Period to
period comparisons of our results should not be relied on as indications of
future performance.
Our
limited ability to protect our intellectual property, and the possibility that
our technology could inadvertently infringe technology owned by others, may
adversely affect our ability to compete.
We rely
on a combination of trade secret laws and confidentiality procedures to protect
the technological know-how that comprise much of our intellectual property. We
protect our technological know-how pursuant to non-disclosure and
non-competition provisions contained in our employment agreements, and
agreements with them to keep confidential all information relating to our
customers, methods, business and trade secrets during and after their employment
with us. Our employees are also required to acknowledge and recognize that all
inventions, trade secrets, works of authorship, developments and other processes
made by them during their employment are our property.
A
successful challenge to the ownership of our intellectual property could
materially damage our business prospects. Our competitors may assert that our
technologies or products infringe on their patents or proprietary rights. We may
be required to obtain from others licenses that may not be available on
commercially reasonable terms, if at all. Problems with intellectual property
rights could increase the cost of our products or delay or preclude our new
product development and commercialization. If infringement claims against
us are deemed valid, we may not be able to obtain appropriate licenses on
acceptable terms or at all. Litigation could be costly and time-consuming
but may be necessary to defend against infringement claims.
RISKS
RELATING TO THE VIE AGREEMENTS
The
PRC government may determine that the VIE Agreements are not in compliance with
applicable PRC laws, rules and regulations
Hebei
Consulting manages and operates our steel production business through Buddha
pursuant to the rights its holds under the VIE Agreements. Almost all
economic benefits and risks arising from Buddha’s operations are transferred to
Hebei Consulting under these agreements. Details of the VIE Agreements are
set out in “DESCRIPTION OF BUSINESS - Acquisition of Gold Promise Limited” above.
There are
risks involved with the operation of our business in reliance on the VIE
Agreements, including the risk that the VIE Agreements may be determined by PRC
regulators or courts to be unenforceable. Our PRC counsel has provided a
legal opinion that the VIE Agreements are binding and enforceable under PRC law,
but has further advised that if the VIE Agreements were for any reason
determined to be in breach of any existing or future PRC laws or regulations,
the relevant regulatory authorities would have broad discretion in dealing with
such breach, including:
·
|
imposing
economic penalties;
|
·
|
discontinuing
or restricting the operations of Buddha or Hebei
Consulting;
|
|
·
|
imposing
conditions or requirements in respect of the VIE Agreements with which
Buddha or Hebei Consulting may not be able to
comply;
|
|
·
|
requiring
our company to restructure the relevant ownership structure or
operations;
|
|
·
|
taking
other regulatory or enforcement actions that could adversely affect our
company’s business; and
|
|
·
|
revoking
the business licenses and/or the licenses or certificates of Hebei
Consulting, and/or voiding the VIE
Agreements.
|
Any of
these actions could adversely affect our ability to manage, operate and gain the
financial benefits of Buddha, which would have a material adverse impact on our
business, financial condition and results of operations.
Our
ability to manage and operate Buddha under the VIE Agreements may not be as
effective as direct ownership
We
conduct our steel production business in the PRC and generate virtually all of
our revenues through the VIE Agreements. Our plans for future growth are based
substantially on growing the operations of Buddha. However, the VIE
Agreements may not be as effective in providing us with control over Buddha as
direct ownership. Under the current VIE arrangements, as a legal matter,
if Buddha fails to perform its obligations under these contractual arrangements,
we may have to (i) incur substantial costs and resources to enforce such
arrangements, and (ii) rely on legal remedies under PRC law, which we cannot be
sure would be effective. Therefore, if we are unable to effectively control
Buddha, it may have an adverse effect on our ability to achieve our business
objectives and grow our revenues.
As
the VIE Agreements are governed by PRC law, we would be required to rely on PRC
law to enforce our rights and remedies under them; PRC law may not provide us
with the same rights and remedies as are available in contractual disputes
governed by the law of other jurisdictions.
The VIE
Agreements are governed by the PRC law and provide for the resolution of
disputes through arbitral proceedings pursuant to PRC law. If Buddha or its
shareholders fail to perform the obligations under the VIE Agreements, we would
be required to resort to legal remedies available under PRC law, including
seeking specific performance or injunctive relief, or claiming damages. We
cannot be sure that such remedies would provide us with effective means of
causing Buddha to meet its obligations, or recovering any losses or damages as a
result of non-performance. Further, the legal environment in China is not as
developed as in other jurisdictions. Uncertainties in the application of various
laws, rules, regulations or policies in PRC legal system could limit our
liability to enforce the VIE Agreements and protect our
interests.
The
payment arrangement under the VIE Agreements may be challenged by the PRC tax
authorities
We
generate our revenues through the payments we receive pursuant to the VIE
Agreements. We could face adverse tax consequences if the PRC tax authorities
determine that the VIE Agreements were not entered into based on arm’s length
negotiations. For example, PRC tax authorities may adjust our income and
expenses for PRC tax purposes which could result in our being subject to higher
tax liability, or cause other adverse financial consequences.
Our
Shareholders have potential conflicts of interest with our company which may
adversely affect our business
Hongzhong
Li is our chief executive officer, and is also the largest shareholder of
Buddha. There could be conflicts that arise from time to time between our
interests and the interests of Mr. Li. There could also be conflicts that arise
between us and Buddha that would require our shareholders and Buddha’s
shareholders to vote on corporate actions necessary to resolve the conflict.
There can be no assurance in any such circumstances that Mr. Li will vote his
shares in our best interest or otherwise act in the best interests of our
company. If Mr. Li fails to act in our best interests, our operating
performance and future growth could be adversely affected.
We
rely on the approval certificates and business license held by Hebei Consulting
and any deterioration of the relationship between Hebei Consulting and Buddha
could materially and adversely affect our business operations
We
operate our steel production business in China on the basis of the approval
certificates, business license and other requisite licenses held by Hebei
Consulting and Buddha. There is no assurance that Hebei
Consulting and Buddha will be able to renew their licenses or certificates
when their terms expire with substantially similar terms as the ones they
currently hold.
Further,
our relationship with Buddha is governed by the VIE Agreements that are intended
to provide us with effective control
over the business operations of Buddha. However, the VIE Agreements may
not be effective in providing control over the application for and maintenance
of the licenses required for our business operations. Buddha could violate the
VIE Agreements, go bankrupt, suffer from difficulties in its business or
otherwise become unable to perform its obligations under the VIE Agreements and,
as a result, our operations, reputations and business could be severely
harmed.
If
Hebei Consulting exercises the purchase option it holds over Buddha’s share
capital pursuant to the VIE Agreements, the payment of the purchase price could
materially and adversely affect our financial position
Under the
VIE Agreements, Buddha’s shareholders have granted Hebei Consulting
an option for the maximum period of time permitted by law to purchase all
of the equity interest in Buddha at a price equal to the capital paid
in by the transferors, adjusted pro rata for purchase of less than all of
the equity interest, unless applicable PRC laws and regulations require an
appraisal of the Equity Interest or stipulate other restrictions regarding the
purchase price of the equity interest. As Buddha is already our
contractually controlled affiliate, Hebei Consulting’s exercising of the option
would not bring immediate benefits to our company, and payment of the purchase
prices could adversely affect our financial position.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Changes
in China's political or economic situation could harm us and our operating
results.
Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some of the things that
could have this effect are:
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·
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Level
of government involvement in the
economy;
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Control
of foreign exchange;
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Methods
of allocating resources;
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Balance
of payments position;
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International
trade restrictions; and
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International
conflict.
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The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways.
For example, state-owned enterprises still constitute a large portion of the
Chinese economy and weak corporate governance and a lack of flexible currency
exchange policy still prevail in China. As a result of these differences, we may
not develop in the same way or at the same rate as might be expected if the
Chinese economy was similar to those of the OECD member countries.
Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
We
conduct substantially all of our business through our operating subsidiary and
affiliate in the PRC. Our principal operating subsidiary and affiliate,
Hebei Consulting and Buddha, are subject to laws and regulations applicable to
foreign investments in China and, in particular, laws applicable to
foreign-invested enterprises. The PRC legal system is based on written statutes,
and prior court decisions may be cited for reference but have limited
precedential value. Since 1979, a series of new PRC laws and regulations have
significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to evolve
rapidly, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involves
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In addition, all of
our executive officers and all of our directors are residents of China and not
of the United States, and substantially all the assets of these persons are
located outside the United States. As a result, it could be difficult for
investors to effect service of process in the United States or to enforce a
judgment obtained in the United States against our Chinese operations,
subsidiary and affiliate.
You
may have difficulty enforcing judgments against us.
We are a
Delaware holding company, but Gold Promise is a Hong Kong company, and our
principal operating affiliate and subsidiary, Buddha and Hebei Consulting, are
located in the PRC. Most of our assets are located outside the United
States and most 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 is 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
predicated 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
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. The recognition and
enforcement of foreign judgments are provided for under the PRC Civil Procedures
Law. Courts in China may recognize and enforce foreign judgments in accordance
with the requirements of the PRC Civil Procedures Law based on treaties between
China and the country where the judgment is made or on reciprocity between
jurisdictions. China 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.
The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.
The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Future
inflation in China may inhibit our ability to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%. These factors have led
to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for
our products and our company.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues will be settled in RMB and U.S. dollars, and any future
restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell
or remit foreign currencies after providing valid commercial documents, at those
banks in China authorized to conduct foreign exchange business. In addition,
conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in China, and companies are required
to open and maintain separate foreign exchange accounts for capital account
items. We cannot be certain that the Chinese regulatory authorities will not
impose more stringent restrictions on the convertibility of the
RMB.
Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.
The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Appreciation or depreciation in the value
of the RMB relative to the U.S. dollar would affect our financial results
reported in U.S. dollar terms without giving effect to any underlying change in
our business or results of operations. Fluctuations in the exchange rate will
also affect the relative value of any dividend we issue that will be exchanged
into U.S. dollars as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.
Since
July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s
Bank of China regularly intervenes in the foreign exchange market to prevent
significant short-term fluctuations in the exchange rate, the RMB may appreciate
or depreciate significantly in value against the U.S. dollar in the medium to
long term. Moreover, it is possible that in the future PRC authorities may lift
restrictions on fluctuations in the RMB exchange rate and lessen intervention in
the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
Restrictions
under PRC law on our PRC subsidiary’s ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.
Substantially
all of our revenues are earned by Hebei Consulting, our PRC subsidiary.
PRC regulations restrict the ability of our PRC subsidiary to make dividends and
other payments to its offshore parent company. PRC legal restrictions
permit payments of dividend by our PRC subsidiary only out of its accumulated
after-tax profits, if any, determined in accordance with PRC accounting
standards and regulations. Our PRC subsidiary is also required under PRC laws
and regulations to allocate at least 10% of our annual after-tax profits
determined in accordance with PRC GAAP to a statutory general reserve fund until
the amounts in said fund reaches 50% of our registered capital.
Allocations to these statutory reserve funds can only be used for specific
purposes and are not transferable to us in the form of loans, advances or cash
dividends. 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.
Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident shareholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiary or affiliate, limit our PRC subsidiary’s and
affiliate’s ability to distribute profits to us or otherwise materially
adversely affect us.
In
October 2005, SAFE, issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, 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 June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire “control” over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC resident’s funds used to establish or acquire the offshore entity;
covering the use of existing offshore entities for offshore financings; (3)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (4) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under Circular
75 are required in connection with any increase or decrease of capital, transfer
of shares, mergers and acquisitions, equity investment or creation of any
security interest in any assets located in China to guarantee offshore
obligations, and Notice 106 makes the offshore SPV jointly responsible for these
filings. In the case of 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 Notice 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 Notice 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.
Although
our majority shareholder, Crowning Elite Limited, is owned by a Canadian
passport holder and therefore Circular 75 & Notice 106 are not applicable to
it, we have advised our shareholders who are PRC residents, as defined in
Circular 75, to register with the relevant branch of SAFE, as currently
required, in connection with their equity interests in us and our acquisitions
of equity interests in our PRC subsidiary and affiliate. However, we cannot
provide any assurances that their existing registrations have fully complied
with, and they have made all necessary amendments to their registration to fully
comply 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. For example, our
present and prospective PRC subsidiary’s and affiliate’s ability to conduct
foreign exchange activities, such as the remittance of dividends and foreign
currency-denominated borrowings, may be subject to compliance with Circular 75
by our PRC resident beneficial holders. In addition, such PRC residents may not
always be able to complete the necessary registration procedures required by
Circular 75. We also have little control over either our present or prospective
direct or indirect shareholders or the outcome of such registration procedures.
A failure by our PRC resident beneficial holders or future PRC resident
shareholders to comply with Circular 75, if SAFE requires it, could subject
these PRC resident beneficial holders to fines or legal sanctions, restrict our
overseas or cross-border investment activities, limit our subsidiary’s and
affiliate’s ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and
prospects.
Our
business and financial performance may be materially adversely affected if the
PRC regulatory authorities determine that our acquisition of Buddha constitutes
a Round-trip Investment without MOFCOM approval.
On August
8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and
Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A
Rule, which became effective on September 8, 2006. According to the 2006 M&A
Rule, when a PRC business that is owned by PRC individual(s) is sold to a
non-PRC entity that is established or controlled, directly or indirectly, by
those same PRC individual(s) it must be approved by the Ministry of Commerce, or
MOFCOM, and any indirect arrangement or series of arrangements which achieves
the same end result without the approval of MOFCOM is a violation of PRC
law.
On April
15, 2010, Mr. Hongzhong Li, our Chief Executive Officer, who is a PRC citizen,
entered into a call option agreement with Mr. Xi Chen, a Canadian passport
holder and the sole shareholder of Crowning Elite Limited, our principal
shareholder after the reverse acquisition. Under the call option
agreement, Mr. Li has an option to acquire up to 100% of the shares of Crowning
Elite Limited for fixed consideration, which option vests over three
years. The option agreement also provides that Mr. Chen shall not dispose
any of the shares of Crowning Elite Limited without Mr. Li’s
consent.
The PRC
regulatory authorities may take the view that the reverse acquisition
transaction and the Share Exchange Agreement are part of an overall series of
arrangements which constitute a Round-trip Investment, because at the end of
these transactions, Mr. Li, though Crowning Elite Limited, after the exercise of
the Call Option Agreement, will become majority owner and effective controlling
party of a foreign entity that acquired ownership of our Chinese
subsidiary. The PRC regulatory authorities may also take the view that the
registration of the acquisition of Hebei Consulting with the relevant AIC in
Beijing and the filings with the SAFE may not be evidence that the acquisition
has been properly approved because the relevant parties did not fully disclose
to the AIC, SAFE or MOFCOM the overall restructuring arrangements, the existence
of the Share Exchange Agreement and its link with the acquisition. If the
PRC regulatory authorities take the view that the acquisition constitutes a
Round-trip Investment under the 2006 M&A Rules, we cannot assure you we may
be able to obtain the approval required from MOFCOM.
If the
PRC regulatory authorities take the view that the acquisition constitutes a
Round-trip Investment without MOFCOM approval, they could invalidate our
acquisition and ownership of our Chinese subsidiary. Additionally, the PRC
regulatory authorities may take the view that the acquisition constitutes a
transaction which requires the prior approval of the China Securities Regulatory
Commission, or CSRC, before MOFCOM approval is obtained. We believe that if this
takes place, we may be able to find a way to re-establish control of our Chinese
subsidiary’s business operations through a series of contractual arrangements
rather than an outright purchase of our Chinese subsidiary. But we cannot
assure you that such contractual arrangements will be protected by PRC law or
that the registrant can receive as complete or effective economic benefit and
overall control of our Chinese subsidiary’s business than if the Company had
direct ownership of our Chinese subsidiary. In addition, we cannot assure
you that such contractual arrangements can be successfully effected under PRC
law. If we cannot obtain MOFCOM or CSRC approval if required by the PRC
regulatory authorities to do so, and if we cannot put in place or enforce
relevant contractual arrangements as an alternative and equivalent means of
control of our Chinese subsidiary, our business and financial performance will
be materially adversely affected.
Under
the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC shareholders.
Under the
New EIT Law effective on January 1, 2008, an enterprise established outside
China with “de facto management bodies” within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese
enterprise for enterprise income tax purposes. The implementing rules of the New
EIT Law define de facto management as “substantial and overall management and
control over the production and operations, personnel, accounting, and
properties” of the enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a “non-domestically incorporated resident
enterprise” if (i) its senior management in charge of daily operations reside or
perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets
and properties, accounting books, corporate chops, board and shareholder minutes
are kept in China; and (iv) at least half of its directors with voting rights or
senior management often resident in China. A resident enterprise would be
subject to an enterprise income tax rate of 25% on its worldwide income and must
pay a withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural person. Nor are
detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
We may be
deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax
authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow.
First, we may be subject to the enterprise income tax at a rate of 25% on our
worldwide taxable income as well as PRC enterprise income tax reporting
obligations. In our case, this would mean that income such as interest on
financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the New EIT Law
and its implementing rules dividends paid to us from our PRC subsidiary would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax purposes. Finally,
it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC shareholders and
with respect to gains derived by our non-PRC shareholders from transferring our
shares. We are actively monitoring the possibility of “resident enterprise”
treatment for the 2010 tax year.
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and
Chinese anti-corruption laws, and any determination that we violated these laws
could have a material adverse effect on our business.
We are
subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by
the statute, for the purpose of obtaining or retaining business. We have
operations, agreements with third parties and we make the majority of our sales
in China. PRC also strictly prohibits bribery of government officials. Our
activities in China create the risk of unauthorized payments or offers of
payments by the employees, consultants, sales agents or distributors of our
Company, even though they may not always be subject to our control. It is our
policy to implement safeguards to discourage these practices by our employees.
However, our existing safeguards and any future improvements may prove to be
less than effective, and the employees, consultants, sales agents or
distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA or Chinese anti-corruption laws may result
in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, operating results and
financial condition. In addition, the U.S. government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in
which we invest or that we acquire.
Because
our business is located in the PRC, we may have difficulty establishing adequate
management, legal and financial controls, which we are required to do in order
to comply with U.S. securities laws.
PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. Most of our middle and top management staff are not educated and
trained in the Western system, and we may have difficulty hiring new employees
in the PRC with such training. As a result of these factors, we may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet Western
standards. Therefore, we may, in turn, experience difficulties in implementing
and maintaining adequate internal controls as required under Section 404 of the
Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or
material weaknesses in our internal controls, which could impact the reliability
of our financial statements and prevent us from complying with Commission rules
and regulations and the requirements of the Sarbanes-Oxley Act of 2002.
Any such deficiencies, weaknesses or lack of compliance could have a
materially adverse effect on our business.
RISKS
RELATED TO THE MARKET FOR OUR STOCK GENERALLY
Our
common stock is quoted on the OTC Bulletin Board, which may have an unfavorable
impact on our stock price and liquidity.
Our
common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board
is a significantly more limited market than established trading markets such as
the New York Stock Exchange or NASDAQ. The quotation of our shares on the
OTC Bulletin Board may result in a less liquid market available for existing and
potential shareholders to trade shares of our common stock, could depress the
trading price of our common stock and could have a long-term adverse impact on
our ability to raise capital in the future. We plan to list our common stock as
soon as practicable. However, we cannot assure you that we will be able to
meet the initial listing standards of any stock exchange, or that we will be
able to maintain any such listing.
We
may be subject to penny stock regulations and restrictions and you may have
difficulty selling shares of our common stock.
The SEC
has adopted regulations which generally define so-called “penny stocks” to be an
equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exemptions. Our common
stock is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or
the Penny Stock Rule. This rule imposes additional sales practice requirements
on broker-dealers that sell such securities to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by Rule 15g-9, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale. As a
result, this rule may affect the ability of broker-dealers to sell our
securities and may affect the ability of purchasers to sell any of our
securities in the secondary market, thus possibly making it more difficult for
us to raise additional capital.
For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in penny stock, of a disclosure schedule required by
the SEC relating to the penny stock market. Disclosure is also required to be
made about sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stock.
There can
be no assurance that our common stock will qualify for exemption from the Penny
Stock Rule. In any event, even if our common stock were exempt from the Penny
Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the SEC the authority to restrict any person from participating in a
distribution of penny stock, if the SEC finds that such a restriction would be
in the public interest.
Provisions
in our Certificate of Incorporation and Bylaws or Delaware law might discourage,
delay or prevent a change of control of us or changes in our management and,
therefore depress the trading price of the common stock.
Our
Certificate of Incorporation authorizes our board of directors to issue up to
10,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the board of directors without further action by stockholders. These terms may
include preferences as to dividends and liquidation, voting rights, conversion
rights, redemption rights and sinking fund provisions. The issuance of any
preferred stock could diminish the rights of holders of our common stock, and
therefore could reduce the value of such common stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
our ability to merge with, or sell assets to, a third party. The ability of our
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent our stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
In
addition, Delaware corporate law and our Certificate of Incorporation and Bylaws
also contain other provisions that could discourage, delay or prevent a change
in control of our Company or changes in its management that our stockholders may
deem advantageous. These provisions:
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deny
holders of our common stock cumulative voting rights in the election of
directors, meaning that stockholders owning a majority of our outstanding
shares of common stock will be able to elect all of our
directors;
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require
any stockholder wishing to properly bring a matter before a meeting of
stockholders to comply with specified procedural and advance notice
requirements; and
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allow
any vacancy on the board of directors, however the vacancy occurs, to be
filled by the directors.
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We
do not intend to pay dividends for the foreseeable future.
For the
foreseeable future, we intend to retain any earnings to finance the development
and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Accordingly, investors must be prepared to rely
on sales of their common stock after price appreciation to earn an investment
return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will
be made at the discretion of our board of directors and will depend on our
results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.
Our
controlling stockholder holds a significant percentage of our outstanding voting
securities, which could hinder our ability to engage in significant corporate
transactions without his approval.
Mr.
Hongzhong Li, as the sole director of Crowning Elite Limited and the father of
Meng Li, is the beneficial owner of approximately 76.1% of our outstanding
voting securities. As a result, he possesses significant influence, giving him
the ability, among other things, to elect a majority of our board of directors
and to authorize or prevent proposed significant corporate transactions. His
ownership and control may also have the effect of delaying or preventing a
future change in control, impeding a merger, consolidation, takeover or other
business combination or discourage a potential acquirer from making a tender
offer.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Dachang
Hui Autonomous County Baosheng Steel Products Co., Ltd. (Buddha) was established
in 1999 in Hebei province, Northern China. Buddha is a leading producer
and vendor of high value-added, ultra-thin precision cold rolled steel
products. Buddha’s cold rolled steel is specially engineered and
manufactured using state of the art machinery according to the highest quality
standards, and our premium products are tailor-made to customers’ individual
requirements. Buddha’s steel is further processed by downstream
manufacturers and incorporated into a wide variety of end products including
automobiles, home appliances, packaging, and specialized construction materials
among others. Buddha’s production facilities occupy more than 47 acres and
include 96 annealing furnaces and 17 lines: 13 cold-rolling mills, 1 tin-plate
sheet mill, and 3 leveler stretchers. We employ over 900
employees.
In 2009,
we produced 446,000 MT of steel products, a capacity utilization rate of
95%. As of 2009, we had the capacity to produce 465,000 MT of cold rolled
steel assuming our 2009 product mix. Our capacity tonnage can vary
significantly depending on the types of products produced, and we strive to
maximize profit by producing the largest tonnage of product with the highest
margin available to us. Our products range in thickness from fractions of
millimeters to 7.5mm and can be up to 1450 mm in width. The production
process begins with our major raw material, hot-rolled steel coils, which we
clean, anneal and then stretch in a cold-rolling mill to the desired
specifications.
We sell
products primarily in China, but our distribution network also covers a diverse
export market. Approximately 19% of 2009 sales were eventually further
processed abroad, and our major export markets include Africa and Southeast
Asia.
Recent
Developments
Acquisition
of Gold Promise Limited
On April
28, 2010, we completed a reverse acquisition transaction through a share
exchange with Gold Promise and its shareholders, or the Shareholders, whereby we
acquired 100% of the issued and outstanding capital stock of Gold Promise in
exchange for 10,000 shares of our Series A Preferred Stock which constituted
98.75% of our issued and outstanding capital stock on a as-converted basis as of
and immediately after the consummation of the reverse acquisition. As a result
of the reverse acquisition, Gold Promise became our wholly-owned subsidiary and
the former shareholders of Gold Promise became our controlling
stockholders. The share exchange transaction with Gold Promise and the
Shareholders was treated as a reverse acquisition, with Gold Promise as the
acquirer and AG Volney as the acquired party. Unless the context suggests
otherwise, when we refer in this report to business and financial information
for periods prior to the consummation of the reverse acquisition, we are
referring to the business and financial information of Gold Promise and its
consolidated subsidiaries.
Immediately
prior to the Share Exchange, the common stock of Gold Promise was owned by the
following persons in the indicated percentages: Crowning Elite Limited (a BVI
company) (66.44%); Meng Li (9.62%); Yonghe Guo (5.01%); Shaochen Hu (5.01%);
William H. Luckman (6.96%); and Joseph J. Meuse (6.96%). Xi Chen, a
Canadian passport holder, owns 100% of the capital stock of Crowning Elite
Limited. Hongzhong Li, our Chief Executive Officer and the majority
shareholder and chairman of Buddha, is also the sole director of Crowning Elite
Limited.
Hongzhong
Li has entered into a call option agreement (the “Call Option Agreement”) with
Xi Chen, a Canadian passport holder and the sole shareholder of Crowning Elite
Limited, our principal shareholder after the reverse acquisition. Under
the Call Option Agreement, Mr. Li has the right to acquire up to 100% or the
shares of Crowning Elite Limited for fixed consideration, with such option
vesting over three years. The Call Option Agreement also provides that Mr.
Chen shall not dispose any of the shares of Crowning Elite Limited without Mr.
Li’s consent.
Hongzhong
Li has also entered into an entrustment agreement (“Entrustment Agreement”) with
Xi Chen, the sole owner of Crowning Elite Limited, under which Mr. Li is
authorized to exercise all shareholders’ and voting rights with respect to
Crowning Elite Limited in accordance with its Memorandum and Articles of
Association and the parameters of BVI law. In addition, pursuant to the
Entrustment Agreement, the Mr. Li has the right to operate and manage, and
designate and appoint all of the directors and senior officers of, Crowning
Elite Limited, and Xi Chen has agreed to waive all the voting and related rights
associated with his shareholdings in Crowning Elite Limited and to procure the
consent of Mr. Li before taking certain actions which would affect Mr. Li’s
interest under the Entrustment Agreement.
As a
result of his control of Crowning Elite Limited, Hongzhong Li, our Chief
Executive Officer, may be considered the beneficial owner of a majority of the
capital stock and voting power of AG Volney, as well as Buddha.
Immediately
following closing of the reverse acquisition of Gold Promise, the shareholders
of Gold Promise transferred 128 of the 10,000 shares of Series A Preferred Stock
issued to them in the Share Exchange to certain persons who provided services to
Gold Promise and its subsidiary and controlled affiliate.
Upon the
closing of the reverse acquisition, David F. Stever, our President, CEO, CFO and
a director, and Samantha M. Ford, our Secretary and a director, each submitted a
resignation letter pursuant to which they resigned from all offices that they
held effective immediately and from their positions as our directors that will
become effective on the tenth day following the mailing by us of an information
statement, or the Information Statement, to our stockholders that complies with
the requirements of Section 14f-1 of the Exchange Act. In addition, our
board of directors on April 28, 2010, increased the size of our board of
directors to three directors and appointed Hongzhong Li, Zhenqi Chen and Xianmin
Meng to fill the vacancies created by such resignations and increase in the size
of the board, which appointments will become effective upon the effectiveness of
the resignations of David F. Stever and Samantha M. Ford on the tenth day
following the mailing by us of the Information Statement to our
stockholders. In addition, our executive officers were replaced by
Buddha’s executive officers upon the closing of the reverse acquisition as
indicated in more detail below.
As a
result of our acquisition of Gold Promise, we now own all of the issued and
outstanding capital stock of Gold Promise, which in turn owns all of the issued
and outstanding capital stock of Hebei Consulting. In addition, we
effectively and substantially control Buddha through a series of captive
agreements with Hebei Consulting. Buddha is principally engaged in the
production of cold-rolled steel products in the PRC.
Gold
Promise was established in Hong Kong on January 8, 2010 to serve as an
intermediate holding company. Hebei Consulting was established in the PRC
on April 2, 2010. Buddha, our operating affiliate, was established in the
PRC on September 9, 1999. On March 29, 2010, the local government of the
PRC issued a certificate of approval regarding the foreign ownership of Hebei
Consulting by Gold Promise, a Hong Kong entity.
On April
2, 2010, prior to the reverse acquisition transaction, Hebei Consulting and
Buddha and its shareholders entered into a series of agreements known as
variable interest agreements (the “VIE Agreements”) pursuant to which Buddha
became Hebei Consulting’s contractually controlled affiliate. The use of
VIE agreements is a common structure used to acquire PRC corporations,
particularly in certain industries in which foreign investment is restricted or
forbidden by the PRC government. The VIE Agreements included:
|
(1)
|
A
Consulting Services Agreement through which Hebei Consulting has the right
to advise, consult, manage and operate Buddha and collect and own all of
the net profits of Buddha;
|
|
(2)
|
an
Operating Agreement through which Hebei Consulting has the right to
recommend director candidates and appoint the senior executives of Buddha,
approve any transactions that may materially affect the assets,
liabilities, rights or operations of Buddha, and guarantee the contractual
performance by Buddha of any agreements with third parties, in exchange
for a pledge by Buddha of its accounts receivable and
assets;
|
|
(3)
|
a
Voting Rights Proxy Agreement under which the owners of Buddha have vested
their collective voting control over Buddha to Hebei Consulting and will
only transfer their equity interests in Buddha to Hebei Consulting or its
designee(s);
|
|
(4)
|
an
Option Agreement under which the owners of Buddha have granted to Hebei
Consulting the irrevocable right and option to acquire all of their equity
interests in Buddha or, alternatively, all of the assets of Buddha;
and
|
|
(5)
|
an
Equity Pledge Agreement under which the owners of Buddha have pledged all
of their rights, titles and interests in Buddha to Hebei Consulting to
guarantee Buddha’s performance of its obligations under the Consulting
Services Agreement.
|
The
foregoing description of the terms of the Consulting Services Agreement, the
Operating Agreement, the Voting Rights Proxy Agreement, the Option Agreement and
the Equity Pledge Agreement is qualified in its entirety by reference to the
provisions of the agreements filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5
to this report, respectively, which are incorporated by reference
herein.
See
“Related Party Transactions” for further information on our contractual
arrangements with these parties.
Because
of the common control between Gold Promise, Hebei Consulting and Buddha, for
accounting purposes, the acquisition of these entities has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities. The restructuring has been accounted for using the “as if”
pooling method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated financial
statements.
Principal
Factors Affecting Our Financial Performance
Our
operating results are primarily affected by the following factors:
|
·
|
Growth in
the Chinese Economy - We operate our manufacturing facilities in
China and derive the majority of our revenues from sales to customers in
China. Economic conditions in China, therefore, affect virtually all
aspects of our operations, including the demand for our products, the
availability and prices of our raw materials and our other expenses.
China has experienced significant economic growth, achieving a compound
annual growth rate of over 10% in gross domestic product from 1996 through
2008. Concurrent with this growth, domestic demand for our products
has also increased. China is expected to experience continued growth
in all areas of investment and consumption, even in the face of a global
economic recession. However, our growth remained strong and positive
throughout the global downturn.
|
·
|
Supply and
Demand in the Cold Rolled Steel Market and the Steel Market in General
– We are subject to macroeconomic factors dictating the supply and
demand of hot- and cold-rolled steel in the PRC. Steel prices have
been volatile in the past, and while they have stabilized since the first
quarter of 2009, our revenues and earnings could be dramatically affected
by increases and decreases in raw material and finished product
costs.
|
While the
overall Chinese steel industry has recently experienced a period of excess
supply, there is an increasing shortage of high-end thin steel sheets and
galvanized steel products in China, which has been primarily driven by the
limited number of producers of precision thin steel products in China.
We are also impacted by the market for our principal raw material,
hot-rolled steel, which comprises the vast majority of our cost of goods
sold.
·
|
Production
Capacity –In order to capture the market share and take advantage
of the demand for our products, we have expanded, and wish to continue to
expand our production capacity. Increased capacity has had a
significant impact on our ability to increase revenues and net income
through increased product sales.
|
·
|
Our Product
Mix – Our gross margin is affected by our product mix. We
produce and sell products according to customer orders. In general,
the thinner our cold rolled products can be produced, the higher the
margins we can achieve. Also, alloyed and plated products can afford
higher margins. We therefore strive to allocate our capacity to the
highest margin product mix possible for a given output
tonnage.
|
Taxation
United
States and Hong Kong
We are
subject to United States tax at a tax rate of 34%. No provision for income taxes
in the United States has been made as we have no income taxable in the United
States.
Gold
Promise is incorporated in Hong Kong and is subject to Hong Kong profits
tax.
People’s
Republic of China
Income
Taxes:
The
Company accounts for income taxes in accordance with ASC 740 “Income
Taxes”. ASC 740 requires an asset and liability approach for financial
accounting and reporting for income taxes and allows recognition and measurement
of deferred tax assets based upon the likelihood of realization of tax benefits
in future years. Under the asset and liability approach, deferred taxes
are provided for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. A valuation allowance is
provided for deferred tax assets if it is more likely than not these items will
either expire before the Company is able to realize their benefits, or that
future deductibility is uncertain. There was no deferred tax asset or liability
for the years ended December 31, 2009 and 2008. The Company is governed by
the Income Tax Law of the PRC concerning the private-run enterprises, which are
generally subject to tax at a statutory rate of 25% and 33% on income reported
in the statutory financial statements after appropriated tax adjustments in 2009
and 2008 respectively.
For the
years ended December 31, 2009 and 2008, as approved by the local tax authority
of Dachang County, the Company's income tax was assessed annually at a
pre-determined fixed rate as an incentive to stimulate local economy and
encourage entrepreneurship. Although the possibility exists for reinterpretation
of the application of the tax regulations by higher tax authorities in the PRC,
potentially overturning the decision made by the local tax authority, the
Company has not experienced any reevaluation of the income taxes for prior
years. Management believes that the possibility of any reevaluation of income
taxes is remote based on the fact that the Company has obtained the written tax
clearance from the local tax authority.
Value
Added Taxes:
The
Company is subject to value added tax (“VAT”) for selling merchandise. The
applicable VAT rate is 17% for products sold in the PRC. The amount of VAT
liability is determined by applying the applicable tax rate to the invoiced
amount of goods sold (output VAT) less VAT paid on purchases made with the
relevant supporting invoices (input VAT). Under the commercial practice of the
PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be
issued subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and the
date on which the tax invoice is issued. In the event that the PRC tax
authorities dispute the date on which revenue is recognized for tax purposes,
the PRC tax office has the right to assess a penalty based on the amount of the
taxes which are determined to be late or deficient, and will be expensed in the
period if and when a determination is made by the tax authorities that a penalty
is due.
Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will punctually adjust our effective income tax rate when
necessary.
Results
of Operations Comparison of Twelve Months
Ended December 31, 2009 and December 31, 2008
The
following table sets forth key components of our results of operations during
the twelve months periods ended December 31, 2009 and 2008, both in dollars and
as a percentage of our net sales. As the reverse acquisition of Gold Promise was
entered into after December 31, 2009 and during the periods indicated Buddha was
the only entity in our combined business that had operations, the results of
operations below refer only to that of Buddha:
Twelve
Months Ended
|
Twelve
Months Ended
|
|||||||||||||||
31-Dec-09
|
31-Dec-08
|
|||||||||||||||
%
of Net
|
%
of Net
|
|||||||||||||||
Amount
|
Sales
|
Amount
|
Sales
|
|||||||||||||
Net
Sales
|
$ | 275,779,038 | 100.0 | % | $ | 185,810,277 | 100.0 | % | ||||||||
Cost
of sales
|
259,401,899 | 94.1 | % | 174,696,115 | 94.0 | % | ||||||||||
Gross
profit
|
16,377,139 | 5.9 | % | 11,114,162 | 6.0 | % | ||||||||||
Selling,
General and Administrative Expenses
|
2,694,123 | 1.0 | % | 2,760,303 | 1.5 | % | ||||||||||
Operating
Income
|
13,683,016 | 5.0 | % | 8,353,859 | 4.5 | % | ||||||||||
Other
income & interest expense
|
1,821,656 | 0.7 | % | 1,884,990 | 1.0 | % | ||||||||||
Income
Before Income Taxes
|
11,861,360 | 4.3 | % | 6,486,869 | 3.5 | % | ||||||||||
Income
taxes
|
58,556 | 0.0 | % | 144,891 | 0.1 | % | ||||||||||
Net
income
|
$ | 11,802,804 | 4.3 | % | $ | 6,323,978 | 3.4 | % |
Net Sales. Our net sales
increased to $275,779,038 in the twelve months ended December 31, 2009 from
$185,810,277 in the same period in 2008, an increase of $89,968,761 or
approximately 48.4%. While this was mainly driven by an increase in sales
volume of cold-rolled coil, we also saw significant growth in sales of tin plate
sheets, cold-rolled
steel strips and cold-rolled sheets to our existing and new
customers.
Cost of Sales. During the year
ended December 31, 2009, we had cost of sales of $259,401,899, as compared with
cost of sales of $174,696,115 during the year ended December 31, 2008, an
increase of approximately $84,705,784 or 48.4% in line with the increase in
sales.
Gross Profit and Gross Margin.
Our gross profit increased to $16,377,139 in the twelve months ended December
31, 2009 from $11,114,162 in the same period in 2008, an increase of $5,262,977
or approximately 47.3% mainly due to increase in the volume of sales, though we
did enjoy a increase in gross margin excluding depreciation due to increased
production of higher margin goods.
Selling, General and Administrative
Expenses. In 2009, our selling, general and administrative
expenses decreased by $66,180 to $2,694,123, compared to the 2008 level of
$2,760,303. The decrease in operating expenses was principally due to small
operational efficiencies in general and selling expenses. Selling expenses
decreased from $1,232,176 during the year ended December 31, 2008 to $1,211,272
during the year ended December 31, 2009. General and administrative
expenses decreased from $1,402,207 during the year ended December 31, 2008 to
$1,357,014 the year ended December 31, 2009,
Other Income. Other income
decreased to $1,821,656 in the twelve months ended December 31, 2009 from
$1,884,990 in the same period in 2008. This small decrease was due to decreased
interest payments as we lowered our debt level and overall interest
rate.
Net Income. As a result of the
factors described above, we had net income of $11,802,804 during the year ended
December 31, 2009, compared with $6,323,978 during the year ended December 31,
2008, representing a growth rate of 87%.
Liquidity
And Capital Resources
As of
December 31, 2009, we had cash and cash equivalents of $7,609,826, primarily
consisting of cash on hand and demand deposits. The following table provides
detailed information about our net cash flow for all financial statement periods
presented in this report. To date, we have financed our operations primarily
through cash flows from operations and contributions from our
shareholders.
The
following table sets forth a summary of our cash flows for the periods
indicated:
Cash
Flow
(all
amounts in U.S. dollars)
Twelve Months
Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Net
cash provided by (used in) operating activities
|
$ | (3,654,815 | ) | $ | 9,285,077 | |||
Net
cash used in investing activities
|
(713,540 | ) | (4,285,305 | ) | ||||
Net
cash provided by (used in) financing activities
|
9,770,203 | (5,690,001 | ) | |||||
Effects
of Exchange Rate Change in Cash
|
(24,495 | ) | 1,520,325 | |||||
Net Increase
in Cash and Cash Equivalents
|
5,337,203
|
830,097 | ||||||
Cash
and Cash Equivalent at Beginning of the Year
|
2,232,473 | 1,402,376 | ||||||
Cash
and Cash Equivalent at End of the Year
|
7,609,826 | 2,232,473 |
Operating
activities
Net cash
used in operating activities was $3,654,815 for the twelve months ended December
31, 2009, as compared to $9,285,077 provided for the same period in 2008. The
decrease in net cash provided by operating activities was due to increased cash
outflows advanced to customers.
Investing
activities
Net cash
used in investing activities for the twelve months ended December 31, 2009 was
$713,540 as compared to $4,285,305 net cash used in investing activities during
the same period of 2008. The decrease in net cash provided by investing
activities was mainly due to cash expended in construction in progress and fixed
asset purchases.
Financing
activities
Net
cash provided by financing activities for the twelve months ended
December 31, 2009 was $9,770,203, as compared to $5,690,001 net cash used
in the same period of 2008. In the
year ended December 31, 2008, we repaid $7.5 million loans and obtained $13.1
million bank notes and in the meantime set aside $11 million restricted cash in
our bank account to obtain the above banks notes as requested by the
lenders. In the year ended December 31, 2009, we repaid $11.3 million
debts and obtained $8.9 million new borrowing from various
lenders. In addition, $11.8 million of restricted cash was released
due to the repayment of bank notes.
We
believe that our cash on hand and cash flow from operations will meet part of
our present cash needs and we will require additional cash resources, to meet
our expected capital expenditure and working capital for the next 12 months. We
may, however, in the future, require additional cash resources due to changed
business conditions, implementation of our strategy to ramp up our marketing
efforts and increase brand awareness, or acquisitions we may decide to pursue.
If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.
Inflation
Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor the price
change in travel industry and continually maintain effective cost control in
operations.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.
Critical
Accounting Policies
The
financial statements have been prepared in order to present the financial
position and results of operations in accordance with the accounting principles
generally accepted in the United States of America (“US GAAP”) and are expressed
in the U.S. Dollars.
Revenue
Recognition
The
Company recognizes revenues under the FAS Codification Topic 605 (“ASC 605”).
Revenue from the sale of goods and services is recognized on the transfer of
risks and rewards of ownership, which generally coincides with the time when the
goods are delivered to customers and the title has passed and services have
been rendered and invoiced. Revenue is reported net of all value added
taxes. Other income is recognized when it is earned.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories.
Actual results could differ from those estimates.
Accounts
and Other Receivables
Accounts
receivable consists of balances due from customers for the sale of the Company’s
steel products. Accounts receivable are recorded at net realizable value
consisting of the carrying amount less an allowance for uncollectible
amounts.
The
Company performs periodical reviews as to whether the carrying values of
accounts have become impaired. The assets are considered to be impaired if
the collectability of the balances become doubtful, accordingly, the management
estimates the valuation allowance for anticipated uncollectible receivable
balances. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. The management of the Company determined
that no allowance for doubtful accounts was necessary for the years ended
December 31, 2009, 2008 and 2007 since all accounts receivables and other
receivables are considered fully collectible.
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment, intangible assets and
long-term investments, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the assets. If the carrying amount of an
asset exceeds its estimated undiscounted future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the assets. Fair value is generally determined using the
asset’s expected future discounted cash flows or market value, if readily
determinable.
Long-Term
Investments
Long-term
investments are accounted for using the cost method and are evaluated annually
for any impairment in value.
Inventories
Inventory
is stated at the lower of cost or market. Cost is determined using the
weighted average method. Market value represents the estimated selling price in
the ordinary course of business less the estimated costs necessary to complete
the sale.
The cost
of inventory comprises all costs of purchases, costs of conversion and other
costs incurred in bringing the inventory to their present location and
condition. The costs of conversion of inventory include fixed and variable
production overheads, taking into account the stage of completion.
Comprehensive
Income
Statement
of Financial Accounting Standards ("FAS") No. 130, “Reporting Comprehensive
Income”, which was subsequently codified within ASC 220, “Comprehensive Income”,
requires disclosure of all components of comprehensive income and loss on an
annual and interim basis. Comprehensive income and loss is defined as the change
in equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. Accumulated other comprehensive
income (loss) arose from the changes in foreign currency exchange
rates.
Foreign
Currency Translation
The
Company’s financial information is presented in US dollars. The functional
currency of the Company is Renminbi (“RMB”), the currency of the PRC.
Transactions at the Company which are denominated in currencies other than RMB
are translated into RMB at the exchange rate quoted by the People’s Bank of
China prevailing at the dates of the transactions. Exchange gains and
losses resulting from transactions denominated in a currency other than that RMB
are included in statements of operations as exchange gains. The financial
statements of the Company have been translated into U.S. dollars in accordance
with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign
Currency Translation”, which was subsequently codified within ASC 830, “Foreign
Currency Matters”. The financial information is first prepared in RMB and then
is translated into U.S. dollars at period-end exchange rates as to assets and
liabilities and average exchange rates as to revenue and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred. The effects of foreign currency translation adjustments
are included as a component of accumulated other comprehensive income (loss) in
shareholders’ equity.
December 31,
|
|||||||||
2009
|
2008
|
||||||||
RMB:
US$ exchange rate
|
6.8270 | 6.8225 | |||||||
Average
RMB: US$ exchange rate
|
6.8311 | 6.9483 |
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation.
Recent
Accounting Pronouncements
In April
2009, the FASB updated the accounting standards to provide guidance on
estimating the fair value of a financial asset or liability when the trade
volume and level of activity for the asset or liability have significantly
decreased relative to historical levels. The standard requires entities to
disclose the inputs and valuation techniques used to measure fair value and any
changes in valuation inputs or techniques. In addition, debt and equity
securities as defined by GAAP shall be disclosed by major category. This
standard is effective for interim and annual reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009,
and is to be applied prospectively. The adoption did not have a material effect
on the Company's results of operations and financial condition.
In May
2009, the FASB issued guidance related to subsequent events under ASC 855-10,
Subsequent Events. This guidance sets forth the period after the balance sheet
date during which management or a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. It requires disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, whether that date represents the
date the financial statements were issued or were available to be issued. This
guidance is effective for interim and annual periods ending after June 15, 2009.
We have included the required disclosures in our consolidated condensed
financial statements.
In June
2009, the FASB issued an amendment to ASC 810-10, Consolidation. This guidance
amends ASC 810-10-15 to replace the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial
interest in a VIE with a primarily qualitative approach focused on identifying
which enterprise has the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance. It also requires ongoing
assessments of whether an enterprise is the primary beneficiary of a VIE and
requires additional disclosures about an enterprise’s involvement in VIEs. This
guidance is effective as of the beginning of the reporting entity’s first annual
reporting period that begins after November 15, 2009 and earlier adoption is not
permitted. We are currently evaluating the potential impact, if any, of the
adoption of this guidance will have on our consolidated condensed financial
statements.
In June
2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC
105, Generally Accepted Accounting Principles. This guidance states that the ASC
will become the source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Once effective, the Codification’s content
will carry the same level of authority. Thus, the U.S. GAAP hierarchy will be
modified to include only two levels of U.S. GAAP: authoritative and
non-authoritative. This is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. We adopted ASC 105 as
of September 30, 2009 and thus have incorporated the new Codification citations
in place of the corresponding references to legacy accounting
pronouncements.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring
Liabilities at Fair Value, which amends ASC 820, Fair Value Measurements and
Disclosures. This Update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure the fair value using one or more of the
following techniques: a valuation technique that uses the quoted price of the
identical liability or similar liabilities when traded as an asset, which would
be considered a Level 1 input, or another valuation technique that is consistent
with ASC 820. This Update is effective for the first reporting period (including
interim periods) beginning after issuance. Thus, we adopted this guidance as of
September 30, 2009, which did not have a material impact on our consolidated
condensed financial statements.
In
September 2009, the Financial Accounting Standards Board (FASB) amended existing
authoritative guidance to improve financial reporting by enterprises involved
with variable interest entities and to provide more relevant and reliable
information to users of financial statements. The amended guidance is effective
for fiscal annual reporting periods beginning after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and
annual reporting periods thereafter. The Company is currently assessing the
impact, if any, of adoption may have on its financial statements or
disclosures.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding beneficial ownership of our
common stock as of April 28, 2010 by (i) any person or group with more than 5%
of any class of voting securities, (ii) each director, (iii) our chief executive
officer and each other executive officer whose cash compensation for the most
recent fiscal year exceeded $100,000 and (iv) all such executive officers and
directors as a group. Unless otherwise specified, the address of each of
the persons set forth below is in care of the Company, Dachang Hui Autonomous
County Industrial Park, Hebei, 065300 People’s Republic of China. Except
as indicated in the footnotes to this table and subject to applicable community
property laws, the persons named in the table to our knowledge have sole voting
and investment power with respect to all shares of securities shown as
beneficially owned by them. The information in this table is as of April 28,
2010 based upon (i) 23,250,027 shares of common stock outstanding and (ii)
10,000 shares of Series A Convertible Preferred Stock outstanding.
Name and Address of Beneficial Owner
|
Office, If
Any
|
Title of Class
|
Amount and
Nature of
Beneficial
Ownership
|
Percent
Series A
Preferred
Stock
|
Percent
Common
Stock
|
Percent of
Combined
Voting Power
of Common
Stock and
Series A
Preferred
Stock
(1)
|
||||||||||||||
Officers
and Directors
|
||||||||||||||||||||
Hongzhong
Li
|
Chief
Executive Officer
|
Series
A Convertible Preferred Stock
|
7,606 | (2) | 76.1 | % | - | 75.1 | % | |||||||||||
David
F. Stever
124
Lincoln Ave. S.
Liverpool,
NY 13088
|
Director
and former CEO
|
Common
Stock
|
206,746 | - | * | * | ||||||||||||||
Samantha
M. Ford
410
Balsam Street
Liverpool,
NY 13203
|
Director
|
Common
Stock
|
206,746 | - | * | * | ||||||||||||||
All
officers and directors as a group (three persons named
above)
|
Series
A Convertible Preferred Stock
|
7,606 | 76.1 | % | 1.8 | % | 75.1 | % | ||||||||||||
Common
Stock
|
413,492 | |||||||||||||||||||
5%
Security Holders
|
||||||||||||||||||||
Crowning
Elite Limited (3)
|
Series
A Convertible Preferred Stock
|
6,644 | 66.4 | % | - | 65.6 | % | |||||||||||||
William
Luckman
360
Main Street
PO
Box 393
Washington,
Virginia 22747
|
Series
A Convertible Preferred Stock
|
696 | 7.0 | % | - | 6.9 | % | |||||||||||||
Joseph
Meuse
360
Main Street
PO
Box 393
Washington,
Virginia 22747
|
Series
A Convertible Preferred Stock
|
696 | 7.0 | % | - | 6.9 | % | |||||||||||||
Meng
Li (4)
|
Series
A Convertible Preferred Stock
|
962 | 9.6 | % | - | 9.5 | % | |||||||||||||
Yonghe
Guo
|
Series
A Convertible Preferred Stock
|
501 | 5.0 | % | - | 4.9 | % | |||||||||||||
Shaochen
Hu
|
Series
A Convertible Preferred Stock
|
501 | 5.0 | % | - | 4.9 | % | |||||||||||||
Carl
E. Worboys
|
Common
Stock
|
2,583,168 | - | 11.1 | % | * | ||||||||||||||
118
Chatham Rd.
|
||||||||||||||||||||
Syracuse,
NY 13203
|
||||||||||||||||||||
Joseph
C. Passalaqua
|
Common
Stock
|
15,916,621 | - | 68.5 | % | * | ||||||||||||||
106
Glenwood Dr. S.
|
||||||||||||||||||||
Liverpool,
NY 13090
|
* Less
than 1%
-
N/A
(1)
Common Stock shares have one vote per share. Shares of Series A
Convertible Preferred Stock will automatically convert into shares of common
stock on the basis of one share of Series A Preferred Stock for 987.5 shares of
common stock upon the effectiveness of a planned 1-for-186 reverse split of our
outstanding common stock. Holders of Series A Preferred Stock vote with
the holders of common stock on all matters on an as-converted to common stock
based on an assumed post 1-for-186 reverse split basis.
(2) 6,644
of such shares of Series A Convertible Preferred are owned by Crowning Elite
Limited, a BVI limited company. Hongzhong Li is the sole director of
Crowning Elite Limited and also has an option to purchase 100% of the shares of
Crowning Elite Limited, which option vests over three years. 962 of such
shares of Series A Convertible Preferred are owned by Meng Li, who is the
daughter of Hongzhong Li.
(3)
Crowning Elite Limited, a BVI limited company, owns 6,644 shares of Series A
Convertible Preferred. Xi Chen, a Canadian passport holder, currently owns
100% of Crowning Elite Limited. Hongzhong Li, our CEO, is the sole
director of Crowning Elite Limited and also has an option to purchase 100% of
the shares of Crowning Elite Limited, which option vests over three
years.
(4) Meng
Li is the daughter of Hongzhong Li, our CEO and beneficially controlling
stockholder.
Changes
in Control
The Company does not have
any change of control or retirement arrangements with its executive
officers.
DIRECTORS
AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors
and Executive Officers
The
following sets forth information about our directors and executive officers as
of the date of this report:
NAME
|
AGE
|
POSITION
|
||
Hongzhong
Li
|
49
|
Chief
Executive Officer
|
||
Zhenqi
Chen
|
45
|
Chief
Financial Officer
|
||
Liwen
Chen
|
44
|
Vice
President – Sales
|
||
Hongzhi
Fang
|
42
|
Chief
Technology Officer
|
||
Jianmin
Li
|
44
|
Vice
President - Operations
|
||
David
F. Stever
|
64
|
Director
|
||
Samantha
M. Ford
|
26
|
Director
|
Hongzhong Li Mr. Li has
served as Buddha’s Chairman since he founded it in 1999, and our Chief Executive
Officer since April 28, 2010. Mr. Li is a graduate of Hebei Party
Committee University, with a degree in philosophy. He received an
Economist Examination Certificate in 1987. Previous experience includes a
position as the Secretary of Dachang Town Party from 1987-1990, Vice Secretary
of Dachang County Committee Office from 1990-1992, and Director of Dachang
County Beijing-Hebei Associated High-Frequency Welded Pipe Factory from
1992-1998.
Zhenqi Chen Mr. Chen has
served as Buddha’s Chief Financial Officer since it was founded in 1999, and our
Chief Financial Officer since April 28, 2010. Mr. Chen graduated from
Hebei Economic & Trade University with a bachelor’s degree in
accounting. Mr. Chen worked in Dachang County Financial Bureau from 1986
to 1999.
Liwen Chen Mr. Chen has
managed Buddha’s sales department since it was founded in 1999 and has served as
our Vice President - Sales since April 28, 2010. Mr. Chen has a rich
history of steel industry experience including being the Secretary of Dachang
County Committee Office from 1985-1991, and Sales Section Chief of Dachang
County Jing-Hebei Associated High-Frequency Welded Pipe Company from
1992-1999. Mr. Chen graduated from Hebei University in 1988 with a major
in business management.
Hongzhi Fang Mr. Fang
has served as Buddha’s Chief Technology Officer since it was founded in 1999,
and our Chief Technology Officer since April 28, 2010. Mr. Fang graduated
from Tianjin University of Metallurgy in 1991, majored in metal pressure
processing and became a State Registered Engineer in 1993. Mr. Fang was
previously the Director of Tianjin Cold-Rolled Steel Co., Ltd. from
1991-1998.
Jianmin Li Mr. Li has
served as Buddha’s Vice President - Operations since it was founded in 1999, and
our Vice President - Operations since April 28, 2010. Mr. Li is a 1993
graduate of North China Institute of Aerospace. His previous work
experience includes management roles at Dachang Fertilizer Company from
1985-1990, and Director of Dachang County Beijng-Hebei Associated High-Frequency
Welded Pipe Factory from 1991-1998.
David F. Stever Mr.
Stever has served as a director of AG Volney since July 2003 and served as our
CEO and CFO until April 28, 2010. Mr. Stever spent twelve years in
customer service and sales with Allegheny Airlines, and the last six years in a
supervisory capacity. He subsequently formed and ran a travel company
which required substantial negotiation of bulk purchases and sales as well as
individual travel plans. In addition Mr. Stever owned and managed Happy
Journey's Travel, Inc. a travel agency for over 25 years. He has also
acted as an officer and director of the Syracuse Rose Society, an association
which purchases bulk for resale to members and others as fund
raisers.
Samantha M. Ford Ms.
Ford has served as a director of AG Volney since December 2009 and served as our
Secretary until April 28, 2010. Ms. Ford has approximately two years
experience as an associate in a major retail chain and two years experience as
an assistant manager at a thrift store. Ms. Ford is a high school graduate
who worked as a sales associate in retail chains while still in high
school. She also has bookkeeping and sales experience in the retail trade
business. She also received experience as a cashier for Sam's Club.
From the spring of 1999 through the fall of 2001, she was Secretary for Sigma
Alpha Chi sorority while attending college full-time and holding a part-time job
on campus. In 2002, she moved back to Syracuse, New York and was hired as
the assistant manager of the Salvation Army Thrift Store. Subsequently,
Ms. Ford worked for AAA of Western and Central NY as an Emergency Roadside
Assistance Representative. She started a family and was a stay at home
mother from February 2003 through October of 2005. She then re-entered the
workforce. Ms. Ford currently also works part-time for a medical
transportation company.
Family
Relationships:
There is
no family relationship among any of our officers and directors.
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, none of our directors or executive officers has been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past ten years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws. Except as set forth in our discussion below in
“Certain Relationships and Related Transactions, and Director Independence –
Transactions with Related Persons,” none of our directors, director nominees or
executive officers has been involved in any transactions with us or any of our
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.
EXECUTIVE
COMPENSATION
Summary
Compensation Table — Fiscal Years Ended December 31, 2009 and 2008
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the named persons for services
rendered in all capacities during the noted periods. No other executive officer
received total annual salary and bonus compensation in excess of
$100,000.
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Total
($)
|
||||||||||
Hongzhong
Li, Chief Executive Officer
|
2008
|
7,027 | 7,320 | 14,347 | ||||||||||
2009
|
7,027 | 7,320 | 14,347 | |||||||||||
David
F. Stever, former President
|
2008
|
0 | 0 | 0 | ||||||||||
2009
|
0 | 0 | 0 |
(1) On
April 28, 2010, we acquired Gold Promise in a reverse acquisition transaction
that was structured as a share exchange and in connection with that transaction,
Mr. Hongzhong Li became our Chief Executive Officer. Prior to the
effective date of the reverse acquisition, Mr. David Stever served as President
of AG Volney. The compensation shown in this table includes the amounts
Mr. Li received from Buddha prior to the consummation of the reverse
acquisition.
Summary
of Employment Agreements and Material Terms
Prior to
our reverse acquisition of Gold Promise, Buddha, our operating affiliate was a
private limited company organized under the laws of the PRC, and in accordance
with PRC regulations, the salary of our executives was determined by our
shareholders. In addition, each employee is required to enter into an
employment agreement. Accordingly, all our employees, including
management, have executed our employment agreement. Our employment
agreements with our executives provide the amount of each executive officer’s
salary and establish their eligibility to receive a bonus. Mr. Hongzhong
Li’s employment agreement provides for an annual salary of RMB 48,000
(approximately $7,027).
Other
than the salary and necessary social benefits required by the government, which
are defined in the employment agreement, we currently do not provide other
benefits to the officers at this time. Our executive officers are not entitled
to severance payments upon the termination of their employment agreements or
following a change in control.
We have
not provided retirement benefits (other than a state pension scheme in which all
of our employees in China participate) or severance or change of control
benefits to our named executive officers.
Outstanding
Equity Awards at Fiscal Year End
For the
year ended December 31, 2009, no director or executive officer has received
compensation from us pursuant to any compensatory or benefit plan. There is no
plan or understanding, express or implied, to pay any compensation to any
director or executive officer pursuant to any compensatory or benefit plan,
although we anticipate that we will compensate our officers and directors for
services to us with stock or options to purchase stock, in lieu of
cash.
Compensation
of Directors
No member
of our board of directors received any compensation for his services as a
director during the year ended December 31, 2009 and currently no compensation
arrangements are in place for the compensation of directors.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions
with Related Persons
The
following includes a summary of transactions since the beginning of the 2009
year, or any currently proposed transaction, in which we were or are to be a
participant and the amount involved exceeded or exceeds the lesser of $120,000
or one percent of the average of our total assets at year end for the last two
completed fiscal years, and in which any related person had or will have a
direct or indirect material interest (other than compensation described under
“Executive Compensation”). We believe the terms obtained or consideration that
we paid or received, as applicable, in connection with the transactions
described below were comparable to terms available or the amounts that would be
paid or received, as applicable, in arm’s-length transactions.
On April
2, 2010, prior to the reverse acquisition transaction, Hebei Consulting and
Buddha and its shareholders entered into a series of agreements known as
variable interest agreements (the “VIE Agreements”) pursuant to which Buddha
became Hebei Consulting’s contractually controlled affiliate. The use of
VIE agreements is a common structure used to acquire PRC corporations,
particularly in certain industries in which foreign investment is restricted or
forbidden by the PRC government. The VIE Agreements included:
|
(1)
|
A
Consulting Services Agreement through which Hebei Consulting has the right
to advise, consult, manage and operate Buddha and collect and own all of
the net profits of Buddha;
|
|
(2)
|
an
Operating Agreement through which Hebei Consulting has the right to
recommend director candidates and appoint the senior executives of Buddha,
approve any transactions that may materially affect the assets,
liabilities, rights or operations of Buddha, and guarantee the contractual
performance by Buddha of any agreements with third parties, in exchange
for a pledge by Buddha of its accounts receivable and
assets;
|
|
(3)
|
a
Voting Rights Proxy Agreement under which the owners of Buddha have vested
their collective voting control over Buddha to Hebei Consulting and will
only transfer their equity interests in Buddha to Hebei Consulting or its
designee(s);
|
|
(4)
|
an
Option Agreement under which the owners of Buddha have granted to Hebei
Consulting the irrevocable right and option to acquire all of their equity
interests in Buddha or, alternatively, all of the assets of Buddha;
and
|
|
(5)
|
an
Equity Pledge Agreement under which the owners of Buddha have pledged all
of their rights, titles and interests in Buddha to Hebei Consulting to
guarantee Buddha’s performance of its obligations under the Consulting
Services Agreement.
|
The
foregoing description of the terms of the Consulting Services Agreement, the
Operating Agreement, the Voting Rights Proxy Agreement, the Option Agreement and
the Equity Pledge Agreement is qualified in its entirety by reference to the
provisions of the agreements filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5
to this report, respectively, which are incorporated by reference
herein.
Mr.
Hongzhong Li, the Chief Executive Officer and indirect controlling stockholder
of AG Volney, is a director of Hebei Consulting and the controlling stockholder
and Chairman of Buddha.
During
the year ended December 31, 2009, Inna Sheveleva, a shareholder of AG Volney,
and David Stever, President and a shareholder of AG Volney, were customers of
the Company accounting for 15% of the sales revenue during that
period.
As of
March 31, 2010, two major shareholders of AG Volney, Joseph C. Passalaqua and
Mary Passalaqua, had outstanding loans to the Company totaling $154,596.
These loans were payable on demand and carried a simple interest rate between 8%
and 18% per annum. As of March 31, 2010 there was $8,486 of interest due
on the notes. On April 28, 2010, AG Volney issued 5,920,027 shares of its
common stock to Mr. Passalaqua to retire approximately $187,000 in debts of AG
Volney owed to Joseph and Mary Passalaqua.
As of
December 31, 2009, AG Volney incurred a liability to Lyboldt-Daly in the amount
of $6,700. Lyboldt-Daly completed the bookkeeping and internal accounting
for AG Volney. Joseph Passalaqua is President of Lyboldt-Daly and a major
shareholder in AG Volney. Total bookkeeping services for the three month
period ended March 31, 2010 were $1,100.
Prior to the acquisition of
Gold
Promise by the
AG Volney,
certain
related
parties
were issued loans by Buddha.
As of
December 31, 2009 and 2008, the balances due from related parties to Buddha were
as follows:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Xianmin
Meng
|
$ | 171,208 | $ | 171,320 | ||||
Hongzhong
Li
|
187,566 | 715,356 | ||||||
Total
|
$ | 358,774 | $ | 886,676 |
As of the date of this
filing, all balances have been repaid and no loans to these related
parties are outstanding.
As of
December 31, 2009 and 2008, there were also balances due to related parties, the
balances as follows:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Hebei
Buddha Engineering Technology Co. Ltd.
|
$ | 131,830 | $ | 1,587,234 |
Mr.
Hongzhong Li, our CEO and controlling beneficial owner, is the Chairman and the
controlling shareholder of Buddha and the husband of Xianmin Meng. Hebei
Buddha Engineering Technology Co., Ltd. is an affiliated company also owned by
Hongzhong Li. The balances with the related parties have no fixed
repayment terms. These balances are unsecured, interest-fee and due upon
demand. All balances due from related parties have been repaid as of the
date of this filing.
Insider
Transactions Policies and Procedures
The
Company does not currently have an insider transaction policy.
Director
Independence
We
currently do not have any independent directors as the term “independent” is
defined by the rules of the Nasdaq Stock Market.
LEGAL
PROCEEDINGS
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties and an adverse result in these or other matters may arise
from time to time that may harm our business. We are currently not aware of any
such legal proceedings or claims that we believe will have a material adverse
affect on our business, financial condition or operating results.
MARKET
PRICE AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our
common shares are quoted for trading on the OTC Bulletin Board under the symbol
"AGVO", but are not currently trading.
Holders
As of
April 28, 2010, immediately prior to the Share Exchange, there were
approximately 63 stockholders of record of the 23,250,027 shares of our common
stock.
Dividends
In the
past, we have not distributed earnings to shareholders. Any future
decisions regarding dividends will be made by our board of directors. We
currently intend to retain and use any future earnings for the development and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has complete discretion on
whether to pay dividends. Even if our board of directors decides to pay
dividends, the form, frequency and amount will depend upon our future operations
and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that the board of directors may deem
relevant.
Substantially
all of our revenues are earned by Buddha or Hebei Consulting, our PRC affiliate
and subsidiary. PRC regulations restrict the ability of our PRC subsidiary to
make dividends and other payments to its offshore parent company. PRC
legal restrictions permit payments of dividend by our PRC subsidiary only out of
its accumulated after-tax profits, if any, determined in accordance with PRC
accounting standards and regulations. Our PRC subsidiary is also required
under PRC laws and regulations to allocate at least 10% of its annual after-tax
profits determined in accordance with PRC GAAP to a statutory general reserve
fund until the amounts in said fund reaches 50% of its registered capital.
Allocations to this statutory reserve fund can only be used for specific
purposes and are not transferable to us in the form of loans, advances or cash
dividends. 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.
Securities
Authorized for Issuance Under Equity Compensation Plans
We do not
have in effect any compensation plans under which our equity securities are
authorized for issuance and we do not have any outstanding stock
options.
RECENT
SALES OF UNREGISTERED SECURITIES
Reference
is made to the disclosure set forth under Item 3.02 of this report, which
disclosure is incorporated by reference into this section.
DESCRIPTION
OF SECURITIES
Common
Stock
We are
authorized to issue up to 100,000,000 shares of common stock, par value $0.001
per share. Each outstanding share of common stock entitles the holder
thereof to one vote per share on all matters. Our bylaws provide that any
vacancy occurring in the board of directors may be filled by the affirmative
vote of a majority of the remaining directors though less than a quorum of the
board of directors. Shareholders do not have preemptive rights to purchase
shares in any future issuance of our common stock.
The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. Our
board of directors has never declared a dividend and does not anticipate
declaring a dividend in the foreseeable future. Should we decide in the
future to pay dividends, as a holding company, our ability to do so and meet
other obligations depends upon the receipt of dividends or other payments from
our operating subsidiary and other holdings and investments. In addition,
our operating subsidiary in the PRC, from time to time, may be subject to
restrictions on its ability to make distributions to us, including as a result
of restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory
restrictions. In the event of our liquidation, dissolution or winding up,
holders of our common stock are entitled to receive, ratably, the net assets
available to shareholders after payment of all creditors.
All of
the issued and outstanding shares of our common stock are duly authorized,
validly issued, fully paid and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing shareholders will be diluted.
As April
28, 2010, we had a total of 23,250,027 shares of common stock
outstanding.
Preferred
Stock
We are
authorized to issue up to 10,000,000 shares of preferred stock, par value $0.001
per share, in one or more series as may be determined by our board of directors,
who may establish, from time to time, the number of shares to be included in
each series, may fix the designation, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or restrictions
thereof. Any preferred stock so issued by the board of directors may rank
senior to the common stock with respect to the payment of dividends or amounts
upon liquidation, dissolution or winding up of us, or both. Moreover,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, under certain circumstances, the issuance of
preferred stock or the existence of the unissued preferred stock might tend to
discourage or render more difficult a merger or other change of
control.
Series A Convertible
Preferred Stock
In
accordance with our Certificate of Incorporation, our Board of Directors
unanimously approved the filing of a Certificate of Designation designating and
authorizing the issuance of up to 10,000 shares of our Series A Preferred
Stock. The Certificate of Designation was filed on April 27,
2010.
Shares of
Series A Preferred Stock will automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 987.5 shares of common
stock upon the effectiveness of a planned 1-for-186 reverse split (the “Reverse
Split”) of our outstanding common stock. Upon the reverse split the 10,000
outstanding shares of Series A Preferred Stock will automatically convert into
9,875,001 shares of common stock, which will constitute 98.75% of the
outstanding common stock of AG Volney subsequent to the Reverse
Split.
Holders
of Series A Preferred Stock vote with the holders of common stock on all matters
on an as-converted to common stock basis, based on an assumed post 1-for-186
reverse split (to retroactively take into account the Reverse Split). For
example, assuming 100 shares of Series A Preferred Stock are issued and
outstanding on the record date for any stockholder vote, such shares, voting in
aggregate, would vote a total of 18,367,500 voting shares.
The
holders of our Series A Preferred Stock are entitled to vote on all matters
together with all other classes of stock. Holders of Series A Preferred
Stock have protective class voting veto rights on certain matters, such as
increasing the authorized shares of Series A Preferred Stock and modifying the
rights of Series A Preferred Stock.
Following
the reverse acquisition as of April 28, 2010, we had 10,000 shares of Series A
Preferred Stock outstanding. Following the effectiveness of the Reverse
Split and conversion of the Series A Preferred Stock into common stock, there
will be approximately 10,000,000 shares of our common stock issued and
outstanding.
Anti-takeover Effects of Our
Certificate of Incorporation and By-laws
Our
Certificate of Incorporation and Bylaws contain certain provisions that may have
anti-takeover effects, making it more difficult for or preventing a third party
from acquiring control of the Company or changing its board of directors and
management. According to our Bylaws and Certificate of Incorporation,
neither the holders of the Company’s common stock nor the holders of the
Company’s preferred stock have cumulative voting rights in the election of our
directors. The combination of the present ownership by a few stockholders
of a significant portion of the Company’s issued and outstanding common stock
and lack of cumulative voting makes it more difficult for other stockholders to
replace the Company’s board of directors or for a third party to obtain control
of the Company by replacing its board of directors.
Anti-takeover
Effects of Delaware Law
Delaware
Anti-Takeover Statute.
We are
subject to the provisions of Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a
business combination with an interested stockholder for a period of three years
following the date the person became an interested stockholder
unless:
|
·
|
prior to the date of the
transaction, our board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
|
|
·
|
upon completion of the
transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, calculated as provided under Section 203;
or
|
|
·
|
at or subsequent to the date of
the transaction, the business combination is approved by our board of
directors and authorized at an annual or special meeting of stockholders,
and not by written consent, by the affirmative vote of at least two-thirds
of the outstanding voting stock which is not owned by the interested
stockholder.
|
Generally,
a business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder. An
interested stockholder is a person who, together with affiliates and associates,
owns or, within three years prior to the determination of interested stockholder
status, did own 15% or more of a corporation’s outstanding voting stock. We
expect the existence of this provision to have an anti-takeover effect with
respect to transactions our board of directors does not approve in advance. We
also anticipate that Section 203 may also discourage attempts that might result
in a premium over the market price for the shares of common stock held by
stockholders.
The
provisions of Delaware law and the provisions of our certificate of
incorporation could have the effect of discouraging others from attempting
hostile takeovers and, as a consequence, they might also inhibit temporary
fluctuations in the market price of our common stock that often result from
actual or rumored hostile takeover attempts. These provisions might also have
the effect of preventing changes in our management. It is possible that these
provisions could make it more difficult to accomplish transactions that
stockholders might otherwise deem to be in their best interests.
Transfer
Agent and Registrar
Our
independent stock transfer agent is Pacific Stock Transfer Company. Their
mailing address is 4045 South Spencer Street, Suite 403, Las Vegas, NV 89119,
and their phone number is (702) 361-3033.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Section
145 of the Delaware General Corporation Law authorizes a corporation to grant,
and authorizes a court to award, indemnity to officers, directors and other
corporate agents.
As
permitted by Section 102(b)(7) of the Delaware General Corporation Law, the
Company’s certificate of incorporation includes a provision that eliminates the
personal liability of its directors for breach of their fiduciary duty as
directors, except that a director shall be liable to the extent provided by
applicable law (i) for breach of the director’s duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) pursuant to
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit.
In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the bylaws of the Company provide that:
|
·
|
The Company shall indemnify its
directors, officers, employees or agents for serving the Company in those
capacities or for serving other business enterprises at the Company’s
request, to the fullest extent permitted by Delaware law. Delaware law
provides that a corporation may indemnify such person if such person acted
in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Company and, with respect to any
criminal proceeding, had no reasonable cause to believe such person’s
conduct was unlawful.
|
|
·
|
The Company is authorized to
obtain insurance to indemnify such
persons.
|
These
indemnification provisions may be sufficiently broad to permit indemnification
of the Company’s officers and directors for liabilities (including reimbursement
of expenses incurred) arising under the Securities Act of 1933. The
Company may at the discretion of the board of directors purchase and maintain
insurance on behalf of any person who holds or who has held any position
identified in the paragraph above against any and all liability incurred by such
person in any such position or arising out of his status as such.
Insofar
as indemnification by us for liabilities arising under the Securities Act may be
permitted to our directors, officers or persons controlling the company pursuant
to provisions of our certificate of incorporation and bylaws, or otherwise, we
have been advised that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification by such director,
officer or controlling person of us in the successful defense of any action,
suit or proceeding is asserted by such director, officer or controlling person
in connection with the securities being offered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding, which may result in a claim for such indemnification.
ITEM
3.02
UNREGISTERED
SALES OF EQUITY SECURITIES
On April
28, 2010, we issued 10,000 shares of our Series A Preferred Stock to the
shareholders of Gold Promise. The total consideration for the 10,000
shares of our Series A Preferred Stock was 10,000 ordinary shares of Gold
Promise, which is all the issued and outstanding capital stock of Gold
Promise. The number of our shares issued to the shareholders of Gold
Promise was determined based on an arms-length negotiation. The issuance of our
shares to the shareholders of Gold Promise was made in reliance on the exemption
provided by Section 4(2) of the Securities Act for the offer and sale of
securities not involving a public offering and Regulation D promulgated
thereunder.
On April
28, 2010, we issued 5,920,027 shares of our Common Stock to Joseph C. Passalaqua
in consideration for Mr. Passalaqua retiring approximately $187,000 in
liabilities of AG Volney immediately prior to the Share Exchange. The
issuance of our shares to Mr. Passalaqua was made in reliance on the exemption
provided by Section 4(2) of the Securities Act for the offer and sale of
securities not involving a public offering and Regulation D promulgated
thereunder.
We issued
securities in reliance upon Rule 506 of Regulation D of the Securities Act.
These shareholders who received the securities in such instances made
representations that (a) the shareholder is acquiring the securities for his,
her or its own account for investment and not for the account of any other
person and not with a view to or for distribution, assignment or resale in
connection with any distribution within the meaning of the Securities Act, (b)
the shareholder agrees not to sell or otherwise transfer the purchased shares
unless they are registered under the Securities Act and any applicable state
securities laws, or an exemption or exemptions from such registration are
available, (c) the shareholder has knowledge and experience in financial and
business matters such that he, she or it is capable of evaluating the merits and
risks of an investment in us, (d) the shareholder had access to all of our
documents, records, and books pertaining to the investment and was provided the
opportunity ask questions and receive answers regarding the terms and conditions
of the offering and to obtain any additional information which we possessed or
were able to acquire without unreasonable effort and expense, and (e) the
shareholder has no need for the liquidity in its investment in us and could
afford the complete loss of such investment. Management made the determination
that the investors in instances where we relied on Regulation D are accredited
investors (as defined in Regulation D) based upon management’s inquiry into
their sophistication and net worth. In addition, there was no general
solicitation or advertising for securities issued in reliance upon Regulation
D.
In
instances described above where we indicate that we relied upon Section 4(2) of
the Securities Act in issuing securities, our reliance was based upon the
following factors: (a) the issuance of the securities was an isolated private
transaction by us which did not involve a public offering; (b) there were only a
limited number of offerees; (c) there were no subsequent or contemporaneous
public offerings of the securities by us; (d) the securities were not broken
down into smaller denominations; and (e) the negotiations for the sale of the
stock took place directly between the offeree and us.
Shares of
Series A Preferred Stock will automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 987.5 shares of common
stock upon the effectiveness of a planned 1-for-186 reverse split of our
outstanding common stock. Upon the Reverse Split, the 10,000 outstanding
shares of Series A Preferred Stock will automatically convert into 9,875,001
shares of common stock, which will constitute 98.75% of the outstanding common
stock of subsequent to the Reverse Split.
ITEM
5.01
CHANGES
IN CONTROL OF REGISTRANT
Reference
is made to the disclosure set forth under Item 2.01 of this report, which
disclosure is incorporated herein by reference.
As a
result of the closing of the reverse acquisition with Gold Promise, the former
shareholders of Gold Promise now own 0% of the total outstanding shares of our
common stock, 100% of the total outstanding shares of our Series A Preferred
Stock, and 98.75% total voting power of all our outstanding voting
securities.
ITEM
5.02
DEPARTURE
OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN
OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS
Upon the
closing of the reverse acquisition, each of David F. Stever, our CEO, President,
CFO and a director, and Samantha M. Ford, our Secretary, Treasurer and a
director, submitted a resignation letter pursuant to which they resigned from
all offices that they held effective immediately and from their position as our
director that will become effective on the tenth day following the mailing by us
of an information statement, or the Information Statement, to our stockholders
that complies with the requirements of Section 14f-1 of the Exchange Act.
In addition, our board of directors on April 28, 2010, increased the size of our
board of directors to three directors and appointed Hongzhong Li (Chairman),
Zhenqi Chen and Xianmin Meng to fill the vacancies created by such resignations
and increase in the size of the board, which appointments will become effective
upon the effectiveness of the resignations of David F. Stever and Samantha
M. Ford on the tenth day following the mailing by us of the Information
Statement to our stockholders. In addition, our executive officers were
replaced by the executive officers of Buddha upon the closing of the reverse
acquisition as indicated in more detail above.
For
certain biographical and other information regarding the newly appointed
officers, see the disclosure under Item 2.01 of this report, which disclosure is
incorporated herein by reference.
ITEM
5.03
AMENDMENTS
TO CERTIFICATE OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL YEAR
Series A Convertible
Preferred Stock
In
accordance with our Certificate of Incorporation, our Board of Directors
unanimously approved the filing of a Certificate of Designation designating and
authorizing the issuance of up to 10,000 shares of our Series A Convertible
Preferred Stock (“Series A Preferred Stock”). The Certificate of
Designation was filed on April 27, 2010.
Shares of
Series A Preferred Stock will automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 987.5 shares of common
stock upon the effectiveness of a planned 1-for-186 reverse split (the “Reverse
Split”) of our outstanding common stock. Upon the reverse split the 10,000
outstanding shares of Series A Preferred Stock will automatically convert into
9,875,001 shares of common stock, which will constitute 98.75% of the
outstanding common stock of AG Volney subsequent to the Reverse
Split.
Holders
of Series A Preferred Stock vote with the holders of common stock on all matters
on an as-converted to common stock basis, based on an assumed post 1-for-186
reverse split (to retroactively take into account the Reverse Split). For
example, assuming 100 shares of Series A Preferred Stock are issued and
outstanding on the record date for any stockholder vote, such shares, voting in
aggregate, would vote a total of 18,367,500 voting shares.
The
holders of our Series A Preferred Stock are entitled to vote on all matters
together with all other classes of stock. Holders of Series A
Preferred Stock have protective class voting veto rights on certain matters,
such as increasing the authorized shares of Series A Preferred Stock and
modifying the rights of Series A Preferred Stock.
The
Certificate of Designation is filed as Exhibit 3.3 to this Current Report on
Form 8-k and is incorporated herein by reference.
ITEM
5.06
CHANGE
IN SHELL COMPANY STATUS
Prior to
the closing of the reverse acquisition, AG Volney was a “shell company” as
defined in Rule 12b-2 of the Exchange Act. As described in Item 2.01
above, which is incorporated by reference into this Item 5.06, AG Volney ceased
being a shell company upon completion of the reverse acquisition on April 28,
2010.
ITEM
9.01
FINANCIAL
STATEMENTS AND EXHIBITS
Financial
Statements of Business Acquired
Filed
herewith are the following:
1. Audited consolidated financial
statements of Dachang Hui Autonomous County Baosheng Steel Products Co.,
Ltd. for the fiscal years
ended December 31, 2009 and 2008.
(b)
Pro Forma
Financial Information
Filed herewith is the unaudited pro
forma condensed consolidated financial information of A.G. Volney Center,
Inc. and its subsidiaries
for the requisite periods.
(d)
Exhibits
Exhibit
No.
|
Description
|
|
2.1
|
Share
Exchange Agreement, dated as of April 28, 2010, among A.G. Volney
Center, Inc., Gold Promise Group (Honk Kong)
Co., Limited (“Gold Promise”), the shareholders of Gold Promise, Joseph C.
Passalaqua, Carl E. Worboys and Dachang Hui Autonomous County
Baosheng Steel Products Co., Ltd.
|
|
*3.1
|
Certificate
of Incorporation, as amended
|
|
*3.2
|
Bylaws
|
|
3.3
|
Certificate
of Designation of Series A Convertible Preferred Stock, as filed with the
Delaware Secretary of State on April 27, 2010.
|
|
10.1
|
Consulting
Services Agreement, dated April 2, 2010, between Hebei Anbang Investment
Consultation Co., Ltd. and Dachang Hui Autonomous County Baosheng Steel
Products Co., Ltd.
|
|
10.2
|
Operating
Agreement, dated April 2, 2010, among Hebei Anbang Investment Consultation
Co., Ltd. and Dachang Hui Autonomous County Baosheng Steel Products Co.,
Ltd. and its shareholders
|
|
10.3
|
Voting
Rights Proxy Agreement, dated April 4, 2010, among Hebei Anbang
Investment Consultation Co., Ltd. and Dachang Hui Autonomous County
Baosheng Steel Products Co., Ltd. and its
shareholders
|
|
10.4
|
Option
Agreement, dated April 2, 2010, among Hebei Anbang Investment Consultation
Co., Ltd. and Dachang Hui Autonomous County Baosheng Steel Products Co.,
Ltd. and its shareholders
|
|
10.5
|
Equity
Pledge Agreement, dated April 2, 2010, among Hebei Anbang Investment
Consultation Co., Ltd. and Dachang Hui Autonomous County Baosheng Steel
Products Co., Ltd. and its shareholders
|
|
10.6
|
Lease
Agreement, dated November 11, 2005, between Dachang Hui Autonomous County,
Xiadian Town, Xiaodingfu Village Committee and Dachang Hui Autonomous
County Baosheng Steel Products Co., Ltd.
|
|
21
|
Subsidiaries
of the Company
|
|
*
|
Filed
as an exhibit to the Company's registration statement on Form 10-SB, as
filed with the SEC on October 19, 2006, and the Company’s current report
on Form 8-K, as filed with the SEC on April 27, 2010, and incorporated
herein by this
reference
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Date:
April 28, 2010
|
|
A.G. Volney Center, Inc.
|
|
(Registrant)
|
|
/s/ Hongzhong Li
|
|
*Signature
|
|
Chief Executive Officer
|
|
Title
|
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
FINANCIAL
STATEMENTS
DECEMBER
31, 2009 AND 2008
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
TABLE
OF CONTENTS
Report
of Independent Registered Public Accounting Firm
|
1
|
Balance
Sheets as of December 31, 2009 and 2008
|
2
|
Statements
of Operations for the years ended December 31, 2009 and
2008
|
3
|
Statements
of Shareholders’ Equity (Deficit) for the years ended December 31, 2009
and 2008
|
4
|
Statements
of Cash Flows for the years ended December 31, 2009 and
2008
|
5
|
Notes
to Financial Statements
|
6
-18
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Dachang Hui Autonomous County Baosheng Steel Products Co., Ltd.
We have
audited the accompanying balance sheets of Dachang Hui Autonomous County
Baosheng Steel Products Co., Ltd. as of December 31, 2009 and 2008, and the
related statements of income, stockholders’ equity and comprehensive income, and
cash flows for each of the years in the two-year period ended December 31, 2009.
Dachang Hui Autonomous County Baosheng Steel Products Co., Ltd.’s management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our 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 of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Dachang Hui Autonomous County
Baosheng Steel Products Co., Ltd. as of December 31, 2009 and 2008, and the
results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America.
/s/
Friedman LLP
|
Friedman LLP |
Marlton,
New Jersey
|
April
6, 2010
|
Dachang
Hui Autonomous County Baosheng Steel Products Co., Ltd.
Balance
Sheets
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 7,609,826 | $ | 2,232,473 | ||||
Restricted
cash
|
17,182,807 | 29,043,582 | ||||||
Accounts
receivable
|
7,704,160 | 757,625 | ||||||
Other
receivables
|
314,835 | 365,362 | ||||||
Prepaid
expenses
|
88,781 | 202,301 | ||||||
Inventory
|
20,386,511 | 103,754,750 | ||||||
Due
from shareholders
|
358,774 | 886,676 | ||||||
Advances
to suppliers
|
35,760,307 | 23,836,795 | ||||||
Value
added tax recoverable
|
322,754 | 17,005,754 | ||||||
Total
current assets
|
89,728,755 | 178,085,318 | ||||||
Property,
plant and equipment
|
||||||||
Property,
plant and equipment, net
|
33,869,949 | 37,520,342 | ||||||
Construction-in-progress
|
657,877 | 494,285 | ||||||
Total
property, plant and equipment
|
34,527,826 | 38,014,627 | ||||||
Other
assets
|
||||||||
Intangible
assets, net
|
1,122,949 | 1,149,768 | ||||||
Long-term
investments
|
219,716 | 219,860 | ||||||
Total
other assets
|
1,342,665 | 1,369,628 | ||||||
Total
assets
|
$ | 125,599,246 | $ | 217,469,573 | ||||
Liabilities
and shareholders' equity
|
||||||||
Current
liabilities
|
||||||||
Bank
notes payable
|
$ | 29,580,781 | $ | 38,021,253 | ||||
Short-term
debts
|
28,270,104 | 19,347,746 | ||||||
Accounts
payable
|
11,360,335 | 6,823,496 | ||||||
Advances
from customers
|
39,152,737 | 146,273,280 | ||||||
Taxes
payable
|
1,455,116 | 187 | ||||||
Other
payables
|
475,266 | 365,375 | ||||||
Due
to related parties
|
131,830 | 1,587,234 | ||||||
Total current liabilities
|
110,426,169 | 212,418,571 | ||||||
Long-term
debt
|
- | 1,685,599 | ||||||
Shareholders'
equity
|
||||||||
Paid-in
capital
|
6,040,398 | 6,040,398 | ||||||
Additional
paid-in capital
|
16,280,130 | 16,280,130 | ||||||
Accumulated
other comprehensive loss
|
(2,516,801 | ) | (2,521,671 | ) | ||||
Accumulated
deficits
|
(4,630,650 | ) | (16,433,454 | ) | ||||
Total
shareholders' equity
|
15,173,077 | 3,365,403 | ||||||
Total
liabilities and shareholders' equity
|
$ | 125,599,246 | $ | 217,469,573 |
The
accompanying notes are an integral part of these financial
statements
-2-
Dachang
Hui Autonomous County Baosheng Steel Products Co., Ltd.
Statements
of Income
For the Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenue
|
$ | 275,779,038 | $ | 185,810,277 | ||||
Cost
of goods sold
|
||||||||
Depreciation
|
4,018,384 | 2,190,747 | ||||||
Cost
of sales
|
255,383,515 | 172,505,368 | ||||||
Total
cost of goods sold
|
259,401,899 | 174,696,115 | ||||||
Gross
profit
|
16,377,139 | 11,114,162 | ||||||
Operating
expenses
|
||||||||
Selling
expenses
|
1,211,272 | 1,232,176 | ||||||
General
and administrative expenses
|
1,357,014 | 1,402,207 | ||||||
Depreciation
|
125,837 | 125,920 | ||||||
Total
operating expenses
|
2,694,123 | 2,760,303 | ||||||
Income
from operations
|
13,683,016 | 8,353,859 | ||||||
Other
income (expenses)
|
||||||||
Other
income
|
327,620 | 439,544 | ||||||
Other
expenses
|
(174,976 | ) | (157,472 | ) | ||||
Interest
expenses
|
(1,974,300 | ) | (2,167,062 | ) | ||||
Total
other income (expenses)
|
(1,821,656 | ) | (1,884,990 | ) | ||||
Net
income before income tax
|
11,861,360 | 6,468,869 | ||||||
Provision
for income tax
|
(58,556 | ) | (144,891 | ) | ||||
Net
income
|
$ | 11,802,804 | $ | 6,323,978 | ||||
Other
comprehensive income (loss)
|
||||||||
Foreign
currency translation gain (loss)
|
4,870 | (1,114,220 | ) | |||||
Comprehensive
income
|
$ | 11,807,674 | $ | 5,209,759 | ||||
Basic
and diluted income per common share
|
||||||||
Basic
|
$ | 1.95 | $ | 1.05 | ||||
Diluted
|
$ | 1.95 | $ | 1.05 | ||||
Weighted
average number of common shares outstanding
|
||||||||
Basic
|
6,040,398 | 6,040,398 | ||||||
Diluted
|
6,040,398 | 6,040,398 |
The
accompanying notes are an integral part of these financial
statements
-3-
Dachang
Hui Autonomous County Baosheng Steel Products Co., Ltd.
Statements
of Shareholders' Equity
Additional
|
Accumulated Other
|
Retained
|
||||||||||||||||||
Paid-in Capital
|
Paid-in Capital
|
Comprehensive loss
|
Earnings
|
Total
|
||||||||||||||||
Balance
at December 31,2007
|
$ | 6,040,398 | $ | 59,007 | $ | (1,407,451 | ) | $ | (22,757,432 | ) | $ | (18,065,478 | ) | |||||||
Additional
capital contributed
|
16,221,123 | 16,221,123 | ||||||||||||||||||
Net
income of the year
|
6,323,978 | 6,323,978 | ||||||||||||||||||
Foreign
currency translation loss
|
(1,114,220 | ) | (1,114,220 | ) | ||||||||||||||||
Balance
at December 31, 2008
|
6,040,398 | 16,280,130 | (2,521,671 | ) | (16,433,454 | ) | 3,365,403 | |||||||||||||
Net
income for the year
|
11,802,804 | 11,802,804 | ||||||||||||||||||
Foreign
currency translation gain
|
4,870 | 4,870 | ||||||||||||||||||
Balance
at December 31, 2009
|
$ | 6,040,398 | $ | 16,280,130 | $ | (2,516,801 | ) | $ | (4,630,650 | ) | $ | 15,173,077 |
The
accompanying notes are an integral part of these financial
statements
-4-
Dachang
Hui Autonomous County Baosheng Steel Products Co., Ltd.
Statements
of Cash Flows
For the Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flow from operating activities
|
||||||||
Net
income
|
$ | 11,802,804 | $ | 6,323,978 | ||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities
|
||||||||
Depreciation
- cost of goods sold
|
4,018,384 | 2,190,747 | ||||||
Depreciation
- operating expenses
|
125,837 | 125,920 | ||||||
Amortization
of land use right
|
26,045 | 25,606 | ||||||
Net
changes in assets and liabilities
|
||||||||
Accounts
receivable
|
(6,942,865 | ) | 226,415 | |||||
Other
receivables
|
79,241 | (64,543 | ) | |||||
Prepaid
expenses
|
113,318 | (145,707 | ) | |||||
Inventories
|
83,249,853 | (42,292,089 | ) | |||||
Advances
to suppliers
|
(11,932,058 | ) | (9,564,683 | ) | ||||
Value
added tax recoverable
|
16,661,784 | (8,662,934 | ) | |||||
Accounts
payable
|
4,538,611 | (10,896,696 | ) | |||||
Advances
from customers
|
(106,959,891 | ) | 72,007,675 | |||||
Taxes
payable
|
1,454,056 | (286 | ) | |||||
Other
payables
|
110,066 | 11,674 | ||||||
Net
cash provided by (used in) operating activities
|
(3,654,815 | ) | 9,285,077 | |||||
Cash
flows from investing activities
|
||||||||
Purchase
of fixed assets and addition of construction-in-progress
|
(684,555 | ) | (4,285,305 | ) | ||||
Lending
to officers
|
(28,985 | ) | - | |||||
Net
cash used in investing activities
|
(713,540 | ) | (4,285,305 | ) | ||||
Cash
flow from financing activities
|
||||||||
Restricted
cash
|
11,860,775 | (11,303,164 | ) | |||||
Repayments
of related party loans
|
(926,484 | ) | (1,031,915 | ) | ||||
Proceeds
from short-term debts
|
8,929,748 | - | ||||||
Repayment
of short-term debts
|
- | (5,631,305 | ) | |||||
Repayment
of long-term debts
|
(1,683,477 | ) | (863,521 | ) | ||||
Proceeds
from bank notes payable
|
- | 13,139,905 | ||||||
Repayment
of bank notes payable
|
(8,410,359 | ) | - | |||||
Net
cash provided by (used in) financing activities
|
9,770,203 | (5,690,001 | ) | |||||
Effect
of exchange rate changes on cash
|
(24,495 | ) | 1,520,325 | |||||
Net
increase in cash and cash equivalent
|
5,377,353 | 830,097 | ||||||
Cash
and cash equivalents, beginning of year
|
2,232,473 | 1,402,376 | ||||||
Cash
and cash equivalents, end of year
|
$ | 7,609,826 | $ | 2,232,473 | ||||
Supplemental
disclosure of cash flow information
|
||||||||
Interest
paid
|
$ | 1,797,356 | $ | 2,168,018 | ||||
Income
taxes paid
|
$ | 58,556 | $ | 144,891 | ||||
Supplemental
disclosure of non-cash transactions
|
||||||||
Capital
contributed by shareholders in form of fixed assets
|
$ | - | $ | (15,946,347 | ) |
The
accompanying notes are an integral part of these financial
statements
-5-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
1.
|
Basis
of Presentation and Organization
|
Dachang
Hui Autonomous County Baosheng Steel Products Co., Ltd. (“the Company”) was
registered on September 9, 1999 in Dachang County, Hebei Province, the People’s
Republic of China (“PRC”). The Company has registered capital of
$6,040,398 and is primarily engaged in the business of manufacturing, marketing
and sales of high precision, ultra thin cold-rolled steel products.
The
financial statements have been prepared in order to present the financial
position and results of operations in accordance with the accounting principles
generally accepted in the United States of America (“US GAAP”) and are expressed
in the U.S. Dollars.
2.
|
Summary
of Significant Accounting Policies
|
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories.
Actual results could differ from those estimates.
Cash
and Equivalents
The Company considers all
highly liquid debt instruments purchased with maturity period of three months or
less to be cash equivalents. The carrying amounts reported in the
accompanying balance sheets for cash and cash equivalents approximate their fair
value.
Accounts
Receivables and Other Receivables
Accounts
receivable consists of balances due from customers for the sale of the Company’s
steel products. Accounts receivable are recorded at net realizable value
consisting of the carrying amount less an allowance for uncollectible
amounts.
The
Company performs periodical reviews as to whether the carrying values of
accounts have become impaired. The assets are considered to be impaired if
the collectability of the balances become doubtful, accordingly, the management
estimates the valuation allowance for anticipated uncollectible receivable
balances. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. The management of the Company determined
that no allowance for doubtful accounts was necessary for the years ended
December 31, 2009 and 2008 since all accounts receivables and other receivables
are considered fully collectible.
Long-term
Investment
Long-term
investments are accounted for using the cost method and are evaluated annually
for any impairment in value.
-6-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2.
|
Summary
of Significant Accounting Policies
(Continued)
|
Inventory
Inventory
is stated at the lower of cost or market. Cost is determined using the
weighted average method. Market value represents the estimated selling price in
the ordinary course of business less the estimated costs necessary to complete
the sale.
The cost
of inventory comprises all costs of purchases, costs of conversion and other
costs incurred in bringing the inventory to their present location and
condition. The costs of conversion of inventory include fixed and variable
production overheads, taking into account the stage of completion.
Advances
to Suppliers
In order
to insure a steady supply of raw materials, the Company is required from time to
time to make cash advances when placing its purchase orders. The management
determined that no reserve was necessary for advance to suppliers for the years
ended December 31, 2009 and 2008.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation. The
cost of an asset comprises its purchase price and any directly attributable
costs of bringing the asset to its present working condition and location for
its intended use.
Depreciation
is computed on a straight-line basis over the estimated useful lives of the
related assets and assumes a 10% salvage value at the end of the assets useful
life. The estimated useful lives for significant property and equipment
are as follows:
Buildings
|
20
years
|
Machineries
|
10
years
|
Office
equipment
|
5
years
|
Motor
vehicles
|
5
years
|
Repairs
and maintenance costs are normally charged to the statement of operations in the
year in which they are incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an increase in the future
economic benefits expected to be obtained from the use of the asset, the
expenditure is capitalized as an additional cost of the asset.
Property,
plant and equipment are evaluated annually for any impairment in value.
Where the recoverable amount of any property and equipment is determined to have
declined below its carrying amount, the carrying amount is reduced to reflect
the decline in value. There were no property and equipment impairments
recognized during the years ended December 31, 2009 and 2008.
-7-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2.
|
Summary
of Significant Accounting Policies
(Continued)
|
Construction-in-Progress
Represents
direct costs of construction or acquisition and design fees incurred.
Capitalization of these costs ceases and the construction in progress is
transferred to plant and equipment when substantially all the activities
necessary to prepare the assets for their intended use are completed. No
depreciation is provided until it is completed and ready for intended
use.
Advances
from Customers
Advance
from customers consist of amounts received from customers relating to the sales
of the Company’s steel products. The Company recognizes these funds as a
current liability until the revenue can be recognized.
Revenue
Recognition
The
Company recognizes revenues under the FAS Codification Topic 605 (“ASC 605”).
Sales revenue is recognized when all of the following have occurred: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the price is fixed or determinable, and (iv)
the ability to collect is reasonably assured. These criteria are generally
satisfied at the time of delivery for sales when risk of loss and title passes
to the customer. Revenue is reported net of all value added taxes.
Other income is recognized when it is earned.
Cost
of sales
Costs of
sales include costs of the products sold, inbound freight costs, cost of direct
labor and overhead. Write-down of inventory to lower of cost or market is also
recorded in cost of sales.
Foreign
Currency Translation
The
Company’s financial information is presented in US dollars. The functional
currency of the Company is Renminbi (“RMB”), the currency of the PRC.
Transactions at the Company which are denominated in currencies other than RMB
are translated into RMB at the exchange rate quoted by the People’s Bank of
China prevailing at the dates of the transactions. Exchange gains and losses
resulting from transactions denominated in a currency other than that RMB are
included in statements of operations as exchange gains. The financial statements
of the Company have been translated into U.S. dollars in accordance with
Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign
Currency Translation”, which was subsequently codified within ASC 830, “Foreign
Currency Matters”. The financial information is first prepared in RMB and then
is translated into U.S. dollars at period-end exchange rates as to assets and
liabilities and average exchange rates as to revenue and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred. The effects of foreign currency translation adjustments
are included as a component of accumulated other comprehensive income (loss) in
shareholders’ equity.
December 31,
|
||||||||
2009
|
2008
|
|||||||
RMB:
US$ exchange rate
|
6.8270 | 6.8225 | ||||||
Average
RMB: US$ exchange rate
|
6.8311 | 6.9483 |
-8-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2.
Summary of Significant Accounting Policies (Continued)
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation
Income
Taxes
The
Company accounts for income tax under the provisions of Financial
Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”)
No.740 "Income Taxes", which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of the events that have
been included in the financial statements or tax returns. Deferred income
taxes are recognized for all significant temporary differences between tax and
financial statements bases of assets and liabilities. Valuation allowances
are established against net deferred tax assets when it is more likely than not
that some portion or all of the deferred tax asset will not be realized.
The Company had no deferred tax as of December 31, 2009 and 2008.
Value
added tax
The
Provisional Regulations of the People’s Republic of China Concerning Value Added
Tax (“VAT”) promulgated by the State Council came into effect on January 1,
1994. Under these regulations and the Implementing Rules of the
Provisional Regulations of the People’s Republic of China Concerning Value Added
Tax, value added tax is imposed on goods sold in or imported into the PRC and on
processing, repair and replacement services provided within the
PRC.
Value
added tax payable in the PRC is charged on an aggregated basis at a rate of 13%
or 17% (depending on the type of goods involved) on the full price collected for
the goods sold or, in the case of taxable services provided, at a rate of 17% on
the charges for the taxable services provided, but excluding, in respect of both
goods and services, any amount paid in respect of value added tax included in
the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and services in the same financial year.
Certain offshore and overseas sales are not subject to VAT tax.
As of
December 31, 2009 and 2008, the Company’s VAT recoverable amounted to US$322,754
and $17,005,754, respectively.
Fair
Value of Financial Instruments
Fair
value of financial instruments is the amount at which the financial instruments
could be exchanged for in a current transaction between willing
parties. The carrying amounts of certain financial instruments, including
cash, accounts receivable, other receivables, accounts payable, accrued
expenses, and other payables approximate their fair values as at December 31,
2009 and 2008 because of the relatively short-term maturity of these
instruments.
-9-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2.
|
Summary
of Significant Accounting Policies
(Continued)
|
Impairment
of Long-lived Assets
Long-lived
assets, which include property, plant and equipment, intangible assets and
long-term investments, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the assets. If the carrying amount of an
asset exceeds its estimated undiscounted future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the assets. Fair value is generally determined using the
asset’s expected future discounted cash flows or market value, if readily
determinable.
Comprehensive
income
Statement
of Financial Accounting Standards ("FAS") No. 130, “Reporting Comprehensive
Income”, which was subsequently codified within ASC 220, “Comprehensive Income”,
requires disclosure of all components of comprehensive income and loss on an
annual and interim basis. Comprehensive income and loss is defined as the change
in equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. Accumulated other comprehensive
income (loss) arose from the changes in foreign currency exchange
rates.
Statement
of Cash Flows
In
accordance with SFAS 95, "Statement of Cash Flows," which was subsequently
codified within ASC 230, “Statement of Cash Flows”, cash flows from the
Company's operations is calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statements of cash
flows will not necessarily agree with changes in the corresponding balances on
the balance sheets.
Commitments
and Contingencies
In the
normal course of business, the company is subject to contingencies, including
legal proceedings and claims arising out of the normal course of businesses that
relate to a wide range of matters, including among others, product liability.
The company records accruals for such contingencies based upon the assessment of
the probability of occurrence and where determinable, and estimate of the
liability. Management may consider many factors in making these assessments
including past history, scientific evidence and the specifics of each matter. As
management has not become aware of any product liability claims arising from any
incident over the years, the company has not recognized a liability for product
liability claims
-10-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2.
|
Summary
of Significant Accounting Policies
(Continued)
|
Shipping
costs
Shipping
costs are expensed as incurred. Shipping costs were included in selling expenses
and amounted to $391,347 and $331,695 for the years ended December 31, 2009 and
2008, respectively.
Advertising
Advertising
is expensed as incurred and is included in selling expenses. There was no
advertising expense for the years ended December 31, 2009 and 2008.
Subsequent
Events
The
Company has evaluated subsequent events that have occurred through the date of
this financial statement issuance.
Earnings
per Share
Basic
earnings per share are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
There are no such additional common shares available for dilution purposes for
years ended December 31, 2009 and 2008.
Risks
and Uncertainties
The
operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy. The Company’s operations in the PRC are
subject to special considerations and significant risks not typically associated
with companies in North America and Western Europe. These include risks
associated with, among others, the political, economic and legal environment and
foreign currency exchange. The Company’s results may be adversely affected by
changes in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion, remittances abroad, and rates and methods of
taxation, among other things.
Segments
The
Company operates in only one segment and in only one geographic region, which is
the PRC, thereafter segment disclosure is not presented.
-11-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2.
|
Summary
of Significant Accounting Policies
(Continued)
|
Risks
of Losses
The
Company is potentially exposed to risks of losses that may result from business
interruptions, injury to others (including employees) and damage to
property. These losses may be uninsured, especially due to the fact that
the Company’s operations are in China, where business insurance is not readily
available. If: (i) information is available before the Company’s financial
statements are issued or are available to be issued indicates that such loss is
probable and (ii) the amount of the loss can be reasonably estimated, an
estimated loss will be accrued by a charge to income. If such loss is
probable but the amount of loss cannot be reasonably estimated, the loss shall
be charged to the income of the period in which the loss can be reasonably
estimated and shall not be charged retroactively to an earlier period. As
of December 31, 2009 and 2008, the Company has not experienced any uninsured
losses from injury to others or other losses.
Recent
Accounting Pronouncements
In April
2009, the FASB updated the accounting standards to provide guidance on
estimating the fair value of a financial asset or liability when the trade
volume and level of activity for the asset or liability have significantly
decreased relative to historical levels. The standard requires entities to
disclose the inputs and valuation techniques used to measure fair value and any
changes in valuation inputs or techniques. In addition, debt and equity
securities as defined by GAAP shall be disclosed by major category. This
standard is effective for interim and annual reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009,
and is to be applied prospectively. The adoption did not have a material effect
on the Company's results of operations and financial condition.
In May
2009, the FASB issued guidance related to subsequent events under ASC 855-10,
Subsequent Events. This guidance sets forth the period after the balance sheet
date during which management or a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. It requires disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, whether that date represents the
date the financial statements were issued or were available to be issued. This
guidance is effective for interim and annual periods ending after June 15, 2009.
We have included the required disclosures in our consolidated condensed
financial statements.
In June
2009, the FASB issued an amendment to ASC 810-10, Consolidation. This guidance
amends ASC 810-10-15 to replace the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial
interest in a VIE with a primarily qualitative approach focused on identifying
which enterprise has the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance. It also requires ongoing
assessments of whether an enterprise is the primary beneficiary of a VIE and
requires additional disclosures about an enterprise’s involvement in VIEs. This
guidance is effective as of the beginning of the reporting entity’s first annual
reporting period that begins after November 15, 2009 and earlier adoption is not
permitted. We are currently evaluating the potential impact, if any, of the
adoption of this guidance will have on our consolidated condensed financial
statements.
-12-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2.
|
Summary
of Significant Accounting Policies
(Continued)
|
In June
2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC
105, Generally Accepted Accounting Principles. This guidance states that the ASC
will become the source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Once effective, the Codification’s content
will carry the same level of authority. Thus, the U.S. GAAP hierarchy will be
modified to include only two levels of U.S. GAAP: authoritative and
non-authoritative. This is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. We adopted ASC 105 as
of September 30, 2009 and thus have incorporated the new Codification citations
in place of the corresponding references to legacy accounting
pronouncements.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring
Liabilities at Fair Value, which amends ASC 820, Fair Value Measurements and
Disclosures. This Update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure the fair value using one or more of the
following techniques: a valuation technique that uses the quoted price of the
identical liability or similar liabilities when traded as an asset, which would
be considered a Level 1 input, or another valuation technique that is consistent
with ASC 820. This Update is effective for the first reporting period (including
interim periods) beginning after issuance. Thus, we adopted this guidance as of
September 30, 2009, which did not have a material impact on our consolidated
condensed financial statements.
In
September 2009, the Financial Accounting Standards Board (FASB) amended existing
authoritative guidance to improve financial reporting by enterprises involved
with variable interest entities and to provide more relevant and reliable
information to users of financial statements. The amended guidance is effective
for fiscal annual reporting periods beginning after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and
annual reporting periods thereafter. The Company is currently assessing the
impact, if any, of adoption may have on its financial statements or
disclosures.
3.
|
Restricted
Cash
|
As of
December 31, 2009 and 2008, the Company has restricted cash of $17,182,807 and
$29,043,582, respectively. These restricted cash was required by the lenders to
maintain a minimum 50% - 100% of the balance of the acceptance notes (see Note
11) as collateral to ensure future credit availability. The Company earns
interest at a variable rate per month on these restricted cash.
4.
|
Concentrations
of Business and Credit Risk
|
The
Company provides credit sales in the normal course of business. The
Company performs ongoing credit evaluations of its customers and clients and
maintains allowances for doubtful accounts based on factors surrounding the
credit risk of specific customers and clients, historical trends, and other
information. Accounts receivable totaled $7,704,160 and $757,625 and
other receivables were $314,835 and $365,362 as of December
31, 2009 and 2008, respectively. There are no allowances recorded by the
Company as all receivables are considered fully collectible.
-13-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
5.
|
Inventory
|
As of
December 31, 2009 and 2008, inventory consisted of the
following:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 10,275,786 | $ | 56,335,115 | ||||
Work
in progress
|
2,631,074 | 2,582,354 | ||||||
Finished
goods
|
7,479,651 | 44,837,281 | ||||||
Total
|
$ | 20,386,511 | $ | 103,754,750 |
6.
|
Property,
Plant and Equipment
|
Property,
plant and equipment, stated at cost less accumulated depreciation, consisted of
the following:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Plant
and building
|
$ | 4,352,992 | $ | 4,355,863 | ||||
Machinery
and equipment
|
41,203,594 | 40,722,478 | ||||||
Motor
vehicles
|
120,940 | 114,776 | ||||||
Office
equipment
|
164,497 | 157,751 | ||||||
Subtotal
|
45,842,023 | 45,350,868 | ||||||
Accumulated
depreciation
|
(11,972,074 | ) | (7,830,526 | ) | ||||
Construction
in progress
|
657,877 | 494,285 | ||||||
Total
|
$ | 34,527,826 | $ | 38,014,627 |
Depreciation
expense for the years ended December 31, 2009 and 2008 were
$4,144,221 and $2,316,667, respectively.
-14-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
7.
|
Advances
to Suppliers
|
As a
normal practice of doing business in China, the Company is frequently required
to make advance payments to suppliers for purchases of raw materials. Such
advance payments are interest free. The balances of advances to suppliers were
$35,760,307 and $23,836,795 as of December 31, 2009 and 2008,
respectively.
8.
|
Long-term
Investment
|
The
balance of long-term investment represents the Company’s equity investment in
Dachang Xiadian Rural Credit Cooperative (“DRCC”). The Company holds 3.75% of
the total interest of DRCC. The purpose of the investment is to facilitate the
Company’s financing for working capital needs. Long-term investments are
accounted for using the cost method. The management determined that no
impairment was needed for the years ended December 31, 2009 and
2008.
9.
|
Intangible
Assets
|
Intangible
asset consists of land use rights only. All land in the People’s Republic of
China is government owned and cannot be sold to any individual or company.
Instead, the government grants the user a “Land use right” (the “Right”) to use
the land. The Company acquired three Rights during the period from year 2000 to
2003 for the aggregate amount of RMB8,895,838 (currently US$1,303,038). The
Company has the right to use these lands for 50 years and amortizes the Right on
a straight-line basis over 50 years.
The land
use rights at December 31, 2009 and 2008 were as follows:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Cost
|
$ | 1,303,038 | $ | 1,303,898 | ||||
Less:
Accumulated amortization
|
(180,089 | ) | (154,130 | ) | ||||
Total
|
$ | 1,122,949 | $ | 1,149,768 |
The
amortization expense for the years ended December 31, 2009 and 2008 was $26,035
and $25,606, respectively.
10.
|
Bank
Notes Payable
|
The
balance of bank notes payable represents the outstanding and used notes that are
guaranteed to be paid by the banks and usually for a short-term period of six
months. For the years ended December 31, 2009 and 2008, the unused and available
borrowings under bank notes facilities were $1,183,830 and $-0-,
respectively. In addition, the Company is required to maintain cash
deposits at a minimum 50% to 100% of the total balance of the bank acceptance
notes with the banks in order to ensure future credit
availability.
-15-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
11.
|
Short-term
Debts
|
In order
to provide working capital for operations, the company entered into the
following short- term loan agreements as of December 31, 2009 and
2008.
December 31,
|
||||||||
Lenders
|
2009
|
2008
|
||||||
Xiadian
City Rural Credit Cooperative
|
$ | 2,636,590 | $ | 4,397,215 | ||||
Agricultural
Bank of China, Dachang Branch
|
15,819,540 | 14,071,088 | ||||||
Huaxia
Bank, Shijiazhuang Branch
|
7,323,861 | - | ||||||
Shenzhen
Zengshun Import and Export Co., Ltd.
|
2,490,113 | - | ||||||
China
Development Bank, Hebei Branch
|
- | 879,443 | ||||||
Total
Short-term Debts
|
$ | 28,270,104 | $ | 19,347,746 |
The loans
from the Xiadian City Rural Credit Cooperative are loans with fixed terms of
twelve months or less. The interest was at fixed rate per annum 8.496% for 2009,
but varied from 7.44% to 7.47% per annum for 2008.
The loans
from the Agricultural Bank, Dachang Branch are loans with fixed terms of twelve
months or less. The interest was at fixed rate per annum 5.842% for 2009, and
varied from 7.668% to 9.711% per annum for 2008.
The above
loans are secured by the Company’s land use right and building with the total
estimated value of $30,996,821.
The loans
borrowed from Shenzhen Zengshun Import and Export Co., Ltd., an unrelated
company, has no fixed repayment terms. This loan is unsecured, interest-fee and
due upon demand.
The loan
from the Huaxia Bank, Shijiazhuang Branch has a one year term, maturing on April
29, 2010. The loan bears an annual fixed interest of 5.841%. This loan is
secured by the Company’s production line with the total value of
$22,484,254
The loan
from China Development Bank Branch represents the current portion of a long-term
loan the company borrowed in 2006 (see Note 12).
-16-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
12.
|
Long-Term
Debts
|
The
balance of long-term debt represents the non-current portion of a loan from
China Development Bank. The loan term is from May 15, 2006 to May 14, 2011 with
a fixed interest rate of 6.732% per annum for the first year, adjustable
annually based on prevailing lending rate of the People’s Bank of China plus 10%
afterwards. The loan was guaranteed by an unrelated party and was repaid in full
in November 2009.
13.
|
Advances
from Customers
|
Advances
from customers represent advance cash receipts from new customers and for which
goods have not been delivered as of the balance sheets dates. Advances
from customers for goods to be delivered in the subsequent year are carried
forward. As of December 31, 2009 and 2008, there were advances from
customers of $39,152,737 and $146,273,280, respectively.
14.
|
Related
Party Transactions
|
As of
December 31, 2009 and 2008, the balance of due from related parties is as
follows:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Xianmin
Meng
|
$ | 171,208 | $ | 171,320 | ||||
Hongzhong
Li
|
187,566 | 715,356 | ||||||
Total
|
$ | 358,774 | $ | 886,676 |
Mr.
Hongzhong Li is the Chairman and the 96% shareholder of the Company and the
husband of Xianmin Meng. And Xianmin holds the rest 4% of the
Company.
As of
December 31, 2009 and 2008, the balance of due to related parties represents the
loan borrowed from Hebei Buddha Engineering Technology Co., Ltd., an affiliated
company also owned by Hongzhong Li.
The
balances with the related parties have no fixed repayment terms. These balances
are unsecured, interest-fee and due upon demand.
-17-
DACHANG
HUI AUTONOMOUS COUNTY BAOSHENG STEEL PRODUCTS CO., LTD
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
15.
|
Income
Tax
|
The
Company did not generate any taxable income outside of the PRC for the years
ended December 31, 2009 and 2008. The Company is governed by the Income Tax Law
of the PRC concerning the private-run enterprises, which are generally subject
to tax at a new statutory rate of 25% and were, until January 2008, subject to
tax at a statutory rate of 33% (30% state income tax plus 3% local income tax)
on income reported in the statutory financial statements after appropriate tax
adjustments.
On March
16, 2007, the National People’s Congress of China approved the Corporate Income
Tax Law of the People’s Republic of China (the New CIT Law), which is effective
from January 1, 2008. Under the new law, the corporate income tax rate
applicable to all Companies, including both domestic and foreign-invested
companies, will be 25%, replacing the current applicable tax rate of 33%.
However, pending the detailed implementation rulings from the tax authorities,
we believe that some of the tax concession granted to eligible companies prior
to the new CIT laws will be grand fathered.
As
approved by the local tax authority of Dachang County, the Company’s CIT was
assessed annually at a pre-determined fixed rate as an incentive to stimulate
local economy and encourage entrepreneurship. For the years ended December 31,
2009 and 2008, the Company’s assessed income taxes were $58,556 and $144,891,
respectively.
Although
the possibility exists for reinterpretation of the application of the tax
regulations by higher tax authorities in the PRC, potentially overturning the
decision made by the local tax authority, the Company has not experienced any
reevaluation of the income taxes for prior years. Management believes that the
possibility of any reevaluation of income taxes is remote based on the fact that
the Company has obtained the written tax clearance from the local tax authority.
Thus, no additional taxes payable has been recorded for the difference between
the taxes due based on taxable income calculated according to statutory taxable
income method and the taxes due based on the fixed rate method. It is the
Company’s policy that if such reevaluation of income taxes becomes probable and
the amount of additional taxes due can be reasonably estimated, additional taxes
shall be recorded in which period the amount can be reasonably estimated and
shall not be charged retroactively to an earlier period.
16.
|
Shareholders’
Equity
|
The
Company was incorporated under the laws of the PRC in September 1999 with a
total registered capital of $6,040,398. The capital was fully paid in as of
August 30, 2004 from two shareholders of the Company.
The
industry practice in the PRC does not require the issuance of stock certificates
to the shareholders, nor a third party transfer agent to maintain the records.
For the purpose of financial reporting, the Company elected to designate one (1)
share of common stock for each US$ contributed. Accordingly, there were
6,040,398 shares of common stock issued and outstanding for the years ended
December 31, 2009 and 2008.
In
September 2008, the Board of Directors of the Company approved the shareholders’
capital contribution in form of fixed assets to expand the Company’s production
capacity. The total amount of the capital contribution was $15,946,347 and was
recorded in additional paid-in capital.
-18-
A.
G. VOLNEY CENTER, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLODATED
FINANCIAL
STATEMENTS
DECEMBER
31, 2009
A.
G. VOLNEY CENTER, INC.
INDEX
TO UNAUDITED PRO FORMA CONDENSED CONSOLODATED
FINANCIAL
STATEMENTS
PAGE
(S)
|
|
Introduction
to Unaudited Pro Forma Condensed Consolidated Financial
statements
|
1
|
Pro
Forma Condensed Consolidated Balance Sheet as of December 31, 2009
(Unaudited)
|
2
|
Pro
Forma Condensed Consolidated Statement of Operations for the Year Ended
December
31, 2009 (Unaudited)
|
3
|
Notes
to Condensed Consolidated Pro Forma Financial Statements
(Unaudited)
|
4
|
A.
G. VOLNEY CENTER, INC.
INTRODUCTION
TO UNAUDITIED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
On April 28, 2010, A. G. Volney
Center, Inc., a corporation formed under the laws of the State of Delaware
(“AGVO” or the “Company”) and its majority shareholder, Mr. Joseph C.
Passalaqua, entered into a Share Exchange Agreement with Gold Promise Group
(Hong Kong) Co., Ltd. (“Gold Promise”), a company incorporated in Hong Kong, and
its shareholders.
Pursuant
to the Share Exchange Agreement, the shareholders of Gold Promise shall transfer
and assign to the Company all of its issued and outstanding shares of the
capital stock of Gold Promise, in exchange for 10,000 newly issued shares
of the Company’s Series A Convertible
Preferred stock, $0.001 par value, (the “Share Exchange”), representing, in the
aggregate, 98.75% of our issued and outstanding common shares on an as-converted
to common stock basis. As a result of this Share Exchange, Gold Promise
will become a wholly-owned subsidiary of the Company.
Subsequent
to Closing of the Share Exchange, the new management of Volney will effect a
1-for-186 stock reverse split of our outstanding shares of common stock (the
“Reverse Split”). Immediately subsequent to the Reverse Split, the 10,000
newly issued Series A Convertible Preferred Stock shall automatically be
converted into 9,875,001 shares of common stock (“Converted Common Shares”) in
accordance with the Certificate of Designation of the Series A Convertible
Preferred Stock.
In
connection with the change of control contemplated by the Share Exchange, David
Stever and Samantha Ford shall resign as directors of the Company
and all present officers of the Company will be resigning from
their positions at the closing of the reverse acquisition of Gold Promise.
Simultaneously, Mr. Hongzhong Li, Mr. Zhenqi Chen and Mrs. Xianmin Meng shall be
appointed to the Board of Directors of the Company. Mr. Hongzhong Li will be
appointed as the Company’s Chief Executive Officer and Chairman of the Board.
And Mr. Zhenqi Chen will be appointed as the Company’s Chief Financial
Officer.
The
transaction will be accounted for as a reverse merger under the purchase method
of accounting since there was a change of control. Accordingly, Gold Promise
will be treated as the continuing entity for accounting purposes.
The
accompanying unaudited pro forma condensed consolidated balance sheet has been
presented with consolidated subsidiaries at December 31, 2009. The unaudited pro
forma condensed consolidated statement of operations for the year ended December
31, 2009 has been presented as if the share exchange had occurred on January 1,
2009. The unaudited pro forma condensed consolidated financial statements
do not necessarily represent the actual results that would have been achieved
had the companies been combined at the beginning of the year, nor may they be
indicative of future operations. These unaudited pro forma condensed
consolidated financial statements should be read in conjunction with the
companies’ respective historical financial statements and notes included
thereto.
1
A.
G. VOLNEY CENTER, INC.
PRO
FORMA CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS
OF DECEMBER 31, 2009
Gold Promise Group
|
Pro Forma
|
Pro Forma
|
||||||||||||||
AGVO
|
(Hong Kong) Co., Ltd.
|
Adjustments
|
Combined Total
|
|||||||||||||
ASSETS
|
||||||||||||||||
Current
assets:
|
||||||||||||||||
Cash
& cash equivalents
|
$ | 23 | $ | 24,792,633 | (23 | )a | $ | 24,792,633 | ||||||||
Accounts
receivable, net of allowance for doubtful accounts
|
3,063 | 7,704,160 | (3,063 | )a | 7,704,160 | |||||||||||
Other
receivables, net of allowance for doubtful accounts
|
- | 403,616 | 403,616 | |||||||||||||
Inventories
|
- | 20,386,511 | 20,386,511 | |||||||||||||
Advance
to vendors
|
- | 35,760,307 | 35,760,307 | |||||||||||||
Value
added tax recoverable
|
- | 322,754 | 322,754 | |||||||||||||
Due
from shareholders
|
- | 358,774 | 358,774 | |||||||||||||
Total
current assets
|
3,086 | 89,728,755 | 89,728,755 | |||||||||||||
Property,
plant and equipment, net
|
- | 34,527,826 | 34,527,826 | |||||||||||||
- | ||||||||||||||||
Other
Asset
|
- | 1,342,665 | 1,342,665 | |||||||||||||
Total
Assets
|
$ | 3,086 | $ | 125,599,246 | $ | 125,599,246 | ||||||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||||||
Current
liabilities:
|
||||||||||||||||
Bank
notes payable
|
$ | - | $ | 29,580,781 | $ | 29,580,781 | ||||||||||
Short-term
loans
|
$ | - | 28,270,104 | 28,270,104 | ||||||||||||
Accounts
payable
|
17,956 | 11,360,335 | (17,956 | )a | 11,360,335 | |||||||||||
Advance
from customers
|
- | 39,152,737 | 39,152,737 | |||||||||||||
Other
payable and accured liabilities
|
6,387 | 475,266 | (6,387 | )a | 475,266 | |||||||||||
Taxes
payable
|
92 | 1,455,116 | (92 | )a | 1,455,116 | |||||||||||
Due
to related parties
|
42,422 | 131,830 | (42,422 | )a | 131,830 | |||||||||||
Total
current liabilities
|
66,857 | 110,426,169 | 110,426,169 | |||||||||||||
Total
Liabilities
|
66,857 | 110,426,169 | 110,426,169 | |||||||||||||
Stockholders'
equity
|
||||||||||||||||
Preferred
Stock, $0.001 par value, 10,000,000 shares authorized, 10,000 shares of
Series A Convertible Preferred Stock issued and oustanding at December 31,
2009
|
- | - | 10 | b | 10 | |||||||||||
Common
Stock, $0.001 par value, 100,000,000 shares authorized, 23,250,027 shares
issued and oustanding at December 31, 2009
|
17,330 | 1,290 | 4,630 | a,b | 23,250 | |||||||||||
Additional
paid-in capital
|
36,270 | 22,319,238 | (58,240 | )a,b | 22,297,268 | |||||||||||
Retained
earnings (deficit)
|
(117,371 | ) | (4,630,650 | ) | 117,371 | a,b | (4,630,650 | ) | ||||||||
Accumulated
other comprehensive loss
|
- | (2,516,801 | ) | (2,516,801 | ) | |||||||||||
Total
stockholders' equity
|
(63,771 | ) | 15,173,077 | 15,173,077 | ||||||||||||
Total
Liabilities and Stockholders' Equity
|
$ | 3,086 | $ | 125,599,246 | $ | 125,599,246 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
2
A.
G. VOLNEY CENTER, INC.
PRO
FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR
THE YEAR ENDED DECEMBER 31, 2009
Gold Promise Group
|
Pro Forma
|
Pro Forma
|
||||||||||||||
AGVO
|
(Hong Kong) Co., Ltd.
|
Adjustments
|
Combined Total
|
|||||||||||||
Revenues
|
$ | 3,067 | $ | 275,779,038 | $ | 275,782,105 | ||||||||||
Cost
of sales
|
1,000 | 259,401,899 | 259,402,899 | |||||||||||||
Gross
profit
|
2,067 | 16,377,139 | 16,379,206 | |||||||||||||
Operating
expenses
|
||||||||||||||||
Selling
and distribution expenses
|
- | 1,211,272 | 1,211,272 | |||||||||||||
General
and administrative expenses
|
31,457 | 1,482,851 | (31,457 | )a | 1,482,851 | |||||||||||
Total
operating expenses
|
31,457 | 2,694,123 | 2,694,123 | |||||||||||||
Operating
income
|
(29,390 | ) | 13,683,016 | 13,685,083 | ||||||||||||
Other
income (expenses)
|
||||||||||||||||
Interest
expenses
|
(4,630 | ) | (1,974,300 | ) | (1,978,930 | ) | ||||||||||
Other
income (expenses)
|
30,000 | 152,644 | 182,644 | |||||||||||||
Total
other income
|
25,370 | (1,821,656 | ) | (1,796,286 | ) | |||||||||||
Income
before income taxes
|
(4,020 | ) | 11,861,360 | 11,888,797 | ||||||||||||
Provision
for income taxes
|
(60 | ) | (58,556 | ) | (58,616 | ) | ||||||||||
Net
income
|
$ | (4,080 | ) | $ | 11,802,804 | $ | 11,830,181 | |||||||||
Other
comprehensive loss
|
||||||||||||||||
Foreign
currency translation adjustment
|
- | 4,870 | 4,870 | |||||||||||||
Comprehensive
income
|
$ | (4,080 | ) | $ | 11,807,674 | $ | 11,835,051 | |||||||||
Basic
and diluted income per common share
|
||||||||||||||||
Basic
|
$ | (0.000 | ) | $ | 1.955 | $ | 1.184 | |||||||||
Diluted
|
$ | (0.000 | ) | $ | 1.955 | $ | 1.184 | |||||||||
Weighted
average common shares outstanding
|
||||||||||||||||
Basic
|
17,300,000 | 6,040,398 | 10,000,000 | |||||||||||||
Diluted
|
17,300,000 | 6,040,398 | 10,000,000 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements
3
A.
G. VOLNEY CENTER, INC.
NOTES
TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
The
following unaudited pro forma adjustments are included in the accompanying
unaudited pro forma condensed consolidated balance sheet as of December 31, 2009
and the unaudited pro forma condensed consolidated statement of operations for
the year ended December 31, 2009 to reflect the Share Exchange between AGVO and
Gold Promise:
|
a.
|
To
record the spin-off of the Shell Company’s (AGVO) assets and liabilities
prior to the Share Exchange;
|
|
b.
|
These
adjustments reflect the recapitalization as a result of the transactions
related to the Share Exchange.
|
4